SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 1994
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[ ] 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 1-9357
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TYCO TOYS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3319358
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(State of Incorporation) (I.R.S. Employer
Identification No.)
6000 Midlantic Drive, Mt. Laurel, New Jersey 08054
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (609) 234-7400
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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Number of shares outstanding of each class of Registrant's Stock as of
November 11, 1994:
Common, $.01 par value.............................. 34,702,726 shares
Preferred, 6% Series B, $.10 par value.............. 48,928 shares
TYCO TOYS, INC. AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1994
INDEX
Part I.Financial Information Page
- ---------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1994 and 1993
and December 31, 1993 3
Consolidated Statements of Operations - Quarters and
Nine Months Ended September 30, 1994 and 1993 4
Consolidated Statements of Stockholders' Equity -
Nine Months Ended September 30, 1994 and
Year Ended December 31, 1993 5
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1994 and 1993 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-14
Part II. Other Information
- -----------------------------
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
- 2 -
Part I. Financial Information.
Item 1. Financial Statements.
TYCO TOYS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share amounts)
September 30, December 31,
----------------- ------------
1994 1993 1993
------- ------- ------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 16,488 $ 13,214 $ 32,036
Receivables, net 289,161 283,384 219,232
Inventories, net 113,224 154,231 93,902
Prepaid expenses and
other current assets 23,086 27,416 27,187
Deferred taxes 17,389 26,113 16,489
------- ------- -------
Total current assets 459,348 504,358 388,846
Property and equipment, net 50,211 68,840 50,182
Other assets
Goodwill, net 232,738 243,492 235,824
Deferred taxes 25,635 - 25,635
Other assets 18,375 19,808 14,682
------- ------- -------
Total other assets 276,748 263,300 276,141
------- ------- -------
Total assets $786,307 $836,498 $715,169
======= ======= =======
Liabilities and Stockholders' Equity
Current liabilities
Notes and acceptances payable $117,533 $106,827 $ 68,963
Current portion of long-term debt 25,272 15,133 15,259
Accounts payable 53,346 69,063 62,602
Accrued expenses and other current
liabilities 125,608 113,332 109,681
------- ------- -------
Total current liabilities 321,759 304,355 256,505
Long-term debt, net of current portion 147,302 184,312 179,771
Deferred income taxes and other liabilities 1,758 5,910 1,444
Stockholders' Equity
Preferred stock, 6% Series B voting
convertible, exchangeable, $.10 par
value, 1,000,000 shares authorized;
48,214 shares issued and outstanding 5 - -
Common stock, $.01 par value, 50,000,000
shares authorized; 34,878,316 shares
issued as of September 30, 1994 and
34,847,316 shares issued as of
September 30, 1993 and December 31, 1993 347 347 347
Additional paid-in capital 343,010 294,045 294,500
Retained earnings (deficit) (14,348) 65,444 7,298
Treasury stock, at cost; 175,590 shares (1,595) (1,595) (1,595)
Cumulative translation adjustment (11,931) (16,320) (23,101)
------- ------- -------
Total stockholders' equity 315,488 341,921 277,449
------- ------- -------
Total liabilities and stockholders' equity $786,307 $836,498 $715,169
======= ======= =======
See accompanying notes to consolidated financial statements.
