-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ER+31BRwMfnvr0/me8wIAZ3jPybdhio2CMMNcbuTEytX/2m3PmVJQm36IUGJjtdo 8Qe9tIB5PHAx//DysS7a/A== 0000909518-97-000668.txt : 19971117 0000909518-97-000668.hdr.sgml : 19971117 ACCESSION NUMBER: 0000909518-97-000668 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALOOB TOYS INC CENTRAL INDEX KEY: 0000751968 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 941716574 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09599 FILM NUMBER: 97719248 BUSINESS ADDRESS: STREET 1: 500 FORBES BLVD CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 4159521678 FORMER COMPANY: FORMER CONFORMED NAME: GALOOB LEWIS TOYS INC /DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 10Q FOR PERIOD END 09/30/97 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 September 30, 1997 ------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9599 GALOOB TOYS, INC ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 94-1716574 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 500 Forbes Boulevard, South San Francisco, California 94080 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 952-1678 -------------- Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, par value $.01, 18,100,864 as of September 30, 1997. GALOOB TOYS, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION PAGE - -------------------------------- ---- Item 1 - Condensed Consolidated Balance Sheets 1 - Condensed Consolidated Statements of Operations 2 - Condensed Consolidated Statements of Cash Flows 3 - Notes to Condensed Consolidated Financial Statements 4-6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7-11 PART II - OTHER INFORMATION - ----------------------------- Item 1 - Legal Proceedings 12 Item 6 - Exhibits and Reports on Form 8-K 12 SIGNATURE 13 - --------- GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except shares)
(Unaudited) (Unaudited) (Audited) September 30 September 30 December 31 1997 1996 1996 ------------ ----------- ------------- ASSETS Current Assets Cash and cash equivalents $21,766 $2,244 $27,920 Accounts receivable, net 75,161 99,018 102,322 Inventories 23,402 23,219 19,974 Tooling and related costs 13,423 15,247 15,436 Prepaid expenses and other assets 8,057 9,069 12,361 Deferred income taxes 10,009 --- 2,404 ---------- ---------- --------- Total Current Assets 151,818 148,797 180,417 Land, building and equipment, net 10,550 9,746 10,013 Indebtedness from related party 950 950 950 Other assets 12,001 5,462 5,525 Deferred income taxes 8,316 -- --- ---------- ---------- --------- Total Assets $183,635 $164,955 $196,905 ========== ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ --- $44,043 $ --- Accounts payable 24,056 25,137 19,655 Accrued expenses 30,329 17,159 24,680 Income taxes payable 449 1,742 1,671 Current portion of long-term debt --- 4,266 17 ---------- ---------- --------- Total Current Liabilities 54,834 92,347 46,023 Other liabilities 4,285 --- 20 Deferred income taxes --- --- 1,071 ---------- ---------- --------- Total Liabilities 59,119 92,347 47,114 ---------- ---------- --------- SHAREHOLDERS' EQUITY Common stock, par value $.01 per share authorized 50,000,000 shares Issued and outstanding 18,100,864 shares, 15,149,651 shares, and 17,919,864 shares 181 152 179 Additional paid-in capital 171,707 106,030 170,291 Retained earnings (deficit) (46,808) (33,127) (20,232) Cumulative translation adjustment (564) (447) (447) ---------- ---------- --------- Total Shareholders' Equity 124,516 72,608 149,791 ---------- ---------- --------- Total Liabilities and Shareholders' Equity $183,635 $164,955 $196,905 ========== ========== =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 1 GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Net revenues $83,248 $88,547 $176,202 $175,270 Costs of products sold 56,734 45,590 108,460 93,871 ------ ------ ------- ------ Gross margin 26,514 42,957 67,742 81,399 Operating expenses: Advertising and promotion 17,437 11,066 32,319 23,477 Other selling and administrative 9,493 10,164 24,432 22,916 Royalties, research and development 14,437 10,097 28,913 25,599 ------ ------ ------ ------ Total operating expenses 41,367 31,327 85,664 71,992 ------ ------ ------ ------ Earnings (loss) from operations (14,853) 11,630 (17,922) 9,407 Micro Machines license rights and litigation settlement -- -- (22,949) -- Interest expense (134) (1,069) (252) (2,665) Other income (expense), net (3,269) 94 (2,445) 185 ------- ------- ------- ------- Earnings (loss) before income taxes (18,256) 10,655 (43,568) 6,927 Provision for income taxes (7,121) 1,386 (16,992) 1,386 ------- ------ -------- ------ Net earnings (loss) (11,135) 9,269 (26,576) 5,541 Preferred stock dividends -- -- -- 21 Charge related to the exchange of preferred stock for common -- -- -- 24,279 ------ ------ ------- ------ Net earnings (loss) applicable to common shares ($11,135) $9,269 ($26,576) ($18,759) ========= ====== ========= ========= Average common shares outstanding 18,073 16,387 18,019 13,565 Net earnings (loss) per common share ($0.62) $0.57 ($1.47) ($1.38)
The accompanying notes are an integral part of these Consolidated Financial Statements. 2 GALOOB TOYS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, except shares) (Unaudited)
Nine Months Ended September 30 ------------------------------ 1997 1996 ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: Net earnings (loss) $(26,576) $5,541 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 654 540 Changes in assets and liabilities: Accounts receivable 27,161 (30,616) Inventories (3,428) (5,728) Tooling and related costs 2,013 (6,936) Prepaid expenses and other assets (2,172) (1,244) Deferred income taxes (16,992) --- Accounts payable 4,401 7,996 Accrued expenses and other liabilities 9,914 2,939 Income taxes payable (1,222) 1,011 ------- -------- Net cash (used in) provided by operating activities (6,247) (26,497) ------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Investment in land, building and equipment, net (1,191) (1,505) ------- ------- Net cash (used in) provided by investing activities (1,191) (1,505) ------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Net borrowings under notes payable --- 28,972 Repayments under long-term debt agreements (17) (156) Proceeds from issuance of common stock 1,418 1,144 Redemption of preferred stock --- (462) Costs associated with the conversion of debentures and the preferred shares exchange --- (1,282) Other, net (117) --- ------- ------- Net cash (used in) provided by financing activities 1,284 28,216 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,154) 214 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,920 2,030 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $21,766 $2,244 ======= ======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY: During the nine months ended September 30, 1996, $14 million of the Company's 8% convertible subordinated debentures were converted into 1,511,872 shares of its common stock. Deferred loan costs and accrued interest amounting to approximately $0.5 million, net, were charged against additional paid-in capital. See Note F. During the nine months ended September 30, 1996, 1,822,899 depositary shares of the Company's preferred stock were exchanged for 3,359,432 shares of its common stock. See Note G. The accompanying notes are an integral part of these Consolidated Financial Statements. 3 GALOOB TOYS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 (Unaudited) NOTE A - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------- The condensed consolidated balance sheets as of September 30, 1997 and 1996 and the condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 1997 and 1996 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 1997 and 1996 have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 1997 and 1996 have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1996. Certain amounts in the financial statements of prior years have been reclassified to conform with the current year's presentation. The results of operations for the three- and nine-month periods ended September 30, 1997 and 1996 are not necessarily indicative of the operating results for the full year. NOTE B - LEGAL - -------------- The current status of litigation is described in Part II, Item 1, herein. NOTE C - LOAN AGREEMENT - ----------------------- In 1995, the Company entered into an amended and restated loan and security agreement (the "Loan Agreement") with Congress Financial Corporation (Central) (the "Lender"). The Loan Agreement provided an original line of credit of $40 million which has been increased to $50 million, with a provision to increase the line to $60 million at the option of the Company. Borrowing availability is determined by a formula based on both accounts receivable and inventories. The interest rate was generally prime rate plus 1% until March 31, 1997. In consideration for entering into the Loan Agreement, the Company paid a $100,000 fee; additional fees of $100,000 were paid as the Company exercised its option to increase the line. The Company has also agreed to pay an unused line fee of 0.25% and certain management fees. The Loan Agreement has been amended to extend until December 31, 1997. The interest rate was prime plus 2% for the period April 1, 1997 through September 30, 1997 and will be prime plus 1% for the period October 1, 1997 through December 31, 1997. A fee of $25,000 was paid for these extensions. On October 10, 1997, the Company signed a letter agreement with the Lender increasing the credit limit to $75 million, extending the Loan Agreement until December 31, 2000 with the interest rate equal to prime. The letter agreement is subject to certain conditions and final documentation.
NOTE D - INVENTORIES - -------------------- (in thousands) September 30 December 31 ------------ ----------- 1997 1996 1996 ---- ---- ---- Finished goods $23,089 $23,165 $19,667 Raw materials and parts 313 54 307 ---------- --------- ---------- $23,402 $23,219 $19,974 ========== ========= ==========
4 NOTE E - RESEARCH AND DEVELOPMENT - --------------------------------- Research and development expenses amounted to $2.1 million and $2.3 million for the three months ended September 30, 1997 and 1996, respectively, and $7.8 million and $7.4 million for the nine months ended September 30, 1997 and 1996, respectively. NOTE F - LONG-TERM DEBT - ----------------------- In February 1996, the Company issued a call for the redemption of its 8% Convertible Subordinated Debentures originally due November 30, 2000 (the "Debentures"). This call resulted in the conversion on March 15, 1996, of all $14,000,000 Debentures at $9.26 per share and the issuance of 1,511,872 new shares of common stock. Unamortized debt issuance costs of $833,000 were charged against additional paid-in capital on conversion of the Debentures. NOTE G - SHAREHOLDERS' EQUITY - ----------------------------- In February 1996, the Company offered to exchange 1.85 shares of its common stock for each Depositary Exchangeable Preferred Share (the "Depositary Shares") outstanding. Each Depositary Share represents 1/10th of a share of $17.00 Convertible Exchangeable Preferred Stock. This inducement offer was accepted by the owners of 98% of the Depositary Shares resulting in the issuance of 3,336,433 shares of common stock on March 29, 1996. Generally accepted accounting principles require a non-cash charge to reduce Net Earnings Applicable to Common Shares in the calculation of Earnings Per Share for the fair value of the securities issued in excess of the existing conversion rate of approximately 1.185 common shares per Depositary Share. This non-cash charge amounted to $24,279,000 or $1.76 per common share in the nine months ended September 30, 1996. Excluding this charge, net earnings for the nine months ended September 30, 1996 would have been $0.38 per common share as compared to $1.38 net loss per common share. The balance of the Depositary Shares were converted at the specified 1.185 exchange rate or redeemed by the Company in June 1996. NOTE H - MICRO MACHINES LICENSE RIGHTS AND LITIGATION SETTLEMENT - ---------------------------------------------------------------- During June 1997, the Company finalized an agreement under which it acquired all outstanding rights to its line of miniature vehicles, playsets and accessories marketed under the Micro Machines(R) brand. The agreement also ended litigation between the Company and Clemens V. Hedeen, Patti Jo Hedeen, and various affiliated entities (the "Licensor") over past royalties claimed by the Licensor and the extent of the Licensor's rights in Micro Machines. Under the agreement, the Company paid the Licensor an initial payment of $22,500,000. Additional amounts with a present value of $4,911,000, as of the agreement date, are due periodically through June 1, 2012. The agreement eliminates all future royalty payments to the Licensor, effective after March 31, 1997. The Company accounted for this agreement by taking a pre-tax charge of $22,949,000 in the quarter ended June 30, 1997. The present value of the remaining balance amounting to $4,462,000 was classified as other assets and is being amortized. 5 NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- The FASB issued three new standards, SFAS No. 128, Earnings per Share, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 128 simplifies the standards for computing earnings per share ("EPS") previously found in APB Opinion No. 15 "Earnings per Share". This new standard replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the three and nine months ended September 30, 1997, SFAS 128 would have had no impact on the reported EPS as primary and basic are equal since the potentially dilutive securities were anti-dilutive. SFAS No. 130 establishes standards for reporting comprehensive income and its components in a financial statement and display of the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital. The Company does not expect the implementation of SFAS No. 130 to have a significant impact on the financial statements. SFAS No. 131 establishes standards for the reporting of selected information about operating segments in annual financial statements and interim financial reports issued to shareholders and the related disclosures about products and services, geographic areas and major customers. The Company has not determined the impact of SFAS No. 131 on the financial statements. The Company will be required to adopt the SFAS 128 for the year ending December 31, 1997, and SFAS 130 and SFAS 131 for the year ending December 31, 1998. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------------------------- Overview - -------- On October 14, 1997, the Company entered into an exclusive, worldwide license with Lucas Licensing Ltd. to make small-scale figures, vehicles, playsets and accessories for the next three Star Wars movies. In addition, the Company's current rights to market toys based on the original Star Wars trilogy was included in the new license. In a separate agreement, the Company also acquired long-term preferential negotiating rights from Lucasfilm Ltd. for the same categories of toys based on new Lucasfilm movies. In consideration of these agreements, the Company has granted the Lucas companies warrants for slightly less than 20% of the Company's issued and outstanding common stock, equal to approximately 3.6 million shares as of the closing date, at an exercise price of $15.00 per share. The new Star Wars agreement also calls for advance payments against future royalties of $140 million payable as the three new films are released. In connection with the acquisition of the Star Wars license, the Company has restructured its product portfolio and changed its product selection strategy. These adjustments are intended to maximize the future value of the rights acquired to market small-scale toys for the next three Star Wars films and the classic Star Wars Trilogy. Therefore, for the three months ended September 30, 1997, the Company incurred special charges amounting to $17.6 million after tax. These special charges principally relate to the costs of discontinuing all of the Company's male action lines introduced in 1996 and 1997, and all future male action properties under development. These charges also include provisions for unrecovered costs associated with the Company's Sky Dancers(R) line, miscellaneous expenses, and expenses incurred for arranging financing the Company ultimately did not need to use in connection with the acquisition of the Star Wars license. Results of Operations - --------------------- The following table sets forth for the periods indicated the percentage relationships between revenues and certain expense and earnings items:
Percentage of Net Revenues Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Net revenues 100.0% 100.0% 100% 100% Costs of products sold 68.1 51.5 61.6 53.6 ---- ---- ---- ---- Gross margin 31.9 48.5 38.4 46.4 Advertising and promotion 21.0 12.5 18.3 13.4 Other selling and administrative 11.4 11.5 13.9 13.0 Royalties, research and development 17.3 11.4 16.4 14.6 ---- ---- ---- ---- Earnings (loss) from operations (17.8) 13.1 (10.2) 5.4 Micro Machines license rights and litigation settlement --- --- (13.0) --- Interest expense (0.2) (1.2) (0.1) (1.5) Other income (expense), net (3.9) 0.1 (1.4) 0.1 Provision for income taxes 8.5 (1.6) 9.6 (0.8) ----- ----- --- ----- Net earnings (loss) (13.4)% 10.4% (15.1)% 3.2% ======= ===== ======= ====
Net earnings (loss) have been affected by certain unusual non-recurring items. A comparison of the net earnings (loss) per common share and the net earnings (loss) per common share adjusted to exclude unusual items is set forth below: 7
Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1997 1996 1997 1996 ---- ---- ---- ---- Net earnings (loss) per common share on a primary basis, as reported $ (0.62) $ 0.57 $(1.47) $(1.38) Net earnings (loss) per common share on a primary basis, adjusted to exclude the unusual items $ (0.62) $ 0.57 $(0.70) $ 0.38
The unusual items excluded are as follows: Acquisition of Micro Machines license rights and litigation settlement of $14.0 million (after tax) in the nine months ended September 30, 1997 and a one-time charge related to the exchange of preferred stock for common stock of $24.3 million in the nine months ended September 30, 1996. 1997 Compared to 1996 - --------------------- Net sales decreased 6% to $83.2 million in the third quarter of 1997 as compared to $88.5 million in the third quarter of 1996. Domestic sales increased 6%, to $57.7 million while international sales decreased 25% to $25.5 million, due to a generally weak European retail environment. The Company's worldwide sales of boys' toys decreased 17% in the third quarter of 1997 as compared to the third quarter of 1996. This decrease was attributable to reduced sales of the Company's Dragon Flyz(TM) and Jonny Quest(TM) lines of toys which accounted for 37% of worldwide boys' toys sales in the third quarter of 1996. This decrease was partially offset by an increase in the worldwide sales of Micro Machines (including Star Wars(TM) Action Fleet(R)), which increased by 16% in the third quarter of 1997 as compared to the third quarter of 1996. United States retail sales success of Micro Machines continued, reaching its nineteenth consecutive quarter of growth. The Company's worldwide sales of girls' toys increased by 27% in the third quarter of 1997 as compared to the third quarter of 1996. This increase was attributable to the introduction of the Company's Anastasia(TM) line and growth in the Company's Pound Puppies(R) line, offset by a decrease in worldwide sales of the Company's Sky Dancers line. Net sales increased 1% to $176.2 million in the nine months ended September 30, 1997 as compared to $175.3 million in the nine months ended September 30, 1996. Domestic sales increased 12%, rising to $124.5 million. International sales decreased 20%, to $51.7 million. This decrease was due to the same factors noted for the third quarter. As discussed above, the Company has discontinued several product lines. These discontinued lines include Dragon Flyz, Jonny Quest and Men in Black(TM), its male action lines introduced in 1996 and 1997. In addition, the Company has discontinued Sky Dancers from the Company's girls' toys line. Gross margins decreased $16.5 million to $26.5 million in the third quarter of 1997 from $43.0 million in the third quarter of 1996. The lower sales volume decreased gross margin by $2.6 million and a decrease in the gross margin rate accounted for $13.9 million. The gross margin rate decreased to 31.9% in the third quarter of 1997 as compared to 48.5% in the third quarter of 1996. The change in the gross margin rate was primarily attributable to provisions for unrecovered costs associated with the Company's discontinued lines including tooling, packaging development, inventory valuation allowances and price concessions offset by a favorable mix of sales between domestic and international markets. The Company's gross margin rate on domestic sales is significantly greater than foreign sales because the Company's prices on foreign sales are lower than on domestic sales as the foreign customer is responsible for the cost of importing and promoting the products. Gross margins decreased $13.7 million to $67.7 million in the nine months ended September 30, 1997 from $81.4 million in the nine months ended September 30, 1996. The gross margin rate decreased to 38.4% in the nine months ended September 30, 1997 as compared to 46.4% in the nine months ended September 30, 1996. This decrease was primarily attributable to the same factors as noted for the third quarter. 8 Advertising and promotion expenses were $17.4 million, or 21.0% of net revenues in the third quarter of 1997, as compared to $11.1 million, or 12.5% of net revenues in the third quarter of 1996. For the nine months ended September 30, 1997, these expenses were $32.3 million, or 18.3% of net revenues as compared to $23.5 million, or 13.4% in the nine months ended September 30, 1996. The increase in the advertising and promotion expenses in both periods reflected higher television advertising expense, trade show and product promotion expenses and sample costs which included the impact of the Company's discontinued lines. Other selling and administrative expenses were $9.5 million in the third quarter of 1997 as compared to $10.2 million in the third quarter of 1996. This decrease was primarily attributable to lower personnel and legal costs partially offset by provisions for expenses associated with the Company's future discontinued lines. For the nine months ended September 30, 1997, these expenses were $24.4 million as compared to $22.9 million in the nine months ended September 30, 1996. Other selling and administrative expenses in the nine months ended September 30, 1996 include a recovery received by the Company in settlement of a claim for damages partially offset by unusual legal expenses related to this claim and a lawsuit. Exclusive of this net recovery in the nine months ended September 30, 1996, other selling and administrative expenses remained relatively unchanged in the nine month comparable periods. Royalties, research and development expenses were $14.4 million in the third quarter of 1997 as compared to $10.1 million in the third quarter of 1996. For the nine months ended September 30, 1997, these expenses were $28.9 million as compared to $25.6 million in the nine months ended September 30, 1996. The increase in royalties, research and development for the three- and nine-month periods was primarily related to the write-off of royalty advances and commitments associated with discontinued products. During the nine months ended September 30, 1997, the Company acquired all outstanding rights to its line of miniature vehicles, playsets and accessories marketed under the Micro Machines brand and settled related litigation. In 1986, the Licensor (as previously defined) licensed a concept to the Company that contributed to the origination of Micro Machines. The Company had paid royalties to the Licensor on the majority of Micro Machines sales. The agreement eliminates all future royalty payments to the Licensor, effective after March 31, 1997. The agreement also ends litigation between the Company and the Licensor over past royalties claimed by the Licensor and the extent of the Licensor's rights in Micro Machines. The Company recorded a pre-tax charge to earnings of $22.9 million in the nine months ended September 30, 1997, relating to this transaction. Additionally, the Company capitalized $4.5 million which is being amortized. Interest expense was $0.1 million in the third quarter of 1997, as compared to $1.1 million in the second quarter of 1996. For the nine months ended September 30, 1997, this expense was $0.3 million as compared to $2.7 million in the nine months ended September 30, 1996. The decrease in interest expense was due to the paydown of the Company's borrowings under its loan agreement with Congress Financial Corporation in the fourth quarter of 1996 and the conversion of the $14 million convertible debentures to common stock in the first quarter of 1996. Other expense was $3.3 million in the third quarter of 1997 as compared to other income of $0.1 million in the third quarter of 1996. For the nine months ended September 30, 1997, other expense was $2.4 million as compared to other income of $0.2 million in the nine months ended September 30, 1996. Other expenses in the three- and nine-month periods ended September 30, 1997 include expenses incurred for arranging financing the Company ultimately did not use in connection with the acquisition of the Star Wars license. The income tax benefit in the third quarter and nine months ended September 30, 1997 reflects the quarterly application of the estimated annual rate based on projected full year earnings. The income tax provision for the three- and nine-month periods ended September 30, 1996 reflects the quarterly application of the estimated annual rate based on projected full-year earnings and includes the effect of the utilization of net operating loss carryforwards and federal tax credits. All of the Company's products are manufactured to its specifications by nonaffiliated parties located in China and, to a lesser extent, other foreign locations. Therefore, the Company could be adversely affected by political or economic unrest or disruptions affecting business in such countries. The Company does not carry insurance for political or economic unrest or disruptions for several reasons, including, but not limited to, costs of such insurance and the limited insurance coverage available. The political unrest in 1989 in China had 9 an insignificant impact on the manufacturing and shipping of the Company's products. There can be no assurance that in the future the Company will not be adversely affected by political or economic disruptions in China or other foreign locations. Further, changes in tariffs could have an adverse effect on the cost of goods imported from China. While China is currently accorded Most Favored Nation ("MFN") status by the United States, this status (which was last renewed in May 1997) is subject to annual review and could be revoked prospectively for any given year. Current MFN tariffs on toys imported into the United States are zero, and the loss of MFN status for China would result in a substantial increase in tariffs applicable to toys imported from China. This increase in duty could be large enough that it could have a material adverse effect on the Company's business, financial condition and results of operations. Products shipped from China to other countries would not be affected by China's loss of MFN status with the United States without similar actions being taken by the other importing countries. Moreover, many other toy companies also source products from China and could be affected to similar degrees. The Company can also be subject to the imposition of retaliatory tariffs or other import restrictions as a result of trade disputes between China and the United States. Generally, trade negotiations over matters in dispute between the two countries have been difficult but have been resolved without the imposition of trade retaliation. In the past, proposed retaliation by the United States has not included increased tariffs or other trade restrictions applicable to toys imported from China. It is possible, however, that some future trade dispute could result in substantial increases in tariffs or other restrictions on imports, such as quotas, of toys from China. These increased tariffs or other restrictions could be imposed under Section 301 of the Trade Act of 1974, as amended, whether or not the trade dispute itself involved toys. Such increased tariffs or other trade restrictions could have a material adverse effect on the Company's business, financial condition and results of operations. The impact on the Company of any political or economic unrest or disruptions in China, the loss of China's MFN status or the imposition of retaliatory trade restrictions on products manufactured in China would depend on several factors, including, but not limited to, the Company's ability to (i) procure alternative manufacturing sources satisfactory to the Company, (ii) retrieve its tooling located in China, (iii) relocate its production in sufficient time to meet demand, and (iv) pass cost increases likely to be incurred as a result of such factors to the Company's customers through product price increases. As a result, any political or economic unrest or disruptions in China, the loss of China's MFN status or the imposition of retaliatory trade restrictions on products manufactured in China could have a material adverse effect on the Company's business, financial condition and results of operations. In 1994, certain quotas on toy products made in China were introduced in the European Economic Community. The quotas did not have a material impact on the Company's business in 1995 and, although no assurance can be given, are not expected to have a material impact on the Company's business in the foreseeable future. In addition, the Company's subsidiary, Galco International Toys, N.V. ("Galco") is located in Hong Kong. On July 1, 1997, ownership of Hong Kong reverted back to China. At the present time, the Company is unable to predict the effect, if any, that such change will have on the Company's or Galco's business, financial condition or results of operations. In addition, changes in the relationship between the United States dollar and the Hong Kong dollar may have an impact on the cost of goods purchased from manufacturers. Disclosure Regarding Forward-Looking Statements - ----------------------------------------------- All statements other than statements of historical fact included in this Form 10-Q Report, including, without limitation the statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements ("Cautionary Statements") include: the demand for the Company's products (including those products developed under the new Star Wars license); the Company's dependence on timely development, introduction and customer acceptance of new products (including those products developed under the new Star Wars license); possible weakness of the Company's markets; the impact of competition on revenues, margins and pricing; the effect of currency fluctuations; other risks and uncertainties as may be disclosed from time to time in the Company's public announcements; the gross national product 10 in the United States and other countries, which also influences demand for the Company's products; customer inventory levels; the cost and availability of raw materials; and changes in trade conditions regarding China. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of one or both of them are expressly qualified in their entirety by such Cautionary Statements. Liquidity, Financial Resources and Capital Expenditures - ------------------------------------------------------- Demand for the Company's products is greatest in the third and fourth quarters of the year. As a result, collections of accounts typically peak in the fourth quarter and early first quarter of the following year. Due to the seasonality of its revenues and collections, the Company's working capital requirements fluctuate significantly during the year. The Company's seasonal financing requirements are usually highest during the fourth quarter of each calendar year. In 1995, the Company entered into an amended and restated loan and security agreement (the "Loan Agreement") with Congress Financial Corporation (Central) (the "Lender"). The Loan Agreement provided an original line of credit of $40 million which has been increased to $50 million, with a provision to increase the line to $60 million at the option of the Company. Borrowing availability is determined by a formula based on both accounts receivable and inventories. The interest rate was generally prime rate plus 1% until March 31, 1997. In consideration for entering into the Loan Agreement, the Company paid a $100,000 fee; additional fees of $100,000 were paid as the Company exercised its option to increase the line. The Company has also agreed to pay an unused line fee of 0.25% and certain management fees. The Loan Agreement has been amended to extend until December 31, 1997. The interest rate was prime plus 2% for the period April 1, 1997 through September 30, 1997 and will be prime plus 1% for the period October 1, 1997 through December 31, 1997. A fee of $25,000 was paid for these extensions. On October 10, 1997, the Company signed a letter agreement with the Lender increasing the credit limit to $75 million, extending the Loan Agreement until December 31, 2000 with the interest rate equal to prime. The letter agreement is subject to certain conditions and final documentation. During the nine months ended September 30, 1997, the Company used $6.2 million of cash in its operating activities. The net cash used by operating activities resulted primarily from the net loss which included the acquisition of the Micro Machines rights and litigation settlement. Also contributing to the use of cash were increases in inventories and deferred taxes, offset by a decrease in accounts receivable and increases in accounts payable and accrued expenses. Working capital was $97.0 million at September 30, 1997 compared to $134.4 million at December 31, 1996 and $56.5 million at September 30, 1996. The ratio of current assets to current liabilities was 2.8 to 1.0 at September 30, 1997 compared to 3.9 to 1.0 at December 31, 1996 and 1.6 to 1.0 at September 30, 1996. The Company had no material commitments for capital expenditures at September 30, 1997. On October 14, 1997, the Company entered into an exclusive, worldwide license with Lucas Licensing Ltd. to make small-scale figures, vehicles, playsets and accessories for the next three Star Wars movies as well as the Company's current rights to market toys based on the original Star Wars trilogy. This licensing agreement calls for advance payment against future royalties of $140 million payable as the three new films are released. The first payment is anticipated to be due in the Spring of 1999. The Company believes that its cash flow from operations, cash on hand and borrowings under the extended credit arrangement will be sufficient to meet its working capital and capital expenditure requirements and provide the Company with adequate liquidity to meet its anticipated operating needs for the foreseeable future. 11 Part II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- Licensing Litigation - -------------------- In June 1995, the Company filed a declaratory judgment action in the United States District Court for the Northern District of California. The suit named Clemens V. Hedeen, Jr., Patti Jo Hedeen, and various affiliated entities, as defendants, and sought a determination that the Company is not obligated to pay royalties to the defendants under their license agreement on certain specific products sold under the Company's "Micro Machines" name and trademark. The defendants filed a cross-complaint for breach of this license agreement claiming, among other things, damages for past royalties allegedly due but not paid under the license agreement, and claiming entitlement to additional royalties on future sales of such product. On June 2, 1997, the Company entered into a Settlement & Release Agreement (the "Agreement") with all of the defendants in this pending litigation. Under the Agreement, the litigation was terminated and the various claims and counterclaims were dismissed with prejudice, and the Company acquired all of the outstanding rights to its "Micro Machines" brand. Acquisition of these rights by the Company has eliminated all future royalty payments by it to the defendants in connection with the Micro Machines brand, effective after March 31, 1997. In October 1995, the Company filed a breach of contract action in the United States District Court for the Northern District of California. The suit named Abrams Gentile Entertainment Inc. and Up, Up and Away as defendants, and alleged damages for the licensing, marketing and sale of products that are in violation of the Company's rights as licensee under its Sky Dancers and Dragon Flyz license agreements with Abrams Gentile Entertainment, Inc. The defendants filed a number of counterclaims, including breach of contract, interference with contractual relationships, misappropriation of copyright, unfair competition and trade libel. The Company has settled all of the open matters in this litigation, and the various claims and counterclaims have been dismissed with prejudice. The settlement will not result in additional liabilities to the Company, and the Company's rights under the license agreements have been preserved. Manufacturer Litigation - ----------------------- In January 1991, the Company, through its wholly owned subsidiary, Galco, filed a lawsuit in Hong Kong against Kader Industrial Co., Ltd. ("Kader") alleging damages suffered by both Galco and the Company as a result of Kader's defective manufacturing of two lead doll items for the Company's Bouncin' Babies toy line in 1990. Kader filed counterclaims alleging breach of 17 individual contracts. In August 1996, the trial court rendered a decision in favor of Kader on the general issue of liability in this matter, including an award of damages based on Kader's counterclaims which was approximately $250,000, plus prejudgment interest. In addition, the court awarded certain litigation costs to Kader, the amount of which will be determined in future proceedings and could substantially exceed the amount of the damages awarded. However, in the opinion of management of the Company, such amount is not likely to have a material adverse effect on the business, financial condition and results of operations of the Company. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 4.1 Warrant, dated as of October 14, 1997, between Lucasfilm Ltd. and Galoob Toys, Inc. 4.2 Warrant, dated as of October 14, 1997, between Lucas Licensing Ltd. and Galoob Toys, Inc. 4.3 Agreement of Strategic Relationship, dated as of October 14, 1997, between Lucasfilm Ltd., a California corporation, and Galoob Toys, Inc. 10 Toy License Agreement, dated as of October 14, 1997, between Lucas Licensing Ltd. and Galoob Toys, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a current report on Form 8K dated October 14, 1997, which sets forth information under Item 5, Other Events and Exhibits. 