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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-9357
TYCO TOYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3319358
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
TYCO TOYS, INC.
6000 MIDLANTIC DRIVE, MT. LAUREL, NEW JERSEY
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICER)
08054
(ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(609) 234-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------------------------- -------------------------------------
Common Stock New York Stock Exchange, NASDAQ,
Philadelphia Stock Exchange
Senior Subordinated Debentures New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
---- ----
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on March 15, 1995 was 172,563,370.
Numbers of shares of Common Stock outstanding as of March 30, 1995:
34,757,926.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders to be held May 11, 1995 is
incorporated by reference into Part III of this Form 10-K.
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Part I.
Item 1. Business
Tyco designs and markets a broad range of toy products worldwide.
The Company includes Tyco Toys, Inc. (the Company, Tyco or Tyco Toys) and its
wholly-owned subsidiaries - Tyco Industries, Inc. (Tyco Industries), Tyco (Hong
Kong) Ltd., Tyco Manufacturing Corp., Tyco Distribution Corp., Tyco
Manufacturing (Europe), Inc., Tyco Far East Ltd., Tyco Toys (UK) Ltd., Tyco Toys
(France) S.A., Tyco Toys (Canada) Inc., Tyco Distribution (Europe) n.v., Tyco
Toys (Benelux) n.v., Tyco Matchbox (Deutschland) GmbH, Tyco Toys (Espana)
S.A.,Tyco Playtime Inc., Tyco Asia Ltd., Universal Product Innovations, Inc.,
Matchbox, Tyco Toys (Switzerland) A.G., Tyco Toys (Austria), GmbH and Tyco Toys
(New Zealand) Pty., Ltd.
Tyco owns a 75% interest in Croner-Tyco Toys Pty., Ltd., an Australian Company,
a 75% interest in the Company's Mexican subsidiary, Ensueno-Tyco Toys, S.A. de
C.V., and a 50% interest in Rivergate Partnership L.P., an operator of
warehousing space in Portland, Oregon. The Company expects to acquire the
remaining 25% interest in Ensueno-Tyco by the end of March 1995 for
approximately $1,100,000.
Tyco also owns interests in foreign joint venture entities including a
manufacturing entity in Thailand, and three manufacturing entities and one tool-
making entity in the Peoples Republic of China.
Recent Developments
In April 1994, the Company issued $50,000,000 of 6% Series B Voting
Convertible Exchangeable Preferred Stock to a group led by Corporate Partners,
L.P., an investment fund affiliated with Lazard Freres & Co. Two representatives
of Corporate Partners, Jonathan Kagan and David Golub, have been appointed to
the Company's Board of Directors.
In October 1994, Gary Baughman joined the Company as President and Chief
Operating Officer. Mr. Baughman is responsible for all the Company's Domestic
and International operations. For the previous five years he was the President
of Little Tikes, a division of Rubbermaid, Inc.
In December 1994, Martin Scheman was named Chief Executive Officer of Tyco
Playtime, the Company's direct import subsidiary. Mr. Scheman was the former
owner of Illco Toys, the maker of Sesame Street toy products that Tyco acquired
in 1992 and subsequently consolidated with Tyco Playtime.
In February 1995, the Company announced that it was consolidating certain
European operations in Belgium in order to streamline its activities, reduce
operating expenses and to enhance its service to customers.
In February and March 1995, the Company finalized new working capital credit
lines totaling $290,000,000 including facilities with General Electric Capital
Corporation and facilities arranged by General Electric Capital Corporation.
These facilities replaced the Company's principal credit facility with a bank
group led by NationsBank of North Carolina, N.A.
The Company markets its toys through three separate business units: Domestic
(Tyco U.S.), International and Direct Import (Tyco Playtime).
TYCO U.S.
In 1994, Tyco's domestic sales rose approximately 10% and the U.S. division,
which designs and develops most of the toys the Company sells around the world,
significantly improved its operating results. A focus on strengthening the
Company's core brands and the successful introduction of popular new toys
contributed to the improved results of this division in 1994.
Radio Control
-------------
Tyco maintains the largest market share in radio control toys. Tyco's radio
control business was successfully repositioned in 1994 with the addition of a
mid-priced line featuring a new lower-priced 6.0V Jet Turbo(R) battery pack. In
1995, Tyco's line will feature the first ever Harley-Davidson Radio Control
Motorcycle, the 6.0V Jet Turbo(R) Rebound X-4/TM/ and a new line of value-priced
4.8V vehicles that come complete with battery pack and charger.