-3-
Tyco Toys, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
For the Quarters Ended For the Nine Months Ended
September 30, September 30,
---------------------- -------------------------
1994 1993 1994 1993
---------- -------- -------- --------
Net sales $241,085 $235,251 $506,330 $482,238
Cost of goods sold 143,501 134,613 295,086 272,365
------- ------- ------- -------
Gross profit 97,584 100,638 211,244 209,873
Marketing, advertising and
promotion 50,535 49,798 114,999 111,910
Selling, distribution and
administrative expenses 30,425 35,181 86,645 92,789
Restructuring charge 4,700 - 4,700 -
Amortization of goodwill 1,617 1,685 4,769 4,883
------- ------- ------- -------
Total operating expenses 87,277 86,664 211,113 209,582
------- ------- ------- -------
Operating income (loss) 10,307 13,974 131 291
Interest and debt expense 8,298 6,561 21,732 17,518
Foreign exchange (gain)
loss (290) 1,232 799 1,982
Other (income) expense, net 263 (272) (2,129) (1,744)
------- ------- ------- -------
Interest and other
expense, net 8,271 7,521 20,402 17,756
------- ------- ------- -------
Income (loss) before income
taxes (benefit) 2,036 6,453 (20,271) (17,465)
Provision (benefit) for
income taxes 10,139 1,767 - (5,671)
------- ------- ------- -------
Net income (loss) (8,103) 4,686 (20,271) (11,794)
Preferred stock dividend 750 - 1,375 -
------- ------- ------- -------
Net income (loss)
available to common
shareholders $ (8,853) $ 4,686 $(21,646) $(11,794)
======= ======= ======= =======
Net income (loss) per
common share:
Primary $ (0.26) $ 0.14 $ (0.62) $ (0.35)
Fully diluted $ (0.26) $ 0.13 $ (0.62) $ (0.35)
Weighted average number of
common shares outstanding:
Primary 34,683 34,669 34,679 33,232
Fully diluted 34,683 36,104 34,679 33,232
Dividends per common share $ - $ 0.025 $ - $ 0.075
See accompanying notes to consolidated financial statements.
-4-
Tyco Toys, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Year ended December 31, 1993
and Nine Months Ended September 30, 1994 (unaudited)
(in thousands)
Preferred Stock Common Stock Additional Paid-in Capital Treasury Stock
--------------- ------------ --------------------------- --------------
Number Number Retained Number Cumulative
of Par of Par Preferred Common Earnings of Translation
Shares Value Shares Value Stock Stock (Deficit) Shares Amount Adjustment
------ ----- ------ ----- --------- ------ --------- ------ ------ -----------
Balance at December 31, 1992 - $- 31,830 $320 $ - $271,417 $ 79,769 176 $(1,595) $(14,670)
Exercise of stock options - - 170 1 - 612 - - - -
Exercise of warrants - - 2,672 26 - 22,017 - - - -
Foreign currency translation - - - - - - - - - (8,431)
Dividends declared - - - - - - (2,531) - - -
Tax benefit from exercise of
stock options - - - - - 454 - - - -
Net loss - - - - - - (69,940) - - -
-- -- ------ ---- ------- -------- -------- --- ------- --------
Balance at December 31, 1993 - - 34,672 347 - 294,500 7,298 176 (1,595) (23,101)
Exercise of stock options - - 31 - - 139 - - - -
Issuance of preferred stock 48 5 - - 46,996 - - - - -
Preferred stock dividend - - - - 1,375 - (1,375) - - -
Foreign currency translation - - - - - - - - - 11,170
Net loss - - - - - - (20,271) - - -
-- -- ------ ---- ------- -------- -------- --- ------- --------
Balance at September 30, 1994 48 $5 34,703 $347 $48,371 $294,639 $(14,348) 176 $(1,595) $(11,931)
== == ====== ==== ======= ======== ======== === ======= ========
See accompanying notes to consolidated financial statements.
-5-
Tyco Toys, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
-------------------
1994 1993
-------- ---------
Cash Flows from Operating Activities:
Net loss $(20,271) $ (11,794)
Adjustments to reconcile net loss to net cash
utilized by operating activities:
Depreciation 16,579 17,329
Amortization 6,240 5,068
Decrease in allowance for bad debts, returns,
discounts and other receivable reserves (13,246) (31,519)
Decrease in allowance for obsolescence and
other inventory reserves (2,176) (5,951)
Change in assets and liabilities:
Increase in receivables (47,457) (28,192)
Increase in inventories (9,789) (53,684)
Decrease in prepaid expenses and other current assets 5,041 1,517
(Increase) in other assets (4,874) (2,342)
Decrease in accounts payable (11,022) (10,707)
Increase in accrued expenses and other current
liabilities 13,209 12,441
------- ---------
Total adjustments (47,495) (96,040)
------- ---------
Net cash utilized by operating activities (67,766) (107,834)
------- ---------
Cash Flows From Investing Activities:
Disposition of property and equipment - 5,061
Capital expenditures (18,157) (24,084)
------- ---------
Net cash utilized by investing activities (18,157) (19,023)
------- ---------
Cash Flows From Financing Activities:
Repayment of long-term debt (10,894) (6,223)
Increase in notes and acceptances payable, net 48,570 79,686
Proceeds from issuance of preferred stock 47,000 -
Proceeds from issuance of common stock 139 22,655
Dividends paid to common shareholders - (1,664)
------- ---------
Net cash provided by financing activities 84,815 94,454
------- ---------
Effect of exchange rate changes on cash (14,440) (5,564)
------- ---------
Net Decrease in Cash and Cash Equivalents (15,548) (37,967)
Cash and Cash Equivalents, Beginning of Year 32,036 51,181
------- ---------
Cash and Cash Equivalents, End of Period $ 16,488 $ 13,214
======= =========
Cash Payments During Period For:
Interest $ 25,145 $ 20,289
Taxes 343 1,603
Non cash Financing Activities:
Convertible bonds issued in lieu of interest payments $ 962 $ -
Preferred stock dividends 1,375 -
See accompanying notes to consolidated financial statements.