12 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GALOOB TOYS, INC. (Registrant) Date: November 13, 1997 By: /s/ Roger J. Kowalsky ---------------------------------- Roger J. Kowalsky Executive Vice President, Finance and Chief Financial Officer 13 EXHIBIT INDEX ------------- Exhibit Description 4.1 Warrant, dated as of October 14, 1997, between Lucasfilm Ltd. and Galoob Toys, Inc. 4.2 Warrant, dated as of October 14, 1997, between Lucas Licensing Ltd. and Galoob Toys, Inc. 4.3 Agreement of Strategic Relationship, dated as of October 14, 1997, between Lucasfilm Ltd., a California corporation, and Galoob Toys, Inc. 10 Toy License Agreement, dated as of October 14, 1997, between Lucas Licensing Ltd. and Galoob Toys, Inc. 27 Financial Data Schedule EX-4 2 EXHIBIT 4.1 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. NO SALE, TRANSFER OR OTHER DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (III) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, OR (IV) OTHERWISE COMPLYING WITH THE PROVISIONS OF ARTICLE III OF THIS WARRANT. THIS WARRANT MAY NOT BE TRANSFERRED OTHER THAN TO AN AFFILIATE (AS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) PRIOR TO THE SECOND ANNIVERSARY OF THE CLOSING DATE. WARRANT TO PURCHASE SHARES OF COMMON STOCK AS HEREIN DESCRIBED Dated October 14, 1997 This certifies that for value received: LUCASFILM LTD. or registered assigns, is entitled, subject to the terms set forth herein, to purchase from Galoob Toys, Inc., a Delaware corporation (the "Company"), up to 1,450,000 fully paid and nonassessable shares of the Common Stock of the Company, at the exercise price of fifteen dollars ($15.00) per share, and the number of shares purchasable hereunder are subject to adjustment in certain events, all as more fully set forth under Article IV herein. ARTICLE I. DEFINITIONS ----------- "Additional Stock" means Common Stock, Convertible Securities and Options, other than (i) the Preferred Stock and (ii) Common Stock, Convertible Securities or Options issued to officers, directors, employees or consultants of the Company. "Charter" means the certificate of incorporation of the Company, as filed with the Delaware Secretary of State. NYFS03...:\15\47315\0003\2475\CRTN017R.010 "Closing Date" means October 14, 1997. "Commission" means the Securities and Exchange Commission, or any other federal agency then administering the Securities Exchange Act of 1934 or the Securities Act. "Common Stock" means the Company's Common Stock, par value $.01 per share, any stock into which such stock shall have been changed or any stock resulting from any reclassification of such stock, and any other capital stock of the Company of any class or series now or hereafter authorized having the right to share in distributions either of earnings or assets of the Company without limit as to amount or percentage. "Company" means Galoob Toys, Inc., a Delaware corporation, and any successor corporation. "Convertible Securities" means evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for, with or without payment of additional consideration, shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event or both. "Exercise Period" means the period commencing on the Closing Date and terminating at 5:00 p.m. Pacific Time on the twelfth anniversary of the Closing Date. "Exercise Price" means the exercise price per share of Common Stock set forth in the Preamble to this Warrant, as such price may be adjusted pursuant to Article IV hereof. "Fair Market Value" means (i) If shares of Common Stock are being sold pursuant to a public offering under an effective registration statement under the Securities Act which has been declared effective by the Commission and Fair Market Value is being determined as of the closing of the public offering, the "price to public" specified for such shares in the final prospectus for such public offering; (ii) If shares of Common Stock are then listed or admitted to trading on any national securities exchange or traded on any national market system and Fair Market Value is not being determined as of the date described in clause (i) of this definition, the average of the daily closing prices for the ten trading days before such date. The closing price for each day shall be the last sale price on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange or national market system on which such shares are then listed, admitted to trading or traded; (iii) If no shares of Common Stock are then listed or admitted to trading on any national securities exchange or traded on any national market system or being offered to the public pursuant to a registration described in clause (i) of this definition, the average of the reported closing bid and asked prices thereof on such date in the over-the-counter market as shown by the Nasdaq Stock 2 Market or, if such shares are not then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the New York Stock Exchange selected by the Holder; (iv) If no shares of Common Stock are then listed or admitted to trading on any national exchange or traded on any national market system, if no closing bid and asked prices thereof are then so quoted or published in the over-the-counter market and if no such shares are being offered to the public pursuant to a registration described in clause (i) of this definition, the fair value of a share of Common Stock shall be as determined by an investment bank selected by Holder with the approval of the Company (which approval shall not be unreasonably withheld or delayed), the costs of such investment banker to be paid by the Company. "Fiscal Year" means the fiscal year of the Company. "Holder" means the person in whose name this Warrant is registered on the books of the Company maintained for such purpose and any permitted transferee of all or a portion of this Warrant. "Market Price" means $18 per share of Common Stock, which shall be adjusted in the same manner as provided in Article IV as if it were the Exercise Price. "Option" means any right, warrant or option to subscribe for or purchase shares of Common Stock or Convertible Securities. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, government entities and authorities and other organizations, whether or not legal entities. "Preferred Stock" means a series Preferred Stock with an aggregate liquidation preference on the date of issuance and an aggregate purchase price in an amount not exceeding $30 million. "Principal Executive Office" means the Company's office at 500 Forbes Boulevard, South San Francisco, California 94080 or such other office as designated in writing to the Holder by the Company. "Register," "Registered" and "Registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Rule 144" means Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that the Commission may promulgate. 3 "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Shareholder" means a holder of one or more Warrant Shares. "Warrant" means the warrant dated as of Closing Date issued to the Holder and all warrants issued upon the partial exercise, transfer or division of or in substitution for any Warrant. "Warrant Shares" means the shares of Common Stock issued or issuable upon the exercise of this Warrant provided that if under the terms hereof there shall be a change such that the securities purchasable hereunder shall be issued by an entity other than the Company or there shall be a change in the type or class of securities purchasable hereunder, then the term shall mean the securities issued or issuable upon the exercise of the rights granted hereunder. ARTICLE II. EXERCISE -------- 2.1. Exercise Right; Manner of Exercise. The purchase rights represented by this Warrant may be exercised by the Holder, in whole or in part, at any time and from time to time during the Exercise Period upon (i) surrender of this Warrant, together with an executed notice of exercise, substantially in the form of Exhibit "D-1" ("Notice of Exercise") attached hereto, at the Principal Executive Office, and (ii) payment to the Company of the aggregate Exercise Price for the number of Warrant Shares specified in the Notice of Exercise (such aggregate Exercise Price, the "Total Exercise Price"). The Total Exercise Price shall be paid by check; provided, however, that if the Warrant Shares are acquired in conjunction with a Registration of such Warrant Shares, then the Holder may arrange for the aggregate Exercise Price for such Warrant Shares to be paid to the Company from the proceeds of the sale of such Warrant Shares pursuant to such Registration. The Person or Person(s) in whose name(s) any certificate(s) representing the Warrant Shares which are issuable upon exercise of this Warrant shall be deemed to become the Holder(s) of, and shall be treated for all purposes as the record holder(s) of, such Warrant Shares, and such Warrant Shares shall be deemed to have been issued, immediately prior to the close of business on the date on which this Warrant and Notice of Exercise are presented and payment made for such Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to such Person or Person(s). Certificates for the Warrant Shares so purchased shall be delivered to the Holder within two business days after this Warrant is exercised. If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which the Holder is entitled to purchase hereunder. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issuance tax with respect thereto or any other cost incurred by the Company in connection with the exercise of this Warrant and the related issuance of Warrant Shares. 4 2.2. Conversion of Warrant. (a) Right to Convert. In addition to, and without limiting, the other rights of the Holder hereunder, the Holder shall have the right (the "Conversion Right") to convert this Warrant or any part hereof into Warrant Shares at any time and from time to time during the term hereof. Upon exercise of the Conversion Right, the Company shall deliver to the Holder, without payment by the Holder of any Exercise Price or any cash or other consideration, that number of Warrant Shares computed using the following formula: X = Y (A-B) ------- A Where: X = The number of Warrant Shares to be issued to the Holder Y = The number of Warrant Shares purchasable pursuant to this Warrant or such lesser number of Warrant Shares as may be selected by the Holder A = The Fair Market Value of one Warrant Share as of the Conversion Date B = The Exercise Price (b) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the Principal Executive Office, together with a written statement (the "Conversion Statement") specifying that the Holder intends to exercise the Conversion Right and indicating the number of Warrant Shares to be acquired upon exercise of the Conversion Right. Such conversion shall be effective upon the Company's receipt of this Warrant, together with the Conversion Statement, or on such later date as is specified in the Conversion Statement (the "Conversion Date") and, at the Holder's election, may be made contingent upon the closing of the consummation of the sale of Common Stock pursuant to a Registration. Certificates for the Warrant Shares so acquired shall be delivered to the Holder within a reasonable time, not exceeding two business days after the Conversion Date. If applicable, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which Holder is entitled to purchase hereunder. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issuance tax with respect thereto or any other cost incurred by the Company in connection with the conversion of this Warrant and the related issuance of Warrant Shares; provided that the Holder will be responsible for any transfer taxes in respect of the issuance of Warrant Shares to a Person other than the Holder. 2.3. Fractional Shares. The Company shall not issue fractional shares of Common Stock upon any exercise or conversion of this Warrant. As to any fractional share of Common Stock which the Holder would otherwise be entitled to purchase from the Company upon such exercise or conversion, the Company shall purchase from the Holder such fractional share at a price equal to an amount calculated by multiplying such fractional share (calculated to the nearest 1/100th of a share) by 5 the Fair Market Value of a share of Common Stock on the date of the Notice of Exercise or the Conversion Date, as applicable. Payment of such amount shall be made in cash or by check payable to the order of the Holder at the time of delivery of any certificate or certificates arising upon such exercise or conversion. 2.4. Continued Validity. A Shareholder shall be entitled to all rights and subject to all obligations which a Holder of this Warrant is entitled pursuant to the provisions of this Warrant, except rights and obligations which by their terms apply only to a Warrant. The Company shall, at the time of the exercise of this Warrant, in whole or in part, upon the request of a Shareholder, acknowledge in writing, in form reasonably satisfactory to the Shareholder, its continuing obligation to afford to the Shareholder all rights to which the Shareholder is entitled in accordance with the provisions of this Warrant; provided, however, that if the Shareholder fails to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Shareholder all such rights. ARTICLE III. TRANSFER, EXCHANGE AND REPLACEMENT ---------------------------------- 3.1. Maintenance of Registration Books. The Company shall keep at the Principal Executive Office a register in which, subject to such reasonable regulations as it may prescribe, it shall provide for the registration, transfer and exchange of this Warrant. The Company and any Company agent may treat the Person in whose name this Warrant is registered as the owner of this Warrant for all purposes whatsoever, and neither the Company nor any Company agent shall be affected by any notice to the contrary. 3.2. Restrictions on Transfers. (a) Compliance with Securities Act. The Holder, by acceptance hereof, agrees that this Warrant and the Common Stock to be issued to the Holder upon exercise hereof are being acquired for investment, solely for the Holder's own account and not as a nominee for any other Person, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any such shares of Common Stock except under circumstances which will not result in a violation of the Securities Act. Upon exercise of this Warrant, the Holder shall confirm in writing, by executing the form attached as Exhibit "D-2" hereto, that the shares of Common Stock purchased thereby are being acquired for investment, solely for the Holder's own account and not as a nominee for any other Person, and not with a view toward distribution or resale. (b) Certificate Legends. This Warrant and all Warrant Shares issued upon exercise of this Warrant (unless Registered under the Securities Act) shall be stamped or imprinted with legends in substantially the following form (in addition to any legends required by applicable state securities laws): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR 6 UNDER ANY STATE SECURITIES LAWS. NO SALE, TRANSFER OR OTHER DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF ARTICLE III OF THE WARRANT UNDER WHICH THIS SECURITY WAS ISSUED. In addition, the Warrant (unless Registered under the Securities Act) shall be stamped or imprinted with a legend in substantially the following form: THIS WARRANT MAY NOT BE TRANSFERRED OTHER THAN TO AN AFFILIATE (AS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) PRIOR TO THE SECOND ANNIVERSARY OF THE CLOSING DATE. (c) Additional Restriction on Transfer. The Holder shall not sell, assign or otherwise transfer all or part of this Warrant until the second anniversary of the Closing Date other than in connection with the transfer of the Holder's entire business. (d) Disposition of Warrant or Warrant Shares. With respect to any offer, sale or other disposition of this Warrant or any Warrant Shares issued upon exercise of this Warrant prior to Registration of such shares, the Holder or the Shareholder, as the case may be, agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of the Holder's or Shareholder's counsel to the effect that such offer, sale or other disposition may be effected without Registration under the Securities Act or qualification under any applicable state securities laws of this Warrant or such Warrant Shares, as the case may be, and indicating whether or not under the Securities Act certificates for this Warrant or such Warrant Shares, as the case may be, to be sold or otherwise disposed of, require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Securities Act and any other applicable securities laws. Promptly upon receiving such written notice and reasonably satisfactory opinion the Company, as promptly as practicable, shall notify the Holder or the Shareholder, as the case may be, that it may sell or otherwise dispose of this Warrant or such Warrant Shares, as the case may be, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this subsection (d) that the opinion of counsel for the Holder or the Shareholder, as the case may be, is not reasonably satisfactory to the Company, the Company shall so notify the Holder or the Shareholder, as the case may be, promptly after such determination has been made and shall specify the legal analysis supporting any such conclusion. Notwithstanding the foregoing, this Warrant or such Warrant Shares, as the case may be, may be offered, sold or otherwise disposed of in accordance with Rule 144, provided that the Company shall have been furnished with such information as the Company may reasonable request to provide reasonable assurance that the provisions of Rule 144 have been satisfied. Each certificate representing this Warrant or the shares thus transferred (except a transfer pursuant to 7 Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Securities Act, unless in the aforesaid reasonably satisfactory opinion of counsel for the Holder or the Shareholder, as the case may be, such legend is not necessary in order to insure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. (e) Warrant Transfer Procedure. Transfer of this Warrant to a third party, following compliance with the preceding subsections of this Article III, shall be effected by execution of the Assignment Form attached hereto as Exhibit "D-3", and surrender for registration of transfer of this Warrant at the Principal Executive Office, together with funds sufficient to pay any applicable transfer tax. Upon receipt of the duly executed Assignment Form and the necessary transfer tax funds, if any, the Company, at its expense, shall execute and deliver, in the name of the designated transferee or transferees, one or more new Warrants representing the right to purchase a like number of shares of Common Stock. (f) Termination of Restrictions. The restrictions imposed under this Section 3.2 upon the transferability of the Warrant (other than those in Section 3.2(c)) and the shares of Common Stock acquired upon the exercise of this Warrant shall cease when (i) a registration statement covering the applicable securities becomes effective under the Securities Act, (ii) the Company is presented with an opinion of counsel reasonably satisfactory to the Company that such restrictions are no longer required in order to insure compliance with the Securities Act or with a Commission "no-action" letter stating that future transfers of such securities by the transferor or the contemplated transferee would be exempt from registration under the Securities Act, or (iii) such securities may be transferred in accordance with Rule 144(k). When such restrictions terminate, the Company shall, or shall instruct its transfer agent to, promptly, and without expense to the Holder or the Shareholder, as the case may be, issue new securities in the name of the Holder and/or the Shareholder, as the case may be, not bearing the legends required under subsection (b) of this Section 3.2. 3.3. Exchange. At the Holder's option, this Warrant may be exchanged for other Warrants representing the right to purchase a like aggregate number of shares of Common Stock upon surrender of this Warrant at the Principal Executive Office. Whenever this Warrant is so surrendered to the Company at the Principal Executive Office for exchange, the Company shall execute and deliver the Warrants which the Holder is entitled to receive. All Warrants issued upon any registration of transfer or exchange of Warrants shall be the valid obligations of the Company, evidencing the same rights, and entitled to the same benefits, as the Warrants surrendered upon such registration of transfer or exchange. No service charge shall be made for any exchange of this Warrant. 3.4. Replacement. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (i) in the case of any such loss theft or destruction, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or (ii) in the case of any such mutilation, upon surrender of such Warrant for cancellation at the Principal Executive Office, the Company, at its expense, shall execute and deliver, in lieu thereof, a new Warrant. 8 ARTICLE IV. ANTIDILUTION PROVISIONS ----------------------- 4.1. Reorganization, Reclassification or Recapitalization of the Company. In case of (1) a capital reorganization, reclassification or recapitalization of the Company's capital stock (other than in the cases referred to in Section 4.2 hereof), (2) the Company's consolidation or merger with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted, by virtue of the merger, into other property, whether in the form of securities, cash or otherwise, or (3) the sale or transfer of the Company's property as an entirety or substantially as an entirety, then, as part of such reorganization, reclassification, recapitalization, merger, consolidation, sale or transfer, lawful provision shall be made so that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof (in lieu of or in addition to the number of shares of Common Stock theretofore deliverable, as appropriate), and without payment of any additional consideration, the number of shares of stock or other securities or property to which the holder of the number of shares of Common Stock which would otherwise have been deliverable upon the exercise of this Warrant or any portion thereof at the time of such reorganization, reclassification, recapitalization, consolidation, merger, sale or transfer would have been entitled to receive in such reorganization, reclassification, recapitalization, consolidation, merger, sale or transfer. This Section 4.1 shall apply to successive reorganizations, reclassifications, recapitalizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. 4.2. Reclassifications. If the Company changes any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefore shall be appropriately adjusted. 4.3. Splits and Combinations. If the Company at any time subdivides any of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely if the outstanding shares of Common Stock are combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. Upon any adjustment of the Exercise Price under this Section 4.3, the number of shares of Common Stock issuable upon exercise of this Warrant shall equal the number of shares determined by dividing (i) the aggregate Exercise Price payable for the purchase of all shares issuable upon exercise of this Warrant immediately prior to such adjustment by (ii) the Exercise Price per share in effect immediately after such adjustment. 4.4. Dividends and Distributions. If the Company declares a dividend or other distribution on the Common Stock or if a dividend or other distribution on the Common Stock occurs pursuant to the Charter (other than a cash dividend or distribution), then, as part of such dividend or distribution, 9 lawful provision shall be made so that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof, in addition to the number of shares of Common Stock receivable thereupon and without payment of any additional consideration, the amount of the dividend or other distribution to which the holder of the number of shares of Common Stock obtained upon exercise hereof would have been entitled to receive had the exercise occurred as of the record date for such dividend or distribution. 4.5. Liquidation; Dissolution. If the Company shall dissolve, liquidate or wind up its affairs, the Holder shall have the right, but not the obligation, to exercise this Warrant effective as of the date of such dissolution, liquidation or winding up. If any such dissolution, liquidation or winding up results in any cash distribution to the Holder in excess of the aggregate Exercise Price for the shares of Common Stock for which this Warrant is exercised, then the Holder may, at its option, exercise this Warrant without making payment of such aggregate Exercise Price and, in such case, the Company shall, upon distribution to the Holder, consider such aggregate Exercise Price to have been paid in full, and in making such settlement to the Holder, shall deduct an amount equal to such aggregate Exercise Price from the amount payable to the Holder. 4.6. Antidilution. (a) Adjustment of Exercise Price. If the Company issues any Additional Stock for no consideration or for a consideration per share of Common Stock (which, in the case of Convertible Securities or Options shall be the consideration paid to purchase such security plus the conversion price, exercise price or exchange price, as the case may be, per share of Common Stock) ("Additional Stock Price") less than the Market Price in effect immediately prior to the time of such issuance (with the value of any non-cash consideration paid for such Additional Stock reasonably determined by the Company's Board of Directors), then the Exercise Price shall be reduced to a price equal to the Exercise Price in effect immediately prior to such adjustment less the difference between such Market Price and the Additional Stock Price; provided, however, that (i) if any Convertible Securities or Options expire or otherwise terminate prior to the exercise, conversion or exchange of such securities for Common Stock ("Expiring Additional Securities"), such Expiring Additional Securities shall no longer constitute Additional Stock for purposes of adjustments under this Section 4.6, and the Exercise Price shall upon such expiration or termination be readjusted to equal what the Exercise Price would have been if those Expiring Additional Securities (and only those Expiring Additional Securities) had never been issued and (ii) if shares of Common Stock are issued pursuant to Convertible Securities or Options at a price different from the Additional Stock Price originally calculated for such Convertible Securities or Options, the Additional Stock Price for such Convertible Securities or Options shall be recalculated to equal the actual price paid per share of Common Stock in respect of such issuance, and the Exercise Price shall be readjusted accordingly. (b) Adjustment of Number of Shares Purchasable. Upon any adjustment of the Exercise Price under subsection (a) of this Section 4.6, the number of shares of Common Stock issuable upon exercise of this Warrant shall equal the number of shares determined by dividing (i) the Market Price immediately prior to such adjustment multiplied by the number of shares issuable upon exercise of 10 this Warrant immediately prior to such adjustment by (ii) the Market Price per share in effect immediately after such adjustment. 4.7. Maximum Exercise Price. At no time shall the Exercise Price exceed the amount set forth in the Preamble to this Warrant, unless the Exercise Price is adjusted pursuant to Section 4.3 hereof. 4.8. Other Dilutive Events. If any event occurs as to which the other provisions of this Article IV are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof, then, in each such case, the Company shall appoint a firm of independent public accountants of recognized national standing (which may be the Company's regular auditors) which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in this Article IV, necessary to preserve, without dilution, the purchase rights represented by this Warrant; provided, that no adjustments shall be made in connection with the issuance of Common Stock upon exercise, conversion or exchange of Options or Convertible Securities to the extent that adjustment has previously been made upon issuance of such Options or Convertible Securities and each lowering of the effective purchase price of Common Stock pursuant to such Option or Convertible Securities. Upon receipt of such opinion, the Company shall promptly mail a copy thereof to the Holder and shall make the adjustments described therein. 4.9. Certificates and Notices. (a) Adjustment Certificates. Upon any adjustment of the Exercise Price and/or the number of shares of Common Stock purchasable upon exercise of this Warrant, a certificate, signed by (i) the Company's President or Chief Financial Officer, or (ii) any independent firm of certified public accountants of recognized national standing the Company selects at its own expense, setting forth in reasonable detail the events requiring the adjustment and the method by which such adjustment was calculated, shall be mailed to the Holder and shall specify the adjusted Exercise Price and the number of shares of Common Stock purchasable upon exercise of the Warrant after giving effect to the adjustment. (b) Extraordinary Corporate Events. If the Company, after the date hereof, proposes to effect (i) any transaction described in Sections 4.1 or 4.2 hereof or (ii) a liquidation, dissolution or winding up of the Company described in Section 4.5 hereof, then, in each such case, the Company shall mail to the Holder a notice describing such proposed action and specifying the date on which the Company's books shall close, or a record shall be taken, for determining the holders of or Common Stock entitled to participate in such action, or the date on which such reorganization, reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders of Common Stock of record shall be entitled to receive securities and/or other property deliverable upon such action, if any such date is to be fixed. Such notice shall be mailed to the Holder at least twenty days prior to the record date for such action in the case of any action described in clause (i) or clause (iii) above, and 11 in the case of any action described in clause (ii) above, at least twenty days prior to the date on which the action described is to take place and at least twenty days prior to the record date for determining holders of Common Stock entitled to receive securities and/or other property in connection with such action. 4.10. No Impairment. The Company shall not, by amendment of the Charter or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Article IV and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. 4.11. Application. Except as otherwise provide herein, all sections of this Article IV are intended to operate independently of one another. If an event occurs that requires the application of more than one section, all applicable sections shall be given independent effect. ARTICLE V. REGISTRATION RIGHTS ------------------- 5.1. Registration on Form S-3. 5.1.1. Filing of Registration Statement. The Company shall use its best efforts to secure effectiveness of, as soon as practicable, and shall file no later than 15 business days after the Closing Date, a registration statement in form and substance satisfactory to the Holder on Form S-3 (the "Registration Statement") with the Commission under the Securities Act to register: (i) the resale of the Warrant; (ii) the exercise of the Warrant by any person, other than Lucasfilm Ltd. or any transferee of Warrants prior to the resale of Warrants pursuant to the Registration Statement; and (iii) the Warrant Shares issued upon exercise of the Warrant by any person and the resale of any such Warrant Shares by Lucasfilm Ltd. or any transferee of Warrants who exercised such Warrants and received Warrant Shares otherwise than pursuant to the Registration Statement. The Company shall amend such Registration Statement (or file a new Registration Statement) (i) to include issuance of the Warrant Shares to Lucasfilm Ltd. after one year from the Closing Date and (ii) to include the transfer of the Warrant after two years from the Closing Date (the Warrant and the Warrant Shares constituting the "Registrable Securities"); provided however, that in the event the Company fails to file reports in a timely manner or otherwise fails (due to an action or inaction of the Company) to be eligible to file a registration statement on Form S-3, the Company shall file a registration statement or a post-effective registration statement, as the case may be, on Form S-1. In the event of a change in the interpretive position of the staff of the Commission with respect to registration under the Securities Act of warrants, the exercise of warrants and the sale of securities into which warrants can be exercised, the Company shall comply with such changed position promptly after consultation with counsel to Lucasfilm Ltd. 5.1.2. Registrable Expenses. The Company shall pay all Registration Expenses (as defined below) in connection with any registration, qualification or compliance hereunder, and each 12 Holder shall pay all Selling Expenses (as defined below) and other expenses that are not Registration Expenses relating to the Registrable Securities resold by such Holder. "Registration Expenses" shall mean all expenses, except for Selling Expenses, incurred by the Company in complying with the registration provisions herein described, including, without limitation, all registration, qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration. "Selling Expenses" shall mean all selling commissions, underwriting fees and stock transfer taxes applicable to the Registrable Securities and all fees and disbursements of counsel for any Holder. 5.1.3. Additional Company Obligations. In the case of any registration effected by the Company pursuant to these registration provisions, the Company will use its best efforts to: keep such registration effective until such date as all of the Registrable Securities have been sold; (ii) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of the Registrable Securities; (iii) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (iv) cause all such Registrable Securities registered as described herein to be listed on each securities exchange and quoted on each quotation system on which similar securities issued by the Company are then listed or quoted; (v) provide a transfer agent and registrar for all Registrable Securities registered pursuant to the Registration Statement and a CUSIP number for all such Registrable Securities; (vi) use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securityholders, to the extent required, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (vii) file the documents required of the Company and otherwise use its best efforts to maintain requisite blue sky clearance in (A) all jurisdictions in which any of the Warrant Shares are originally sold and (B) all other states specified in writing by a Holder as may reasonably be required to sell such Holder's Warrant Shares, provided as to clause (B), however, that the Company shall not be required to qualify to do business or consent to service of process in any state in which it is not now so qualified or has not so consented. 5.1.4. Conditions and Limitations (a) Cooperation by Holder. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Article V in respect of the Registrable Securities that the Holder shall furnish to the Company such information regarding such Registrable Securities and the intended method of disposition thereof as the Company shall reasonably request and as shall be required in connection with the action taken by the Company. (b) Notification Prior to Sale. If any Holder shall propose to sell any Registrable Securities pursuant to the Registration Statement, it shall notify the Company of its intent to do so at least three full business days prior to such sale, and the provision of such notice to the 13 Company shall be deemed to establish an agreement by such Holder to comply with the registration provisions contained herein. Such notice shall be deemed to constitute a representation that any information previously supplied by such Holder is accurate as of the date of such notice. At any time within such three business day period, the Company may refuse to permit the Holder to resell any Registrable Securities pursuant to the Registration Statement; provided, however, that in order to exercise this right, the Company must deliver a certificate in writing to the Holder to the effect that a delay in such sale is necessary because, in the good faith judgment of the Company, a sale pursuant to the Registration Statement would require the public disclosure of information that would not otherwise be required to be disclosed (which disclosure would, in the good faith judgment of the Company, have a material adverse effect on the Company) or could in other respects constitute a violation of the federal securities laws. In such an event, the Company shall use its best efforts to amend the Registration Statement to the extent required to comply with Section 5.1.4 and to take all other actions necessary to allow such sale under the federal securities laws, and shall notify the Holders promptly after it has determined that such circumstances no longer exist. Notwithstanding the foregoing, the Company shall not under any circumstances be entitled to refuse to permit the Holder to resell any Registrable Securities more than twice in any twelve-month period, and any individual period during which the Company refuses to permit the Holder to resell any Registrable Securities shall not exceed sixty days. Subject to the foregoing, when a Holder is entitled to sell and gives notice of its intent to sell pursuant to the Registration Statement, the Company shall furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing. 5.2. Indemnification and Contribution. 5.2.1. Indemnification by the Company. The Company agrees to indemnify and hold harmless each Holder from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which such Holder may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any claim by a third party asserting any untrue statement of a material fact contained in the Registration Statement or omission of a material fact therefrom necessary to make the statements therein not misleading, on the effective date thereof, or arise out of any failure by the Company to fulfill any undertaking included in the Registration Statement, and the Company will, as incurred, reimburse such Holder for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damages or liability arises out of, or is based upon (i) an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder specifically for use in preparation of the Registration Statement or (ii) any untrue statement in any prospectus that is corrected in any subsequent prospectus that was delivered to the Holder prior to the pertinent sale or sales by the Holder. 14 5.2.2. Indemnification by Holder. Each Holder, severally and not jointly, agrees to indemnify and hold harmless the Company from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which the Company may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon any claim by a third party asserting (i) an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder specifically for use in preparation of the Registration Statement, provided, however, that no Holder shall be liable in any such case for any untrue statement included in any prospectus which statement has been corrected, in writing, by such Holder and delivered to the Company at least three business days before the sale from which such loss occurred or (ii) any untrue statement in any prospectus that is corrected in any subsequent prospectus that was delivered to the Holder prior to the pertinent sale or sales by the Holder, and each Holder, severally and not jointly, will, as incurred, reimburse the Company for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim. 5.2.3. Indemnification Procedures. Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 5.2, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and the indemnifying person shall have been notified thereof, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified person. After notice from the indemnifying person to such indemnified person of the indemnifying person's election to assume the defense thereof, the indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate in the reasonable opinion of counsel for the indemnified person for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that in the case of the immediately preceding proviso the indemnifying person shall not be responsible for the legal expenses of more than one counsel for all indemnified persons. 5.2.4. Contribution in Lieu of Indemnity. If the indemnification provided for in this Section 5.2 is unavailable to or insufficient to hold harmless an indemnified party under Section 5.2.1 or 5.2.2 above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefit and relative fault of the respective parties as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied 15 by the Company on the one hand or a Holder on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 5.2.4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5.2.4. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 5.2.4 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.2.4, no Holder shall be required to contribute any amount in excess of the net amount received by the Holder from the sale of the Registrable Securities to which such loss relates. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 5.2.4 to contribute are several in proportion to their respective sales of Registrable Securities to which such loss relates and not joint. 5.2.5. Controlling Persons Indemnified. The obligations of the Company and the Holders under this Section 5.2 shall be in addition to any liability which the Company and the respective Holders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company or any Holder within the meaning of the Securities Act including, without limitation, the directors and officers of the Company and the Holder, as the case may be. 5.3. Transfer of Registration Rights. The right to sell Registrable Securities pursuant to the registration statement described herein will automatically be assigned to each transferee of the Warrant or Warrant Shares. In the event that it is necessary, in order to permit a Holder to sell Registrable Securities pursuant to the Registration Statement, to amend the Registration Statement to name such Holder, such Holder shall, upon written notice to the Company, be entitled to have the Company make such amendment as soon as reasonably practicable. ARTICLE VI. REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY ---------------------------------------------------- 6.1. Representations and Warranties. The Company represents and warrants that: (a) Legal Status; Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware and is qualified or licensed to do business in all other countries, states and provinces in which the laws thereof require the Company to qualify and/or be licensed, except where failure to qualify or be licensed would not have a material adverse effect on the business or assets of the Company taken as a whole; 16 (b) Capitalization. The Company's authorized capital stock consists of: 50,000,000 shares of Common Stock, of which shares are issued and outstanding and 1,000,000 shares of preferred stock, par value $1.00 per share, of which 30,000 shares Preferred Stock are outstanding; (c) Options. Except as described in Exhibit "D-4" hereto there are no Options, warrants or similar rights to acquire from the Company, or agreements or other obligations by the Company, absolute or contingent, to issue or sell Common Stock, whether on conversion or exchange of Convertible Securities or otherwise; (d) Preemptive Rights. No shareholder of the Company has any preemptive rights to subscribe for shares of Common Stock; (e) Authority. The Company has the right and power, and is duly authorized and empowered, to enter into, execute, deliver and perform its obligations under this Warrant; (f) Binding Effect. This Warrant has been duly authorized, executed and delivered and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity; (g) No Conflict. The execution, delivery and/or performance by the Company of this Warrant shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in the Company's Charter or Bylaws or contained in any agreement, instrument or document to which the Company is a party or by which it is bound; (h) Consents. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the valid issuance of the Warrant or for the performance of any of the Company's obligations hereunder, except in connection with listing on the New York Stock Exchange, which filings will be effected in accordance with the rules and regulations of the New York Stock Exchange; (i) Offering. Neither the Company nor any agent acting on its behalf has, either directly or indirectly, sold, offered for sale or disposed of, or attempted or offered to dispose of, this Warrant or any part hereof, or any similar obligation of the Company, to, or has solicited any offers to buy any thereof from, any Person or Persons other than the Holder. Neither the Company nor any agent acting on its behalf will sell or offer for sale or dispose of, or attempt or offer to dispose of, this Warrant or any part thereof to, or solicit any offers to buy any warrant of like tenor from, or otherwise approach or negotiate in respect thereof, with, any Person or Persons so as thereby to bring the issuance of this Warrant within the provisions of Section 5 of the Securities Act; (j) Registration. It is not necessary in connection with the issuance and sale of this Warrant to the Holder to Register this Warrant under the Securities Act. 17 6.2. Covenants. The Company covenants that: (a) Authorized Shares. The Company will at all times have authorized, and reserved for the purpose of issuance or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant (for purposes of determining compliance with this covenant, the shares of Common Stock issuable upon exercise of all other Options and warrants to acquire Common Stock and upon conversion of all instruments convertible into Common Stock shall be deemed issued and outstanding); (b) Proper Issuance. The Company, at its expense, will take all such action as may be necessary to assure that the Common Stock issuable upon the exercise of this Warrant may be so issued without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange or automated quotation system upon which any capital stock of the Company may be listed or quoted, as the case may be. Such action may include, but not be limited to, causing such shares to be duly registered or approved, listed or quoted on relevant domestic securities exchanges or automated quotation systems; and (c) Fully Paid Shares. The Company will take all actions necessary or appropriate to validly and legally issue fully paid and nonassessable shares of Common Stock upon exercise of this Warrant. All such shares will be free from all taxes, liens and charges with respect to the issuance thereof, other than any stock transfer taxes in respect to any transfer occurring contemporaneously with such issuance. ARTICLE VII. MISCELLANEOUS ------------- 7.1. Certain Expenses. The Company shall pay all expenses in connection with, and all taxes (other than stock transfer and income taxes) and other governmental charges that may be imposed in respect of, the issuance, sale and delivery of the Warrant and the Warrant Shares. 7.2. Holder Not a Shareholder. Prior to the exercise of this Warrant as hereinbefore provided, the Holder shall not be entitled to any of the rights of a shareholder of the Company including, without limitation, the right as a shareholder (i) to vote on or consent to any proposed action of the Company or (ii) except as provided herein, to receive (a) dividends or any other distributions made to shareholders, (b) notice of or attend any meetings of shareholders of the Company or (c) notice of any other proceedings of the Company. 7.3. Like Tenor. All Warrants shall at all times be substantially identical except as to the Preamble. 7.4. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate to the fullest extent permitted by law, and 18 that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 7.5. Enforcement Costs. If any party to, or beneficiary of, this Warrant seeks to enforce its rights hereunder by legal proceedings or otherwise, then the non-prevailing party shall pay all reasonable costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys' fees (including the allocable costs of in-house counsel). 7.6. Nonwaiver; Cumulative Remedies. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder and/or any Shareholder shall operate as a waiver of such right or otherwise prejudice the rights, powers or remedies of the Holder or such Shareholder. No single or partial waiver by the Holder and/or any Shareholder of any provision of this Warrant or of any breach or default hereunder or of any right or remedy shall operate as a waiver of any other provision, breach, default right or remedy or of the same provision, breach, default, right or remedy on a future occasion. The rights and remedies provided in this Warrant are cumulative and are in addition to all rights and remedies which the Holder and each Shareholder may have in law or in equity or by statute or otherwise. 7.7. Notices. Any notice, demand or delivery to be made pursuant to this Warrant will be sufficiently given or made if sent by certified or registered mail, postage prepaid, nationally recognized overnight delivery service or facsimile transmission, addressed to (a) the Holder and the Shareholders at their last known addresses appearing on the books of the Company maintained for such purpose or (b) the Company at its Principal Executive Office. The Holder, the Shareholders and the Company may each designate a different address by notice to the other pursuant to this Section 7.7. A notice shall be deemed effective upon receipt. 7.8. Successors and Assigns. This Warrant shall be binding upon, the Company and any Person succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company with respect to the shares of Common Stock issuable upon exercise of this Warrant shall survive the exercise, expiration or termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the Holder, each Shareholder and their respective successors and assigns. The Company shall, at the time of exercise of this Warrant, in whole or in part, upon request of the Holder or any Shareholder but at the Company's expense, acknowledge in writing its continuing obligations hereunder with respect to rights of the Holder or such Shareholder to which it shall continue to be entitled after such exercise in accordance with the terms hereof; provided that the failure of the Holder or any Shareholder to make any such request shall not affect the continuing obligation of the Company to the Holder or such Shareholder in respect of such rights. 19 7.9. Modification; Severability. (a) If, in any action before any court or agency legally empowered to enforce any term, any term is found to be unenforceable, then such term shall be deemed modified to the extent necessary to make it enforceable by such court or agency. (b) If any term is not curable as set forth in subsection (a) above, the unenforceability of such term shall not affect the other provisions of this Warrant but this Warrant shall be construed as if such unenforceable term had never been contained herein. 7.10. Integration. This Warrant replaces all prior and contemporaneous agreements and supersedes all prior and contemporaneous negotiations between the parties with respect to the transactions contemplated herein and constitutes the entire agreement of the parties with respect to the transactions contemplated herein. 7.11. Survival of Representations and Warranties. The representations and warranties of any party in this Warrant shall survive the execution and delivery of this Warrant and the consummation of the transactions contemplated hereby, notwithstanding any investigation by the such party or its agents. 7.12. Amendment. This Warrant may not be modified or amended except by written agreement of the Company, the Holder and the Shareholder(s), if any, holding a majority of the Warrant Shares. 7.13. Headings. The headings of the Articles and Sections of this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 7.14. Meanings. Whenever used in this Warrant, any noun or pronoun shall be deemed to include both the singular and plural and to cover all genders; and the words "herein," "hereof" and "hereunder" and words of similar import shall refer to this instrument as a whole, including any amendments hereto. 7.15. Governing Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts entered into and to be performed wholly within California by California residents. 20 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer this October 14, 1997. LUCASFILM LTD. ("Holder") GALOOB TOYS, INC. ("Company") By: /s/ Gordon Radley By: /s/ Mark Goldman ------------------------- ------------------------- Title: Title: President and CEO ---------------------- ---------------------- 21 SCHEDULE OF EXHIBITS -------------------- EXHIBIT "D-1"-Notice of Exercise (Section 2.1) EXHIBIT "D-2"-Investment Representation Certificate (Section 3.2(a)) EXHIBIT "D-3"-Assignment Form (Section 3.2(d)) EXHIBIT "D-4"-Schedule of Options and Preemptive Rights (Sections 6.1(c) and 6.1(d)) 22 EXHIBIT "D-1" NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant hereby irrevocably exercises the within Warrant for and purchases shares of Common Stock of Galoob Toys, Inc. and herewith makes payment therefor in the amount of $_________, all at the price and on the terms and conditions specified in the within Warrant and requests that a certificate (or _____ certificates in denominations of shares) for the shares of Common Stock of Galoob Toys, Inc. hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) [NAME], whose address is and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of Galoob Toys, Inc. not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b) [NAME], whose address is ------------------------------. Dated: ______________________ NOTICE: The signature to this Notice of Exercise must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. 23 EXHIBIT "D-2" INVESTMENT REPRESENTATION CERTIFICATE ------------------------------------- Purchaser: Company: Galoob Toys, Inc. Security: Common Stock Amount: Date: (a) In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to the Company as follows: (b) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"); (c) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefor, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein; (d) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased; and (e) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: (i) the availability of certain public information about the Company; (ii) the resale occurring not less than one year after the party has purchased and paid for the securities to be sold; (iii) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of 24 securities being sold during any three-month period not exceeding the specified limitations stated therein. The Purchaser represents that it is an "accredited investor" as that term is defined in Rule 501 of Regulation D under the Securities Act or any successor regulation thereunder. Date: _________________________ PURCHASER: _____________________ 25 EXHIBIT "D-3" ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _____ , whose address is ____________ all of the rights of the undersigned under the within Warrant, with respect to shares of Common Stock of Galoob Toys, Inc. and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of Galoob Toys, Inc. not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint ____________ attorney to register such transfer on the books of Galoob Toys, Inc. maintained for the purpose, with full power of substitution in the premises. Dated: _________________________ ------------------------------------ ------------------------------------ By: -------------------------------- (Signature of Registered Holder) Title: ----------------------------- NOTICE: The signature to this Assignment must correspond with the name upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. 26 EXHIBIT "D-4" OUTSTANDING OPTIONS AND PREEMPTIVE RIGHTS ----------------------------------------- (Sections 6.1(c) and 6.1(d)) Options 1. Options to purchase shares of the Company's Common Stock are outstanding pursuant to the following employee benefit plans: o 1984 Amended and Restated Employee Stock Option Plan o 1994 Senior Management Stock Option Plan o 1995 Non-Employee Director Stock Option Plan o 1996 Share Incentive Plan 2. Gerard Klauer Mattison & Co., LLC holds a warrant to purchase 25,000 shares of Common Stock. 3. Each share of Common Stock has appurtenant thereto one preferred stock purchase right (a "Right") issued pursuant to the Company's Stockholder Rights Plan. Upon the occurrence of certain events involving a change in control of the Company, Rights not held by an "acquiring person" will entitle the holder to purchase shares of Common Stock pursuant to the terms of the Stockholder Rights Plan. Preemptive Rights None. 27 EX-4 3 EXHIBIT 4.2 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. NO SALE, TRANSFER OR OTHER DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (I) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (II) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (III) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, OR (IV) OTHERWISE COMPLYING WITH THE PROVISIONS OF ARTICLE III OF THIS WARRANT. THIS WARRANT MAY NOT BE TRANSFERRED OTHER THAN TO AN AFFILIATE (AS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) PRIOR TO THE SECOND ANNIVERSARY OF THE CLOSING DATE. WARRANT TO PURCHASE SHARES OF COMMON STOCK AS HEREIN DESCRIBED Dated October 14, 1997 This certifies that for value received: LUCAS LICENSING LTD. or registered assigns, is entitled, subject to the terms set forth herein, to purchase from Galoob Toys, Inc., a Delaware corporation (the "Company"), up to 2,130,000 fully paid and nonassessable shares of the Common Stock of the Company, at the exercise price of fifteen dollars ($15.00) per share, and the number of shares purchasable hereunder are subject to adjustment in certain events, all as more fully set forth under Article IV herein. ARTICLE I. DEFINITIONS ----------- "Additional Stock" means Common Stock, Convertible Securities and Options, other than (i) the Preferred Stock and (ii) Common Stock, Convertible Securities or Options issued to officers, directors, employees or consultants of the Company. "Charter" means the certificate of incorporation of the Company, as filed with the Delaware Secretary of State. "Closing Date" means October 14, 1997. NYFS03...:\15\47315\0003\2475\CRTN017P.570 "Commission" means the Securities and Exchange Commission, or any other federal agency then administering the Securities Exchange Act of 1934 or the Securities Act. "Common Stock" means the Company's Common Stock, par value $.01 per share, any stock into which such stock shall have been changed or any stock resulting from any reclassification of such stock, and any other capital stock of the Company of any class or series now or hereafter authorized having the right to share in distributions either of earnings or assets of the Company without limit as to amount or percentage. "Company" means Galoob Toys, Inc., a Delaware corporation, and any successor corporation. "Convertible Securities" means evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for, with or without payment of additional consideration, shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event or both. "Exercise Period" means the period commencing on the Closing Date and terminating at 5:00 p.m. Pacific Time on the twelfth anniversary of the Closing Date. "Exercise Price" means the exercise price per share of Common Stock set forth in the Preamble to this Warrant, as such price may be adjusted pursuant to Article IV hereof. "Fair Market Value" means (i) If shares of Common Stock are being sold pursuant to a public offering under an effective registration statement under the Securities Act which has been declared effective by the Commission and Fair Market Value is being determined as of the closing of the public offering, the "price to public" specified for such shares in the final prospectus for such public offering; (ii) If shares of Common Stock are then listed or admitted to trading on any national securities exchange or traded on any national market system and Fair Market Value is not being determined as of the date described in clause (i) of this definition, the average of the daily closing prices for the ten trading days before such date. The closing price for each day shall be the last sale price on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange or national market system on which such shares are then listed, admitted to trading or traded; (iii) If no shares of Common Stock are then listed or admitted to trading on any national securities exchange or traded on any national market system or being offered to the public pursuant to a registration described in clause (i) of this definition, the average of the reported closing bid and asked prices thereof on such date in the over-the-counter market as shown by the Nasdaq Stock Market or, if such shares are not then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, 2 and in either case as reported by any member firm of the New York Stock Exchange selected by the Holder; (iv) If no shares of Common Stock are then listed or admitted to trading on any national exchange or traded on any national market system, if no closing bid and asked prices thereof are then so quoted or published in the over-the-counter market and if no such shares are being offered to the public pursuant to a registration described in clause (i) of this definition, the fair value of a share of Common Stock shall be as determined by an investment bank selected by Holder with the approval of the Company (which approval shall not be unreasonably withheld or delayed), the costs of such investment banker to be paid by the Company. "Fiscal Year" means the fiscal year of the Company. "Holder" means the person in whose name this Warrant is registered on the books of the Company maintained for such purpose and any permitted transferee of all or a portion of this Warrant. "Market Price" means $18 per share of Common Stock, which shall be adjusted in the same manner as provided in Article IV as if it were the Exercise Price. "Option" means any right, warrant or option to subscribe for or purchase shares of Common Stock or Convertible Securities. "Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, government entities and authorities and other organizations, whether or not legal entities. "Preferred Stock" means a series Preferred Stock with an aggregate liquidation preference on the date of issuance and an aggregate purchase price in an amount not exceeding $30 million. "Principal Executive Office" means the Company's office at 500 Forbes Boulevard, South San Francisco, California 94080 or such other office as designated in writing to the Holder by the Company. "Register," "Registered" and "Registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. "Rule 144" means Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that the Commission may promulgate. 3 "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Shareholder" means a holder of one or more Warrant Shares. "Warrant" means the warrant dated as of Closing Date issued to the Holder and all warrants issued upon the partial exercise, transfer or division of or in substitution for any Warrant. "Warrant Shares" means the shares of Common Stock issued or issuable upon the exercise of this Warrant provided that if under the terms hereof there shall be a change such that the securities purchasable hereunder shall be issued by an entity other than the Company or there shall be a change in the type or class of securities purchasable hereunder, then the term shall mean the securities issued or issuable upon the exercise of the rights granted hereunder. ARTICLE II. EXERCISE -------- 2.1. Exercise Right; Manner of Exercise. The purchase rights represented by this Warrant may be exercised by the Holder, in whole or in part, at any time and from time to time during the Exercise Period upon (i) surrender of this Warrant, together with an executed notice of exercise, substantially in the form of Exhibit "D-1" ("Notice of Exercise") attached hereto, at the Principal Executive Office, and (ii) payment to the Company of the aggregate Exercise Price for the number of Warrant Shares specified in the Notice of Exercise (such aggregate Exercise Price, the "Total Exercise Price"). The Total Exercise Price shall be paid by check; provided, however, that if the Warrant Shares are acquired in conjunction with a Registration of such Warrant Shares, then the Holder may arrange for the aggregate Exercise Price for such Warrant Shares to be paid to the Company from the proceeds of the sale of such Warrant Shares pursuant to such Registration. The Person or Person(s) in whose name(s) any certificate(s) representing the Warrant Shares which are issuable upon exercise of this Warrant shall be deemed to become the Holder(s) of, and shall be treated for all purposes as the record holder(s) of, such Warrant Shares, and such Warrant Shares shall be deemed to have been issued, immediately prior to the close of business on the date on which this Warrant and Notice of Exercise are presented and payment made for such Warrant Shares, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Warrant Shares shall not then be actually delivered to such Person or Person(s). Certificates for the Warrant Shares so purchased shall be delivered to the Holder within two business days after this Warrant is exercised. If this Warrant is exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which the Holder is entitled to purchase hereunder. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issuance tax with respect thereto or any other cost incurred by the Company in connection with the exercise of this Warrant and the related issuance of Warrant Shares. 4 2.2. Conversion of Warrant. (a) Right to Convert. In addition to, and without limiting, the other rights of the Holder hereunder, the Holder shall have the right (the "Conversion Right") to convert this Warrant or any part hereof into Warrant Shares at any time and from time to time during the term hereof. Upon exercise of the Conversion Right, the Company shall deliver to the Holder, without payment by the Holder of any Exercise Price or any cash or other consideration, that number of Warrant Shares computed using the following formula: X = Y (A-B) ------- A Where: X= The number of Warrant Shares to be issued to the Holder Y= The number of Warrant Shares purchasable pursuant to this Warrant or such lesser number of Warrant Shares as may be selected by the Holder A= The Fair Market Value of one Warrant Share as of the Conversion Date B= The Exercise Price (b) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of this Warrant at the Principal Executive Office, together with a written statement (the "Conversion Statement") specifying that the Holder intends to exercise the Conversion Right and indicating the number of Warrant Shares to be acquired upon exercise of the Conversion Right. Such conversion shall be effective upon the Company's receipt of this Warrant, together with the Conversion Statement, or on such later date as is specified in the Conversion Statement (the "Conversion Date") and, at the Holder's election, may be made contingent upon the closing of the consummation of the sale of Common Stock pursuant to a Registration. Certificates for the Warrant Shares so acquired shall be delivered to the Holder within a reasonable time, not exceeding two business days after the Conversion Date. If applicable, the Company shall, upon surrender of this Warrant for cancellation, deliver a new Warrant evidencing the rights of the Holder to purchase the balance of the Warrant Shares which Holder is entitled to purchase hereunder. The issuance of Warrant Shares upon exercise of this Warrant shall be made without charge to the Holder for any issuance tax with respect thereto or any other cost incurred by the Company in connection with the conversion of this Warrant and the related issuance of Warrant Shares; provided that the Holder will be responsible for any transfer taxes in respect of the issuance of Warrant Shares to a Person other than the Holder. 2.3. Fractional Shares. The Company shall not issue fractional shares of Common Stock upon any exercise or conversion of this Warrant. As to any fractional share of Common Stock which the Holder would otherwise be entitled to purchase from the Company upon such exercise or conversion, the Company shall purchase from the Holder such fractional share at a price equal to an amount calculated by multiplying such fractional share (calculated to the nearest 1/100th of a share) by the Fair Market Value of a share of Common Stock on the date of the Notice of Exercise or the Conversion Date, as applicable. Payment of such amount shall 5 be made in cash or by check payable to the order of the Holder at the time of delivery of any certificate or certificates arising upon such exercise or conversion. 2.4. Continued Validity. A Shareholder shall be entitled to all rights and subject to all obligations which a Holder of this Warrant is entitled pursuant to the provisions of this Warrant, except rights and obligations which by their terms apply only to a Warrant. The Company shall, at the time of the exercise of this Warrant, in whole or in part, upon the request of a Shareholder, acknowledge in writing, in form reasonably satisfactory to the Shareholder, its continuing obligation to afford to the Shareholder all rights to which the Shareholder is entitled in accordance with the provisions of this Warrant; provided, however, that if the Shareholder fails to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Shareholder all such rights. ARTICLE III. TRANSFER, EXCHANGE AND REPLACEMENT ---------------------------------- 3.1. Maintenance of Registration Books. The Company shall keep at the Principal Executive Office a register in which, subject to such reasonable regulations as it may prescribe, it shall provide for the registration, transfer and exchange of this Warrant. The Company and any Company agent may treat the Person in whose name this Warrant is registered as the owner of this Warrant for all purposes whatsoever, and neither the Company nor any Company agent shall be affected by any notice to the contrary. 3.2. Restrictions on Transfers. (a) Compliance with Securities Act. The Holder, by acceptance hereof, agrees that this Warrant and the Common Stock to be issued to the Holder upon exercise hereof are being acquired for investment, solely for the Holder's own account and not as a nominee for any other Person, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any such shares of Common Stock except under circumstances which will not result in a violation of the Securities Act. Upon exercise of this Warrant, the Holder shall confirm in writing, by executing the form attached as Exhibit "D-2" hereto, that the shares of Common Stock purchased thereby are being acquired for investment, solely for the Holder's own account and not as a nominee for any other Person, and not with a view toward distribution or resale. (b) Certificate Legends. This Warrant and all Warrant Shares issued upon exercise of this Warrant (unless Registered under the Securities Act) shall be stamped or imprinted with legends in substantially the following form (in addition to any legends required by applicable state securities laws): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAWS. NO SALE, TRANSFER OR OTHER DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT 6 RELATING THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF ARTICLE III OF THE WARRANT UNDER WHICH THIS SECURITY WAS ISSUED. In addition, the Warrant (unless Registered under the Securities Act) shall be stamped or imprinted with a legend in substantially the following form: THIS WARRANT MAY NOT BE TRANSFERRED OTHER THAN TO AN AFFILIATE (AS DEFINED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) PRIOR TO THE SECOND ANNIVERSARY OF THE CLOSING DATE. (c) Additional Restriction on Transfer. The Holder shall not sell, assign or otherwise transfer all or part of this Warrant until the second anniversary of the Closing Date other than in connection with the transfer of the Holder's entire business. (d) Disposition of Warrant or Warrant Shares. With respect to any offer, sale or other disposition of this Warrant or any Warrant Shares issued upon exercise of this Warrant prior to Registration of such shares, the Holder or the Shareholder, as the case may be, agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of the Holder's or Shareholder's counsel to the effect that such offer, sale or other disposition may be effected without Registration under the Securities Act or qualification under any applicable state securities laws of this Warrant or such Warrant Shares, as the case may be, and indicating whether or not under the Securities Act certificates for this Warrant or such Warrant Shares, as the case may be, to be sold or otherwise disposed of, require any restrictive legend as to applicable restrictions on transferability in order to insure compliance with the Securities Act and any other applicable securities laws. Promptly upon receiving such written notice and reasonably satisfactory opinion the Company, as promptly as practicable, shall notify the Holder or the Shareholder, as the case may be, that it may sell or otherwise dispose of this Warrant or such Warrant Shares, as the case may be, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this subsection (d) that the opinion of counsel for the Holder or the Shareholder, as the case may be, is not reasonably satisfactory to the Company, the Company shall so notify the Holder or the Shareholder, as the case may be, promptly after such determination has been made and shall specify the legal analysis supporting any such conclusion. Notwithstanding the foregoing, this Warrant or such Warrant Shares, as the case may be, may be offered, sold or otherwise disposed of in accordance with Rule 144, provided that the Company shall have been furnished with such information as the Company may reasonable request to provide reasonable assurance that the provisions of Rule 144 have been satisfied. Each certificate representing this Warrant or the shares thus transferred (except a transfer pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to insure compliance with the Securities Act, unless in the aforesaid 7 reasonably satisfactory opinion of counsel for the Holder or the Shareholder, as the case may be, such legend is not necessary in order to insure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. (e) Warrant Transfer Procedure. Transfer of this Warrant to a third party, following compliance with the preceding subsections of this Article III, shall be effected by execution of the Assignment Form attached hereto as Exhibit "D-3", and surrender for registration of transfer of this Warrant at the Principal Executive Office, together with funds sufficient to pay any applicable transfer tax. Upon receipt of the duly executed Assignment Form and the necessary transfer tax funds, if any, the Company, at its expense, shall execute and deliver, in the name of the designated transferee or transferees, one or more new Warrants representing the right to purchase a like number of shares of Common Stock. (f) Termination of Restrictions. The restrictions imposed under this Section 3.2 upon the transferability of the Warrant (other than those in Section 3.2(c)) and the shares of Common Stock acquired upon the exercise of this Warrant shall cease when (i) a registration statement covering the applicable securities becomes effective under the Securities Act, (ii) the Company is presented with an opinion of counsel reasonably satisfactory to the Company that such restrictions are no longer required in order to insure compliance with the Securities Act or with a Commission "no-action" letter stating that future transfers of such securities by the transferor or the contemplated transferee would be exempt from registration under the Securities Act, or (iii) such securities may be transferred in accordance with Rule 144(k). When such restrictions terminate, the Company shall, or shall instruct its transfer agent to, promptly, and without expense to the Holder or the Shareholder, as the case may be, issue new securities in the name of the Holder and/or the Shareholder, as the case may be, not bearing the legends required under subsection (b) of this Section 3.2. 3.3. Exchange. At the Holder's option, this Warrant may be exchanged for other Warrants representing the right to purchase a like aggregate number of shares of Common Stock upon surrender of this Warrant at the Principal Executive Office. Whenever this Warrant is so surrendered to the Company at the Principal Executive Office for exchange, the Company shall execute and deliver the Warrants which the Holder is entitled to receive. All Warrants issued upon any registration of transfer or exchange of Warrants shall be the valid obligations of the Company, evidencing the same rights, and entitled to the same benefits, as the Warrants surrendered upon such registration of transfer or exchange. No service charge shall be made for any exchange of this Warrant. 3.4. Replacement. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (i) in the case of any such loss theft or destruction, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or (ii) in the case of any such mutilation, upon surrender of such Warrant for cancellation at the Principal Executive Office, the Company, at its expense, shall execute and deliver, in lieu thereof, a new Warrant. 8 ARTICLE IV. ANTIDILUTION PROVISIONS ----------------------- 4.1. Reorganization, Reclassification or Recapitalization of the Company. In case of (1) a capital reorganization, reclassification or recapitalization of the Company's capital stock (other than in the cases referred to in Section 4.2 hereof), (2) the Company's consolidation or merger with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted, by virtue of the merger, into other property, whether in the form of securities, cash or otherwise, or (3) the sale or transfer of the Company's property as an entirety or substantially as an entirety, then, as part of such reorganization, reclassification, recapitalization, merger, consolidation, sale or transfer, lawful provision shall be made so that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof (in lieu of or in addition to the number of shares of Common Stock theretofore deliverable, as appropriate), and without payment of any additional consideration, the number of shares of stock or other securities or property to which the holder of the number of shares of Common Stock which would otherwise have been deliverable upon the exercise of this Warrant or any portion thereof at the time of such reorganization, reclassification, recapitalization, consolidation, merger, sale or transfer would have been entitled to receive in such reorganization, reclassification, recapitalization, consolidation, merger, sale or transfer. This Section 4.1 shall apply to successive reorganizations, reclassifications, recapitalizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. 4.2. Reclassifications. If the Company changes any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefore shall be appropriately adjusted. 4.3. Splits and Combinations. If the Company at any time subdivides any of its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced, and, conversely if the outstanding shares of Common Stock are combined into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased. Upon any adjustment of the Exercise Price under this Section 4.3, the number of shares of Common Stock issuable upon exercise of this Warrant shall equal the number of shares determined by dividing (i) the aggregate Exercise Price payable for the purchase of all shares issuable upon exercise of this Warrant immediately prior to such adjustment by (ii) the Exercise Price per share in effect immediately after such adjustment. 4.4. Dividends and Distributions. If the Company declares a dividend or other distribution on the Common Stock or if a dividend or other distribution on the Common Stock 9 occurs pursuant to the Charter (other than a cash dividend or distribution), then, as part of such dividend or distribution, lawful provision shall be made so that there shall thereafter be deliverable upon the exercise of this Warrant or any portion thereof, in addition to the number of shares of Common Stock receivable thereupon and without payment of any additional consideration, the amount of the dividend or other distribution to which the holder of the number of shares of Common Stock obtained upon exercise hereof would have been entitled to receive had the exercise occurred as of the record date for such dividend or distribution. 