Matchbox (R)
--------
Matchbox(R) is among the Company's largest core brands. In 1995, Tyco is
expanding this line to include Zero G/TM/, a new track system. Zero G/TM/ brings
speed and excitement to the Matchbox brand by featuring low-friction, high-speed
cars and a twisting aerodynamic track layout.
In addition, the Company is further developing the Matchbox Collectibles
business in 1995 by adding new cars to the core line of vehicles, expanding the
Harley-Davidson(R) line and introducing a line of action vehicles called
Carnivores/TM/.
Large Dolls
-----------
The Company is among the market leaders in the large dolls category and, in
1995, will have four TV-advertised large dolls including a new version of 1994's
My Newborn Nancy/TM/. Brand new for 1995 are Flower Magic Mary/TM/, which lets
girls make flowers that stick to the doll's clothing, Surprise Hat Susie/TM/, a
value-priced doll with lots of hair styling play-value, and Cathy's Cut 'n Curl
Salon/TM/ which combines a doll with a salon playset.
2
In addition, Tyco is expanding its successful line of Kenya(R) African-American
dolls with Color Me Kente Kenya/TM/, which allows girls to decorate Kenya's
outfit to reflect the Kente clothes worn by West African royalty.
Magna Doodle(R)
---------------
Magna Doodle(R) continues to be the number one selling drawing toy worldwide. A
new advertising campaign aimed at parents and a new 'try-me' package helped to
increase Magna Doodle sales in 1994. The new Magna Doodle 3-in-1 Play Center
lets children sit at a table-top desk with three board surfaces for doodling,
drawing and playing with building blocks.
Electric Racing
---------------
Tyco continues to maintain a dominant market share in the electric racing
category. For 1995, the Company is featuring two new TV-advertised race sets
that will sell for about 20% less than comparable sets in prior years. Haunted
Highway/TM/ is a set that features a monster's rolling eyeball as an obstacle.
Super Cliff Hangers(R) is a new set with cars that race up a wall, upside down
and through a loop. In addition, Tyco's line of X-Treme Racing/TM/ sets,
featuring on-the-wall racing, will return in 1995 after a successful
introduction last year.
Games
-----
Tyco's game business grew in 1994 based on the successful introduction of Fleas
on Fred/TM/ and the continued strength of core games such as Toss Across(R),
Rock 'em Sock 'em Robots(R), Jeopardy!(R), Wheel of Fortune(R), Magic 8 Ball(R),
Rebound(R) and Kerplunk(R). In 1995, three new games are being introduced: B-
Ball Jam/TM/, an exciting game of competitive dunking, Don't Bug Me/TM/, a
frantic 'block the bug' action game and Love It or Hate It/TM/, an adult social
interaction game invented and promoted by actress Daryl Hannah.
View-Master(R)
--------------
Tyco's View-Master(R) line of 3-D viewers continues to hold the dominant market
share in this category. In 1995, new viewers featuring popular licenses such as
Mighty Morphin Power Rangers/TM/, Casper and Batman join new story reels
featuring the same licenses as well as Pocahontas, Gargoyles/TM/ and many
classics from Disney and Sesame Street(R).
Looney Tunes(R)
---------------
The Company acquired the master toy license for Warner Bros.' popular Looney
Tunes characters in 1994 and is adding to the line in 1995 with T-shirt Pals,
which feature Bugs Bunny, Taz, Sylvester and Tweety in colorful T-shirts, a Taz
backpack and an expanded line of talking plush.
3
Other Toys
----------
Boys' Toys
In 1995, the Company is introducing BattleTech(R), a new action figure line
based on popular strategy board games, video games and a syndicated animated TV
series. A full line of toys that is expected to appeal to girls as well as boys
is also being introduced in 1995 based on the Steven Speilberg movie, Casper,
scheduled for release Memorial Day weekend.
Girls' Toys
In 1995, the Company is introducing two new small doll lines. Fabulous Hair
Friends/TM/ are one and a half inch dolls with eight inches of hair. The dolls
come in sets of multiple interlocking dolls. Liddle Kiddles/TM/, two and a
quarter inch dolls packed in their own wearable cases, were very popular in the
'60s and '70s and return in 1995. Tyco's line of plush has continued to expand
and in 1995, Playtime Puppies/TM/, Kitty Kitty Glamour Kittens/TM/ and Doodle
Bear/TM/, a washable bear perfect for decorating or tatooing messages, will add
to the popularity enjoyed by the Kitty Kitty Kittens(R) line. Also new in girls'
toys is Sparkle Party/TM/, color change playsets with sparkling food,
invitations, jewelry and more for making a surprise party or pizza party.