-6-
TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements
include the accounts of Tyco Toys, Inc. (the Company, Tyco or Tyco Toys) and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Investments in unconsolidated joint ventures and
other companies are accounted for on the equity method or cost basis depending
upon the level of the investment and/or the Company's ability to exercise
influence over operating and financial policies. In the opinion of management,
all adjustments (consisting of a normal recurring nature) considered necessary
for a fair presentation of results for interim periods have been made. Certain
items in the prior period's financial statements have been reclassified to
conform with the current year's presentation. Due to the seasonal nature of the
Company's business, the results of operations for the interim periods are not
necessarily indicative of the results for a full year. The unaudited financial
statements herein should be read in conjunction with the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 which was filed with the
Securities and Exchange Commission.
(2) Accounting For Income Taxes
---------------------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective January 1, 1993. There was
no cumulative effect on the deferred tax balances as a result of adopting this
pronouncement.
In accordance with SFAS 109, deferred income taxes reflect the impact of
temporary differences between values recorded for assets and liabilities for
financial reporting purposes and the values utilized for measurement in
accordance with current tax laws.
-7-
TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
The tax effects of the significant temporary differences giving rise to the
Company's deferred tax assets (liabilities) for the year ended December 31,
1993, which the adoption of SFAS 109 has required the Company to recognize, are
as follows (in thousands):
Current:
Sales and product allowances $ 4,790
Co-operative advertising 4,738
Receivable reserves 4,230
Obsolescence reserve 3,934
------
17,692
Valuation allowance (1,203)
------
$16,489
======
Noncurrent:
Net operating losses $48,461
State temporary differences 10,411
Foreign tax credits 5,269
Depreciation (1,885)
Other 5,983
------
68,239
Valuation allowance (42,604)
------
$25,635
======
Management believes, considering all available evidence, including the Company's
history of earnings from prior years (after adjustments for nonrecurring items,
restructuring charges and permanent differences), it is more likely than not
that the Company will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of certain net operating losses and
tax credit carryforwards, and other temporary differences. The total net
deferred tax assets (both current and noncurrent) have been reduced by
establishing valuation allowances aggregating $43,807,000.
The valuation allowances have been established recognizing that certain tax
credit carryforwards and net operating loss carryforwards, which are limited
under income tax laws, may expire prior to their full utilization. The
valuation allowances include $16,836,000 related to the preacquisition net
operating losses of Matchbox and $174,000 related to the Company's Belgium
subsidiaries. Any subsequently recognized benefits related to these net
operating losses will be allocated to reduce goodwill. The valuation allowances
are generally established annually, when management undertakes a comprehensive
analysis. During interim periods, management makes its best estimate of year-
end balances in order to determine the interim tax provision. Changes to the
valuation allowance on an interim basis, however, are and will be made if
appropriate.
Based on the results for the first nine months of 1994, the Company announced in
October that it does not expect to be profitable for the year. Accordingly, the
$10,139,000 tax benefit recorded through June 30, 1994 was reversed in the third
quarter of 1994.