4.5. Liquidation; Dissolution. If the Company shall dissolve, liquidate or wind up its affairs, the Holder shall have the right, but not the obligation, to exercise this Warrant effective as of the date of such dissolution, liquidation or winding up. If any such dissolution, liquidation or winding up results in any cash distribution to the Holder in excess of the aggregate Exercise Price for the shares of Common Stock for which this Warrant is exercised, then the Holder may, at its option, exercise this Warrant without making payment of such aggregate Exercise Price and, in such case, the Company shall, upon distribution to the Holder, consider such aggregate Exercise Price to have been paid in full, and in making such settlement to the Holder, shall deduct an amount equal to such aggregate Exercise Price from the amount payable to the Holder. 4.6. Antidilution. (a) Adjustment of Exercise Price. If the Company issues any Additional Stock for no consideration or for a consideration per share of Common Stock (which, in the case of Convertible Securities or Options shall be the consideration paid to purchase such security plus the conversion price, exercise price or exchange price, as the case may be, per share of Common Stock) ("Additional Stock Price") less than the Market Price in effect immediately prior to the time of such issuance (with the value of any non-cash consideration paid for such Additional Stock reasonably determined by the Company's Board of Directors), then the Exercise Price shall be reduced to a price equal to the Exercise Price in effect immediately prior to such adjustment less the difference between such Market Price and the Additional Stock Price; provided, however, that (i) if any Convertible Securities or Options expire or otherwise terminate prior to the exercise, conversion or exchange of such securities for Common Stock ("Expiring Additional Securities"), such Expiring Additional Securities shall no longer constitute Additional Stock for purposes of adjustments under this Section 4.6, and the Exercise Price shall upon such expiration or termination be readjusted to equal what the Exercise Price would have been if those Expiring Additional Securities (and only those Expiring Additional Securities) had never been issued and (ii) if shares of Common Stock are issued pursuant to Convertible Securities or Options at a price different from the Additional Stock Price originally calculated for such Convertible Securities or Options, the Additional Stock Price for such Convertible Securities or Options shall be recalculated to equal the actual price paid per share of Common Stock in respect of such issuance, and the Exercise Price shall be readjusted accordingly. (b) Adjustment of Number of Shares Purchasable. Upon any adjustment of the Exercise Price under subsection (a) of this Section 4.6, the number of shares of Common Stock issuable upon exercise of this Warrant shall equal the number of shares determined by 10 dividing (i) the Market Price immediately prior to such adjustment multiplied by the number of shares issuable upon exercise of this Warrant immediately prior to such adjustment by (ii) the Market Price per share in effect immediately after such adjustment. 4.7. Maximum Exercise Price. At no time shall the Exercise Price exceed the amount set forth in the Preamble to this Warrant, unless the Exercise Price is adjusted pursuant to Section 4.3 hereof. 4.8. Other Dilutive Events. If any event occurs as to which the other provisions of this Article IV are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles hereof, then, in each such case, the Company shall appoint a firm of independent public accountants of recognized national standing (which may be the Company's regular auditors) which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in this Article IV, necessary to preserve, without dilution, the purchase rights represented by this Warrant; provided, that no adjustments shall be made in connection with the issuance of Common Stock upon exercise, conversion or exchange of Options or Convertible Securities to the extent that adjustment has previously been made upon issuance of such Options or Convertible Securities and each lowering of the effective purchase price of Common Stock pursuant to such Option or Convertible Securities. Upon receipt of such opinion, the Company shall promptly mail a copy thereof to the Holder and shall make the adjustments described therein. 4.9. Certificates and Notices. (a) Adjustment Certificates. Upon any adjustment of the Exercise Price and/or the number of shares of Common Stock purchasable upon exercise of this Warrant, a certificate, signed by (i) the Company's President or Chief Financial Officer, or (ii) any independent firm of certified public accountants of recognized national standing the Company selects at its own expense, setting forth in reasonable detail the events requiring the adjustment and the method by which such adjustment was calculated, shall be mailed to the Holder and shall specify the adjusted Exercise Price and the number of shares of Common Stock purchasable upon exercise of the Warrant after giving effect to the adjustment. (b) Extraordinary Corporate Events. If the Company, after the date hereof, proposes to effect (i) any transaction described in Sections 4.1 or 4.2 hereof or (ii) a liquidation, dissolution or winding up of the Company described in Section 4.5 hereof, then, in each such case, the Company shall mail to the Holder a notice describing such proposed action and specifying the date on which the Company's books shall close, or a record shall be taken, for determining the holders of or Common Stock entitled to participate in such action, or the date on which such reorganization, reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders of Common Stock of record shall be entitled to receive securities and/or other property deliverable upon such action, if any such date is to be fixed. Such notice shall be mailed to the Holder at least twenty days prior to the record date for such action in the case of any action described in clause (i) or clause (iii) above, and in the 11 case of any action described in clause (ii) above, at least twenty days prior to the date on which the action described is to take place and at least twenty days prior to the record date for determining holders of Common Stock entitled to receive securities and/or other property in connection with such action. 4.10. No Impairment. The Company shall not, by amendment of the Charter or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in the carrying out of all the provisions of this Article IV and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. 4.11. Application. Except as otherwise provide herein, all sections of this Article IV are intended to operate independently of one another. If an event occurs that requires the application of more than one section, all applicable sections shall be given independent effect. ARTICLE V. REGISTRATION RIGHTS ------------------- 5.1. Registration on Form S-3. 5.1.1. Filing of Registration Statement. The Company shall use its best efforts to secure effectiveness of, as soon as practicable, and shall file no later than 15 business days after the Closing Date, a registration statement in form and substance satisfactory to the Holder on Form S-3 (the "Registration Statement") with the Commission under the Securities Act to register: (i) the resale of the Warrant; (ii) the exercise of the Warrant by any person, other than Lucas Licensing Ltd. or any transferee of Warrants prior to the resale of Warrants pursuant to the Registration Statement; and (iii) the Warrant Shares issued upon exercise of the Warrant by any person and the resale of any such Warrant Shares by Lucas Licensing Ltd. or any transferee of Warrants who exercised such Warrants and received Warrant Shares otherwise than pursuant to the Registration Statement. The Company shall amend such Registration Statement (or file a new Registration Statement) (i) to include issuance of the Warrant Shares to Lucas Licensing Ltd. after one year from the Closing Date and (ii) to include the transfer of the Warrant after two years from the Closing Date (the Warrant and the Warrant Shares constituting the "Registrable Securities"); provided however, that in the event the Company fails to file reports in a timely manner or otherwise fails (due to an action or inaction of the Company) to be eligible to file a registration statement on Form S-3, the Company shall file a registration statement or a post-effective registration statement, as the case may be, on Form S- 1. In the event of a change in the interpretive position of the staff of the Commission with respect to registration under the Securities Act of warrants, the exercise of warrants and the sale of securities into which warrants can be exercised, the Company shall comply with such changed position promptly after consultation with counsel to Lucas Licensing Ltd. 5.1.2. Registrable Expenses. The Company shall pay all Registration Expenses (as defined below) in connection with any registration, qualification or compliance 12 hereunder, and each Holder shall pay all Selling Expenses (as defined below) and other expenses that are not Registration Expenses relating to the Registrable Securities resold by such Holder. "Registration Expenses" shall mean all expenses, except for Selling Expenses, incurred by the Company in complying with the registration provisions herein described, including, without limitation, all registration, qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration. "Selling Expenses" shall mean all selling commissions, underwriting fees and stock transfer taxes applicable to the Registrable Securities and all fees and disbursements of counsel for any Holder. 5.1.3. Additional Company Obligations. In the case of any registration effected by the Company pursuant to these registration provisions, the Company will use its best efforts to: keep such registration effective until such date as all of the Registrable Securities have been sold; (ii) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of the Registrable Securities; (iii) furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (iv) cause all such Registrable Securities registered as described herein to be listed on each securities exchange and quoted on each quotation system on which similar securities issued by the Company are then listed or quoted; (v) provide a transfer agent and registrar for all Registrable Securities registered pursuant to the Registration Statement and a CUSIP number for all such Registrable Securities; (vi) use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its securityholders, to the extent required, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; and (vii) file the documents required of the Company and otherwise use its best efforts to maintain requisite blue sky clearance in (A) all jurisdictions in which any of the Warrant Shares are originally sold and (B) all other states specified in writing by a Holder as may reasonably be required to sell such Holder's Warrant Shares, provided as to clause (B), however, that the Company shall not be required to qualify to do business or consent to service of process in any state in which it is not now so qualified or has not so consented. 5.1.4. Conditions and Limitations (a) Cooperation by Holder. It shall be a condition precedent to the obligation of the Company to take any action pursuant to this Article V in respect of the Registrable Securities that the Holder shall furnish to the Company such information regarding such Registrable Securities and the intended method of disposition thereof as the Company shall reasonably request and as shall be required in connection with the action taken by the Company. (b) Notification Prior to Sale. If any Holder shall propose to sell any Registrable Securities pursuant to the Registration Statement, it shall notify the Company of 13 its intent to do so at least three full business days prior to such sale, and the provision of such notice to the Company shall be deemed to establish an agreement by such Holder to comply with the registration provisions contained herein. Such notice shall be deemed to constitute a representation that any information previously supplied by such Holder is accurate as of the date of such notice. At any time within such three business day period, the Company may refuse to permit the Holder to resell any Registrable Securities pursuant to the Registration Statement; provided, however, that in order to exercise this right, the Company must deliver a certificate in writing to the Holder to the effect that a delay in such sale is necessary because, in the good faith judgment of the Company, a sale pursuant to the Registration Statement would require the public disclosure of information that would not otherwise be required to be disclosed (which disclosure would, in the good faith judgment of the Company, have a material adverse effect on the Company) or could in other respects constitute a violation of the federal securities laws. In such an event, the Company shall use its best efforts to amend the Registration Statement to the extent required to comply with Section 5.1.4 and to take all other actions necessary to allow such sale under the federal securities laws, and shall notify the Holders promptly after it has determined that such circumstances no longer exist. Notwithstanding the foregoing, the Company shall not under any circumstances be entitled to refuse to permit the Holder to resell any Registrable Securities more than twice in any twelve-month period, and any individual period during which the Company refuses to permit the Holder to resell any Registrable Securities shall not exceed sixty days. Subject to the foregoing, when a Holder is entitled to sell and gives notice of its intent to sell pursuant to the Registration Statement, the Company shall furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing. 5.2. Indemnification and Contribution. 5.2.1. Indemnification by the Company. The Company agrees to indemnify and hold harmless each Holder from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which such Holder may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, any claim by a third party asserting any untrue statement of a material fact contained in the Registration Statement or omission of a material fact therefrom necessary to make the statements therein not misleading, on the effective date thereof, or arise out of any failure by the Company to fulfill any undertaking included in the Registration Statement, and the Company will, as incurred, reimburse such Holder for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damages or liability arises out of, or is based upon (i) an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder specifically for use in preparation of the Registration 14 Statement or (ii) any untrue statement in any prospectus that is corrected in any subsequent prospectus that was delivered to the Holder prior to the pertinent sale or sales by the Holder. 5.2.2. Indemnification by Holder. Each Holder, severally and not jointly, agrees to indemnify and hold harmless the Company from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) to which the Company may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon any claim by a third party asserting (i) an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder specifically for use in preparation of the Registration Statement, provided, however, that no Holder shall be liable in any such case for any untrue statement included in any prospectus which statement has been corrected, in writing, by such Holder and delivered to the Company at least three business days before the sale from which such loss occurred or (ii) any untrue statement in any prospectus that is corrected in any subsequent prospectus that was delivered to the Holder prior to the pertinent sale or sales by the Holder, and each Holder, severally and not jointly, will, as incurred, reimburse the Company for any legal or other expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim. 5.2.3. Indemnification Procedures. Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 5.2, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, and, subject to the provisions hereinafter stated, in case any such action shall be brought against an indemnified person and the indemnifying person shall have been notified thereof, the indemnifying person shall be entitled to participate therein, and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to the indemnified person. After notice from the indemnifying person to such indemnified person of the indemnifying person's election to assume the defense thereof, the indemnifying person shall not be liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists or shall exist a conflict of interest that would make it inappropriate in the reasonable opinion of counsel for the indemnified person for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person shall be entitled to retain its own counsel at the expense of such indemnifying person; provided, however, that in the case of the immediately preceding proviso the indemnifying person shall not be responsible for the legal expenses of more than one counsel for all indemnified persons. 5.2.4. Contribution in Lieu of Indemnity. If the indemnification provided for in this Section 5.2 is unavailable to or insufficient to hold harmless an indemnified party under Section 5.2.1 or 5.2.2 above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefit and relative fault of the respective parties as well as any other 15 relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or a Holder on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 5.2.4 were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5.2.4. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 5.2.4 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.2.4, no Holder shall be required to contribute any amount in excess of the net amount received by the Holder from the sale of the Registrable Securities to which such loss relates. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations in this Section 5.2.4 to contribute are several in proportion to their respective sales of Registrable Securities to which such loss relates and not joint. 5.2.5. Controlling Persons Indemnified. The obligations of the Company and the Holders under this Section 5.2 shall be in addition to any liability which the Company and the respective Holders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company or any Holder within the meaning of the Securities Act including, without limitation, the directors and officers of the Company and the Holder, as the case may be. 5.3. Transfer of Registration Rights. The right to sell Registrable Securities pursuant to the registration statement described herein will automatically be assigned to each transferee of the Warrant or Warrant Shares. In the event that it is necessary, in order to permit a Holder to sell Registrable Securities pursuant to the Registration Statement, to amend the Registration Statement to name such Holder, such Holder shall, upon written notice to the Company, be entitled to have the Company make such amendment as soon as reasonably practicable. ARTICLE VI. REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY ---------------------------------------------------- 6.1. Representations and Warranties. The Company represents and warrants that: (a) Legal Status; Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of Delaware and is qualified or licensed to do business in all other countries, states and provinces in which the laws thereof require the Company to qualify and/or be licensed, except where failure to qualify or be 16 licensed would not have a material adverse effect on the business or assets of the Company taken as a whole; (b) Capitalization. The Company's authorized capital stock consists of: 50,000,000 shares of Common Stock, of which shares are issued and outstanding and 1,000,000 shares of preferred stock, par value $1.00 per share, of which 30,000 shares Preferred Stock are outstanding; (c) Options. Except as described in Exhibit "D-4" hereto there are no Options, warrants or similar rights to acquire from the Company, or agreements or other obligations by the Company, absolute or contingent, to issue or sell Common Stock, whether on conversion or exchange of Convertible Securities or otherwise; (d) Preemptive Rights. No shareholder of the Company has any preemptive rights to subscribe for shares of Common Stock; (e) Authority. The Company has the right and power, and is duly authorized and empowered, to enter into, execute, deliver and perform its obligations under this Warrant; (f) Binding Effect. This Warrant has been duly authorized, executed and delivered and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except to the extent that enforceability may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity; (g) No Conflict. The execution, delivery and/or performance by the Company of this Warrant shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in the Company's Charter or Bylaws or contained in any agreement, instrument or document to which the Company is a party or by which it is bound; (h) Consents. No consent, approval, authorization or other order of any court, regulatory body, administrative agency or other governmental body is required for the valid issuance of the Warrant or for the performance of any of the Company's obligations hereunder, except in connection with listing on the New York Stock Exchange, which filings will be effected in accordance with the rules and regulations of the New York Stock Exchange; (i) Offering. Neither the Company nor any agent acting on its behalf has, either directly or indirectly, sold, offered for sale or disposed of, or attempted or offered to dispose of, this Warrant or any part hereof, or any similar obligation of the Company, to, or has solicited any offers to buy any thereof from, any Person or Persons other than the Holder. Neither the Company nor any agent acting on its behalf will sell or offer for sale or dispose of, or attempt or offer to dispose of, this Warrant or any part thereof to, or solicit any offers to buy any warrant of like tenor from, or otherwise approach or negotiate in respect thereof, with, 17 any Person or Persons so as thereby to bring the issuance of this Warrant within the provisions of Section 5 of the Securities Act; (j) Registration. It is not necessary in connection with the issuance and sale of this Warrant to the Holder to Register this Warrant under the Securities Act. 6.2. Covenants. The Company covenants that: (a) Authorized Shares. The Company will at all times have authorized, and reserved for the purpose of issuance or transfer upon exercise of the rights evidenced by this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant (for purposes of determining compliance with this covenant, the shares of Common Stock issuable upon exercise of all other Options and warrants to acquire Common Stock and upon conversion of all instruments convertible into Common Stock shall be deemed issued and outstanding); (b) Proper Issuance. The Company, at its expense, will take all such action as may be necessary to assure that the Common Stock issuable upon the exercise of this Warrant may be so issued without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange or automated quotation system upon which any capital stock of the Company may be listed or quoted, as the case may be. Such action may include, but not be limited to, causing such shares to be duly registered or approved, listed or quoted on relevant domestic securities exchanges or automated quotation systems; and (c) Fully Paid Shares. The Company will take all actions necessary or appropriate to validly and legally issue fully paid and nonassessable shares of Common Stock upon exercise of this Warrant. All such shares will be free from all taxes, liens and charges with respect to the issuance thereof, other than any stock transfer taxes in respect to any transfer occurring contemporaneously with such issuance. ARTICLE VII. MISCELLANEOUS ------------- 7.1. Certain Expenses. The Company shall pay all expenses in connection with, and all taxes (other than stock transfer and income taxes) and other governmental charges that may be imposed in respect of, the issuance, sale and delivery of the Warrant and the Warrant Shares. 7.2. Holder Not a Shareholder. Prior to the exercise of this Warrant as hereinbefore provided, the Holder shall not be entitled to any of the rights of a shareholder of the Company including, without limitation, the right as a shareholder (i) to vote on or consent to any proposed action of the Company or (ii) except as provided herein, to receive (a) dividends or any other distributions made to shareholders, (b) notice of or attend any meetings of shareholders of the Company or (c) notice of any other proceedings of the Company. 18 7.3. Like Tenor. All Warrants shall at all times be substantially identical except as to the Preamble. 7.4. Remedies. The Company stipulates that the remedies at law of the Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate to the fullest extent permitted by law, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 7.5. Enforcement Costs. If any party to, or beneficiary of, this Warrant seeks to enforce its rights hereunder by legal proceedings or otherwise, then the non-prevailing party shall pay all reasonable costs and expenses incurred by the prevailing party, including, without limitation, all reasonable attorneys' fees (including the allocable costs of in-house counsel). 7.6. Nonwaiver; Cumulative Remedies. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder and/or any Shareholder shall operate as a waiver of such right or otherwise prejudice the rights, powers or remedies of the Holder or such Shareholder. No single or partial waiver by the Holder and/or any Shareholder of any provision of this Warrant or of any breach or default hereunder or of any right or remedy shall operate as a waiver of any other provision, breach, default right or remedy or of the same provision, breach, default, right or remedy on a future occasion. The rights and remedies provided in this Warrant are cumulative and are in addition to all rights and remedies which the Holder and each Shareholder may have in law or in equity or by statute or otherwise. 7.7. Notices. Any notice, demand or delivery to be made pursuant to this Warrant will be sufficiently given or made if sent by certified or registered mail, postage prepaid, nationally recognized overnight delivery service or facsimile transmission, addressed to (a) the Holder and the Shareholders at their last known addresses appearing on the books of the Company maintained for such purpose or (b) the Company at its Principal Executive Office. The Holder, the Shareholders and the Company may each designate a different address by notice to the other pursuant to this Section 7.7. A notice shall be deemed effective upon receipt. 7.8. Successors and Assigns. This Warrant shall be binding upon, the Company and any Person succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company with respect to the shares of Common Stock issuable upon exercise of this Warrant shall survive the exercise, expiration or termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the Holder, each Shareholder and their respective successors and assigns. The Company shall, at the time of exercise of this Warrant, in whole or in part, upon request of the Holder or any Shareholder but at the Company's expense, acknowledge in writing its continuing obligations hereunder with respect to rights of the Holder or such Shareholder to which it shall continue to be entitled after such exercise in accordance with the terms hereof; provided that the failure of the Holder or any Shareholder to make any 19 such request shall not affect the continuing obligation of the Company to the Holder or such Shareholder in respect of such rights. 7.9. Modification; Severability. (a) If, in any action before any court or agency legally empowered to enforce any term, any term is found to be unenforceable, then such term shall be deemed modified to the extent necessary to make it enforceable by such court or agency. (b) If any term is not curable as set forth in subsection (a) above, the unenforceability of such term shall not affect the other provisions of this Warrant but this Warrant shall be construed as if such unenforceable term had never been contained herein. 7.10. Integration. This Warrant replaces all prior and contemporaneous agreements and supersedes all prior and contemporaneous negotiations between the parties with respect to the transactions contemplated herein and constitutes the entire agreement of the parties with respect to the transactions contemplated herein. 7.11. Survival of Representations and Warranties. The representations and warranties of any party in this Warrant shall survive the execution and delivery of this Warrant and the consummation of the transactions contemplated hereby, notwithstanding any investigation by the such party or its agents. 7.12. Amendment. This Warrant may not be modified or amended except by written agreement of the Company, the Holder and the Shareholder(s), if any, holding a majority of the Warrant Shares. 7.13. Headings. The headings of the Articles and Sections of this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 7.14. Meanings. Whenever used in this Warrant, any noun or pronoun shall be deemed to include both the singular and plural and to cover all genders; and the words "herein," "hereof" and "hereunder" and words of similar import shall refer to this instrument as a whole, including any amendments hereto. 7.15. Governing Law. This Warrant shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts entered into and to be performed wholly within California by California residents. 20 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officer this October 14, 1997. LUCAS LICENSING LTD. ("Holder") GALOOB TOYS, INC. ("Company") By: /s/ Gordon Radley By: /s/ Mark Goldman -------------------------- ------------------------------ Title: Title: President and CEO ---------------------- --------------------------- 21 SCHEDULE OF EXHIBITS -------------------- EXHIBIT "D-1"-Notice of Exercise (Section 2.1) EXHIBIT "D-2"-Investment Representation Certificate (Section 3.2(a)) EXHIBIT "D-3"-Assignment Form (Section 3.2(d)) EXHIBIT "D-4"-Schedule of Options and Preemptive Rights (Sections 6.1(c) and 6.1(d)) 22 EXHIBIT "D-1" NOTICE OF EXERCISE FORM ----------------------- (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant hereby irrevocably exercises the within Warrant for and purchases shares of Common Stock of Galoob Toys, Inc. and herewith makes payment therefor in the amount of $ _____________, all at the price and on the terms and conditions specified in the within Warrant and requests that a certificate (or _____________ certificates in denominations of shares) for the shares of Common Stock of Galoob Toys, Inc. hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) [NAME], whose address is and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of Galoob Toys, Inc. not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b) [NAME], whose address is ____________________. Dated: --------------------- NOTICE: The signature to this Notice of Exercise must correspond with the name as written upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. 23 EXHIBIT "D-2" INVESTMENT REPRESENTATION CERTIFICATE ------------------------------------- Purchaser: Company: Galoob Toys, Inc. Security: Common Stock Amount: Date: (a) In connection with the purchase of the above-listed securities (the "Securities"), the undersigned (the "Purchaser") represents to the Company as follows: (b) The Purchaser is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The Purchaser is purchasing the Securities for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"); (c) The Purchaser understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefor, which exemption depends upon, among other things, the bona fide nature of the Purchaser's investment intent as expressed herein; (d) The Purchaser further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. In addition, the Purchaser understands that the certificate evidencing the Securities will be imprinted with the legend referred to in the Warrant under which the Securities are being purchased; and (e) The Purchaser is aware of the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: (i) the availability of certain public information about the Company; (ii) the resale occurring not less than one year after the party has purchased and paid for the securities to be sold; (iii) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. The Purchaser represents that it is an "accredited investor" as that term is defined in Rule 501 of Regulation D under the Securities Act or any successor regulation thereunder. Date: PURCHASER: ------------------- ----------------------------- 24 EXHIBIT "D-3" ASSIGNMENT FORM --------------- (To be executed only upon the assignment of the within Warrant) FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto _________________, whose address is _______________ all of the rights of the undersigned under the within Warrant, with respect to shares of Common Stock of Galoob Toys, Inc. and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of Galoob Toys, Inc. not being transferred hereunder be issued in the name of and delivered to the undersigned, and does hereby irrevocably constitute and appoint _____________ attorney to register such transfer on the books of Galoob Toys, Inc. maintained for the purpose, with full power of substitution in the premises. Dated: ------------------ ---------------------------------------- ---------------------------------------- By: ----------------------------------- (Signature of Registered Holder) Title: ---------------------------------- NOTICE: The signature to this Assignment must correspond with the name upon the face of the within Warrant in every particular, without alteration or enlargement or any change whatever. 25 EXHIBIT "D-4" OUTSTANDING OPTIONS AND PREEMPTIVE RIGHTS ----------------------------------------- (Sections 6.1(c) and 6.1(d)) Options 1. Options to purchase shares of the Company's Common Stock are outstanding pursuant to the following employee benefit plans: o 1984 Amended and Restated Employee Stock Option Plan o 1994 Senior Management Stock Option Plan o 1995 Non-Employee Director Stock Option Plan o 1996 Share Incentive Plan 2. Gerard Klauer Mattison & Co., LLC holds a warrant to purchase 25,000 shares of Common Stock. 3. Each share of Common Stock has appurtenant thereto one preferred stock purchase right (a "Right") issued pursuant to the Company's Stockholder Rights Plan. Upon the occurrence of certain events involving a change in control of the Company, Rights not held by an "acquiring person" will entitle the holder to purchase shares of Common Stock pursuant to the terms of the Stockholder Rights Plan. Preemptive Rights None. 26 EX-4 4 EXHIBIT 4.3 AGREEMENT OF STRATEGIC RELATIONSHIP ----------------------------------- This AGREEMENT OF STRATEGIC RELATIONSHIP (the "agreement") is made and entered into as of October 14, 1997, between Lucasfilm Ltd., a California corporation ("Lucasfilm"), on the one hand, located at P. O. Box 2009, San Rafael, CA 94912 and Galoob Toys, Inc., a Delaware Corporation, located at 500 Forbes Boulevard, South San Francisco, CA 94080 ("Galoob"), on the other hand. WHEREAS: - -------- A.Lucasfilm is a California corporation engaged in the production of theatrical motion pictures and the licensing of intellectual property rights related to such theatrical motion pictures; B. Lucasfilm owns or controls rights in respect of the Property (as hereinafter defined); C. Galoob is engaged in the manufacture, distribution and sale of consumer products in the form of toys including, without limitation, toys based on entertainment intellectual properties licensed from third parties; D. Lucasfilm and Galoob have a long standing relationship with respect to the licensing of such rights; and. E. Lucasfilm and Galoob wish to establish a strategic relationship whereby Galoob would acquire the opportunity to license certain rights in and to theatrical motion pictures produced by Lucasfilm for the manufacture, distribution and sale of Products in the Territory, subject to the terms and conditions of this agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. GRANT OF RIGHTS. ---------------- Subject to the terms and conditions of this agreement, and in consideration for all of Galoob's obligations hereunder, including, without limitation, Galoob's agreement to grant to Lucasfilm a warrant as provided in Paragraph 4 hereinbelow, Lucasfilm grants to Galoob an exclusive, non-transferable, non-assignable right of first negotiation (the "First Negotiation Right") and, as more specifically provided in Subparagraph 3.3 hereinbelow, right of first refusal (the "First Refusal Right") during the Term and NYFS03...:\15\47315\0003\2475\AGRN017P.530 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 throughout the Territory to license the Property as provided in Paragraph 3 hereinbelow: 1.1. to develop, design, manufacture, distribute, advertise, publicize, market and sell the Products , for sale to retail Customers through all channels of wholesale and retail distribution permitted hereunder; and 1.2. for reproduction on containers, packaging, display and promotional material and in Advertising and Advertising Materials for the Products. The First Negotiation Right and First Refusal Right shall be exercised by Galoob in accordance with the terms and conditions contained in this agreement. 2. TERM AND TERRITORY. ------------------- 2.1. Term. The term of Galoob's rights pursuant to this agreement with respect to the First Negotiation Right and First Refusal Right (the "Term") shall consist of the time period commencing as of the date hereof and ending on October 14, 2009. 2.2. Territory. The territory of Galoob's rights hereunder (the "Territory") consists of the world excluding China and India. 3. EXERCISE OF FIRST NEGOTIATION RIGHT AND FIRST REFUSAL RIGHT. ------------------------------------------------------------ The First Negotiation Right and in certain situations First Refusal Right as to each theatrical motion picture which is an element of the Property shall be exercisable by Galoob in accordance with the following procedure: 3.1. If Lucasfilm desires to license the rights referenced in Subparagraphs 1.1 and 1.2 hereinabove with respect to any theatrical motion picture which is an element of the Property, then Lucasfilm shall notify Galoob in writing. Lucasfilm shall concurrently make available to Galoob at Lucasfilm's premises all materials then extant regarding such motion picture, including script, artwork, casting, to the extent available. 3.2. Galoob shall thereafter have thirty (30) days from the date of such notice (the "First Negotiation Period") to negotiate and enter into a written agreement (the "Agreement"), which agreement shall incorporate no less than all of the terms and conditions of that certain license agreement between Galoob and Lucas Licensing Ltd. dated as of October 14, 1997 (the "Toy Agreement") with the exception of Royalties (Paragraph 8), Advance (Paragraph 7), Term (Paragraph 2), Staffing/Overhead (Subparagraph 4.3), Minimum Sales Levels (Subparagraph 4.2), and the definition of 2 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 Licensed Property (Subparagraph 24.43) (collectively the "Excluded Terms"); provided, however, that neither party shall be obligated to conclude an Agreement with respect to a particular theatrical motion picture which is an element of the Property. During the First Negotiation Period, the parties shall negotiate with respect to the Excluded Terms, provided that the Royalty Percentage shall be no less than ten percent (10%) of Net Sales and no more than the rates specified in Paragraph 8 of the Toy Agreement. 