Activity Toys
Tyco's Doctor Dreadful/TM/ 'looks gross, tastes great' playsets were very
successful in 1994, and an expanded line is back for 1995 featuring the Squeem
Lab/TM/, Brain Juice Lab/TM/ and Ice Scream Machine/TM/. A more conventional
cooking line is available with Tyco's Betty Crocker(R) Watch-It Bake(R) Oven and
3-Minute Ice Cream Maker(R). In addition, Tyco's line of science and crafts sets
returns in 1995, while Scrunch 'n Wear/TM/, which allows girls to make the
latest fashion hairwear, joins the Fashion Magic(R) girls' activity line.
TYCO INTERNATIONAL
In 1995, the Company's International subsidiaries will continue to market
products developed by the Tyco U.S. business unit as well as, in select
countries, third-party product such as Mighty Morphin Power Rangers/TM/, X-
Men(R) and Gund(R) plush. The Company's International subsidiaries accounted for
approximately 40% of 1994's consolidated sales.
4
TYCO PLAYTIME
In 1995, new Sesame Street(R) toys will be added to the historically popular
line of Sesame Street products and will also be joined by a line of plush based
on Looney Tunes Lovables/TM/, Warner Bros.' characters as toddlers. In addition,
a new line of photographic and science-related toys will be marketed by Tyco
Playtime under the Kodak(R) for Kids/TM/ brand. Other product sold on a direct
import basis by Tyco Playtime are lower cost versions of popular Tyco brands
such as Matchbox(R), Tyco electric racing sets and select Casper items.
Seasonality and Backlog
The toy industry is highly seasonal due to heavy consumer demand for toy
products during the December holiday season. Traditionally, orders received by
toy manufacturers in the first six months range between 65% to 90% of total
calendar year orders, while shipments for that period represent 30% to 40% of
the year's total. Due to these significant fluctuations, the results of
operations for any quarterly period are not necessarily indicative of the
results of operations for the full year.
The timing of orders is largely influenced by the degree of consumer demand for
a product line, inventory levels at retailers, marketing strategies and overall
economic conditions. The Company's fulfillment of its order backlog is
dependent upon manufacturing capacity and the extent to which orders may be
received and/or cancelled due to changes in consumer demand. There can be no
assurance that cancellations will not reduce the amount of net sales realized
from the fulfillment of backlog orders.
Design and Development
The Company is engaged in a continuing product development and packaging design
program. The Company spent $17,519,000, $19,062,000 and $15,096,000 in the
years ended December 31, 1994, 1993 and 1992, respectively, for this program.
The Company employs its own designers, artists, model makers, and product
engineers, and also utilizes independent inventors who submit their ideas and
designs. Typically, the Company acquires exclusive rights to market such items
under agreements which provide for royalty payments to the designer or inventor
for varying periods.
5
Marketing and Distribution
The Company markets its products in the United States to large retail chains,
wholesalers and independent retailers through full-time salesmen and several
independent sales representative organizations. The Company markets its
products internationally in various foreign countries through its subsidiaries
and licensees. International sales accounted for approximately 40%, 41% and 24%
of the Company's sales in the three years ended December 31, 1994, 1993 and
1992, respectively.
For the years ended December 31, 1994, 1993 and 1992, approximately 59%, 54% and
68%, respectively, of the Company's net sales were attributable to its ten
largest customers. For the years ended December 31, 1994, 1993 and 1992, Toys
"R" Us, Inc. (Toys "R" Us), a chain of retail toy stores, accounted for 27%, 24%
and 31%, respectively, of Company revenues. During the three years ended
December 31, 1994, Wal-Mart Stores, Inc. (Wal-Mart), a chain of discount stores,
accounted for approximately 10%, 9% and 12%, respectively, of net sales. No
other customer accounted for more than 10% of net sales during these periods.
The Company's business would be adversely impacted in the event that it lost
either Toys "R" Us or Wal-Mart as a customer. The Company believes, however,
that its relationships with Toys "R" Us and Wal-Mart are good and it has no
reason to expect such a development.