-8-
TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
(3) Receivables, Net (in thousands):
----------------
September 30,
----------------- December 31,
1994 1993 1993
------- ------- -----------
Trade $323,256 $300,183 $262,330
Other receivables 9,325 10,197 13,568
Less:
Doubtful accounts 7,465 9,906 11,201
Returns, discounts and
other reserves 35,955 17,090 45,465
------- ------- -------
$289,161 $283,384 $219,232
======= ======= =======
(4) Inventories, Net (in thousands):
----------------
September 30,
---------------- December 31,
1994 1993 1993
------- ------- -----------
Raw materials $ 22,515 $ 32,647 $ 27,836
Work-in-process 2,606 3,823 2,355
Finished goods 102,348 125,257 80,132
Less obsolescence and other
reserves 14,245 7,496 16,421
------- ------- -------
$113,224 $154,231 $ 93,902
======= ======= =======
(5) Legal Proceedings
-----------------
Italian Litigation
- ------------------
The former managing director of the Company's Italian sales and marketing
subsidiary initiated two court actions against the Company in Italy as the
result of the Company's previously announced decision to close or sell the
subsidiary. One action, alleging violations of Italian employment laws and
regulations, has been dismissed. The second action, alleging breach of a letter
of intent with the plaintiff for the sale of the subsidiary, resulted in the
sequestration of the Company's shares in the subsidiary and has prevented the
completion of the announced sale of the subsidiary to Giochi Preziosi S.A., an
Italian toy distributor. In the opinion of management and its outside counsel,
the Company has meritorious legal and factual defenses to the claims made in
this litigation; therefore, the outcome is not likely to have a material adverse
impact on the Company's earnings, financial condition or liquidity.
Lego Litigation
- ---------------
Tyco Industries, Inc. (Tyco Industries), a wholly-owned subsidiary of the
Company, has been a defendant in proceedings in Italy, the Netherlands, and in
the Federal Court of Canada in which Interlego A.G. (Lego) has asserted unfair
competition claims. The Company received a favorable ruling in the Italian
proceedings, the final appeal taken by Lego has been completed, and the parties
are awaiting final judgement. An adverse determination in any of these cases is
not, in the opinion of management, likely to have a material adverse impact on
the earnings, financial condition or liquidity of the Company.
-9-
TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Shareholder Suits
- -----------------
In October 1994, the U.S. District Court in New Jersey entered judgement in
favor of the Company in litigation filed in 1992 on behalf of the stockholders
alleging violations of federal securities laws. The plaintiff has appealed this
judgement.
In December 1993 and January 1994, two additional stockholders filed litigation
in the same court asserting claims under federal and state securities laws as a
result of the Company's financial performance in 1993. Both are class action
cases and have been consolidated.
The Company's outside counsel is of the opinion that the Company has substantial
and meritorious defenses to these claims and there is a likelihood that the
Company will prevail. Accordingly, it is the opinion of management that the
outcome of this litigation is not likely to have a material adverse effect on
the earnings, financial condition or liquidity of the Company.
U.S. Customs
- ------------
The U.S. Customs Service has issued a penalty notice of an assessment for lost
duty in the amount of $1,500,000, penalties for gross negligence of $5,800,000,
and penalties for fraud of $5,600,000. All of the claims arise from activities
of the Company's View-Master subsidiary for the period prior to its acquisition
by the Company in 1989. Management and the Company's outside counsel are of the
opinion that the Company has legal and factual defenses to the penalty claims
made by the U.S. Customs Service, and that the outcome of the proceedings
relating to these claims, which proceedings may be protracted, are not likely to
have a material adverse impact on the earnings, financial condition or liquidity
of the Company.
Environmental Litigation
- ------------------------
Tyco Industries is a party to three matters arising out of waste hauled by a
transporter to various sites, including the GEMS Landfill. In litigation
relating directly to remediation of the landfill, Tyco Industries has signed a
Consent Order and Trust Agreement and made a settlement contribution of an
amount not material to Tyco Industries. In another matter, the court has
certified class action claims of homeowners near the GEMS Landfill against
approximately 150 defendants, including Tyco Industries, for various types of
unspecified monetary damages, including punitive damages. In the third matter,
the New Jersey Department of Environmental Protection is asserting claims for
remediation expenses at a different site in Sewell, New Jersey, used as a waste
transfer station by the same transporter involved in the other two matters. In
management's opinion, there are meritorious factual and legal defenses to these
claims. Management of the Company and its outside counsel are of the opinion
that these three matters are not likely to have a material adverse impact on the
earnings, financial condition or liquidity of the Company. In addition, the
Company will receive a contribution from a third party towards certain expenses
in these matters.