3.3. If the parties fail to enter into an Agreement with respect to such theatrical motion picture during the First Negotiation Period, then Lucasfilm shall be free to negotiate with and conclude an agreement with any third party with respect to the rights that are incorporated in the First Negotiation Right provided, that with respect to those theatrical motion pictures set forth in Subparagraphs 5.2(a)(i), (ii), (iii), and (iv) ("First Refusal Pictures"), Lucasfilm shall not conclude an agreement with a third party with respect to such rights on terms that are less favorable to Lucasfilm than those terms last offered by Galoob without giving notice of such third party offer to Galoob and providing Galoob with a ten (10) day period (the "First Refusal Period") within which to enter into an Agreement with Lucasfilm on the same terms and conditions contained in the third party offer (the "First Refusal Right"). If Galoob fails to execute such Agreement within such First Refusal Period with respect to a First Refusal Picture or within the First Negotiation Period with respect to all other theatrical motion pictures included within the Property, then Lucasfilm shall be free to enter into an agreement with such third party with respect to a First Refusal Picture or with any third party with respect to all other theatrical motion pictures subject to the First Negotiation Right and such theatrical motion picture shall be deleted from the definition of the Property hereunder. 3.4. Lucasfilm makes no representation or warranty that any rights which otherwise would be subject to the First Negotiation Right and First Refusal Right as to any theatrical motion picture produced by Lucasfilm following the date hereof and during the Term will be owned or controlled by Lucasfilm or that Lucasfilm will retain the right or ability to include such theatrical motion picture as an element of the Property notwithstanding the fact that at any point in time, Lucasfilm may have owned or controlled such rights. In this connection, Galoob acknowledges that Lucasfilm may enter into an arrangement with respect to a particular theatrical motion picture (other than a grant of a license for the Products alone for such theatrical motion picture) in which the grant of such rights to a third party may be necessary in Lucasfilm's sole judgment in order to finance, produce, distribute or exploit such theatrical motion picture or any underlying rights relating to such theatrical motion picture. 3 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 4. WARRANT. -------- 4.1. General. Concurrently with the execution of this Agreement, Galoob shall grant to Lucasfilm a warrant (the "Warrant") for the purchase of up to 1,450,000 fully paid and non-assessable shares of the common stock of Galoob following exercise of the Warrant at a per share exercise price equal to $15.00, subject to adjustment as provided in the warrant dated as of the date hereof between Lucasfilm and Galoob (the "Warrant"). 4.2. Additional Warrants. If at any time prior to the termination of the Warrant, Galoob grants any Common Stock, Convertible Securities or Options (as defined in the Warrant) to any officer, director, employee or consultant of Galoob ("EE Stock"), then Galoob shall simultaneously therewith grant to Lucasfilm a warrant ("Springing Warrant"), on the same terms and conditions as the Warrant (except that the exercise price per share of such Springing Warrant shall equal the exercise price per, or the amount paid for each, share of such EE Stock), to purchase that number of shares of Common Stock computed using the following formula: X = .154(B/A)(X+Y) Where: X = The number of shares of Common Stock to be issued to Lucasfilm upon exercise of the Springing Warrant Y = The number of shares of Common Stock issued or issuable pursuant to the grant of such EE Stock A = The original number of Warrant Shares (as defined in the Warrant) B = The number of Warrant Shares owned by Lucasfilm on the date of such grant of Additional Stock (as defined in the Warrant) 5. DEFINITIONS. ------------ 5.1. "Products" means those products, goods and articles, within the enumerated categories in Schedule II of the Toy Agreement and which are based on or incorporating elements of the Property. 4 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 5.2. "Property" means, subject to the terms, conditions and restrictions contained in Lucasfilm's or any Lucasfilm Related Entity's agreements with persons, firms or entities rendering services or granting rights: (a) the original titles, designs, character names and likenesses, dialogue, music and sound effects, words, symbols, logographics and the footage, photographs, artwork, visual representations of the props, costumes, sets, special effects and any other original creative elements) which appear in, have become directly associated with, and as are depicted in, any theatrical motion picture produced by Lucasfilm prior to or during the Term, as to which Lucasfilm owns and controls the rights hereunder, subject to Section 3.4, including, but not limited to: (i) any theatrical motion picture based on or related to the character "Indiana Jones," including without limitation: Raiders of the Lost Ark, Indiana Jones and the Temple of Doom, Indiana Jones and the Last Crusade, and any prequel or sequel theatrical motion picture based on the "Indiana Jones" character including the sequel theatrical motion picture currently in development and tentatively entitled "Indiana Jones IV" and intended to star Harrison Ford and be directed by Steven Spielberg; (ii) the theatrical motion picture entitled "Willow" and any sequels, prequels or remakes thereof, including, without limitation, those based upon the "Shadow Wars" book series written by George Lucas and Chris Claremont; (iii) any theatrical motion picture based upon the book series entitled "Lucasfilm's Alien Chronicles" published by Berkeley Books; (iv) the theatrical motion pictures entitled "Tucker: The Man and His Dream" and any sequels, prequels or remakes thereof; and (b) such original trademarks, tradenames, servicemarks and servicenames owned by Lucasfilm and arising out of and which become directly associated with any theatrical motion picture which is an element of the Property, to the extent of Lucasfilm's rights in each applicable country of the Territory under such country's applicable trademark laws. Notwithstanding anything set forth above, Property shall not include any theatrical motion picture based on or related to "Star Wars", including without limitation: 5 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 (A) those certain previously released theatrical motion pictures (and the special editions thereof released theatrically in 1997) entitled "STAR WARS: EPISODE IV - A NEW HOPE," "STAR WARS: EPISODE V - THE EMPIRE STRIKES BACK" and "STAR WARS: EPISODE VI - RETURN OF THE JEDI" (the "Classic Trilogy"); and (B) each of the first three succeeding prequel theatrical motion pictures to the Classic Trilogy tentatively entitled "Episode I," "Episode II" and "Episode III," respectively (each such prequel theatrical motion picture a "Prequel" herein). In connection with such exclusion, the parties acknowledge that Galoob has entered into the Toy Agreement with Lucas Licensing Ltd., the owner of the applicable rights related to Star Wars. 6. GENERAL. -------- 6.1. Assignment. Subject to the other terms and conditions of this Subparagraph 6.1, this agreement will bind and inure to the benefit of each party and to their respective successors and assigns. Galoob shall not voluntarily or by operation of law assign, sub-license, transfer, encumber or otherwise dispose of all or part of any right or privilege licensed to Galoob in this agreement, including to a Galoob Affiliate, without Lucasfilm's prior written approval to be given or withheld in Lucasfilm's absolute discretion. Lucasfilm shall not voluntarily or by operation of law assign, transfer or otherwise dispose of all or part of its rights or obligations under Section 4.2 without Galoob's prior written approval to be given or withheld in Galoob's absolute discretion, except that Lucasfilm may assign or otherwise dispose of all or part of such rights or obligations in connection with a sale or other transfer of all or substantially all of Lucasfilm's theatrical motion picture business. For purposes of this Subparagraph 6.1, any change in control of Galoob, whether through merger, acquisition, reorganization, liquidation, foreclosure, involuntary sale in bankruptcy, or the purchase of substantially all of Galoob's assets or otherwise, shall be deemed a purported assignment subject to Lucasfilm's prior written approval. Any attempted assignment, sublicense, transfer, encumbrance or other disposal without such approval will be null and void and constitute a material default and material breach of this agreement. 6.2. Governing Law. This agreement will be governed by and construed in accordance with the laws of the federal laws of the United States and the laws of the State of California applicable to agreements entered into, and to be performed entirely, within California between California residents (and excluding the United Nations Convention on Contracts for the International Sale of Goods) without regard to choice 6 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 of law provisions and regardless of the place or places of its actual execution or performance. Any suit, action or proceeding between or among any of the parties hereto arising out of or related to this agreement will be brought solely in the federal or state courts in the Northern District of California, and Galoob hereby submits to the personal jurisdiction thereof and agrees to such courts as the appropriate venue. Notwithstanding the foregoing, Galoob agrees that, for purposes of collecting monies due pursuant to this agreement, Galoob, at Lucasfilm's election, may be subject to whatever local laws and courts have jurisdiction in any country of the Territory over Galoob. Process in any action or proceeding referenced to in this Subparagraph 6.2 may be served on Galoob at the address for notices set forth in Subparagraph 6.4 hereinbelow. 6.3. Attorneys' Fees. In the event of any legal proceeding between the parties arising out of or related to this agreement, the prevailing party shall be entitled to recover, in addition to any other relief awarded or granted, its costs and expenses (whether or not in connection with litigation and including, without limitation, attorneys' fees and costs) incurred in connection with any such proceeding. 6.4. Notices. Any notice to be given or served under this agreement shall be in writing and shall be delivered to the parties addressed as set forth below, or to such other address as either party shall notify the other party of in writing, as follows: personally or sent by cable, telegram or telemessage or by facsimile, telex, telecopy or other print out communication mechanism or by first class, prepaid, registered or certified mail (if available) post (air mail if posted to another country) to the party to be served at the address set forth below in this Subparagraph 6.4 or to such other address as either party may from time to time notify in writing to the other. Such notice shall be deemed to have been served: (a) immediately in the case of personal delivery; (b) in the case of a cable, telegram or telemessage, on the first business day after the receipt by the relevant service of the order therefor; (c) in the case of facsimile, telex, telecopy or other print out mechanism, on the expiration of four (4) hours from the time of transmission subject in the case of telex or facsimile to proof by the sender that he/she holds an acknowledgment (whether in mechanical form other otherwise) confirming its receipt at its destination and subject in the case of facsimile or other print out transmission in the absence of an acknowledgment to the original notice being sent by post or by personal delivery in accordance with this Subparagraph 6.4 not later than the next business day after such transmission; and (d) in the case of postal delivery, on the second business day following the date of posting (the fifth business day if posted to another country) or on acknowledgment of receipt if earlier. If to Lucasfilm: ---------------- 7 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 For notices to Lucasfilm: P. O. Box 2009, San Rafael, CA 94912, Attention: President; with a copy to: General Counsel. For wire transfers: pursuant to Lucasfilm's written wire transfer instructions For deliveries requiring Lucasfilm's street address: 5858 Lucas Valley Road, Nicasio, CA 94946 If to Galoob: ------------- Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, CA 94080 Attn: Executive Vice President 6.5. No Waiver. No action taken by either party pursuant to this agreement, and no waiver by either party, whether express or implied, of any provision or right in this agreement or any breach thereof, and no failure of either party to exercise or enforce any of its rights under this agreement, will constitute a continuing waiver with respect to such provision or right or as a breach or waiver or any other provision or right, whether or not similar. 6.6. Independent Contractors. The parties to this agreement are and shall remain independent contractors. There is no relationship of partnership, employer, employee, principal, agent, joint venture, employment, franchise or agency between the parties. Except as expressly provided in this agreement, neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written approval and shall not represent that it has such right. 6.7. Nonexclusive Remedy. The exercise by either party of any remedy under this agreement will be without prejudice to its other remedies under this agreement or otherwise. 6.8. Severability. This agreement is severable. If any provision of this agreement is found invalid or unenforceable in any jurisdiction, that provision, as to that jurisdiction, will be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the other remaining provisions of this agreement, which other remaining provisions will not be affected and shall remain in force, to the maximum extent permissible. 8 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 6.9. Headings, Captions and Names. The name of this agreement, and all headings and captions herein contained, are for reference and convenience only and do not define, limit or expand the scope or intent of any provision hereof and shall not be relied upon in or in connection with the construction or interpretation of this agreement. The words "herein," "hereunder," "hereof" and similar terms refer to this entire agreement and shall not be limited to the specific paragraphs or subparagraphs in which they are used. 6.10. Capitalized Terms. All capitalized terms contained in this agreement shall have the same meaning as set forth in the Toy Agreement, except as otherwise expressly set forth herein. 6.11. Counterparts. This agreement may be executed in one or more counterparts, and by facsimile, telex, telecopy or other print out communication mechanism, each copy of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument, but this agreement shall not be binding upon the parties until it has been signed by both parties. The parties hereto agree that facsimile signatures on a copy of this agreement shall be effective and enforceable as if they were original signatures. 6.12. Further Instruments. Except as otherwise expressly provided in this agreement, each party shall furnish to the other (and shall deliver and cause to be executed, acknowledged and delivered to the other) any further instruments, which such other party may reasonably require or deem necessary from time to time to evidence, establish, protect, enforce, defend or secure to such other party any or all of its rights hereunder or to more effectuate or carry out the purposes, provisions or intent of this agreement. 6.13. Entire Agreement. This agreement together with the Warrant constitute the complete and entire agreement between the parties with respect to the subject matter hereof, superseding and replacing any and all prior agreements, negotiations, communications, and understandings (both written and oral) regarding such subject matter. This agreement may only be modified, or any rights under it waived, by a written document executed by both parties. 9 Agreement Between Lucasfilm Ltd. and Galoob Toys, Inc. dated October 14, 1997 LUCASFILM LTD. ("Lucasfilm"), GALOOB TOYS, INC. ("Galoob"), a California Corporation a Delaware Corporation, on behalf of itself and all Galoob Affiliates By: /s/ Gordon Radley By: /s/ Mark Goldman ------------------------------ ------------------------------- Title: Title: President and CEO --------------------------- --------------------------- 10 EX-10 5 EXHIBIT 10 Information contained herein, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. TOY LICENSE AGREEMENT BETWEEN LUCAS LICENSING LTD. AND GALOOB DATED AS OF OCTOBER 14, 1997 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. TOY LICENSE AGREEMENT TABLE OF CONTENTS 1. GRANT OF LICENSE............................................... 1 2. TERM AND TERRITORY............................................. 2 3. RESTRICTIONS ON LICENSE........................................ 3 4. OBLIGATIONS OF LICENSEE........................................ 7 5. LICENSOR APPROVALS............................................. 13 6. ARTWORK AND FILM CLIPS/THIRD PARTY APPROVALS................... 15 7. ADVANCE/[**]................................................... 16 8. ROYALTIES...................................................... 18 9. STATEMENTS AND PAYMENTS........................................ 22 10. TAXES.......................................................... 25 11. RECORDS AND AUDITS............................................. 25 12. COPYRIGHT AND TRADEMARK NOTICES................................ 26 13. OWNERSHIP...................................................... 26 14. PROMOTIONAL VALUE, TRADEMARK RIGHTS AND GOODWILL............... 30 15. APPROVAL OF MANUFACTURERS...................................... 30 16. CONFIDENTIALITY................................................ 31 17. PRODUCT SAMPLES................................................ 33 18. INTENTIONALLY DELETED.......................................... 34 19. REPRESENTATIONS AND WARRANTIES................................. 34 20. INDEMNITIES.................................................... 35 2 NYFS03...:\15\47315\0003\2475\AGRN017P.41A 21. INSURANCE...................................................... 37 22. EXPIRATION AND TERMINATION..................................... 38 23. RESERVED RIGHTS................................................ 42 24. DEFINITIONS.................................................... 42 25. GENERAL........................................................ 49 3 SCHEDULE I - PERMITTED LICENSEE AFFILIATES SCHEDULE II - LICENSED PRODUCTS SCHEDULE III- ADVANCES AND MINIMUM SALES LEVELS SCHEDULE IV - DEDICATED RETAIL SPACE SCHEDULE V - EXCLUDED DISTRIBUTION CHANNELS SCHEDULE VI - LICENSOR TRADEMARKS EXHIBIT A - TRADEMARK LICENSE AGREEMENT EXHIBIT B - APPROVAL OF SUBLICENSEE AGREEMENT EXHIBIT C - STANDARD APPROVAL FORM EXHIBIT D - ROYALTY REPORT FORM EXHIBIT E - THIRD PARTY COPYRIGHT ASSIGNMENT EXHIBIT F - APPROVAL OF MANUFACTURER AGREEMENT 4 TOY LICENSE AGREEMENT This LICENSE AGREEMENT (the "Agreement") is made and entered into as of October 14, 1997, between Lucas Licensing Ltd., a California corporation ("Licensor"), on the one hand, located at P. O. Box 2009, San Rafael, CA 94912 and Galoob Toys, Inc., a Delaware corporation, located at 500 Forbes Boulevard, South San Francisco, CA 94080, and all Permitted Licensee Affiliates (jointly and severally "Licensee" or "Galoob"), on the other hand. WHEREAS: A. Licensor is a California corporation engaged in the licensing of entertainment intellectual properties related to the "Pictures" (as hereinafter defined); B. Licensor owns or controls rights in respect of the Licensed Property (as hereinafter defined); C. Licensee is engaged in the manufacture, distribution and sale of consumer products in the form of toys including, without limitation, toys based on entertainment intellectual properties licensed from third parties; and D. Licensee wishes to be licensed to use the Licensed Property for the manufacture, distribution and sale of Licensed Products in the Territory and Licensor has agreed to license rights in the Licensed Property to Licensee, subject to the terms and conditions of this Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. GRANT OF LICENSE. Subject to the terms and conditions of this Agreement, and in consideration for all of Licensee's warranties, representations and obligations hereunder, including, without limitation, Licensee's agreement to pay and actual payment to Licensor of the Royalties and Advances, Licensor grants to Licensee a non-transferable, non-assignable license during the Term and throughout the Territory: 1.1. to use the Licensed Property, to develop, design, manufacture, have manufactured, distribute, advertise, publicize, market and sell the Licensed Products set forth in Schedule II attached hereto, for sale to retail Customers through all channels of wholesale and retail distribution permitted hereunder; and 1.2. to reproduce the Licensed Property and to use the Licensor Trademarks on containers, packaging, display and promotional material and in Advertising and Advertising Materials for the Licensed Products as provided in this Agreement. Concurrently with its execution of this Agreement, Licensee shall execute a Trademark License Agreement with Licensor on 1 Licensor's then-current form for such agreements (the "Trademark License Agreement"), a current copy of which form is attached hereto and by this reference incorporated herein as Exhibit A. 2. TERM AND TERRITORY. 2.1. Term. Unless earlier terminated as provided in this Agreement, including, without limitation, pursuant to this Subparagraph 2.1, the term of Licensee's rights pursuant to this Agreement (the "Term") shall consist of the time period commencing as of the date hereof (subject to Subparagraph 25.14 hereinbelow) and ending on the final day of the third Calendar Year following the Calendar Year in which the initial general theatrical release in the United States (the "U.S. Release Date") of Episode III occurs (such final day constituting the "Expiration Date"). Notwithstanding anything to the contrary contained herein or otherwise, the Term shall terminate prior to the Expiration Date: (a) if the U.S. Release Date of Episode I does not occur on or before June 30, 2004 (the "Episode I Outside Date"), then the Term shall terminate as of the Episode I Outside Date; (b) if the U.S. Release Date of Episode I occurs on or before the Episode I Outside Date, but the U.S. Release Date of Episode II does not occur prior to the date which is five (5) years following the U.S. Release Date of Episode I (the "Episode II Outside Date"), then the Term shall terminate as of the Episode II Outside Date; or (c) if the U.S. Release Date for Episode I occurs on or before the Episode I Outside Date and the U.S. Release Date of Episode II occurs on or before the Episode II Outside Date, but the U.S. Release Date of Episode III does not occur on or before the date which is five (5) years after the U.S. Release Date of Episode II (the "Episode III Outside Date"), then the Term shall terminate as of the Episode III Outside Date. 2.2. Territory. The territory of Licensee's rights hereunder (the "Territory") consists of the enumerated countries and groupings of countries set forth in Column A of Schedule III attached hereto (each such enumerated country or grouping of countries a "Sub-Territory" herein); provided, however, that the sole activity of manufacturing Licensed Products hereunder may take place in a country outside of the Territory if the terms and conditions of Paragraph 15 hereinbelow have been first satisfied and so long as no Licensed Product manufactured in such country is distributed by Licensee (or with Licensee's express or implied authority) from such country for the "sale" thereof (as defined in Subparagraph 8.2 hereinbelow) to a Customer outside of the Territory. Subject to Paragraph 23 hereinbelow, if Licensor elects to license to any third party the right to manufacture, distribute and sell during the Term of this Agreement any Licensed Product in any country outside of the Territory, then Licensor shall notify Licensee of such election in writing. Licensee shall thereafter have thirty (30) days from the date of such notice to negotiate and enter into a written agreement regarding such license which 2 agreement shall incorporate all of the terms and conditions of this Agreement except for Paragraph 7 (Advance) and Paragraph 4 (Minimum Sales Levels) hereinbelow; provided, however, that neither Licensee nor Licensor shall be obligated to enter into an agreement with respect to such license. For purposes of this Agreement, a country shall be deemed to include all territories and possessions thereof. 3. RESTRICTIONS ON LICENSE. 3.1. Distribution. (a) General. Licensee shall not have the right: (i) to distribute or sell (or authorize any entity to distribute or sell) any Licensed Product other than to a "bona fide and recognized" (as such term is commonly understood in the U.S. toy industry) third party wholesale entity for distribution directly to a Retail Entity or to a bona fide and recognized third party Retail Entity (whether such third party Retail Entity is a third party "traditional retail store" [as that term is commonly understood in the U.S. toy industry] or a third party direct-to-consumer paper-printed catalog company). In particular, but not by way of limitation, Licensee shall not distribute any Licensed Product through any channel, method or outlet of distribution denoted as an Excluded Distribution Channel on Schedule V attached hereto; (ii) to distribute or sell (or authorize any entity to distribute or sell) any Licensed Product to any party if Licensee knows, or in the exercise of its reasonable good faith business judgment should know, that such distribution or sale will result in the distribution for sale or resale of any Licensed Product outside of the Territory; (iii) to conduct or authorize any entity to conduct Advertising primarily intended to be disseminated outside of the Territory for any Licensed Product; or (iv) Except with Licensor's prior written approval, to distribute or sell any Licensed Product to any Closeout Store in any country of the Territory prior to the date eighteen (18) months after the initial "sale" (as such term is defined in Subparagraph 8.2 hereinbelow) of such Licensed Product to a Customer in such country. (b) Licensor Channels. Notwithstanding the rights licensed to Licensee hereunder, Licensor shall also have the right to distribute and/or sell any Licensed Product that has been distributed and/or sold hereunder by Licensee, through any Licensor Channel and, in this connection, Licensor shall purchase or have the right to purchase from Licensee, 3 a Manufacturer or a Sublicensee any Licensed Product for which Licensee has exclusive rights hereunder and which is to be sold through a Licensor Channel, provided, Licensee, such Manufacturer or such Sublicensee shall manufacture and supply to Licensor or to Licensor's designee those numbers of such Licensed Product as Licensor shall request for the applicable Licensor Channel, and shall sell such Licensed Product to Licensor or to Licensor's designee at the lowest price and on the most favorable terms given by Licensee, a Licensee Affiliate or a Sublicensee to a Customer for the same or comparable Licensed Product, whether or not such Licensed Product is Account Specific Merchandise, F.O.B. Product or otherwise. (c) Internet/Electronic Retailers. Licensee shall not have the right to manufacture, distribute and/or sell (or authorize any entity to manufacture, distribute or sell) any Licensed Product: (i) through the Internet (except if such distribution or sale is a Licensor Channel as permitted pursuant to Subparagraph 3.1[b] hereinabove) without Licensor's prior written approval in each instance; or (ii) through any Electronic Retailer except that, at Licensor's request, Licensee is hereby licensed to supply to Licensor or to Licensor's designee such specific Licensed Products to such specific Electronic Retailer(s) as Licensor may approve, in advance in writing. 3.2. Exclusivity. The rights licensed to Licensee hereunder in respect of all Licensed Products shall be exclusive. 3.3. Sublicenses. (a) Approval of Sublicensee Agreement. Licensee shall have no right to sublicense to any entity (including to a distributor or to a Licensee Affiliate that is not a Permitted Licensee Affiliate) any right licensed to it hereunder (other than the right to manufacture any Licensed Product, which shall be subject to Paragraph 15 hereinbelow) or transfer or dispose of any Licensed Property to any distributor, including to a Licensee Affiliate that is not a Permitted Licensee Affiliate or to any other third party unless and until: (i) Licensor has provided Licensee with its prior written approval of the proposed sublicensee and the terms and conditions of any and all agreements between Licensee and such proposed sublicensee (and any modifications thereof, whether oral or written) for such sublicense (collectively the "Sublicense Agreement"); (ii) such sublicensee shall have executed an Approval of Sublicensee Agreement with Licensor on Licensor's then-current form for such agreement, as such form may be revised by Licensor in its sole reasonable discretion from time to time (any such sublicensee and all affiliated and related entities of such sublicensee approved by Licensor for which an Approval of Sublicensee Agreement is fully executed, a 4 "Sublicensee" herein); (iii) such Sublicensee shall agree in the Sublicense Agreement to be fully bound at all times by the terms and conditions of this Agreement which are applicable to the exercise of the rights so sublicensed, including, but not limited to, the distribution and/or sale of any Licensed Product governed by such Sublicense Agreement; (iv) such Sublicensee shall provide to both Licensee and to Licensor, on a monthly basis, a complete written list of such Sublicensee's then-current prices for each and every Licensed Product SKU in respect of each and every Customer of such Sublicensee; (v) such Sublicensee shall execute a Trademark License Agreement with Licensor; and (vi) such Sublicensee shall further agree in such Approval of Sublicensee Agreement that Licensor shall be a third party beneficiary thereof. A copy of Licensor's current form for Approval of Sublicensee Agreement is attached hereto as Exhibit B. The sublicense by Licensee of any rights licensed to Licensee hereunder shall in no manner whatsoever affect Licensee's obligations hereunder, and Licensee shall execute, and shall ensure that each prospective Sublicensee executes, the Approval of Sublicensee Agreement. Any sublicense (in whole or in part) of Licensee's rights hereunder in violation of this Subparagraph 3.3 shall be a material breach of this Agreement. (b) Enforcement of Sublicense Agreement. Licensee agrees to include and strictly enforce in each Sublicense Agreement all of the terms and conditions of this Agreement relevant to the sublicense to Sublicensee of any right licensed to Licensee hereunder. Licensee shall advise Licensor of any breach thereof by any Sublicensee and of any corrective action taken by Licensee as well as the results thereof and, at the request of Licensor, shall terminate such Sublicense Agreement in the event of any such breach, if such breach is not cured within twenty (20) days after Licensee first becomes aware of such breach, to the extent such breach is curable. If Licensee fails to exercise such termination rights by giving written notice to such Sublicensee within ten (10) days after being requested to do so in writing by Licensor, notwithstanding anything to the contrary contained in the Sublicense Agreement, Licensee hereby appoints Licensor its attorney-in-fact to send a notice of termination in the name of Licensee to such Sublicensee for the purpose of terminating such Sublicense Agreement or any specific rights thereunder, which appointment is irrevocable and coupled with an interest. In the event of termination of a Sublicense Agreement, Licensee shall thereafter have a reasonable period of time (not to exceed ninety [90] days after such termination, or one hundred twenty [120] days for any Sublicense Agreement for distribution rights for a Licensed Product in a Sub-Territory hereinbelow defined as Underdeveloped) in which Licensee itself, or a new Sublicensee designated by Licensee shall undertake the same responsibilities of the terminated Sublicensee, subject to the terms and conditions of this Subparagraph 3.3. 3.4. (a) No Rights to Products Other Than Licensed Products. Other than the products, goods and articles expressly set forth in Schedule II as "Licensed Products," all products, goods, items, devices and articles of any kind based on or incorporating the 5 Licensed Property are expressly excluded from the rights licensed to Licensee pursuant to this Agreement and are expressly reserved to Licensor. (b) No Joint or Cross Distributing, Marketing, Promoting or Selling. No Licensed Product shall be jointly or cross distributed, marketed, promoted or sold with any other product or service without Licensor's prior written consent in each instance. 3.5. Other Products. Licensee acknowledges and agrees that the fact that a Licensed Product is capable (whether or not by means of any electronic media or through the use of any electronic feature, mechanical feature, sound effect, light feature, mechanism or otherwise) of interacting with another product, good, item, device or article that is not a Licensed Product (the "Other Product") does not render such Other Product a Licensed Product hereunder or confer to Licensee any rights hereunder with respect to the use of the Licensed Property in conjunction with such Other Product. 3.6. Licensor Third Party Obligations. Notwithstanding anything to the contrary contained in this Agreement or otherwise, but without limitation of Licensor's other rights and remedies: (a) Licensee acknowledges that Licensor may have heretofore executed agreements with third parties which may encompass rights with respect to some or all of the Licensed Products and/or which may grant to such third parties the right to dispose of, distribute and sell Licensed Products during their respective sell-off periods, which sell- off periods may occur during the Term, and that such sell-off rights shall not violate the terms of this Agreement; and (b) Licensor shall have the unrestricted right, prior to the expiration or termination of the Term to provide for the disposition of any or all of the rights licensed to Licensee hereunder, including, without limitation, entering into agreements with any third party(ies) which provide for the right for such third party(ies) to design, manufacture and/or distribute Licensed Products anywhere in the Territory, provided, that such agreement(s) shall not by its terms authorize the shipment of Licensed Products to retail customers on a date that would allow such Licensed Products to be sold to end users at retail prior to the expiration or termination of the Term. 3.7. No Similar Products or Dumping of Licensed Products. Licensee recognizes and acknowledges that the Licensed Property, and all elements thereof, and the goodwill associated with the same are material and substantial business assets of Licensor. In that connection, Licensee agrees that, during the Term and throughout the Territory Licensee: (a) will not Dump any Licensed Product in any country of the Territory during the Term and during any Sell-Off Period, subject to applicable law; 6 (b) will not manufacture, distribute or sell any merchandise or authorize the manufacture, distribution or sale of any merchandise bearing any artwork or other representation which is confusingly similar to or which disparages the Licensed Property (or any element thereof); and (c) shall use its best efforts to sell Licensed Products at a price which, in its reasonable, good faith business judgment, represents the best attainable price from its Customers. 3.8. No Sales Prior to October 1, 1998. Notwithstanding anything to the contrary contained in this Agreement, subject to the final sentence of Subparagraph 25.14 hereinbelow, Licensee shall not sell or distribute, or authorize the sale or distribution of, any Licensed Product manufactured hereunder to a retail or wholesale entity for such entity's receipt anywhere in the Territory prior to October 1, 1998; provided, however, that the foregoing shall not preclude Licensee, in the exercise of its rights licensed pursuant to this Agreement, from showing Licensed Products to its Customers, or taking and booking orders for Licensed Products or undertaking other similar business activities, prior to October 1, 1998 subject to Licensor's prior written consent in each instance and to Licensor's approval rights pursuant to Paragraph 5 hereinbelow and to the provisions of Paragraph 16 hereinbelow. 4. OBLIGATIONS OF LICENSEE. 