The primary competitive factors with respect to the Company's products are
consumer identification, price, play-value and quality of manufacturing. The
Company utilizes a high level of product promotion primarily through advertising
in order to retain consumer recognition of, and commercial success for, its
product lines. The Company's advertising program is similar to other companies
in the toy industry in that most of its advertising budget is allocated to
children-oriented television programming. In 1994, 1993 and 1992, the Company's
expenditures for marketing, advertising and promotion were approximately 23%,
25% and 22% of net sales, respectively.
Trademarks
The Company markets its products under a variety of trademarks, some of which
are not owned by the Company and for which the Company pays a royalty. In 1994,
the most important of these were Tyco(R), View-Master(R), 9.6V Turbo(R),
Matchbox(R), Doctor Dreadful/TM/, 6.0V Jet Turbo Triple Wheels/TM/, Scorcher(R)
and Kenya(R), all of which are owned by the Company, and the licensed
trademarks, Kitty Kitty Kittens(R), Looney Tunes(R), Python(R), Magna Doodle(R)
and Harley-Davidson(R).
The principal trademarks used by Tyco Playtime include Playtime(R), Softies/TM/
and, Air Blasters(R), which are owned by the Company and the licensed trademarks
Sesame Street(R), U.S. Sprint(R), and Stanley(R).
License agreements for certain trademarks require minimum guaranteed royalty
payments over the term of the license. Reference is made to note eleven of the
Notes to Consolidated Financial Statements.
6
Competition
The toy industry is highly competitive. Some of the Company's competitors are
much larger firms which have greater financial resources than the Company.
The Company holds the leading market share in several of its product categories,
including radio control vehicles, electric car racing, drawing toys, and 3-D
viewers. Other major product categories in which the Company holds a
significant market share include die-cast vehicles, plush, activity toys, action
games and dolls.
Manufacturing and Suppliers
Products sourced by Tyco (Hong Kong) Ltd. are shipped to facilities of the
Company or its licensees where they are packaged and/or distributed. The
Company's radio control toy products are manufactured in the Orient exclusively
by Taiyo Kogyo Co., Ltd., a company in which Tyco holds a 16% ownership
interest. The View-Master product line is manufactured in Beaverton, Oregon and
Sint-Niklaas, Belgium. The Matchbox product line is manufactured primarily by
joint venture facilities in Thailand and the People's Republic of China. The
Company's suppliers utilize manufacturing facilities located in China, Hong Kong
and other Asian countries. The Company could be adversely affected by political
or economic disruptions affecting businesses in or trade with such countries.
The most favored nation (MFN) status for China was extended until June 1995. If
the United States Congress were to override such extension or place significant
conditions on MFN status for China or if such MFN status should terminate for
any other reason, the result would be the imposition of burdensome duties on
toys made in China and imported into the United States. The European Community
has also imposed limitations on the importation of Chinese products. To date,
such regulations have not materially affected the Company.
The Company believes that it has the ability to develop, over a period of time,
adequate alternative sources for the products obtained from its present foreign
suppliers should such alternative sources be required. However, if the Company
is prevented from acquiring products from its joint venture partners and
suppliers in the Far East, the Company's operations would be seriously
disrupted, resulting in a significantly adverse financial impact. The Company
maintains close contact with its subcontractors in Hong Kong, China, Singapore,
Malaysia, Taiwan, Thailand and Indonesia through its employees in various Far
East locations.
Packaging, plastics, and other raw materials essential to the production and
marketing of toy products are currently in adequate supply. The Company does
not anticipate shortages of raw materials in the foreseeable future.
Employees
As of December 31, 1994, the Company employed approximately 2,500 people,
including approximately 1,300 in various foreign countries. In the opinion of
management, the Company has good working relations with its employees.
7
Item 2. Properties
The Company leases a total of 1,821,000 square feet for its operations and
administrative offices. The Company believes that its facilities are suitable
for its business needs at the present time and for the immediate future.
Item 3. Legal
Reference is made to note eleven of the Notes to Consolidated Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of 1994 to a vote of
security holders through the solicitation of proxies or otherwise.
8
Part II.
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
Market Information
The Company's common stock is listed for trading on the New York Stock Exchange
under the symbol "TTI".
The following table sets forth, for the fiscal quarters indicated, the high and
low closing sale prices of the common stock as reported on the New York Stock
Exchange.
1994 1993
-------------- ----------------
Quarter High Low High Low
------- ---- --- ---- ---
First $9.750 $8.375 $13.875 $11.375
Second 9.000 6.625 13.000 11.500
Third 8.500 6.750 13.625 11.375
Fourth 8.125 5.375 13.750 8.000
Holders
As of March 15, 1995, the number of shareholders of Tyco common stock was
approximately 22,600.