-10-
TYCO TOYS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Other Litigation
- ----------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact on the
Company's earnings, financial condition or liquidity.
(6) Net Income (Loss) Per Share
---------------------------
Net income (loss) per share was calculated using the weighted average number of
shares of common stock and dilutive common stock equivalents outstanding during
the period. Outstanding options, convertible debentures and preferred shares
were determined to be anti-dilutive for the quarter and nine months ended
September 30, 1994 and for the nine months ended September 30, 1993; therefore,
these items were excluded from the per share calculations.
-11-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
-----------------------------------
Results of Operations
- ---------------------
Net sales for the quarter and nine months ended September 30, 1994 were
$241,085,000 and $506,330,000, respectively, compared to $235,251,000 and
$482,238,000, respectively, for the same periods last year, representing an
increase of 2.5% and 5.0%, respectively. Increased sales for the quarter and
nine months ended September 30, 1994 resulted from higher domestic shipments of
Matchbox vehicles, activity toys and large dolls, in addition to slightly higher
sales by Tyco International, partially offset by lower sales experienced by the
Company's direct import business, Tyco Playtime, as a result of product delays.
Gross profit for the quarter and nine months ended September 30, 1994 was
$97,584,000 and $211,244,000, respectively (40.5% and 41.7%, respectively, of
net sales), compared to $100,638,000 and $209,873,000, respectively (42.8% and
43.5%, respectively, of net sales), for the comparable periods last year. Gross
profit margins decreased for the quarter and nine months ended September 30,
1994 due primarily to product mix and reduced prices realized on carryover
inventory from 1993.
Total operating expenses for the quarter and nine months ended September 30,
1994 were $87,277,000 and $211,113,000, respectively (36.2% and 41.7%,
respectively, of net sales), compared to $86,664,000 and $209,582,000,
respectively (36.8% and 43.5%, respectively, of net sales), for the same periods
last year. Included in the operating expenses for the quarter and nine months
ended September 30, 1994 is a $4,700,000 charge associated with the closure of
the Company's Italian subsidiary. For 1995, an agreement has been made for an
Italian distributor to market the Company's products in Italy. Total operating
expenses, expressed as a percentage of net sales, were lower for the quarter and
nine months ended September 30, 1994 reflecting the Company's continued cost-
containment efforts.
Interest and debt expense for the quarter and nine months ended September 30,
1994 was $8,298,000 and $21,732,000, respectively, compared to $6,561,000 and
$17,518,000, respectively, for the same periods last year. The increase reflects
higher borrowings under the Company's credit facilities. Total average debt for
the nine months ended September 30, 1994 was $257,622,000 at an effective
interest rate of 12.6% compared to total average debt of $210,111,000 with an
effective rate of 13.1% for the first nine months of 1993.
In accordance with generally accepted accounting principles, the quarterly tax
provision reflects the projected full year tax rate. Based on the results for
the first nine months of 1994, the Company announced in October that it does not
expect to be profitable for the year. In addition, the Company does not have
any remaining taxable income in the carryback period to utilize the net
operating loss. Accordingly, for the quarter ended September 30, 1994, the
Company recorded a tax provision which reversed the $10,139,000 tax benefit
recorded through June 30, 1994. For the nine months ended September 30, 1993,
the Company was able to realize a tax benefit of $5,671,000.
-12-
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", the Company is required to record a deferred tax asset for the
future tax benefits of a tax loss, as well as other items, if realization is
more likely than not. Based on the weight of available evidence, management has
concluded that, more likely than not, the Company's future domestic taxable
income will be sufficient over the appropriate carryforward periods to realize
the tax benefit represented by its 1993 domestic net operating loss, certain tax
credits and certain temporary differences. Certain of the Company's
international subsidiaries have net operating loss carryforwards to reduce
future taxable income. Management has determined on a jurisdictional basis
whether it is likely operating income will be sufficient to fully utilize the
loss carryforwards and temporary differences prior to their expiration date.