4.1. Marketing Plans. Prior to the manufacture, distribution or sale of any Licensed Product hereunder for the applicable time period to which a "Marketing Plan" (as hereinafter defined) relates, Licensee shall submit Marketing Plans to Licensor for Licensor's written approval in its sole discretion, as follows: (a) Submissions to Licensor. On or before the applicable due dates set forth hereinbelow, Licensee shall prepare and submit to Licensor thorough and detailed marketing plans for the manufacture, distribution, Advertising, marketing and sale of Licensed Products on a Sub-Territory by Sub-Territory basis (each such marketing plan a "Marketing Plan" herein). Each Marketing Plan shall contain the "Plan Elements" (as hereinafter defined) for each Sub-Territory, but Licensor's approval rights will not extend to product pricing or discounts provided to any Customer. Licensor's approval of any one Marketing Plan or Quarterly Update shall not be deemed to constitute Licensor's approval of any other Marketing Plan or Quarterly Update; it being the intention of the parties that the Quarterly Updates may contain revisions of the Annual Marketing Plans. (i) Initial Marketing Plan: On or before January 1, 1998, Licensee shall submit a Marketing Plan, for Licensor's written approval, for Licensed Products to be manufactured, distributed and sold from and after October 1, 1998 through December 31, 1999 (the "Initial Marketing Plan"); and 7 (ii) Annual Marketing Plan: On or before March 1st of each Calendar Year of the Term, commencing with March 1, 1999, Licensee shall submit a Marketing Plan, for Licensor's written approval, for Licensed Products to be manufactured, distributed and sold for the next succeeding Calendar Year of the Term (each such annual marketing plan an "Annual Marketing Plan"), notwithstanding when such manufacture, distribution or sale occurs; and (iii) Quarterly Updates: On or before the close of each Calendar Quarter of the Term, commencing with the Calendar Quarter ending March 31, 1998, Licensee shall prepare and submit to Licensor, for Licensor's written approval, a modification of the Annual Marketing Plan showing any actual or projected additions, deletions, modifications or changes (the "Quarterly Updates"). (b) Plan Elements. Each Marketing Plan shall detail for each Sub-Territory, at least the following components with respect to the applicable time period to be covered thereby (collectively the "Plan Elements"): (i) Brand Management Strategy (for Initial Marketing Plan and Annual Marketing Plans only): a detailed overall strategy on the management of the "STAR WARS" brand in the context of the manufacture, distribution, Advertising and sale of Licensed Products, including, but not limited to, Licensee's ongoing staffing requirements for its SW Toy Team. (ii) Licensed Product Specifications and Ship Dates: a detailed product plan on a SKU-by-SKU basis (including, without limitation, quantities to be manufactured and ship dates), a detailed description of the Licensed Products to be manufactured hereunder, the manufacturing schedule and specific tooling plans for the Licensed Products. Included in the foregoing shall be, without limitation, a detailed product plan and description of all Licensed Products to be created exclusively for specific retail accounts ("Account Specific Merchandise") and any product specifically created for sale to a Customer of Licensee, a Licensee Affiliate or a Sublicensee on an F.O.B. or Ex-Works basis ("F.O.B. Product"). (iii) Forecasts: separate, detailed forecasts of sales for Licensed Products (the "Sales Projections") by Sub-Territory, by distribution channel, by Customer, by Licensed Product and by SKU. (iv) Product Pricing List: a complete product pricing list by distribution channel, by customer and by SKU, including, without limitation, for all Licensed Products destined for normal retail distribution channels as well as Account Specific Merchandise and F.O.B. Product, as well as any material deviations from the product pricing for any SKUs from the product pricing list 8 submitted for the immediately preceding Quarterly Updates and/or Annual Marketing Plan, as the case may be. (v) Policies and Procedures: a detailed summary of Licensee's policies and procedures with respect to discounts, product pricing, promotions and sales incentive programs as the same relate to the Licensed Products (and any material changes thereto [e.g., deletions, additions or modifications] of which Licensee has not previously apprised Licensor in writing). (vi) Advertising: (A) Ad Plan: a detailed overall strategy for all Advertising campaigns related to the Licensed Products, the proposed advertising agencies to be engaged in connection with such campaigns and the specific strategic and creative criteria to be given to such advertising agencies in the formulation of such campaigns. (B) Advertisements: (1) Television Advertising: specific details, including type of media (e.g., without limitation, national, local spot, etc.), length, demographics, commencement and expiration dates and media value (including GRP's and TRP's set forth on a weekly basis); (2) Radio Advertising: specific details, including type of commercial, market reach, demographics, length, commencement dates, expiration dates and media value; (3) Print Advertising: specific details of the proposed media, commencement dates, expiration dates, demographics, market reach, circulation and media value; (4) Outdoor Advertising: specific details of the proposed outdoor Advertising exhibited anywhere (e.g., without limitation, roadside benches, billboards, public transportation vehicles, stands and walls); (5) Retail Advertising: specific details, including type of media (in-store displays, materials, signage, roto advertisements, product give-aways, etc.); 9 (6) Consumer Promotions: specific details of proposed promotions which may include sweepstakes, free goods offers, offers to purchase or otherwise receive special products, or "cross promotions" with third parties (e.g., with PepsiCo), or other promotions directed to consumers; (7) Public Relations Efforts: specific details, including the type of media targeted, the specific consumer "message" strategy, and the public relations agency, if any, contracted by Licensee; and (8) Other Media Advertising: specific details of proposed Advertising media other than the forms of media Advertising set forth in Subparagraphs 4.1(b)(vi)(B)(1)-(7) hereinabove, whether such media is now or hereafter known, devised, invented or developed. (vii) Public Relations: to the extent not included in Subparagraph 4.1(b)(vi)(B) hereinabove, specific details of proposed publicity campaigns, event marketing plans, trade and consumer press articles related to the Licensed Products and (subject to seasonality) featured sections devoted entirely to Licensed Products in trade circulars to Customers. (viii) Trade Support: specific details of Licensee's trade support programs for the five (5) key retail Customers in each Sub-Territory, specific descriptions of the P.O.S. proposed to be designed and manufactured hereunder, the proposed channels of distribution at which such P.O.S. will be displayed and the time schedules proposed for such displays, and specific details of each and every Dedicated Retail Space pursuant to Subparagraph 4.6 hereinbelow. (ix) Consumer Research: Licensee's plans for specific consumer research that will be conducted as required pursuant to Subparagraph 4.7 hereinbelow. (x) Retail Marketing: to the extent not included in Subparagraph 4.1(b)(vi)(B) hereinabove, specific details of inventory management, fulfillment and refilling of retail product assortments, stock balancing and retail presentations. (c) Adherence to Marketing Plans: Licensee's timely submission of and compliance with each Marketing Plan and each Plan Element approved by Licensor is of the essence of this Agreement. 10 4.2. Minimum Sales Levels. Licensee shall exercise good faith commercial efforts to ensure that Net Sales during each time period for which a Marketing Plan is due hereunder will be equal to or exceed the Sales Projections set forth in such Marketing Plan as approved by Licensor for such time period including the Net Sales outlined in Column D of Schedule III for Calendar Years 1999 and 2000 (the "Minimum Sales Levels"). 4.3. Staffing/Overhead. Licensee shall employ a team of individuals whose services shall at all times hereunder be dedicated "exclusively" (i.e., one hundred percent [100%] dedicated) or "primarily" (i.e., more than fifty percent [50%] but less than one hundred percent [100%] dedicated) as hereinbelow denoted as "Exclusively" or "Primarily," respectively, to Licensee's activities hereunder (collectively the "SW Toy Team"). The number of individuals comprising such SW Toy Team shall be subject to the mutual reasonable approval of Licensor and Licensee. All salary, overhead, benefits and expenses of the SW Toy Team and of their support staff will be Licensee's sole cost, expense and responsibility. The SW Toy Team shall consist of at least the following positions, and the individuals occupying such positions shall be subject to Licensor's approval: (a) Senior Worldwide SW Toy Brand Executive: a senior executive position with overall responsibility for managing and overseeing Licensee's activities on a worldwide basis in the exercise of Licensee's obligations hereunder (the "Senior Worldwide SW Toy Brand Executive"). (Exclusively) (b) Domestic Marketing Executive: an executive position with overall responsibility for the management and oversight of Licensee's marketing efforts in the United States for the Licensed Products, including, without limitation, the implementation of Licensee's specific trade support programs for, and sales relationships with, and all distribution of Licensed Products, to all retail and other Customer accounts in the United States (the "Domestic Marketing Executive"). (Exclusively) (c) International Marketing Executive: an executive position with overall responsibility for the management and oversight of Licensee's marketing efforts outside of the United States for the Licensed Products including, without limitation, the implementation of Licensee's specific trade support programs for, and sales relationships with, and all distribution of Licensed Products to all retail and other Customer accounts in all Sub-Territories outside of the United States (the "International Marketing Executive"). (Primarily) (d) Product Development Team: a number of individuals whose services are exclusively dedicated to the design and development of Licensed Products hereunder (the "Product Development Team"). The Product Development Team shall consist of at least a general manager and a minimum of ten (10) designers, sculptors and artists. (Primarily) 11 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. (e) Retail Marketing Organization: an in-house staff or third party organization contracted by Licensee, whose primary function will be servicing, throughout each and every Sub-Territory, all retail Customers of Licensee in the coordination of inventory management and product allocations and in the management of the physical presentation of Licensed Products on shelves in retail outlets, as well as performing such other functions customarily performed by retail marketing organizations in the toy industry; provided, however, that for Sub-Territories outside of the U.S. and Canada Licensee shall not be responsible to comply with its obligations pursuant to this Subparagraph 4.3(e) to the extent that a retail Customer prohibits retail marketing representatives from all toy distribution companies from performing such functions in such Sub-Territory for such retail Customer. (Primarily) (f) Research Analyst: a full-time research analyst position exclusively dedicated to collating and analyzing all sell-through information relating to the Licensed Products in each such Sub-Territory designated by Licensor and producing weekly updates for Licensor and Licensee of the information so collated and analyzed. (Primarily) 4.4. Licensor Representative. Licensee acknowledges that Licensor intends to secure the services of a senior executive who will oversee, on Licensor's behalf, Licensee's activities in relation to the exercise of the rights licensed to and obligations assumed by Licensee pursuant to this Agreement (the "Licensor Representative"). [**] 4.5. Advertising Commitment. In each and every Calendar Year of the Term beginning with Calendar Year 1999, Licensee shall expend in each Sub-Territory hereunder not less than such Ad Spend as Licensor shall have approved as part of the Marketing Plan and Quarterly Updates for such Sub-Territory. The "Ad Spend" shall be defined as the actual, direct, out-of-pocket costs (without any overhead and administrative charges) for the third party creation and placement of Advertising for the sale of Licensed Products, net of all rebates and credits of any kind (however calculated or denominated). Within thirty (30) days for the Sub-Territories of the U.S. and Canada, and within sixty (60) days for the Sub-Territories outside of the U.S. and Canada, following the end of each Calendar Year of the Term, beginning with Calendar Year 1999, Licensee shall submit to Licensor a true and accurate statement setting forth, Sub- Territory-by-Sub-Territory, the actual Ad Spend within each Sub-Territory, and Licensee shall concurrently supply to Licensor documentation sufficient to evidence Licensee's compliance with the requirements of this Subparagraph 4.5. If Licensor requires an English translation of any non-English language documentation, the sixty (60) day period for the applicable Sub- Territory will be extended accordingly. If Licensee fails to expend the full amount of the Ad Spend approved by Licensor for any Sub-Territory then, as liquidated damages for such failure by Licensee, within fifteen (15) business days following the end of the aforementioned thirty (30) or sixty (60) day period, Licensee shall pay to Licensor an amount equal to the shortfall between the amount of Ad Spend approved by Licensor and the actual amount of Ad Spend expended by Licensee for such Sub-Territory. 12 4.6. Dedicated Retail Space. On a continuous basis throughout the Term, Licensee agrees to use commercially reasonable efforts to secure a retail space that is one hundred percent (100%) dedicated to the sale of Licensed Products and other toy products based on the Licensed Property (a "Dedicated Retail Space") in ninety percent (90%) or more of the stores that are owned or controlled by any and all of the top five (5) retail Chains in the U.S. Sub-Territory and the top three (3) retail Chains, if any, in each Sub-Territory enumerated in Column A of Schedule III. Each Dedicated Retail Space shall consist of not less than the number of running square feet of space set forth on Schedule IV. Licensee shall cooperate with Licensor and with a designated third party licensee of Licensor concerning toy products based on the Licensed Property in working with retailers to secure such Dedicated Retail Space, and as between Licensee and such third party licensee, Licensee shall be responsible for an amount equal to a pro-rata portion of the costs of each such Dedicated Retail Space in any country of the Territory equal to the ratio that the running square feet of such Dedicated Retail Space utilized by Licensee bears to the total running square feet of such Dedicated Retail Space utilized by both Licensee and such third party licensee. 4.7. Consumer Research. No less frequently than annually, throughout the Term and with respect to each Sub-Territory, Licensee shall generate such ongoing qualitative and quantitative consumer research concerning the Licensed Products or the Licensed Property as Licensor and Licensee shall mutually agree, and Licensee shall provide Licensor with a copy of all such research. 5. LICENSOR APPROVALS. 5.1. Creative Materials. Subject to Subparagraph 5.3 hereinbelow, Licensor will have the right to approve in its sole discretion the following material, in accordance with the procedures set forth in Subparagraph 5.2 hereinbelow: (a) the Licensed Products, including, but not limited to, the initial concepts, design documents, scripts, copy, alpha version, beta version, unpainted sculpts, painted sculpts, prototypes and manufacturing samples; (b) any and all audio and/or visual materials (including, without limitation, artwork, photographs, images and designs) incorporating any part of the Licensed Property, including, without limitation, initial concepts, preliminary designs and final artwork intended for any uses hereunder (the "Designs"); and (c) any and all cartons, containers, packaging, instructions, tags, labeling and wrapping material for the Licensed Products and any and all Advertising and marketing, publicity, promotional and similar materials for the Licensed Products (including, by way of illustration, but not limitation, catalogs, trade advertisements, flyers, sales sheets, labels, package inserts and display materials) which are used in connection with the Licensed Products and which make use of any of the Licensed Property, as well as 13 any trade or other Advertising or similar announcements intended to advise potential customers of the rights acquired by Licensee under this Agreement, whether or not such materials make use of the Licensed Property (collectively the "Advertising Materials"). All materials submitted in a language other than English will be accompanied by a complete and accurate English translation. Licensee shall ensure that all Licensed Products, in their finished goods form, shall in all material respects reflect and be accurate representations of the prototypes for the Licensed Products as approved by Licensor, and Licensee's failure to do so shall, at Licensor's sole option, be deemed to be a material breach of this Agreement. 5.2. Approval Procedure. (a) In General. (i) Marketing Plans: Licensee will submit to Licensor each Marketing Plan (including the Initial Marketing Plan, the Annual Marketing Plans and Quarterly Updates) for Licensor's approval, subject to Subparagraph 25.10 hereinbelow, on or before the dates required pursuant to Subparagraph 4.1 above. If Licensor disapproves all or any part of a Marketing Plan, Licensee shall revise such Marketing Plan (or any Plan Element thereof) and re-submit same to Licensor for its approval again pursuant to this Subparagraph 5.2, until such Marketing Plan (or Plan Element, as the case may be) is approved by Licensor. (ii) Creative Materials: Licensee will submit to Licensor, along with Licensor's Standard Approval Form attached hereto as Exhibit C, the Licensed Products, the Designs, Advertising Materials and Copyright Materials for Licensor's approval, subject to Subparagraph 25.10 hereinbelow, prior to manufacture, printing, production, duplication, distribution, sale or other use by Licensee thereof and each and every modification thereto. If Licensor requires alterations, then such alterations shall be made at Licensee's sole cost and shall be submitted to Licensor for further written approval in accordance with this Subparagraph 5.2. Licensee agrees to strictly adhere to all of Licensor's product approval procedures, and to comply with Licensor's style and legal guides provided to Licensee, and cause all parties with whom Licensee contracts relative to the Licensed Products to do so, and, where necessary, to incorporate changes in compliance therewith. Any modification of any Licensed Product, Design, Advertising Material and/or Copyright Material must be re-submitted in advance for Licensor's written approval as if it were a new Licensed Product, Design, Advertising Material and/or Copyright Material. Licensee agrees not to change the Licensed Product, Design, Advertising Material or Copyright Material, as the case may be, without first submitting to 14 Licensor samples showing such proposed changes and obtaining Licensor's written approval of such samples. (b) Licensor's Discretion. Except as otherwise expressly provided in this Agreement, approval and disapproval of all matters for which Licensor's approval is required pursuant to this Agreement shall be at Licensor's discretion, and any product, good or article not so approved in writing by Licensor prior to the manufacture thereof or for which a Marketing Plan has not been approved by Licensor hereunder shall not be a Licensed Product and Licensee shall have no right to manufacture, market, distribute, sell or exercise any other right licensed to it hereunder with respect to such product, good or article. Notwithstanding and without waiver of any other rights or remedies available to Licensor, if any product, good or article not approved by Licensor is manufactured, distributed or sold by Licensee or any third party authorized by Licensee, then Licensor shall have the right to terminate this Agreement subject to and pursuant to the terms of Subparagraph 22.2(a) hereinbelow. Licensor's approval of any Copyright Materials in accordance with Subparagraph 5.2 hereinabove with respect to the Licensed Product shall not be deemed to be approval for the use of any part of such Copyright Materials with respect to another Licensed Product. (c) Third Party Sourcing. Licensee shall not have the right to use any artwork or other creative material incorporating elements of the Licensed Property used in connection with the products, goods or articles of third parties (including, without limitation, books, comics and trading cards) without first advising Licensor in writing of the third party which had used such artwork and without first obtaining Licensor's written approval thereof in accordance with this Paragraph 5. 5.3. Pre-Existing Approvals. Licensor hereby acknowledges and affirms the written approvals given by it in respect of any Licensed Product heretofore approved by Licensor pursuant to that certain agreement between Licensor and Licensee dated as of October 30, 1992, as amended (the "Prior Agreement") with respect to any materials that would constitute Licensed Products, Designs or Advertising Materials hereunder. 6. ARTWORK AND FILM CLIPS/THIRD PARTY APPROVALS. 6.1. Artwork and Film Clips. Licensee agrees and acknowledges that, notwithstanding the license granted by Licensor under this Agreement, use of visual materials, audio representations and audiovisual materials relating to the Licensed Property (whether or not supplied by Licensor) (collectively, "Artwork and Film Clips") may require license payments to third parties independent of and unrelated to Licensee's obligations to make payments to Licensor under this Agreement. Examples of such licenses and/or payments include, without limitation, payments to talent, trade unions and guilds, reuse fees, synchronization licenses and residuals. Licensee agrees and acknowledges that Licensee may in addition be required under any applicable talent agreements or collective bargaining agreements to obtain releases from third 15 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. parties, including performers, artists, talent, unions or guilds, for use of Artwork and Film Clips. 6.2. Third Party Approvals. Licensee shall not have the right to make any use of the Licensed Property, including, without limitation, Artwork and Film Clips, without first obtaining any required third party authorization, release, approval or license, and the prior written approval of Licensor. Licensor agrees that it shall use reasonable efforts to inform Licensee of any third party license or payment of which Licensor has knowledge that is required in connection with any proposed use of the Licensed Property or any Artwork or Film Clips hereunder; provided, however, that Licensor makes no warranty or representation as to the accuracy or completeness of such information and Licensor shall not be liable with respect thereto or with respect to any payment that may be required. Licensee shall be solely responsible for any and all payments required with respect to the use of any Artwork and Film Clips in connection with a Licensed Product and the marketing, Advertising, sale, distribution and/or promotion thereof. All specific uses of any Artwork and Film Clips shall be subject to the prior written approval of Licensor, as provided in Paragraph 5 above. Without limitation of Licensor's rights and remedies in such event, Licensee's failure to comply with this Subparagraph 6.2 shall be deemed to be a material breach of this Agreement. 6.3. Licensor's Costs. Any and all costs and expenses incurred by Licensor in producing, copying, and duplicating Artwork and Film Clips for Licensee and in shipping, handling and delivering Artwork and Film Clips to Licensee shall be reimbursed and paid to Licensor within thirty (30) days after Licensee's receipt of an invoice therefor. The foregoing reimbursement obligation by Licensee shall apply to any original artwork done at Licensee's request by Licensor, or by third parties under contract to Licensor. 7. ADVANCE/[**]. 7.1. Advance. Licensee agrees to pay to Licensor, an advance of One Hundred Forty Million Dollars ($140,000,000) payable in the following amounts, at the following times: (a) Sixty Million Dollars ($60,000,000) thereof, contingent upon the occurrence of the initial general theatrical release in the United States of Episode I and payable on the U.S. Release Date of Episode I; (b) Forty Million Dollars ($40,000,000) thereof, contingent upon the occurrence of the initial general theatrical release in the United States of Episode I and payable on the U.S. Release Date of Episode I; (c) Twenty Million Dollars ($20,000,000) thereof, contingent upon the occurrence of the initial general theatrical release in the United States of Episode II and payable on the U.S. Release Date of Episode II; and 16 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. (d) Twenty Million Dollars ($20,000,000) thereof, contingent upon the occurrence of the initial general theatrical release in the United States of Episode III and payable on the U.S. Release Date of Episode III. The aforementioned advance is apportioned among Sub-Territories as set forth in Schedule III. The advance for a Sub-Territory shall be recouped only by Royalties payable to Licensor for such Sub-Territory (each such advance apportioned for the applicable Sub-Territory is hereinafter referred to as an "Advance"). Royalties actually paid to Licensor from January 1, 1999 through the U.S. Release Date of Episode I may be credited against and in reduction of the Advances otherwise payable to Licensor pursuant to Subparagraphs 7(a) and 7(b) hereinabove. Royalties paid to Licensor for a Sub-Territory in excess of an Advance for such Sub-Territory shall not be used to reduce the amount of a subsequent Advance payable on release of an Episode subsequent to Episode I. Notwithstanding the above, Licensee shall have the right to delay payment of sums due pursuant to Subparagraphs 7.1(b), 7.1(c) and 7.1(d) hereinabove for up to four (4) months; provided, however, that any such delayed payment shall accrue interest charges from the date due until the date of payment to Licensor at a rate equal to three percent (3%) over the prime lending rate set by the Bank of America N.T.S.A. and such interest shall be payable upon demand; provided, that any such interest paid shall not be recoupable by any Royalties or Advances payable hereunder. 7.2. Cross-Collateralization. For the avoidance of doubt, (a) Advances for one Sub-Territory shall not be cross-collateralized by the recoupment of Royalties in another Sub-Territory; and (b) For the purpose of determining recoupment of Advances, a sale with respect to a Licensed Product shall be deemed to take place in the Sub-Territory into which Licensee, a Licensee Affiliate or a Sublicensee ships or delivers (or authorizes the shipment or delivery) such Licensed Product to a Customer. 7.3. [**] 8. ROYALTIES. 8.1. Royalty Percentage. Licensee will pay to Licensor sums ("Royalties") equal to the following applicable percentage of Net Sales ("Royalty Percentage") for each unit of a Licensed Product: [**]. 8.2. Net Sales. "Net Sales" shall be equal to one hundred percent (100%) of all gross amounts derived by Licensee or a Sublicensee (whether or not such Sublicensee is a Licensee Affiliate), as the case may be, from the "sale" (as defined in this Subparagraph 8.2) of each and every Licensed Product hereunder, less only: (a) any and all reasonable and actual trade and promotional discounts and allowances which are shown on an invoice and which do not exceed 17 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. in their totality [**] of the total amount shown on the invoice, and (b) returns supported by credit memos actually issued to a Customer, provided that such returns may not exceed [**] of the total invoiced amount (regardless of whether such returns are the result of return policies, defective products, product warranties, stock balancing, price protection or any other provision or obligation) and further provided that if the Net Sales of any such resold return (in excess of the [**] returns cap mentioned hereinabove) exceeds the original Net Sales therefor, then in addition to the Royalty paid in respect thereof, Licensor shall also be entitled to the applicable Royalty on the difference between the original Net Sales and the Net Sales upon resale of such return. Net Sales shall not be reduced in any other way not specified above in this Subparagraph 8.2 and [**]. A "sale" shall be defined to occur for a specific Licensed Product in any country of the Territory when the first of any of the following events occurs: (i) the date of the invoice for such Licensed Product actually issued by Licensee, by a Licensee Affiliate or by a Sublicensee to a Customer; (ii) the date of the shipment of such Licensed Product to a Customer of Licensee, of a Licensee Affiliate or of a Sublicensee; or (iii) the date payment is received in respect of such Licensed Product by Licensee, by a Licensee Affiliate or by a Sublicensee from a Customer. 8.3. Rebates, Discounts, Deductions. Notwithstanding anything to the contrary in Subparagraph 8.2 hereinabove, there shall be no rebates, discounts, allowances, deductions from or reductions to the gross amounts derived by Licensee, a Licensee Affiliate or a Sublicensee with respect to a Licensed Product as a result of the manufacturing, distribution, marketing, promotion or sale of a product, good or article that is not a Licensed Product, and any rebate, discount, allowance, deduction from or reduction to such gross amounts with respect to a Licensed Product shall be no higher on a per unit basis than the lowest rebate, discount, allowance, deduction or reduction granted to a Customer within the previous two (2) Calendar Years for the same volume of any other product, good or article similar to such Licensed Product distributed by Licensee, a Licensee Affiliate or a Sublicensee to such Customer. 8.4. F.O.B. or Ex Works. Notwithstanding anything to the contrary contained herein or otherwise, with respect to the "sale" (as defined in Subparagraph 8.2 hereinabove) of a Licensed Product on a F.O.B., Ex Works or similar basis (collectively herein "F.O.B."), the applicable Royalty for such Licensed Product shall be as follows: (a) In those cases where the Licensed Product is specifically designed as and is intended to be sold as an F.O.B. Product, is sold directly to retailers on an F.O.B. basis and is not sold by Licensee other than on an F.O.B. basis (e.g., the current product line of Galoob Direct, Inc.), then the applicable Royalty for such Licensed Product shall be the product of the Royalty Percentage in Subparagraph 8.1 hereinabove multiplied by one and sixty-seven one hundredths (1.67) (such Royalty hereinafter the "F.O.B. Royalty"). 18 (b) In those cases where the Licensed Product is offered for sale to a Customer in a Sub-Territory on other than an F.O.B. basis and the same Licensed Product SKU is also sold to the same Customer in the same country on an F.O.B. basis and the number of units of the same Licensed Product SKU that are sold to a Customer in the country on an F.O.B. basis in the applicable Calendar Year do not exceed fifty percent [50%] of the aggregate number of units of such Licensed Product SKU sold to such Customer in such country in the same Calendar Year, then the applicable Royalty for such Licensed Product sold on an F.O.B. basis shall be the Royalty that would have been payable pursuant to Subparagraph 8.1 hereinabove had such Licensed Product been sold to such Customer in such country on other than an F.O.B. basis. In those cases where all the conditions of this Subparagraph 8.4(b) have been met except that the applicable number of units sold on an F.O.B. basis exceed fifty percent (50%) of the applicable aggregated number of units sold, then the provisions of Subparagraph 8.4(d) shall apply. (c) In those cases where the Licensed Product is sold on an F.O.B. basis to a Sublicensee for subsequent distribution to a Customer, then the following shall apply: (i) for purposes of this Subparagraph 8.4(c) only, the Sublicensee shall be deemed to be a Customer for purposes of determining when the sale has occurred and the applicable Net Sales, and (ii) the applicable Royalty for such Licensed Product shall be the greater of the F.O.B. Royalty or the Royalty that would be payable pursuant to Subparagraph 8.1 hereinabove if such Sublicensee is not deemed a Customer. For purposes of this Subparagraph 8.4(c), the Royalty shall initially be accounted for and paid as if the Sublicensee is deemed to be a Customer; thereafter, at such time as such Sublicensee sells such Licensed Product to a Customer, Licensee shall reconcile the accounting and payment to Licensor in accordance with the terms of this Subparagraph 8.4(c)(ii). (d) In those cases where a Licensed Product is sold on an F.O.B. basis not described in Subparagraphs 8.4(a)-(c) hereinabove, the particular method of sale and the applicable Royalty must be approved in writing by Licensor, it being the intention of the parties that such Royalty will in all cases be equal to the higher of the F.O.B. Royalty or the Royalty that would be payable pursuant to Subparagraph 8.1 hereinabove if such sale were made on other than an F.O.B. basis. 8.5. Other Consideration. Notwithstanding anything to the contrary contained in this Agreement, if Licensee, a Licensee Affiliate or a Sublicensee shall derive any consideration (other than the Net Sales for a Licensed Product hereunder) for the right to exercise any of the rights licensed to Licensee hereunder, then Licensor shall be entitled to fifty percent (50%) of any such consideration, which shall be payable and accountable to Licensor in accordance with 19 the provisions of this Agreement and when first received by or credited to Licensee, a Licensee Affiliate or a Sublicensee, as the case may be. 8.6. Bundling Royalty. Licensee shall not have the right to distribute, market or sell (or authorize a third party to distribute, market or sell) any Licensed Product with any other product, good or article (including another Licensed Product) in a single package at a single price ("Bundling") without Licensor's prior written approval of: (a) whether or not such Bundling may occur; (b) the terms and conditions of such Bundling; and (c) Licensor's Royalty in such instance. 8.7. Evaluation Unit. Any shipment by Licensee, a Licensee Affiliate or a Sublicensee to a Customer of a promotional or evaluation unit ("Evaluation Unit") of a Licensed Product will be deemed Net Sales and shall be calculated at an amount equal to the average invoice amount charged for such Licensed Product for the applicable distribution channel in the applicable Sub- Territory from the time of its initial commercial release until the date of such shipment or, if such Licensed Product has not been commercially released, at an amount equal to the average invoice amount charged for a comparable Licensed Product for the applicable distribution channel in the applicable Sub-Territory from the time of its initial commercial release until the date of shipment of such Evaluation Unit, except to the extent that Licensee has obtained Licensor's prior written consent to exempt a Licensed Product SKU from Licensee's Royalty obligations hereunder. 8.8. Value-Added Taxes. Calculation of Net Sales shall not include any Value Added Tax ("VAT") or any other tax (except as expressly provided in this Agreement) and accordingly Licensee shall not pass along to Licensor and Licensor shall not bear any VAT or any other tax charges incurred with respect to a Licensed Product. 8.9. No Waiver. Acceptance of any sums by Licensor by way of Advances, Royalties or otherwise shall not prevent Licensor at any time from disputing or demanding particulars with reference to the amounts due nor shall such acceptance constitute Licensor's waiver of any breach by Licensee of any terms hereof. 8.10. No Carryover. If the parties agree to an extension of the Term and if, on the expiration of the Term, any Advance shall not have been recouped by the applicable Royalties paid to Licensor, then the shortfall will not be carried forward to any extension of the Term. 8.11. Warrant. (a) Concurrently with the execution of this Agreement, Licensee shall grant to Licensor a warrant (the "Warrant") for the purchase of up to 2,130,000 fully paid and non-assessable shares of the common stock of Licensee following exercise of the Warrant at a per share exercise price equal to $15, subject to adjustment as provided in the Warrant. 20 (b) If at any time prior to the termination of the Warrant, Licensee grants any Common Stock, Convertible Securities or Options (as defined in the Warrant) to any officer, director, employee or consultant of Licensee ("EE Stock"), then Licensee shall simultaneously therewith grant to Licensor a warrant ("Springing Warrant"), on the same terms and conditions as the Warrant (except that the exercise price per share of such Springing Warrant shall equal the exercise price per, or the amount paid for each, share of such EE Stock), to purchase that number of shares of Common Stock computed using the following formula: X = .154(B/A)(X+Y) Where: X = The number of shares of Common Stock to be issued to Licensor upon exercise of the Springing Warrant Y = The number of shares of Common Stock issued or issuable pursuant to the grant of such EE Stock A = The original number of Warrant Shares (as defined in the Warrant) B = The number of Warrant Shares owned by Licensor on the date of such grant of Additional Stock 9. STATEMENTS AND PAYMENTS. 9.1. Payment Terms. Licensee will wire transfer (as immediately available funds) to Licensor all sums due to it hereunder for Licensor's receipt thereof within thirty (30) days following the end of each calendar month based on the Net Sales of Licensed Products in such calendar month. Net Sales generated by a Sublicensee (whether or not such Sublicensee is a Licensee Affiliate) shall be reported to Licensor in the calendar month in which such Net Sales are paid or reported to Licensee, whichever first occurs. All payments made to Licensor pursuant to this Agreement will be in United States currency. Late payments will accrue interest charges from the due date through the date of payment at an interest rate equal to three percent (3%) over the prime lending rate set by the Bank of America N.T.S.A., or the maximum legal rate, if such maximum legal rate is lower, and shall be payable upon demand. 9.2. Remittance of Funds. All compensation amounts stated in this Agreement, including without limitation, Advances and Royalties accrued and/or payable to Licensor pursuant to this Agreement shall be computed, accrued, paid and remitted to Licensor as follows, and Licensee shall bear all costs (including, without limitation, all transactional and transfer costs, points and fees), as follows: 21 (a) All Royalties due and payable to Licensor hereunder shall be converted from the local currency of the source country to U.S. Dollars at the rate of exchange published in The Wall Street Journal for such local currency which is in effect on the date payment is due or, if payment is late, then the rate of exchange published in The Wall Street Journal on the date payment is due or the date of actual payment, whichever rate yields the higher amount of U.S. Dollars. (b) It shall be Licensee's sole responsibility and expense to obtain the approval of any governmental authorities to take whatever steps that may be required and to comply in all respects with all applicable laws and regulations in order to remit funds to Licensor. 9.3. Blocked Funds. Royalties are payable to Licensor hereunder on all Net Sales of Licensed Products, regardless of whether monies cannot be converted into U.S. Dollars or cannot be promptly remitted to Licensor in the United States or because any or all of such monies are otherwise restricted due to moratorium, embargo, banking regulations, exchange restrictions or other governmentally-imposed restrictions against such conversion and remittance (such restricted monies the "Blocked Funds"). 9.4. Payment Reports. Within thirty (30) days after the close of each calendar month, Licensee will prepare and deliver to Licensor a Royalty report form in the form attached hereto as Exhibit D, as such form shall be modified by Licensor from time to time, together with all other information required by Licensor hereunder (the "Royalty Report Form"). Commencing with the month of October, 1998, a Royalty Report Form will be due on a calendar monthly basis whether or not Royalties are payable to Licensor hereunder. 9.5. Report Information. (a) Licensee shall furnish to Licensor, concurrently with the delivery of the Royalty Report Form pursuant to Subparagraph 9.4 hereinabove, a full and complete statement, duly certified by an officer of Licensee to be true and accurate, providing at least the following information: (i) one hundred percent (100%) of all gross amounts derived by Licensee or a Sublicensee (whether or not such Sublicensee is a Licensee Affiliate), as the case may be, from the "sale" (as defined in Subparagraph 8.2 hereinabove) of each and every Licensed Product SKU hereunder, itemized by Licensed Product SKU; (ii) itemization of all allowable deductions, if any, in calculating the Net Sales for each Licensed Product; (iii) the Net Sales for each and every Licensed Product SKU; 22 (iv) the amount of Royalties due to Licensor with respect to such Net Sales; (v) credits for any Advance recoupment or other payments made since the last Royalty Report Form rendered to Licensor hereunder; (vi) the balance payable; (vii) an itemization of each and every Licensed Product SKU utilizing the name, voice or likeness of such individual previously identified to Licensee by Licensor to whom Licensor has an obligation to pay a participation in proceeds generated by the sale of such Licensed Product and the identification of each and every name, voice or likeness of a character which is embodied in such Licensed Product SKU; (viii) an itemization of all information required by Licensor and previously advised to Licensee for Licensor to calculate any participation referred to in Subparagraph 9.5(a)(vii) hereinabove and/or to render accountings with respect thereto; and (ix) such other pertinent information as Licensor may reasonably request from time to time. (b) Each and every item of financial information required to be submitted by Licensee pursuant to Subparagraphs 9.5(a)(i) through 9.5(a)(ix) hereinabove shall be broken down into the following categories: the calendar month to which the statement applies; cumulative from the inception of the Calendar Year to which such statement applies; and cumulative from and after the date of this Agreement to the close of the calendar month to which such statement applies; and such information shall be aggregated as follows: (i) by Sub-Territory (and in each country within such Sub-Territory, if more than one country exists in a Sub-Territory); and (ii) by all Licensed Products throughout the Territory as a whole. (c) All amounts to be reported pursuant to Subparagraph 9.5(a) above shall be first stated in the local currency in which the pertinent Net Sales occurred. If several currencies are involved in any reporting category, that category shall be broken down by each such currency. Next to each local currency amount shall be set forth the equivalent amount stated in U.S. Dollars, and the rate of exchange required to be used hereunder in making the conversion calculation. 