Dividends
Total dividends declared on common stock during 1993 were $2,531,000. During
1994, the Company was unable to pay dividends on its common stock pursuant to
restrictions under its principal credit facility. The new credit facilities
entered into with General Electric Capital Corporation and affiliates on
February 24, 1995 similarly restrict the Company's ability to pay cash dividends
until the Company achieves a defined level of tangible net worth. Reference is
made to note six of the Notes to Consolidated Financial Statements. The terms
of the 6% Series B Voting Convertible Exchangeable Preferred Stock, the 10.125%
Senior Subordinated Notes and the 7% Convertible Subordinated Notes also have
limitations on the payment of dividends by the Company.
9
Item 6. Selected Financial Data
(In thousands, except per share data)
The following table presents selected historical financial data for the Company.
The information contained herein should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements and Notes thereto of the
Company.
Year Ended December 31,
---------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Operating Data:
Net sales [1] $753,098 $730,179 $768,589 $548,701 $461,207
-------- -------- -------- -------- --------
Restructuring and other
special charges [2] 4,700 28,214 2,797 6,938 11,200
-------- -------- -------- -------- --------
Operating income (loss) 635 (56,914) 44,082 46,277 22,024
Interest and other expense, net 32,108 26,426 13,946 19,083 19,333
Income (loss) before income taxes, -------- -------- -------- -------- --------
minority interest and extraordinary
loss (31,473) (83,340) 30,136 27,194 2,691
Provision (benefit) for income taxes [3] 1,500 (13,400) 12,124 7,994 3,336
Minority interest - - - - (3,996)
-------- -------- -------- -------- --------
Income (loss) before extraordinary loss (32,973) (69,940) 18,012 19,200 3,351
Extraordinary item - net loss on retirement
of debentures, net of tax benefit - - - 759 -
-------- -------- -------- -------- --------
Net income (loss) (32,973) (69,940) 18,012 18,441 3,351
Preferred stock dividends 2,157 - - - -
Net income (loss) applicable -------- -------- -------- -------- --------
to common shareholders $(35,130) $(69,940) $ 18,012 $ 18,441 $ 3,351
-------- -------- -------- -------- --------
Net income (loss) per common share:
Primary:
Income (loss) before extraordinary
loss $ (1.01) $ (2.08) $ 0.60 $ 1.14 $ 0.25
Extraordinary loss - - - 0.04 -
-------- -------- -------- -------- --------
Net income (loss) $ (1.01) $ (2.08) $ 0.60 $ 1.10 $ 0.25
-------- -------- -------- -------- --------
Fully diluted:
Income (loss) before extraordinary
loss $ (1.01) $ (2.08) $ 0.60 $ 0.97 $ 0.25
Extraordinary loss - - - 0.03 -
-------- -------- -------- -------- --------
Net income (loss) $ (1.01) $ (2.08) $ 0.60 $ 0.94 $ 0.25
-------- -------- -------- -------- --------
Dividends per common share $ - $ 0.075 $ 0.10 $ - $ -
-------- -------- -------- -------- --------
Weighted average shares outstanding:
Primary 34,687 33,595 29,743 18,412 13,304
-------- -------- -------- -------- --------
Fully Diluted 34,687 33,595 31,127 25,152 13,304
-------- -------- -------- -------- --------
10
As of December 31,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital $124,352 $132,341 $212,616 $125,292 $ 77,463
Total assets 670,635 715,169 749,229 390,338 321,308
Short-term debt 78,996 84,222 29,664 5,027 20,492
Long-term obligations 146,851 179,771 198,865 91,017 119,079
Stockholders' equity 296,232 277,449 335,241 181,222 96,895
[1] See note one of the Notes to Consolidated Financial Statements of the
Company.
[2] See note three of the Notes to Consolidated Financial Statements of the
Company.
[3] See note nine of the Notes to Consolidated Financial Statements of the
Company.