In 1994, the Company expanded its products in both core and promotional toy
lines, including diecast vehicles, activity toys and dolls. For the first nine
months of 1994, domestic sales have increased by 13.5% compared to the same
period last year. The Company's domestic subsidiaries have royalty arrangements
with its international subsidiaries. As a result of recent growth in the
international business, and anticipated future growth, management believes that
increased royalty income will contribute to future domestic profitability.
Realization of tax benefits is dependent upon the Company's ability to generate
taxable income from the appropriate sources within the carryforward period
established under the tax law. Based on the Company's expanded product line,
continuing benefits of its profit improvement plan and the Company's prior
history of earnings, management expects that the Company will be able to return
to profitability. Accordingly, management believes the Company's future taxable
income will be at a level sufficient to fully utilize the 1993 domestic net
operating loss carryforward, certain tax credit carryforwards and other
temporary differences. Taxable income (as adjusted for changes in temporary
differences, certain permanent items, nonrecurring charges and other appropriate
adjustments) for the four-year period ending December 31, 1994 is estimated to
be $8,300,000. Using this $8,300,000 estimate as a base and anticipated
increases in royalties from the Company's international subsidiaries future
taxable income would be sufficient to realize the tax benefits represented by
the net operating loss carryforward, tax credit carryforwards and other
temporary differences prior to their expiration.
While management expects that the Company will be able to return to
profitability, future levels of operating income are dependent upon general
economic conditions, including competitive pressures on sales and margins, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for full utilization of
the net operating loss and tax credit carryforwards and other temporary
differences. Management has considered these factors in reaching its conclusion
that it is likely that operating income will be sufficient to fully utilize the
net operating loss and tax credit carryforwards and other temporary differences
prior to their expiration.
-13-
In connection with an examination of the consolidated federal income tax returns
of Tyco Toys, Inc. and Subsidiaries for the fiscal years ended August 31, 1987
through August 31, 1990, the Internal Revenue Service has issued a deficiency
notice to the Company. The Company has elected to appeal this determination and
management believes that the final outcome of this appeal will not materially
affect the results of operations (including realization of net operating loss
carryforwards and tax credit carryforwards), financial condition or liquidity of
the Company.
Net loss available to common shareholders for the quarter ended September 30,
1994 was $8,853,000 or $0.26 per share compared to net income of $4,686,000 or
$0.14 per share ($0.13 on a fully diluted basis) for the same period last year.
The net loss available to common shareholders for the nine months ended
September 30, 1994 was $21,646,000 or $0.62 per share compared to $11,794,000 or
$0.35 per share for the same period last year. Average shares outstanding for
the quarter and nine months ended September 30, 1994 were 34,683,000 and
34,679,000, respectively, compared to 34,669,000 (36,104,000 fully diluted) and
33,232,000, respectively, for the same periods during 1993.
Financial Condition
- -------------------
Nine Months Ended September 30, 1994
- ------------------------------------
The net cash utilization of $15,548,000 for the nine months ended September 30,
1994 is due primarily to the increased funding of receivables as a result of
higher domestic and international sales in addition to the Company's operating
losses during the period, offset by net proceeds of $47,000,000 from the
issuance of preferred stock and increased borrowings under the Company's
existing credit facilities. During the first nine months of 1994, most European
currencies in which the Company transacts business, especially the Belgium
Franc, strengthened against the United States Dollar. The effects of currency
rate changes on receivables and inventories, in particular, resulted in a
$14,440,000 utilization of cash.
Nine Months Ended September 30, 1994 vs. Nine Months Ended September 30, 1993
- -----------------------------------------------------------------------------
On a comparative basis, net receivables for the first nine months of 1994
increased by $6,000,000 as a result of increased domestic and international
sales. The $41,000,000 decline in net inventories reflects the Company's
efforts to maintain lower worldwide inventory levels. The increase in accrued
expenses and other current liabilities of $12,000,000 reflects higher corporate
tax accruals and advertising expenditures, offset by the utilization of purchase
accounting reserves established in conjunction with the 1992 Matchbox
acquisition.
At September 30, 1994, the Company was not in compliance with certain financial
covenants of its principal credit facility. The Company is negotiating with its
lenders and expects to receive a waiver of such defaults. The Company has
received a commitment for a replacement facility and expects that sufficient
cash will be available from operations and its credit facilities to meet its
requirements for the foreseeable future.