23 (d) Each such statement and Royalty Report Form shall be provided by Licensee, at its sole expense, to Licensor in ASCII format or any other electronic media format as Licensor may reasonably request. (e) Upon Licensor's written request, Licensee shall also provide to Licensor such relevant data and information which Licensor shall require to substantiate any Royalty Report Form submitted to Licensor, the proper exercise of the rights licensed to Licensee hereunder and/or the operation and performance of Licensor's duties and obligations hereunder. Such data and information shall be included within the definition of "Licensee's Records" set forth in Subparagraph 11.1 hereinbelow and shall include, without limitation, all sales, manufacturing, distribution and accounting records related to the Licensed Products, all information relating to the inventory of Licensed Products (including components thereof anywhere in the world and "works-in-progress" [as such term is commonly understood in the U.S. toy industry]), all production and sales orders, invoices and bills of lading related to a Licensed Product, and copies of all material contracts and leases between Licensee and any third parties (e.g., without limitation, lenders, manufacturers, vendors, distributors, co-venturers) related to a Licensed Product, to any aspect of Licensor's rights and/or to any aspect of Licensee's obligations hereunder in connection with the manufacture, distribution, marketing, promotion and/or sale of any Licensed Product. 10. TAXES. In addition to any other sums payable hereunder, Licensee agrees that it shall immediately and timely pay or reimburse Licensor for the payment of all amounts imposed as taxes, however designated, arising from or based upon this Agreement or the rights licensed hereunder including, without limitation, all sales, use and value-added taxes, local privilege or excise tax, tariffs, duties, property taxes or assessments, but excluding any taxes based upon Licensor's net income and subject to Subparagraph 8.8 hereinabove. Except as provided in the remainder of this Paragraph 10, no withholding taxes of any kind may be deducted from any Royalties or gross amounts derived with respect to the sale of a Licensed Product. If and only to the extent that Royalties hereunder remitted directly to Licensor are subject to a withholding tax requirement of a country other than the United States, then Licensee is authorized by Licensor to deduct and to withhold from Royalties generated from such country any withholding tax imposed by such country at the local statutory rate or lower income tax convention rate, if applicable; provided, however, that the Royalties due to Licensor with respect to the "sale" (as defined in Subparagraph 8.2 hereinabove) of any particular Licensed Product may not be reduced by withholding taxes from more than one country, that such tax payments made by Licensee on behalf of Licensor may not reduce the amounts payable and paid to Licensor under this Agreement by more than the applicable withholding taxes of the relevant country and, that Licensee shall promptly provide Licensor with notification of and official receipts for all tax payments made on Licensor's behalf pursuant to this Agreement. If, within forty-five (45) days after each payment is made hereunder Licensor has not received either: (a) an 24 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. authenticated withholding tax certificate (stamped by the appropriate tax authority); or (b) written evidence by Licensee (in form satisfactory to Licensor) that Licensee has filed an application to receive a withholding tax certificate from such tax authority, then Licensee shall immediately pay to Licensor an amount equal to the amount previously withheld by Licensee from such payment, divided by 1 minus the applicable withholding tax rate, (e.g.: if the tax withheld was $15, and the withholding tax rate was 15%, then Licensee shall remit to Licensor $15 divided by 85%, or $17.65). 11. RECORDS AND AUDITS. 11.1. Licensee's Records. During the Term and for not less than five (5) years following the expiration or termination of this Agreement, Licensee will maintain complete and accurate records of all transactions relating to this Agreement and/or Licensee's obligations hereunder including, but not limited to, the data and information described in Subparagraphs 9.5(a)-(e) hereinabove (collectively "Licensee Records") and Licensee will contractually obligate and cause all Sublicensees and Manufacturers to maintain complete and accurate records of all transactions relating to this Agreement and the Sublicense Agreement or the Manufacturing Agreement, as the case may be, including, but not limited to, the data and information described in Subparagraph 9.5(e) hereinabove. 11.2. Audits. Licensor or any independent certified public accountant selected by Licensor may from time to time, but not more frequently than two (2) times per Calendar Year, upon reasonable notice and during normal business hours, inspect at Licensee's main headquarters located in the United States any and all Licensee Records. If, upon performing such audit, it is determined that Licensee has underpaid Licensor, Licensee will immediately make full payment under Paragraph 8 hereinabove. If the amount of underpayment exceeds [**] of the payments due Licensor in the period being audited, Licensee will bear all expenses and costs related to such audit in addition to its obligation to make full payment under Paragraph 8 hereinabove. All underpayments and late payments will be subject to interest charges, at the rate specified for late payments in Subparagraph 9.1 hereinabove, calculated from the due date to the actual payment date. The obligation to maintain records and to grant Licensor and Licensor's representatives access to such records shall survive the expiration or earlier termination of this Agreement. 12. COPYRIGHT AND TRADEMARK NOTICES. 12.1. Copyright and Trademark Notices. Licensee will place the following notice on each unit of a Licensed Product and on all Advertising, promotional material, packaging and any other material using the Licensed Property: TM or (R) (if verified in writing by Licensor) & (C) (______) LUCAS. In English or local language: All Rights Reserved. Used under Authorization.) 25 ( ) First year of Publication. If this notice cannot be used due to space limitations, Licensor will supply an alternative notice upon request. Licensee agrees that trademarks arising from the Licensed Property will only be displayed in a form and manner approved by Licensor. Licensor reserves the right to require changes in the required notice if Licensor in its reasonable judgment deems changes required by applicable law. Licensor makes no representations or warranties with respect to the validity or effectiveness of any trademarks in any country of the Territory. 12.2. First Use. Licensee agrees to provide Licensor with the date of first use of each Licensed Product in each country of the Territory, together with documentation evidencing the first sale or shipment of such Licensed Product. In addition, Licensee shall submit to Licensor at the beginning of each Calendar Year, a statement on Licensor's standard form describing the Licensed Products that are being offered for sale. 13. OWNERSHIP. 13.1. Ownership of Copyright Materials. Licensor represents and warrants that it has the right to grant the license granted to Licensee in this Agreement. Licensee acknowledges and agrees that, as between Licensor and Licensee, the Licensed Property is owned solely and exclusively by Licensor, and that Licensee has no rights thereto other than as expressly set forth herein. Further, Licensee acknowledges and agrees that if and to the extent that any Licensed Products, Designs, Advertising Materials, Production Materials or other works are based on derived from the Licensed Property or any part thereof (all of the foregoing to such extent being individually and collectively the "Copyright Materials"), such Copyright Materials will immediately from the inception of creation become the property of Licensor and be owned solely and exclusively by Licensor. Licensor's ownership rights under this Subparagraph 13.1 will include any and all copyrights and any other intellectual property rights in the Licensed Property and in any Copyright Materials; provided, however, that such Licensor ownership rights will not include any Licensee patent, copyright, trademark or other intellectual property that is used by Licensee hereunder on or in connection with products sold by Licensee owned or controlled by Licensee which patent, copyright, trademark or other intellectual property shall be, as between Licensee and Licensor, the property of Licensee to the extent that such intellectual property does not constitute any Licensed Property. Licensor acknowledges and agrees that, as between Licensor and Licensee, Licensee is the owner of all tangible rights in and to any physical inventory of Licensed Products and, subject to Subparagraph 13.2 hereinbelow, in all Production Materials. 13.2. Ownership of Production Materials. In addition to Licensor's other rights and remedies hereunder, if Licensee is in material breach of this Agreement or if the Agreement, in whole or in part, is terminated prior to the expiration of the Term then, at Licensor's sole option exercisable within ninety (90) days of the termination date by written notice to Licensee, Licensee shall transfer, assign and deliver to Licensor, and shall cause all Sublicensees and 26 Manufacturers to transfer and assign to Licensor the full, complete and immediate ownership and possession of any and all physical, tangible tools, molds and printing plates used in the development or production of the Licensed Products created pursuant to this Agreement which reproduce any aspect of the Licensed Property (collectively "Production Materials"), whether or not developed by or on behalf of Licensee, a Licensee Affiliate, a Sublicensee, a Manufacturer or any third party. For any such Production Materials to be purchased by Licensor, Licensor shall pay Licensee an amount equal to ten percent (10%) of Licensee's then remaining net book value of the Production Materials so purchased. Licensee also agrees that upon such termination or expiration of this Agreement, at Licensor's sole discretion and upon Licensor's request, Licensee shall provide to Licensor satisfactory evidence of the destruction of any or all Production Materials not otherwise purchased by Licensor pursuant to this Paragraph 13.2, and that Licensor shall have the right at any time thereafter to enter the premises where the Licensed Products (or their components) are stored or manufactured to take inventory of witness the destruction of and/or take possession of and remove any inventory and/or Production Materials purchased pursuant to this Paragraph 13.2. 13.3. Assignment of Ownership. (a) Assignment by Licensee. Licensee acknowledges that the copyrights and all other proprietary rights in and to the Licensed Property are exclusively owned by and reserved to Licensor. Licensee shall neither acquire nor assert copyright ownership or any other intellectual property right in the Licensed Property or in any derivation, adaptation, variation or name thereof. Without limiting the foregoing, Licensee hereby assigns, and shall contractually obligate all entities with whom it contracts relative to a Licensed Product or Copyright Material to assign to Licensor, all right, title and interest which Licensee or any such other entity may have in the Licensed Property, any Licensed Product or any Copyright Material heretofore or hereafter created by Licensee, such other entity or by any employee of Licensee or such other entity including, without limitation, any copyrights and any other intellectual property rights therein and the goodwill associated therewith. All such new materials shall be included in the definition of "Licensed Property" under this Agreement. Licensee acknowledges that said assignment includes, without limitation, the right on Licensor's part to license such materials outside the Territory during the Term and anywhere thereafter and, upon Licensor's written request, to deliver such materials and all items embodying any Licensed Property used in the manufacture or production of such materials when Licensor determines, in its sole discretion, that they are no longer needed by Licensee for the manufacture, sale or promotion of any Licensed Product. (b) Employment for Hire. Licensee acknowledges that the Licensed Property is owned solely and exclusively by Licensor. All Copyright Materials created or developed by any employee of Licensee shall be prepared by such employee as an employee for hire of Licensee under Licensee's sole supervision, responsibility and monetary obligation and shall be on a "work for hire" basis within the meaning of the 27 U.S. Copyright Act of 1978, as amended. Licensee has caused or shall cause such Copyright Materials to be "works made for hire" (as that term is understood in the U.S. Copyright Law) within the scope of such employee's employment for Licensee, and such Copyright Materials, and the results and proceeds of such employee's services are freely assignable by Licensee hereunder. (c) Assignment of Third Parties. Prior to and as a condition of retaining any third party who is not an employee of Licensee to assist with or contribute to the development or creation of any Copyright Materials, or any part thereof, Licensee, at its sole expense, will obtain from such third party a complete, executed written assignment of all right, title and interest in such Copyright Materials in the form attached hereto as Exhibit E. 13.4. Further Assurances. During and after the Term, Licensee will assist and cooperate, and will cause all of its employees and contractors to assist and cooperate, with Licensor in all respects, including, without limitation, by executing documents (including the form attached hereto as Exhibit E), by giving testimony, executing documents and taking such further acts reasonably requested by Licensor to acquire, transfer, maintain, perfect and enforce copyright, trademark, trade secret, contract rights and other legal protection for the Licensed Property, any Copyright Materials and/or Production Materials. Further, if Licensee fails to comply with any of the obligations set forth above within ten (10) business days of Licensor's request, Licensee hereby appoints the officers of Licensor as its attorneys-in-fact (which appointment is irrevocable and coupled with an interest) to execute documents on behalf of Licensee and its employees and contractors for this limited purpose. Licensee shall not make any representations or do any act which may be taken to indicate that it has any right, title or interest in or to the ownership or use of the Licensed Property except under the terms of this Agreement. Nothing contained in this Agreement shall give Licensee any right, title or interest in or to the Licensed Property except for the rights licensed hereunder, subject to the terms and conditions hereof. 13.5. Moral Rights. Licensee hereby, on behalf of itself, its employees and its contractors, irrevocably transfers and assigns to Licensor, and waives and agrees never to assert, any and all "Moral Rights" (defined hereinbelow) Licensee or its or their respective employees or its contractors may have in or with respect to the Licensed Property or in Licensed Products and/or any Copyright Materials. 13.6. Quality Assurance. Licensee shall ensure that the form, quality and standard of all materials used in connection with the Licensed Products conforms to that of the samples approved by Licensor pursuant to this Agreement and complies with all good manufacturing practices relevant to the Licensed Products including methods of storage and with all laws and regulations relevant to the Licensed Products including any relevant regulations concerning the manufacture, sale or promotion or labeling or marking of such Licensed Products. Any material modifications by or on behalf of Licensee to the Licensed Products previously 28 approved above shall be submitted to Licensor for written approval as if the same were new and without approval. 13.7. Right To Inspect. Licensee shall allow Licensor and/or its duly authorized representative the right to inspect samples of the Licensed Products during normal business hours and on reasonable notice, and on similar terms shall afford Licensor every reasonable assistance and allow or procure them access to any premises of Licensee or other premises where the Licensed Products are being created or held on behalf of Licensee, for so long as any use is made of the Licensed Property hereunder by Licensee. 13.8. Recall Of Product. Licensee shall recall immediately, or take other appropriate action, on the written demand of Licensor, that certain Licensed Product is defective and harmful when used as intended and directed and presents a substantial product hazard under the Federal Hazardous Substance Act or the Consumer Product Safety Act or violates any applicable law or regulation, Licensee shall cease the manufacture, distribution and sale of such Licensed Products until such time as such Licensed Products have been corrected to Licensor's reasonable satisfaction. Licensee shall have in place appropriate procedures to ensure that such recall and cessation can be carried out as promptly as practicable. 14. PROMOTIONAL VALUE, TRADEMARK RIGHTS AND GOODWILL. 14.1. Promotional Value. Licensee acknowledges that Licensor is entering into the Agreement not only in consideration of the Royalties to be paid, but also for the promotional value to be secured by Licensor for the Pictures as a result of the manufacture, sale and distribution by Licensee of Licensed Products and the Advertising and promotion of the Licensed Products. 14.2. Trademark License Agreement. Licensee will execute the Trademark License Agreement attached hereto as Exhibit A, and Licensee's use of Licensor Trademarks will be subject to the terms and conditions of the Trademark License Agreement. 14.3. Goodwill. Licensee recognizes the great value of the goodwill associated with the Licensed Property and acknowledges that such goodwill exclusively belongs to Licensor and that the Licensed Property has acquired a secondary meaning in the mind of the public. Further, any and all goodwill arising from use of the Licensed Property by Licensee, a Licensee Affiliate or a Sublicensee and/or a Manufacturer pursuant to this Agreement will inure to Licensor's sole benefit. 14.4. Registrations. Except with the written approval of Licensor, Licensee will not register or attempt in any country to register copyrights in, or register as a trademark, service mark, design patent or industrial design, or business designation, any of the Licensed Property, Licensor Trademarks or derivations or adaptations thereof, or any word, symbol or design 29 which is so similar thereto as to suggest association with or sponsorship by Licensor or by any Licensor-Related Entities. 14.5. Unlicensed Use Of Licensed Property. Licensee agrees to give Licensor prompt written notice of any unlicensed use by third parties of any Licensed Property including, without limitation, any Licensor Trademarks, and Licensee agrees that it will not, without Licensor's written approval, bring or cause to be brought any criminal prosecution, lawsuit or administrative action for infringement, interference with or violation of any rights to the Licensed Property or any Licensor Trademarks. Licensee agrees to cooperate with Licensor, and, if necessary, to be named by Licensor as a sole complainant or co-complainant in any action against an infringer of the Licensed Property or Licensor Trademarks in the Territory. 15. APPROVAL OF MANUFACTURERS. 15.1. Approval of Manufacturer Agreement. Licensee shall have no right to sublicense the right to manufacture any Licensed Product hereunder to any entity (including to a Licensee Affiliate that is not a Permitted Licensee Affiliate or any other third party) unless and until: (a) Licensor has provided Licensee with its prior written approval of the proposed manufacturer and the terms and conditions of any and all agreements between Licensee and any proposed manufacturer (and any modifications thereof), whether oral or written, for the manufacture of Licensed Products (individually and collectively, the "Manufacturing Agreement"); (b) such manufacturer shall have executed an Approval of Manufacturer Agreement with Licensor on Licensor's then-current form for such agreement, as such form may be revised by Licensor in its sole discretion from time to time (any such manufacturer approved by Licensor for which an Approval of Manufacturer Agreement is fully executed, a "Manufacturer"); (c) such Manufacturer shall agree in the Manufacturing Agreement to be fully bound at all times by the terms and conditions of this Agreement applicable to the manufacture of Licensed Products governed by the Manufacturing Agreement; (d) such Manufacturer shall execute a Trademark License Agreement with Licensor; and (e) such Manufacturer shall further agree in such Manufacturing Agreement that Licensor shall be a third party beneficiary thereof. A copy of Licensor's current form of Approval of Manufacturer Agreement is attached hereto as Exhibit F. The manufacture of Licensed Products by any third party shall in no manner whatsoever affect Licensee's obligations hereunder and Licensee shall execute, and ensure that each prospective Manufacturer executes, the Approval of Manufacturer Agreement. Any manufacture of Licensed Products hereunder in violation of this Subparagraph 15.1 shall be a material breach of this Agreement. 15.2. Enforcement of Manufacturing Agreement. Licensee agrees to include and strictly enforce in each Manufacturing Agreement, all of the terms and conditions of this Agreement relevant to the manufacture of the Licensed Products. Licensee shall advise Licensor of any breach thereof by a Manufacturer and of any corrective action taken by Licensee as well as the results thereof and, at the request of Licensor, shall terminate such Manufacturing Agreement in the event of any such breach, if such breach is not cured within twenty (20) days after Licensee 30 first becomes aware of such breach, if and to the extent such breach is curable. If Licensee fails to exercise such termination rights by giving written notice to such Manufacturer within ten (10) days after being requested to do so in writing by Licensor, notwithstanding anything to the contrary contained in the Manufacturing Agreement, Licensee hereby appoints Licensor its attorney-in-fact to send a notice of termination in the name of Licensee to such Manufacturer for the purpose of terminating Manufacturing Agreement or any specific rights thereunder, which appointment is irrevocable and coupled with an interest. 16. CONFIDENTIALITY. 16.1. Confidential Information. The parties hereto acknowledge and agree that (a) the material terms and conditions contained in this Agreement and/or in any other agreement between Licensor and Licensee related to the Licensed Products; (b) any Marketing Plans, Quarterly Updates and Plan Elements; (c) any project, product, good or article pertaining to any Licensed Product; and (d) any other proprietary financial, marketing, product development, promotional or other information pertaining to the business or operations of Licensee or Licensor are confidential ("Confidential Information"). Without the prior written consent of the party disclosing Confidential Information (the "Disclosing Party"), the recipient of any Confidential Information (the "Recipient") shall neither disclose to any third party (including a Licensee Affiliate) any Confidential Information so disclosed to the Recipient hereunder, nor permit any such third party to have access to such Confidential Information, except to the Recipient's employees, directors, officers and shareholders, attorneys, financial advisors, agents, Sublicensees, Manufacturers and Customers and/or accountants in their capacities as such, if such disclosure is for the purpose of effectuating the terms and conditions of this Agreement, and such individuals or entities are advised in writing of the confidentiality of such Confidential Information and to restrict the use of such Confidential Information to said purpose. The parties' obligations pursuant to this Subparagraph 16.1 shall not apply to any Confidential Information which: (i) was previously known to the Recipient without obligations of confidentiality; (ii) is obtained after the date hereof from a third party which is lawfully in possession of such information and not in violation of any contractual or legal obligations to a Disclosing Party with respect to such information; (iii) is or becomes publicly available or part of public domain through no fault of the Recipient or of its employees; or (iv) is the minimum amount required to be publicly disclosed in order to comply with any applicable law, regulation, stock exchange rule, subpoena or valid order of a court of competent jurisdiction. 16.2. Licensor Information. Notwithstanding, and without limitation of the foregoing terms of Subparagraph 16.1 hereinabove, Licensee expressly acknowledges and agrees that any and all information and material concerning or pertaining to the following are confidential and proprietary to Licensor (collectively "Licensor Information"): (a) any script, concept, schedule of Licensor or of any Licensor-Related Entity (including, without limitation, any pre-production, production or post-production schedule or release schedule for any Prequel or for any derivative work thereof); (b) any term or condition of any agreement between Licensor and any individual or entity relating to any Picture (including, without limitation, any talent 31 agreement); and (c) any Copyright Material and/or any Production Material (including without limitation, any artwork, design or prototype created for any Licensed Product or any Copyright Material). Licensee further acknowledges and agrees that pursuant to this Agreement, Licensee may have access to Licensor Information and that, except as otherwise expressly provided in this Subparagraph 16.2, Licensee shall not use, copy or disclose, or authorize or permit the use, copy or disclosure of, any Licensor Information in whole or in part in any manner or to any person, firm, enterprise, organization, corporation or entity unless authorized in advance in writing by Licensor. Licensee agrees and acknowledges that Licensor's sole purpose in disclosing Licensor Information to Licensee or allowing Licensee access to Licensor Information is for the sole purpose of aiding Licensee in performing its obligations hereunder. Licensee shall receive and hold, and shall contractually obligate and cause all entities with whom it contracts relative to the Licensed Products to maintain, all Licensor Information and Confidential Information in the strictest confidence and Licensee acknowledges, represents, warrants and agrees to use its best efforts to protect the confidentiality of all Licensor Information and Confidential Information. Furthermore, Licensee will not disclose any Licensor Information to any third party for any purpose (including the exercise of its rights or performance of its obligations) unless Licensor otherwise agrees or such third party has executed a written confidentiality agreement in form and substance acceptable to Licensor, which confidentiality agreement, inter alia, shall restrict the use of any Licensor Information to the minimal extent necessary to effectuate the terms and conditions of this Agreement as they apply to such third party and requires such third party to use its best efforts to maintain all Licensor Information in the strictest confidence. Licensee's obligations pursuant to this Subparagraph 16.2 shall not apply to any Licensor Information which: (i) is authorized in writing by Licensor to become publicly known; (ii) is rightfully received from a third party authorized by Licensor to receive such information without restriction and without breach of this Agreement; or (iii) is the minimum amount required to be publicly disclosed in order to comply with any applicable law, regulation, stock exchange rule, subpoena, or valid order of a court of competent jurisdiction. 16.3. Publicity or Announcements. Without limitation of the foregoing and notwithstanding anything to the contrary contained in this Agreement or otherwise, no announcements, press releases, or publicity about the existence or any terms of this agreement, the relationship of the parties or about the rights relating to the Licensed Products to be exercised hereunder shall be made or authorized to be made by Licensee or a Licensee Affiliate without the prior written approval of Licensor in each instance. 16.4. Rights of Publicity. Except as expressly set forth herein, Licensee acquires no right to use and will not use without Licensor's prior written approval the characters, artwork, designs, trade names, copyrighted materials, trademarks or service marks of Licensor or any Licensor- Related Entities in any Advertising, publicity or promotion, to express or imply any endorsement by Licensor or any Licensor-Related Entities of Licensee's services or products, or in any other manner except as expressly authorized in this Agreement. The foregoing provision shall survive expiration or termination of this Agreement. 32 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. 17. PRODUCT SAMPLES. Upon commercial release of each version of a Licensed Product SKU (including each language version or modified version) by or for Licensee, Licensee will furnish to Licensor [**] the following items: (a) one hundred (100) samples of each United States version of a Licensed Product SKU and six (6) samples of all versions and variations of such SKU created for separate countries, as well as all containers, tags, labels and packaging provided that if the minimum selling price of such SKU is Twenty-Five U.S. Dollars (U.S. $25) or more, the number of samples shall be reduced in half; (b) twenty (20) samples of all Advertising, promotional and display materials referencing each version of the Licensed Product SKU; and (c) five (5) videocassette copies of any film or video Advertising Material for each and every Licensed Product SKU. If Licensor requests additional items, Licensee will supply to Licensor such samples at Licensee's direct out-of-pocket cost of manufacture. For the avoidance of doubt, Licensor shall not be entitled to a Royalty hereunder in respect of a Licensed Product distributed to Licensor pursuant to this Paragraph 17. 18. INTENTIONALLY DELETED. 19. REPRESENTATIONS AND WARRANTIES. 19.1. Licensee. Licensee represents and warrants that: (a) Galoob Toys, Inc. has the full power and authority to enter into this Agreement on behalf of itself and all Permitted Licensee Affiliates and that Galoob Toys, Inc. and all Permitted Licensee Affiliates have the full power and authority to perform all of Licensee's obligations pursuant to this Agreement; (b) it is and shall remain throughout the term a corporation in good standing in the jurisdiction of its incorporation; (c) it will not harm or misuse the Licensed Property or bring the Licensed Property into disrepute; (d) it will not create any expenses chargeable to Licensor without the prior written approval of Licensor; 33 (e) it will comply in all material respects with all laws and regulations relating or pertaining to the manufacture, production, distribution, sale, Advertising and use of the Licensed Property, the Licensed Products and Copyright Materials, and will maintain the highest quality and standards of Licensee as of the date of this Agreement; (f) it will diligently and continuously at all times throughout the Term market and distribute the Licensed Products in each of the following Sub-Territories enumerated in Schedule III: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 20, 21, 22, 23, 24, 25, 26, 28, 29, 30 and 35; (g) each Licensed Product will be of good quality in design, material and workmanship and will be suitable for their intended purpose and that no injurious, deleterious, or toxic substances will be used in or on any Licensed Product; (h) the Licensed Products will not cause harm when used as instructed and with ordinary care for their intended purpose; and that the Licensed Products will be manufactured, sold, and distributed in compliance with all applicable laws and regulations; and (i) each and every Permitted Licensee Affiliate set forth in Schedule I meets the definition of a Licensee Affiliate in Subparagraph 24.44 hereinbelow. 20. INDEMNITIES. 20.1. By Licensor. Subject to Subparagraph 20.3 hereinbelow, Licensor shall indemnify and hold harmless Licensee from any and all loss, liability, damage, cost or expense (including reasonable counsel fees and costs, whether or not in connection with litigation) to the extent arising out of any claims or suits brought or made against Licensee by reason of the warranty made by Licensor in the first sentence of Subparagraph 13.1 above. Licensor's indemnity obligation shall be conditioned upon Licensee's prompt written notice, cooperation and assistance to Licensor relative to any such claim or suit. Licensor shall have the option to undertake and conduct the defense of any suit so brought. If Licensor undertakes such defense and Licensee nevertheless retains its own counsel to monitor such defense, Licensee shall be solely responsible for the fees and any other expenses related to such counsel. Licensee shall not, however, be entitled to recover for lost profits. 20.2. By Licensee. Except for Licensor's obligations under Subparagraph 20.1 above, Licensee shall indemnify and hold harmless Licensor and all "Licensor-Related Entities" (as hereinafter defined) from any and all loss, liability, damage, cost or expense (including reasonable counsel fees and costs, whether or not in connection with litigation) arising out of any claims or suits brought or made against Licensor or any Licensor-Related Entities arising out of or in connection with: 34 (a) any activities of Licensee related to this Agreement or to any of the matters herein contained; (b) any alleged defects or inherent dangers in the Licensed Products; (c) any breach or alleged breach by Licensee of any warranty, covenant or obligation contained in this Agreement; (d) any infringement or violation of any copyrights, patents, trademarks, trade secrets or other intellectual property or proprietary rights of any third party in connection with the Licensed Products, Designs, Advertising Materials or any other materials based on or derived from the Licensed Property; (e) libel, slander, or other forms of defamation arising out of or connected with any activities of Licensee, a Licensee Affiliate or a Sublicensee related to this Agreement; (f) plagiarism, piracy or unfair competition resulting from the alleged unauthorized use of titles, formats, ideas, characters, plots, performers, or other material arising out of or connected with any activities of Licensee, a Licensee Affiliate or a Sublicensee related to this Agreement; and/or (g) breach of contract, implied in fact or in law, resulting from the alleged submission, acquisition or use of program, musical or literary material used by Licensee. Licensee's indemnity obligation shall be conditioned upon Licensor's prompt written notice, cooperation and assistance to Licensee relative to any such claim or suit. Subject to Licensor's prior written approval, Licensee shall have the option to undertake and conduct the defense of any suit so brought, provided that, in addition, Licensee's selection of counsel shall be subject to Licensor's prior approval, and further, provided, that Licensee regularly consults with Licensor regarding such defense. Licensee will not enter into any settlement of any claims or suits without the prior written approval of Licensor. If Licensee undertakes such defense and Licensor nevertheless retains its own counsel to monitor such defense, Licensor shall be solely responsible for the fees and any other expenses related to such counsel. Licensee shall not at any time defend on its own behalf any action arising directly or indirectly from any claim that the Licensed Property (or any element of it) infringes or otherwise violates any rights of any third party. This agreement to indemnify shall survive the expiration or earlier termination of this Agreement. 20.3. Trademarks and Copyrights. Notwithstanding anything to the contrary contained in this Agreement or otherwise, no warranty or indemnity, express or implied, is given by Licensor with respect to any liability or expense arising from any claim that use of the Licensed Property or any Licensor Trademark or copyright on or used in connection with the Licensed Products 35 hereunder or any packaging, Advertising or promotional material is registered, registrable, or infringes on any trademark or other intellectual property right of any third party or otherwise constitutes unfair competition. Without limitation of the foregoing, title, character and place names may or may not be registered trademarks or trademarks in the United States and other countries in the classes covering Licensed Products and Licensor makes no representations with respect thereto. It is expressly agreed that it is Licensee's sole responsibility to carry out such investigations as Licensee may deem appropriate to establish that Licensed Products, Copyright Materials, packaging, promotional and Advertising Material which are manufactured or created hereunder, including any uses made of any Licensed Property, do not infringe such right of any third party and Licensor shall not be liable to Licensee if such infringement occurs. 20.4. Notification. Licensee and Licensor agree to give each other prompt written notice of any claim or suit which may arise under the indemnity provisions set forth above. Without limiting the foregoing, Licensee agrees to give Licensor written notice of any product liability claim made with respect to any Licensed Product within seven (7) days of Licensee's receipt of the claim. 20.5. Intellectual Property Protections. Licensee shall assist Licensor (subject to Licensee's indemnity hereunder), to the extent reasonably necessary, in protecting any of Licensor's rights to the Licensed Property. Licensor may commence or prosecute any claims or suits in its own name or (with the approval of Licensee, which approval will not be unreasonably withheld) in the name of Licensee or may join Licensee as a party thereto. In the event Licensee becomes aware of an apparent infringement of the Licensed Property by any third party, Licensee shall notify Licensor within ten (10) days of receiving such information. Licensor and Licensee will discuss the appropriate enforcement steps and which steps are taken shall be determined by Licensor in its sole discretion. If Licensor declines to participate in or otherwise pursue any enforcement, Licensee may take steps to do so, provided that Licensee first obtains Licensor's prior written approval. Licensee in such circumstances agrees to provide current reports regarding the status of any action or negotiations concerning such alleged infringing activity, and shall proceed in consultation with Licensor and Licensor's counsel. Licensee's choice of counsel in any such proceeding shall be subject to Licensor's prior written approval. Licensee shall not settle or compromise any claim without Licensor's prior written approval. Should Licensee recover any sums from the alleged infringer, it shall be entitled to retain the proceeds of any such actions to the extent of Licensee's out-of-pocket expenses for the proceeding, and the remainder will be shared equally between Licensee and Licensor. If Licensor takes any action in protection of any rights licensed to Licensee hereunder, then Licensee shall reimburse Licensor fifty percent (50%) of any and all costs and expenses related to any such action (including, without limitation, attorneys' fees and costs, whether or not in connection with litigation) within thirty (30) days following its receipt of invoices for such payments due. Late payments will accrue interest charges from the due date through the date of payment at an interest rate equal to three percent (3%) over the prime lending rate set by the Bank of America N.T.S.A., or the maximum legal rate, if such maximum legal rate is lower, and shall be payable upon demand. In the event any monies are recovered from any such action which are in 36 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. excess of Licensor's costs and expenses, then such monetary recoveries shall be shared equally between Licensor and Licensee. 