11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Summary
-------
Results of operations expressed as a percentage of net sales:
Year Ended December 31,
-------------------------
1994 1993 1992
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 59.1 59.8 58.5
----- ----- -----
Gross profit 40.9 40.2 41.5
Marketing, advertising
and promotion 22.9 24.7 21.6
Selling, distribution and
administrative expenses 16.4 18.5 13.3
Restructuring and other
special charges 0.6 3.9 0.4
Amortization of goodwill 0.8 0.9 0.5
----- ----- -----
Total operating expenses 40.7 48.0 35.8
----- ----- -----
Operating income (loss) 0.2 (7.8) 5.7
Interest expense 4.2 3.4 1.8
Foreign exchange loss 0.4 0.5 0.1
Other income, net (0.3) (0.3) (0.1)
----- ----- -----
Income (loss) before income
taxes (4.1) (11.4) 3.9
Provision (benefit) for income
taxes 0.2 (1.8) 1.6
----- ----- -----
Net income (loss) (4.3)% (9.6)% 2.3%
----- ----- -----
Results of Operations
---------------------
Year Ended December 31, 1994 vs. Year Ended December 31, 1993
Net sales were $753,098,000 in 1994 compared to $730,179,000 in 1993, an
increase of $22,919,000 or 3.1%. The Company markets its toys through three
separate business units: Domestic, International and Direct Import. In the
Domestic unit, sales increased $32,786,000 or 9.7% to $369,977,000. Sales of
activity toys, led by the new Dr. Dreadful product line, contributed to a
majority of the sales increase. A 26% increase in Matchbox-related product, a
50% increase in games sales and a 6% increase in girls' toys also contributed to
the sales growth. Within the girls' category, increases in plush product offset
declines in the large doll and The Little Mermaid lines. International sales
increased slightly in 1994 to $302,932,000 from $295,487,000 in the prior year.
This increase was achieved as the Company continued its worldwide focus on
development of its core product lines resulting in a 50% increase in radio
control and a 30% increase in View-Master sales. These increases offset an
approximate $60,000,000 aggregate decrease in promotional toy lines including
The Incredible Crash Dummies, The Little Mermaid and Thunderbirds. The 1994
results also included approximately $20,000,000 of close-out sales as the
Company focused on aggressive inventory reduction. Sales of the Company's
Direct Import product lines were $80,189,000 in 1994, a $17,312,000 reduction
from the 1993 level. Delays in the market availability of new products,
primarily based upon the popular Sesame Street license, caused this sales
decrease. However, by the fourth quarter of 1994, these delays were eliminated
and sales during that quarter were approximately 6% above the comparable quarter
in 1993.
12
Gross profit was $307,704,000 in 1994 compared to $293,538,000 in 1993, an
increase of $14,166,000 or 4.8%, primarily due to higher sales volume in 1994.
Gross profit as a percentage of net sales increased to 40.9% from 40.2% in 1993
as the higher margin Domestic business experienced a 5% increase which was
substantially offset by a 5% decrease in International margins. Domestic
percentage margins improved primarily as a result of lower obsolescence
provisions reflected in 1994 results compared with higher obsolescence levels
recorded in the prior year. Also contributing to the margin improvements was
the 1994 introduction of the Dr. Dreadful product line. In the International
business unit, approximately half of the 5% reduction in gross profit margin was
related to the Company's inventory reduction program. The change in the product
mix contributed to the remainder of the margin decrease. Direct Import 1994
gross profit as a percentage of net sales remained unchanged from 1993.
Total operating expenses in 1994 were $307,069,000, representing a more than
$43,000,000 improvement over the prior year. Operating expenses, net of
restructuring and other special charges, decreased by $19,869,000 despite a
$22,919,000 increase in sales. This reduction reflects the Company's continued
cost containment efforts. On a business unit basis, Domestic operating expenses
remained virtually unchanged as a 4% increase in marketing, advertising and
promotional costs required to support the 9.7% sales increase was offset by
reduced selling and administrative expenses. Internationally, continued cost
reduction and streamlining initiatives resulted in an 11% reduction in operating
expenses. In the Direct Import business, a $6,400,000 improvement, or more than
20%, was achieved through a reduction in all operating expense categories.