-14-
Part II. Other Information
Item 1. Legal Proceedings.
- ------ -----------------
Reference is made to Note 5 of Notes to Consolidated Financial
Statements included in Part I, Item 1 of this report.
Item 5. Other Information.
- ------ -----------------
President and Chief Operating Officer
-------------------------------------
During September 1994, the Company named Gary Baughman as President and
Chief Operating Officer reporting to Richard E. Grey, Chairman and
Chief Executive Officer. Mr. Baughman also was appointed Director of
the Company. The provisions of his employment agreement call for Mr.
Baughman to become Chief Executive Officer of the Company in January
1996.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits
--------
11. Statements Regarding Computation of Income (Loss) Per Share -
Quarters and Nine Months Ended September 30, 1994 and 1993.
12. Employment Agreements:
12.1 Richard E. Grey
12.2 Gary Baughman
12.3 Harry J. Pearce
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
-15-
SIGNATURE
---------
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.
TYCO TOYS, INC.
--------------
Registrant
Date November 11, 1994
-----------------
By: /s/ Harry J. Pearce
---------------------
Harry J. Pearce
Vice Chairman,
Chief Financial Officer
-16-
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
11.1 Statements regarding computation
of income (loss) per share for the quarters
ended September 30, 1994 and 1993. 18-19
11.2 Statements regarding computation
of loss per share for the nine months ended
September 30, 1994 and 1993. 20-21
12.1 Employment Agreement between the Company and
Richard E. Grey 22-42
12.2 Employment Agreement between the Company and
Gary Baughman 43-65
12.3 Employment Agreement between the Company and
Harry J. Pearce 66-85
27 Financial Data Schedule 86
-17-
Exhibit 11.1
Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Loss Per Share
(in thousands, except per share amounts)
For the Quarter Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(8,853) $ - $(8,853) $(8,853) $ 1,003 $(7,850)
====== ====== ====== ====== ====== ======
Fully
SHARES Primary Diluted
------- -------
Average shares outstanding 34,683 34,683
Additional shares issued assuming conversion of:
Debentures (2) - 1,446
Preferred Stock (3) - 5,000
------ ------
Total average shares outstanding 34,683 41,129
====== ======
NET LOSS PER COMMON SHARE (4) $(0.26) $(0.19)
==== ====
Note: Reference is made to Note 6 to Consolidated Financial Statements in Part
I, Item 1 of this report.
(1) Reflects (a) interest savings, net of taxes, from the conversion of
debentures (reference note 2 below) at the beginning of the year (or date
of issuance, if later) and (b) the elimination of preferred stock
dividends during the period assuming the conversion of the preferred
stock (see note 3 below ).
(2) Assumes the conversion (for fully diluted earnings per share only) of
the $14,462,000 of 7% convertible debentures into common stock of the
Company at a conversion price of $10 per share as of the beginning of
the period presented (or date of issuance, if later).
(3) Assumes the conversion (for fully diluted earnings per share only) of the
$50,000,000 of 6% Series B voting convertible, exchangeable preferred
stock into 4,999,995 shares of the Company's common stock at a conversion
price of $10 per share as of April 15, 1994, the date of issuance.
Accordingly, the additional shares issued as a result of quarterly
preferred stock dividends have not been included in the calculation for
fully diluted purposes.
(4) Fully diluted earnings per share is not presented in the Consolidated
Statements of Operations since it is anti-dilutive.
-18-
Exhibit 11.1
Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Per Share Earnings
(in thousands, except per share amounts)
For the Quarter Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
NET INCOME $4,686 $ - $ 4,686 $ 4,686 $ 142 $ 4,828
===== ======== ===== ===== === =====
Fully
SHARES Primary Diluted
------- -------
Average shares outstanding 34,665 34,665
Incremental shares issued assuming exercise of
stock options (2) 4 89
Additional shares issued assuming conversion of
debentures (3) - 1,350
------ ------
Total average shares outstanding 34,669 36,104
====== ======
NET INCOME PER COMMON SHARE $ 0.14 $ 0.13
==== ====
Note: Reference is made to Note 6 to Consolidated Financial Statements in
Part I, Item 1 of this report.
(1) Reflects the interest savings, net of taxes, from the conversion of
debentures (reference note 3 below), at the beginning of the period
presented.