21. INSURANCE. 21.1. Insurance. Licensee will, commencing October 1, 1998 and continuing throughout the Term and for a period no less than three (3) years following the expiration or termination of this Agreement, maintain insurance obtained from a reputable carrier with a Best's rating of "A" or better naming Licensor and George W. Lucas, Jr. and all other Licensor-Related Entities as additional insureds in the amounts, for the purposes set forth in and in accordance with this Paragraph 21, covering any and all claims brought anywhere in the world relating to the Licensed Products, as follows: (a) Product Liability and Advertising Injury Liability. Licensee will carry Product Liability and Advertising Injury Liability Insurance covering any and all claims, demands and causes of action for personal injury or property damage arising out of or purporting to arise out of any defects in or failure to perform by any Licensed Product or arising out of or purporting to arise out of any Advertising Material and/or any physical or intangible material used in connection therewith in a minimum amount of [**] combined single limit for each occurrence for personal injury and property damage. (b) Standard Error and Omissions. Licensee will carry coverage commonly known as Standard Errors and Omissions which will include but not be limited to claims arising out of: (i) invasion or infringement of or interference with the right of privacy or publicity, whether under common law or statutory law; (ii) infringement of copyright or trademark, whether under statutory or common law; (iii) libel, slander or other forms of defamation; (iv) plagiarism, piracy or unfair competition resulting from the alleged unauthorized use of titles, formats, ideas, characters, plots, performers, or other material; or (v) breach of contract, implied in fact or in law, resulting from the alleged submission, acquisition or use of program, musical or literary material used by Licensee. 37 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. The amount of coverage under the Standard Errors and Omissions policy shall be a minimum of [**]. 21.2. Notification. Each policy shall provide for prompt written notice (not to exceed thirty [30] days) to Licensor from the insurer by registered mail, return receipt requested, in the event of any material modification, cancellation or termination of such policy. Licensee will furnish to Licensor within thirty (30) business days after the date of execution of this Agreement a Certificate of Insurance naming Licensor and George W. Lucas, Jr. and all other Licensor- Related Entities as additional insureds on each of the above named policies. Licensee's compliance with this Subparagraph 21.2 in no way limits Licensee's indemnity obligations, except to the extent that Licensee's insurance company actually pays Licensor amounts which Licensee would otherwise be obligated to pay Licensor. 22. EXPIRATION AND TERMINATION. 22.1. Term. This Agreement will continue in full force and effect during the Term, unless terminated earlier in accordance with the provisions of this Agreement, except with respect to those matters which by the terms of this Agreement or by their nature survive termination or expiration. 22.2. Events of Termination. Without prejudice to any other right or remedy available to Licensor, Licensor will have the right to terminate this Agreement immediately upon written notice to Licensee: (a) if Licensee materially breaches any of the terms of this Agreement and, if such breach is curable, such breach is not corrected within twenty (20) days after Licensor sends Licensee written notice thereof (or, in the event of a curable breach which cannot be corrected within twenty [20] days, if Licensee fails to commence such correction within twenty [20] days and thereafter diligently prosecutes it to completion); (b) if Licensee becomes insolvent or generally fails to pay, or admits in writing its inability to pay its debts as they become due, or makes any assignment for the benefit of creditors, or files a petition in bankruptcy, or is adjudged bankrupt, or is placed in the hands of a receiver, or if the equivalent of any such proceedings or acts occurs, though known by some other name or term; provided, however, that if Licensee becomes the subject of a voluntary or involuntary petition in bankruptcy or any involuntary proceeding relating to insolvency, receivership, liquidation or composition for the benefit of creditors, then only if such petition or proceeding is not dismissed within sixty (60) days of filing; (c) if Licensee is not permitted or is unable to operate Licensee's business in the usual manner, or is not permitted or is unable to provide Licensor with assurance reasonably satisfactory to Licensor that Licensee will so operate Licensee's business, as 38 debtor in possession or its equivalent, or is not permitted or is unable to otherwise meet any of Licensee's obligations under this Agreement or to provide Licensor with assurance satisfactory to Licensor that Licensee will meet such obligations; or (d) if Licensee attacks the title of Licensor in and to any Licensed Property (including, without limitation, any copyright or trademark pertaining thereto) or Licensee attacks the validity of any license granted hereunder. 22.3. Effect of Expiration or Termination. (a) Cessation and Delivery. Upon the expiration or earlier termination of this Agreement, subject to Subparagraph 22.3(c) hereinbelow: (i) Licensee shall: (A) immediately cease and cause the cessation of all of its activities hereunder respecting the Licensed Property including, without limitation, the design, development, manufacture, sale, Advertising, marketing and distribution of Licensed Products and, within thirty (30) days after such expiration or termination, send Licensor a complete inventory report of Licensed Products; and (B) comply with the provisions of Subparagraph 13.2 hereinabove. Licensee shall have no further right to exercise any of the rights licensed hereunder or otherwise acquired in relation to this Agreement. Licensee agrees that its failure to stop in all respects the manufacture, sale and/or distribution upon the termination of this Agreement will result in immediate irreparable damage to Licensor for which there is not adequate remedy at law, and in the event of such failure by Licensee, Licensor shall be entitled to injunctive relief in addition to its other rights and remedies in such event. Licensor shall be entitled to recover from Licensee, in addition to any other remedies in the event of default, reasonable attorneys' fees, costs and expenses, including collection agency fees incurred by Licensor in the enforcement of any provision hereof. Licensor's exercise of any of the foregoing remedies shall not operate as a waiver of any other rights or remedies which Licensor may have. (ii) Licensee shall immediately cancel or terminate all contracts, orders and requests for the manufacture, sale, distribution or supply of any goods or services which involve or may lead to any use, application or exploitation of the any Licensed Product or the rights herein licensed or any part thereof. 39 (b) Reversion of Rights. Upon the expiration or earlier termination of this Agreement, subject to Subparagraph 22.3(c) hereinbelow, all rights licensed to Licensee hereunder will immediately revert to Licensor, Licensor may exploit such license rights itself or grant such rights to any third party. (c) Limited Sell-Off Rights. Licensee shall have the non-exclusive right, for a period of ninety (90) days after expiration or earlier termination of this Agreement (the "Sell-Off Period") to dispose of its inventory of Licensed Products "in hand" (as such term is commonly understood in the U.S. toy industry), which Licensed Products are manufactured during the Term pursuant to orders actually received by Licensee from its retail Customers prior to the close of the Sell-Off Period (the "Final Orders"); provided, however, that: (i) this Agreement has not been terminated for Licensee's breach or any other reason set forth in Subparagraph 22.2 hereinabove; (ii) Licensee shall not manufacture (or authorize or permit the manufacture of) Licensed Products after the expiration of the Term; (iii) Licensee shall not distribute or sell (or authorize or permit the distribution or sale of) Licensed Products after the expiration of the Sell-Off Period; (iv) Licensee shall only distribute and sell Licensed Products in amounts necessary to fulfill such Final Orders; (v) Licensee shall not manufacture (or authorize or permit the manufacture of) Licensed Products in excess of amounts set forth in the Marketing Plan approved by Licensor for the applicable time period hereunder; (vi) Licensor has the right to pre-approve the amounts of each and every Licensed Product SKU manufactured hereunder and to be distributed during the Sell-Off Period; and (vii) Royalties are paid and statements are furnished to Licensor hereunder with respect to such Sell-Off Period. (d) Return of Confidential Information and Licensor Information. Upon termination or expiration of this Agreement, each party will immediately return all Confidential Information (and, in the case of Licensee all Licensor Information) received from the other party that is in such party's possession or control, and an officer of such party will certify to the other party in writing that such party has done so. 40 (e) Payments. Upon termination of this Agreement or upon expiration of the Sell- Off Period, all monies owed Licensor will become immediately due and payable by Licensee to Licensor. 22.4. No Damages for Termination. Licensor will not be liable to Licensee for damages of any kind, including incidental or consequential damages, on account of the expiration or rightful termination of this Agreement in accordance with the terms and conditions of this Agreement. Licensee waives any right it may have to receive any compensation or reparations on account of expiration or rightful termination of this Agreement by Licensor in accordance with the terms and conditions of this Agreement, other than as expressly provided in this Agreement. Without limiting the generality of this Subparagraph 22.4, Licensor will not be liable to Licensee, on account of such termination or expiration, for reimbursement or damages for the loss of goodwill, prospective profits or anticipated income, or on account of any expenditures, investments, leases or commitments made by either party or for any other reason whatsoever based upon or growing out of such termination or expiration. 23. RESERVED RIGHTS. Notwithstanding anything to the contrary contained in this Agreement, Licensor retains all rights not expressly licensed to Licensee pursuant to this Agreement, including, without limitation, the exclusive right to license to Licensee or to any third party the right to manufacture, market, conduct Advertising, distribute or sell any Licensed Product in connection with any Premiums, giveaways, promotional arrangements and, in this connection, if Licensee is selected by Licensor or by its designee to manufacture, market, distributed or sell Licensed Products as part of such arrangement, then Licensee shall supply such Licensed Product or to Licensor or its designee at an amount equal to the lowest price given by Licensee or any Sublicensee to any Customer for the same or comparable Licensed Product. 24. DEFINITIONS. 24.1. "Account Specific Merchandise" has the meaning set forth in Subparagraph 4.1(b)(ii) hereinabove. 24.2. "Ad Spend" has the meaning set forth in Subparagraph 4.5 hereinabove. 24.3. "Advance" has the meaning set forth in Paragraph 7 hereinabove. 24.4. "Advertising" means the solicitation and/or commercial enticement for the sale of any product, good or article by means of television, radio, print media, outdoor, Internet or by any other means, whether now or hereafter known, devised, invented or developed. 24.5. "Advertising Materials" has the meaning set forth in Subparagraph 5.1(c) hereinabove. 41 24.6. "Annual Marketing Plan" has the meaning set forth in Subparagraph 4.1(a)(ii) hereinabove. 24.7. "Artwork and Film Clips" has the meaning set forth in Subparagraph 6.1 hereinabove. 24.8. "Blocked Funds" has the meaning set forth in Subparagraph 9.3 hereinabove. 24.9. "Bundling" has the meaning set forth in Subparagraph 8.6 hereinabove. 24.10. "Calendar Quarter" means any of the following applicable consecutive successive three (3) month period during a Calendar Year: January 1 through and including March 31, April 1 through and including June 30; July 1 through and including September 30; and October 1 through and including December 31. 24.11. "Calendar Year" means the time period from January 1 through and including December 31 of the same successive consecutive twelve (12) month period, except with respect to 1998 for which "Calendar Year" means the time period from October 1, 1998 through and including December 31, 1998. 24.12."Chain" means a group of twenty (20) or more retail store outlets. 24.13."Classic Trilogy" has the meaning set forth in Subparagraph 24.43(a)(i) hereinbelow. 24.14. "Closeout Stores" means Retail Entities that offer for sale a majority of their inventory initially on a so-called "closeout" basis (as such terms are customarily understood in the U.S. toy industry). For purposes of this Agreement, KayBee Toys, as it practices business as of the date of this Agreement, does not constitute a Closeout Store. 24.15. "Confidential Information" has the meaning set forth in Subparagraph 16.1 hereinabove. 24.16."Copyright Materials" has the meaning set forth in Subparagraph 13.1 hereinabove. 24.17. "Customer" means an entity that is not a Licensee, a Licensee Affiliate (including any Permitted Licensee Affiliate) or a Sublicensee, except as provided in Subparagraph 8.4(c) hereinabove. 24.18."Dedicated Retail Space" has the meaning set forth in Subparagraph 4.6 hereinabove. 24.19."Designs" has the meaning set forth in Subparagraph 5.1(b) hereinabove. 24.20."Disclosing Party" has the meaning set forth in Subparagraph 16.1 hereinabove. 42 Information below, marked with [**], has been omitted pursuant to a request for confidential treatment. A complete copy of this document has been supplied to the Securities and Exchange Commission under separate cover. 24.21. "Dump" means to distribute a Licensed Product in a manner which disparages the Licensed Property, and/or materially diminishes the value of Licensor's goodwill, business opportunities, trademark or tradename rights pursuant to any applicable laws in the relevant country of the Territory. 24.22. "Electronic Retailers" means retailers that market and sell products to consumers primarily through electronic media, including, without limitation, by means of television (such as, without limitation, QVC, HSN) or Internet. 24.23. INTENTIONALLY OMITTED. 24.24."Episode I" has the meaning set forth in Subparagraph 24.43(a)(ii) hereinbelow. 24.25. "Episode I Outside Date" has the meaning set forth in Subparagraph 2.1(a) hereinabove. 24.26."Episode II" has the meaning set forth in Subparagraph 24(a)(ii) hereinbelow. 24.27. "Episode II Outside Date" has the meaning set forth in Subparagraph 2.1(b) hereinabove. 24.28."Episode III" has the meaning set forth in Subparagraph 24(a)(ii) hereinbelow. 24.29. "Episode III Outside Date" has the meaning set forth in Subparagraph 2.1(c) hereinabove. 24.30."Evaluation Unit" has the meaning set forth in Subparagraph 8.5 hereinabove. 24.31. "Event Window" means a minimum four (4) week period associated with the theatrical release of a Picture, the video release of a Picture, the Christmas Holiday, or other key promotional event. 24.32."Excluded Distribution Channels" has the meaning set forth in Schedule V hereinbelow. 24.33."Final Orders" has the meaning set forth in Subparagraph 22.3 hereinabove. 24.34."F.O.B. Product" has the meaning set forth in Subparagraph 4.1(b)(ii) hereinabove. 24.35."F.O.B. Royalty" has the meaning set forth in Subparagraph 8.4(a) hereinabove. 24.36. [**] 43 24.37. "Highly Developed" means the following Sub-Territories: U.S., Canada, U.K., France, Germany, and Japan. 24.38."Initial Marketing Plan" has the meaning set forth in Subparagraph 4.1(a)(i) hereinabove. 24.39."Intermediate Vehicles" has the meaning set forth in Schedule II hereinbelow. 24.40. "International Marketing Executive" has the meaning set forth in Subparagraph 4.3(c) hereinabove. 24.41. "Internet" means the computer-generated, computer-mediated or computer-assisted transmission, reception, recordation or display arising from any network or other connection of instruments or devices now known or hereafter invented capable of transmission, reception, recordation and/or display (such instruments or devices to include, without limitation, computers, laptops, cellular or PCS telephones, pagers, PDAs, wireless transmitters or receivers, modems, radios, televisions, satellite receivers, cable networks, smart cards and set- top boxes). 24.42. "Licensed Products" means those products, goods and articles, within the enumerated categories set forth in Schedule II attached hereto, and which are based on or incorporating elements of the Licensed Property. 24.43. "Licensed Property" means, subject to the terms, conditions and restrictions contained in Licensor's or any Licensor Related Entity's agreements with persons, firms or entities rendering services or granting rights, (a) the original titles, designs, character names and likenesses, dialogue, music and sound effects, words, symbols, logographics and the footage, photographs, artwork, visual representations of the props, costumes, sets, special effects and any other original creative elements) which appear in, have become directly associated with, and as are depicted in, the following motion pictures: (i) those certain previously released theatrical motion pictures (and the special editions thereof released theatrically in 1997) entitled "STAR WARS: EPISODE IV - A NEW HOPE," "STAR WARS: EPISODE V - THE EMPIRE STRIKES BACK" and "STAR WARS: EPISODE VI - RETURN OF THE JEDI" (the "Classic Trilogy"); and/or (ii) each of the first three succeeding prequel theatrical motion pictures to the Classic Trilogy tentatively entitled "Episode I," "Episode II" and "Episode III," respectively (each such prequel theatrical motion picture a "Prequel" herein). 44 (Classic Trilogy and the Prequels are jointly, severally and collectively referred to as the "Picture[s]"); (b) such original titles, designs, character names and likenesses, dialogue, music and sound effects, words, symbols, logographics, photographs, artwork, visual representation of the props, costumes, sets, special effects, and any other original creative elements which do not exist in the Pictures but which are embodied in games, novels, comics, videogames, television programs or series (whether live or animated) based on and derived from the Pictures, to the extent of Licensor's right to grant the rights licensed to Licensee pursuant to Paragraph 1 hereinabove (collectively "Spin-Off Properties"); and (c) such original trademarks, tradenames, servicemarks and servicenames owned by Licensor and arising out of and which have become directly associated with the Pictures, to the extent of Licensor's rights in each applicable country of the Territory under such country's applicable trademark laws, including, but not limited to, those specified in Schedule VI (the "Licensor Trademarks"). 24.44. "Licensee Affiliate" means any entity other than Licensor that is directly or indirectly controlled by, under common control with or that controls Licensee (including, without limitation, any Permitted Licensee Affiliate). For purposes of this definition of "Licensee Affiliate," an entity will control another entity, or be deemed to control another entity, if such entity: (a) has the ability to elect a majority of the directors, trustees (or other managers) of such other entity; (b) is a general partner or joint venturer of such other entity; (c) directly or indirectly holds (or has power to vote) twenty percent (20%) or more of the economic interests of such other entity; or (d) directly or indirectly holds (or has power to vote) five percent (5%) or more of the voting equity interests of such other entity (except for an investment fund which holds such voting equity interests). 24.45. "Licensee's Records" has the meaning set forth in Subparagraphs 9.5(e) and 11.1 hereinabove. 24.46. "Licensor Channel" means an outlet and/or method of distribution or delivery of any products, goods or articles (including, without limitation, through catalogs, direct mail, Internet and/or fan clubs), which outlet and/or method of distribution or delivery is owned or controlled (in whole or in part) or licensed by Licensor or by any Licensor-Related Entity. 24.47."Licensor Information" has the meaning set forth in Subparagraph 16.2 hereinabove. 24.48. "Licensor-Related Entities" means George W. Lucas, Jr. and all of Licensor's present and future affiliated, related and/or subsidiary entities, including, without limitation, Lucasfilm Ltd., LucasArts Entertainment Company LLC, Lucas Digital Ltd. LLC and/or Lucas Learning 45 Ltd. and their respective divisions, subsidiaries, directors, employees, officers, successors, assigns, agents and joint venturers. 24.49. "Licensor Trademarks" has the meaning set forth in Subparagraph 24.43(c) hereinabove. 24.50. "Manufacturer" has the meaning set forth in Subparagraph 15.1 hereinabove. 24.51. "Manufacturing Agreement" has the meaning set forth in Subparagraph 15.1 hereinabove. 24.52."Marketing Plan" has the meaning set forth in Subparagraph 4.1(a) hereinabove. 24.53."Micro Figures" has the meaning set forth in Schedule II hereinbelow. 24.54."Micro Playsets" has the meaning set forth in Schedule II hereinbelow. 24.55."Micro Vehicles" has the meaning set forth in Schedule II hereinbelow. 24.56. "Mid-Level" means the following Sub-Territories: Spain/Portugal, Italy, Australia/New Zealand, Scandinavia, Benelux, Far East/Asia (All Countries), Mexico, Latin America, and Austria/Switzerland. 24.57."Minimum Sales Levels" has the meaning set forth in Subparagraph 4.2 hereinabove. 24.58. "Moral Rights" means any rights to claim authorship of a work, to object to or prevent the modification of a work, or to withdraw from circulation or control the publication or distribution of a work, and any similar right, existing under the law of any country in the world or under any treaty. 24.59."Net Sales" has the meaning set forth in Subparagraph 8.2 hereinabove. 24.60."Other Product" has the meaning set forth in Subparagraph 3.5 hereinabove. 24.61. "Permitted Licensee Affiliates" means those Licensee Affiliates set forth in Schedule I and such additional Licensee Affiliates as Licensor shall approve, if at all, in writing. 24.62."Pictures" has the meaning set forth in Subparagraph 24.43(a) hereinabove. 24.63."Plan Elements" has the meaning set forth in Subparagraph 4.1(b) hereinabove. 24.64. "P.O.S." means all "point of sale" items, including, without limitation, endcaps, shelf- talkers, electronic cart "smart ads," dedicated retail aisles, pamphlets, leaflets, standees, 46 displays and other "point of sale" items which prominently and exclusively feature elements of or based on the Licensed Property. 24.65. "Premium" means a product, good or article based on or incorporating the Licensed Property that is used in connection with promotional activities intended to augment or enhance the sale or other exploitation of products other than Licensed Products, whether or not as part of in purchase-with-purchase promotions, self-liquidator programs, joint merchandising programs, giveaways, sales incentive programs, fan club programs, fund-raisers or entries in sweepstakes or to customers for resale by direct mail or other direct marketing methods. 24.66."Prequel" has the meaning set forth in Subparagraph 24.43(a)(ii) hereinabove. 24.67."Prior Agreement" has the meaning set forth in Subparagraph 5.3 hereinabove. 24.68. "Product Development Team" has the meaning set forth in Subparagraph 4.3(d) hereinabove. 24.69."Production Materials" has the meaning set forth in Subparagraph 13.2 hereinabove. 24.70."Quarterly Update" has the meaning set forth in Subparagraph 4.1(a)(iii) hereinabove. 24.71."Recipient" has the meaning set forth in Subparagraph 16.1 hereinabove. 24.72. "Retail Entity" means a Customer which is ordinarily in the business of selling goods and products directly to a public (non-business) consumer. 24.73. "Royalties" means the applicable "Royalty Percentage" of "Net Sales," as such terms are defined and set forth in Subparagraphs 8.1, 8.2 and 8.4 hereinabove. 24.74."Royalty Percentage" has the meaning set forth in Subparagraph 8.1 hereinabove. 24.75."Royalty Report Form" has the meaning set forth in Subparagraph 9.4 hereinabove. 24.76."Sales Projections" has the meaning set forth in Subparagraph 4.1(b)(iii) hereinabove. 24.77."Sell-Off Period" has the meaning set forth in Subparagraph 22.3(c) hereinabove. 24.78. "Senior Worldwide SW Toy Brand Executive" has the meaning set forth in Subparagraph 4.3(a) hereinabove. 24.79."Spin-Off Properties" has the meaning set forth in Subparagraph 24.43(b) hereinabove. 47 24.80. "Standard Dedicated Retail Space" means the Dedicated Retail Space at all times other than during an Event Window. 24.81."Sublicense Agreement" has the meaning set forth in Subparagraph 3.3 hereinabove. 24.82."Sublicensee" has the meaning set forth in Subparagraph 3.3 hereinabove. 24.83."Sub-Territory" has the meaning set forth Subparagraph 2.2 hereinabove. 24.84."SW Toy Team" has the meaning set forth in Subparagraph 4.3 hereinabove. 24.85."Term" has the meaning set forth in Subparagraph 2.1 hereinabove. 24.86."Territory" has the meaning set forth in Subparagraph 2.2 hereinabove. 24.87. "Trademark License Agreement" has the meaning set forth in Subparagraph 1.2 hereinabove. 24.88. "Underdeveloped" means the following Sub-Territories: Greece, Turkey, Israel, Eastern Europe, Middle East & Africa, Brazil and all Sub-Territories other than Highly Developed and Mid-Level. 24.89."U.S. Release Date" has the meaning set forth in Subparagraph 2.1 hereinabove. 24.90."VAT" has the meaning set forth in Subparagraph 8.8 hereinabove. 25. GENERAL. 25.1. Assignment. Subject to the other terms and conditions of this Subparagraph 25.1, this Agreement will bind and inure to the benefit of each party and to their respective successors and assigns. Licensee shall not voluntarily or by operation of law assign, sub-license, transfer, encumber or otherwise dispose of all or part of any right or privilege licensed to Licensee in this Agreement, including to a Licensee Affiliate, without Licensor's prior written approval. For purposes of this Subparagraph 25.1, any change in control of Licensee, whether through merger, acquisition, reorganization, liquidation, foreclosure, involuntary sale in bankruptcy, or the purchase of substantially all of Licensee's assets or otherwise, shall be deemed a purported assignment subject to Licensor's prior written approval. Any attempted assignment, sublicense, transfer, encumbrance or other disposal without such approval will be null and void and constitute a material default and material breach of this Agreement. 25.2. Governing Law. This Agreement will be governed by and construed in accordance with the laws of the federal laws of the United States and the laws of the State of California applicable to agreements entered into, and to be performed entirely, within California between 48 California residents (and excluding the United Nations Convention on Contracts for the International Sale of Goods) without regard to choice of law provisions and regardless of the place or places of its actual execution or performance. Any suit, action or proceeding between or among any of the parties hereto arising out of or related to this Agreement will be brought solely in the federal or state courts in the Northern District of California, and Licensee hereby submits to the personal jurisdiction thereof and agrees to such courts as the appropriate venue. Notwithstanding the foregoing, Licensee agrees that, for purposes of collecting monies due pursuant to this Agreement, Licensee, at Licensor's election, may be subject to whatever local laws and courts have jurisdiction in any country of the Territory over Licensee. Process in any action or proceeding referenced to in this Subparagraph 25.2 may be served on Licensee at the address for notices set forth in Subparagraph 25.5 hereinbelow. 25.3. Attorneys' Fees. In the event of any legal proceeding between the parties arising out of or related to this Agreement, the prevailing party shall be entitled to recover, in addition to any other relief awarded or granted, its costs and expenses (whether or not in connection with litigation and including, without limitation, attorneys' fees and costs) incurred in connection with any such proceeding. 25.4. Equitable Relief. Licensee recognizes and acknowledges that a material breach by Licensee of any covenants, agreements or undertakings made or assumed by it will cause Licensor irreparable damage, which cannot be readily remedied in damages in an action at law, and may, in addition thereto, constitute an infringement of Licensor's intellectual property and other rights in the Licensed Property, thereby entitling Licensor to equitable remedies (including, without limitation, injunctive relief), costs (including, without limitation, whether or not in connection with litigation) and reasonable attorney's fees. For purposes of this Subparagraph 25.4, Licensee acknowledges that (by way of example and not limitation) infringement of Licensor's intellectual property rights include any use of the Licensed Property by Licensee other than those licensed under this Agreement, failure to obtain approvals required under this Agreement, use or release of any Licensed Product or Confidential Information in violation of this Agreement, and failure to secure permissions and transfers of rights from third parties as required pursuant to this Agreement. 25.5. Notices. Any notice to be given or served under this Agreement shall be in writing and shall be delivered to the parties addressed as set forth below, or to such other address as either party shall notify the other party of in writing, as follows: personally or sent by cable, telegram or telemessage or by facsimile, telex, telecopy or other print out communication mechanism or by first class, prepaid, registered or certified mail (if available) post (air mail if posted to another country) to the party to be served at the address set forth below in this Subparagraph 25.5 or to such other address as either party may from time to time notify in writing to the other. Such notice shall be deemed to have been served: (a) immediately in the case of personal delivery; (b) in the case of a cable, telegram or telemessage, on the first business day after the receipt by the relevant service of the order therefor; (c) in the case of facsimile, telex, telecopy or other print out mechanism, on the expiration of four (4) hours from the time of 49 transmission subject in the case of telex or facsimile to proof by the sender that he/she holds an acknowledgment (whether in mechanical form other otherwise) confirming its receipt at its destination and subject in the case of facsimile or other print out transmission in the absence of an acknowledgment to the original notice being sent by post or by personal delivery in accordance with this Subparagraph 25.5 not later than the next business day after such transmission; and (d) in the case of postal delivery, on the second business day following the date of posting (the fifth business day if posted to another country) or on acknowledgment of receipt if earlier. If to Licensor: For notices to Licensor: P. O. Box 2009, San Rafael, CA 94912, Attention: Vice President; with a copy to: General Counsel. For all approvals by Licensor pursuant to Paragraph 5 above: P. O. Box 2009, San Rafael, CA 94912, Attention: Approvals Coordinator For all other approvals by Licensor including, without limitation, pursuant to Paragraph 4 above: P.O. Box 2009, San Rafael, CA 94912, Attention: Vice President For statements and payments to Licensor: P. O. Box 2009, San Rafael, CA 94912, Attention: Cashier For wire transfers: pursuant to Licensor's written wire transfer instructions For deliveries requiring Licensor's street address: 5858 Lucas Valley Road, Nicasio, CA 94946 If to Licensee: Galoob Toys, Inc. 500 Forbes Blvd. South San Francisco, CA 94080 Attn: Gary Niles, Executive Vice President cc: William Catron, Executive Vice President 25.6. No Waiver. No action taken by either party pursuant to this Agreement, and no waiver by either party, whether express or implied, of any provision or right in this Agreement or any breach thereof, and no failure of either party to exercise or enforce any of its rights under this Agreement, will constitute a continuing waiver with respect to such provision or right or as a breach or waiver or any other provision or right, whether or not similar. 50 25.7. Independent Contractors. The parties to this Agreement are and shall remain independent contractors. There is no relationship of partnership, employer, employee, principal, agent, joint venture, employment, franchise or agency between the parties. Except as expressly provided in this Agreement, neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written approval and shall not represent that it has such right. 25.8. Nonexclusive Remedy. The exercise by either party of any remedy under this Agreement will be without prejudice to its other remedies under this Agreement or otherwise. 25.9. Severability. This Agreement is severable. If any provision of this Agreement is found invalid or unenforceable in any jurisdiction, that provision, as to that jurisdiction, will be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the other remaining provisions of this Agreement, which other remaining provisions will not be affected and shall remain in force, to the maximum extent permissible. 25.10. Approvals. Except as otherwise expressly stated herein, any and all Licensor approvals pursuant to this Agreement may be given or withheld in Licensor's sole discretion for any reason or for no reason. Failure by Licensor to give written approval within fourteen (14) days from the date of receipt of any submission for approval will be deemed to be Licensor's disapproval thereof; provided, however, if Licensee thereafter notifies Licensor in writing that it has not received a response from Licensor, and Licensor does not respond within forty-eight (48) hours of receipt of such notice, then the submission will be deemed approved. A delivery to and an approval made by an authorized representative of Galoob Toys, Inc. shall be deemed to constitute a delivery to and an approval made by Galoob Toys, Inc. and all Permitted Licensee Affiliates. 25.11. Headings, Captions and Names. The name of this Agreement, and all headings and captions herein contained, are for reference and convenience only and do not define, limit or expand the scope or intent of any provision hereof and shall not be relied upon in or in connection with the construction or interpretation of this Agreement. The words "herein," "hereunder," "hereof" and similar terms refer to this entire Agreement and shall not be limited to the specific paragraphs or subparagraphs in which they are used. 25.12. Counterparts. This Agreement may be executed in one or more counterparts, and by telefacsimile transmission, each copy of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument, but this Agreement shall not be binding upon the parties until it has been signed by both parties. The parties hereto agree that facsimile signatures on a copy of this Agreement shall be effective and enforceable as if they were original signatures. 25.13. Further Instruments. Except as otherwise expressly provided in this Agreement, each party shall furnish to the other (and shall deliver and cause to be executed, acknowledged and 51 delivered to the other) any further instruments, which such other party may reasonably require or deem necessary from time to time to evidence, establish, protect, enforce, defend or secure to such other party any or all of its rights hereunder or to more effectuate or carry out the purposes, provisions or intent of this Agreement. 25.14. Conditioned Effectiveness of License. Notwithstanding anything in this Agreement to the contrary, this Agreement will not be deemed effective until the expiration or early termination of the waiting period applicable to the transactions contemplated hereby under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Upon such expiration or early termination, this Agreement will be deemed effective, without any further action of Licensor or Licensee. 25.15. Entire Agreement. This Agreement (including all Exhibits and Schedules attached hereto, which Exhibits and Schedules are incorporated herein by this reference) constitute the complete and entire agreement between the parties with respect to the subject matter hereof, superseding and replacing the Prior Agreement and any and all prior agreements, negotiations, communications, and understandings (both written and oral) regarding such subject matter. This Agreement may only be modified, or any rights under it waived, by a written document executed by both parties. Subject to the foregoing, the "Royalty" (set forth and defined in the Prior Agreement) shall be applicable to the "Licensed Products" (set forth and defined in the Prior Agreement) in the "Territories" (set forth and defined in the Prior Agreement) for Net Sales occurring up to and including December 31, 1998, and the parties agree that Licensee shall no longer have the right to the "Sell-Off Period" (set forth and defined in the Prior Agreement). LUCAS LICENSING LTD. ("LICENSOR") GALOOB TOYS, INC. ON BEHALF OF ITSELF AND ALL PERMITTED LICENSEE AFFILIATES (JOINTLY AND SEVERALLY ("LICENSEE") By: /s/ Gordon Radley By: /s/ Mark Goldman -------------------------------- --------------------------------- Title: Title: President and CEO ----------------------------- ------------------------------ 52 EX-27 6 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. This schedule contains summary financial information extracted from the financial statements of Galoob Toys, Inc. for the quarter ended September 30, 1997, and is qualified in its entirety by reference to such financial statements. Article 5 Multiplier 1,000 Period Type 3 months Fiscal year-end December 31, 1997 Period Start July 1, 1997 Period End September 30, 1997 Cash $ 21,766 Securities 0 Receivables 83,329 Allowances 8,168 Inventory 23,402 Current Assets 151,818 PP&E 17,036 Depreciation 6,486 Total Assets 183,635 Current Liabilities 54,834 Bonds 0 Common 181 Preferred Mandatory 0 Preferred 0 Other - SE 124,335 Total Liability and Equity 183,635 Sales 83,248 Total Revenue 83,248 CGS 56,734 Total Costs 56,734 Other Expenses 41,367 Loss Provision 0 Interest Expense 134 Income Pretax (18,256) Income Tax (7,121) Income Continuing (11,135) Discontinued 0 Extraordinary 0 Changes 0 Net Income (11,135) EPS - Primary (.62) EPS - Diluted (.62)
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