During 1994, the Company recorded a $4,700,000 pre-tax charge related to
additional costs to close its Italian subsidiary, including legal costs
associated with the lawsuit filed by the former managing director of Tyco Italy
against the Company (see note 11 of the Notes to Consolidated Financial
Statements). In 1994, the Company entered into a five-year agreement with an
Italian distributor to market the Company's products in Italy. The Company is
entitled to minimum royalty payments in accordance with this agreement. During
1993, the Company recorded restructuring and other special charges aggregating
$28,214,000, of which $22,238,000 were noncash in nature, including a
$14,669,000 write-off of tooling assets. The restructuring plan was based upon
consolidations of Company subsidiaries in Germany and Australia, the planned
sale of the Company's Italian subsidiary, as well as the integration of the
Playtime and Preschool operations in the U.S. and Hong Kong. The charges
included an $8,511,000 write-off of tooling and intangibles in conjunction with
the Playtime/Preschool reorganization, $2,497,000 for write-downs of inventories
and equipment to estimated realizable values and facility consolidation costs
totaling $2,281,000. Other special charges, totaling $13,525,000, included the
write-down of obsolete tooling and the write-off of other assets predicated by
management's decision in the fourth quarter to discontinue certain products and
product lines. The 1993 results also reflected a $1,400,000 charge for
severance in connection with reorganizing the Company's Direct Import business.
Interest expense increased $6,963,000 to $31,621,000 in 1994, reflecting
increased bank interest associated with greater utilization of the Company's
credit facilities and the payment of related bank amendment fees. Total average
borrowings were $235,560,000 in 1994 with an average borrowing rate of 11.3%
compared to average borrowings of $218,167,000 with an average interest rate of
11.1% in 1993.
Realized and unrealized losses on foreign currency transactions decreased to
$3,138,000 in 1994 from $3,746,000 in the prior year. The 1994 loss, however,
included approximately $2,000,000 from the devaluation of the Mexican peso in
December 1994.
13
As of December 31, 1994, the Company has domestic net operating loss
carryforwards of $45,900,000. These net operating loss carryforwards are
available to reduce the Company's future taxable income and expire in the years
2008 and 2009. The Company also has net operating loss carryforwards of
$47,500,000 related to preacquisition loss carryforwards of Matchbox. The
Matchbox net operating losses are subject to an annual limitation and can only
be used to offset taxable income of the Matchbox domestic companies. These net
operating losses expire during the years 2001 through 2004.
Additionally, the Company's international operating subsidiaries have, in the
aggregate, approximately $94,036,000 of tax loss carryforwards available at
December 31, 1994. These tax losses are available to reduce the originating
subsidiary's future taxable foreign income and have varying expiration dates.
The Company also has general business and foreign tax credit carryovers of
$625,000 and $6,068,000, respectively. The Company's future federal income tax
liability can be reduced by the general business tax credits through the year
2008 and by the foreign tax credits through the year 1999. These credits expire
as follows (in thousands):
Year of Expiration General Business Foreign
------------------ ---------------- -------
1995 $ - $ 120
1996 - 682
1997 24 1,338
1998 47 2,045
1999 112 1,883
2000 to 2008 442 -
---- ------
$625 $6,068
---- ------
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", the Company is required to record a net deferred tax asset for
the future tax benefits of tax loss and tax credit carryforwards, as well as for
other temporary differences, if realization is more likely than not. Based on
the weight of available evidence, management has concluded, more likely than
not, that by taxing jurisdiction, the Company's future taxable income will be
sufficient in the carryforward period to realize a tax benefit on certain of its
temporary differences. Accordingly, the Company has recorded a benefit on that
portion of its temporary differences, including net operating loss and tax
credit carryforwards, which will, more likely than not, be realized prior to
their expiration dates.
Management believes the Company's future taxable income will be at a level
sufficient to fully utilize the 1994 and 1993 domestic net operating loss
carryforwards, certain tax credit carryforwards and other temporary differences.
Average annual pre-tax 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 averaged approximately
$7,000,000. Using this $7,000,000 annual average as a base, future taxable
income would be sufficient to realize the tax benefits represented by the net
operating loss carryforwards, tax credit carryforwards and other temporary
differences prior to their expiration.
Management believes that taxable income over a four-year period represents the
cyclical pattern of the Company's core business. Historically, core products
represented approximately 60% of Domestic and International sales. The
Company's core business includes product lines with lives exceeding three years.
These core products appear in the Company's product line from year to year in
their base form with some modifications. During 1994, sales of core products
approximated 70% of sales.
14
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. Estimated taxable income for 1994, adjusted for
temporary differences, would have to grow at an average annual compound rate of
approximately 10% in order to fully realize the tax benefits prior to
expiration. Based on the Company's core product line and expanded non-core or
promotional product line as well as the Company's prior history of earnings,
management expects that the Company will be able to return to profitability.
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 also contribute to future domestic profitability.