(2) Reflects the shares issuable upon the assumed conversion of all the
outstanding stock options as of the beginning of the period presented (or
date of issuance, if later), net of shares repurchased with the exercise
proceeds.
(3) Assumes the conversion (for fully diluted earnings per share only) of the
$13,500,000 of 7% convertible debentures into common stock of the Company
at a conversion price of $10 per share as of the beginning of the period
presented.
-19-
Exhibit 11.2
Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Loss Per Share
(in thousands, except per share amounts)
For the Nine Months Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(21,646) $ - $(21,646) $(21,646) $2,134 $(19,512)
====== ======= ====== ====== ===== ======
Fully
SHARES Primary Diluted
------- -------
Average shares outstanding 34,679 34,679
Additional shares issued assuming conversion of:
Debentures (2) - 1,446
Preferred stock (3) - 3,076
------ ------
Total average shares outstanding 34,679 39,201
====== ======
NET LOSS PER COMMON SHARE (4) $(0.62) $(0.50)
==== ====
Note: Reference is made to Note 6 to Consolidated Financial Statements in Part
I, Item 1 of this report.
(1) Reflects (a) interest savings, net of taxes, from the conversion of
debentures (reference note 2 below) at the beginning of the year (or date
of issuance, if later) and (b) the elimination of preferred stock
dividends during the period assuming the conversion of the preferred stock
(see note 3 below).
(2) Assumes the conversion (for fully diluted earnings per share only) of the
$14,462,000 of 7% convertible debentures into common stock of the Company
at a conversion price of $10 per share as of the beginning of the year (or
date of issuance, if later).
(3) Assumes the conversion (for fully diluted earnings per share only) of the
$50,000,000 of 6% Series B voting convertible, exchangeable preferred
stock into 4,999,995 shares of the Company's common stock at a conversion
price of $10 per share as of April 15, 1994, the date of issuance.
Accordingly, the additional shares issued as a result of quarterly
preferred stock dividends have not been included in the calculation for
fully diluted purposes.
(4) Fully diluted loss per share is not presented in the Consolidated
Statements of Operations since it is anti-dilutive.
-20-
Exhibit 11.2
Tyco Toys, Inc. and Subsidiaries
Statement Regarding Computation of Loss Per Share
(in thousands, except per share amounts)
For the Nine Months Ended
September 30, 1994
----------------------------------------------------------------
Primary Fully Diluted
------------------------------- -------------------------------
As As As (1) As
Reported Adjustments Adjusted Reported Adjustments Adjusted
-------- ----------- -------- -------- ----------- --------
NET LOSS $(11,794) $ - $(11,794) $(11,794) $425 $(11,369)
====== ===== ====== ====== === ======
Fully
SHARES Primary Diluted
------- -------
Average shares outstanding 33,232 33,232
Incremental shares issued assuming exercise of
stock options (2) 49 52
Incremental shares issued assuming exercise of
warrants (3) 455 522
Additional shares issued assuming conversion of
debentures (4) - 1,350
Total average shares outstanding (5) 33,736 35,156
====== ======
NET LOSS PER COMMON SHARE (6) $(0.35) $(0.32)
==== ====
Note: Reference is made to Note 6 to Consolidated Financial Statements in Part
I, Item 1 of this report.
(1) Reflects the interest savings, net of taxes, from the conversion of
debentures (reference note 3 below) at the beginning of the year.
(2) Reflects the shares issuable upon the assumed conversion of all the
outstanding stock options as of the beginning of the period presented (or
date of issuance, if later), net of shares repurchased with the exercise
proceeds.
(3) Reflects the shares issuable upon the assumed conversion of all the
outstanding warrants as of the beginning of the year. The warrants, which
expired June 30, 1993, were exercisable into shares of the Company's stock
at an exercise price of $8.25 per share.
(4) Assumes the conversion (for fully diluted earnings per share only) of the
$13,500,000 of 7% convertible debentures into common stock of the Company
at a conversion price of $10 per share as of the beginning of the year.
(5) For financial statement purposes, incremental shares have been excluded
from the calculation of primary loss per share, as the effect is anti-
dilutive.
(6) Fully diluted loss per share is not presented in the Consolidated
Statements of Operations since it is anti-dilutive.
-21-