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 profit
margins, and other factors beyond the Company's control. Accordingly, no
assurance can be given that sufficient taxable income will be generated to allow
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 more likely than not that future operating
income will be sufficient to utilize certain net operating loss and tax credit
carryforwards and other temporary differences prior to their expiration.
Valuation allowances totaling $56,983,000 have been established due to
management's analysis indicating that certain tax credit carryforwards and net
operating loss carryforwards, which are limited under the 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. Any
subsequently recognized benefits related to these net operating losses will be
allocated to reduce goodwill.
The 1994 income tax provision of $1,500,000 versus the benefit of $13,400,000
recorded in 1993 reflects limitations on the utilization of income tax benefits
attributable to foreign operations.
The reconciliation of the Company's income (loss) before taxes for financial
statement purposes to domestic taxable income (loss) for the three years ended
December 31, 1994 is as follows (in thousands):
1994 1993 1992
----------- --------- ---------
Income (loss) before taxes $(31,473) $(83,340) $ 30,136
Differences between income (loss) before
taxes for financial statement purposes
and taxable income:
Permanent differences 15,752 14,608 12,894
(Income) loss from subsidiaries not
included in the consolidated tax return 18,174 42,022 (29,288)
Net change in temporary differences (3,601) (30,813) -
Timing differences - - 3,428
Net operating loss utilization - - (7,966)
Stock option deductions - (1,264) (4,077)
-------- -------- --------
Taxable income (loss) $ (1,148) $(58,787) $ 5,127
-------- -------- --------
The Internal Revenue Service has examined the consolidated federal income tax
returns of Tyco Toys, Inc. for the fiscal years ended August 31, 1987 through
August 31, 1990 and has proposed an assessment to the Company, which the Company
has elected to appeal. Management believes that the final outcome of this
appeal will not materially affect the results of operations (including
realization of net operating loss and tax credit carryforwards), financial
condition or liquidity of the Company.
15
Additionally, the consolidated federal income tax returns of Tyco Toys, Inc. for
the fiscal years ended December 31, 1990 through December 31, 1992 are presently
being examined by the Internal Revenue Service. While the final outcome of this
examination is not determinable at this time, management of the Company believes
that any proposed adjustments, if sustained, will not materially affect the
financial condition, results of operations (including realization of net
operating loss carryforwards) or liquidity of the Company.
Year Ended December 31, 1993 vs. Year Ended December 31, 1992
Net sales were $730,179,000 in 1993 compared to $768,589,000 in 1992, a decrease
of $38,410,000 or 5.0%. The Company marketed its toys under five product
categories: Boys' Toys, Girls' Toys, Activity Toys, International and Direct
Import. Boys' Toys generated sales of $154,052,000 in 1993 compared to
$183,317,000 in 1992, a decrease of $29,265,000 or 16.0%, primarily due to a
significant decrease in sales of action figures, in particular The Incredible
Crash Dummies line, and radio control products. Sales of Girls' Toys decreased
$36,297,000 or 29.0% to $88,722,000 reflecting a sharp reduction in sales of
Ariel, Disney's The Little Mermaid doll. Activity Toys sales decreased
$54,973,000 or 36.8% to $94,417,000 in 1993, attributable primarily to a
significant decrease in sales of drawing toys. International sales continue to
expand and increased $112,918,000 or 61.8% to $295,487,000 in 1993. Matchbox
which was acquired in October 1992, along with foreign subsidiaries established
in 1992, contributed sales for the full year in 1993. During 1993, the Company
opened additional subsidiaries in Austria, Switzerland and New Zealand and
acquired a 75% interest in the Company's Mexican distributor, Ensueno. Direct
Import sales decreased $30,793,000 or 24.0% to $97,501,000 due principally to
sharply lower sales of Playtime products as well as increased competition for
preschool products. Effective January 1, 1994, the Playtime and Preschool
subsidiaries were merged in the U.S. and Hong Kong to form Tyco Playtime and
Tyco Asia, respectively.
Gross profit was $293,538,000 in 1993 compared to $318,896,000 in 1992, a
decrease of $25,358,000 or 8.0%, primarily due to lower sales volume in 1993.
Gross profit margins decreased to 40.2% from 41.5% last year due to lower sales
of high margin products (such as The Incredible Crash Dummies and The Little
Mermaid) together with higher obsolescence provisions, offset in part by lower
defective return rates.
Total operating expenses were $350,452,000 in 1993, an increase of $75,638,000
or 27.5% from $274,814,000 in 1992. Marketing, advertising and promotional
costs increased $14,718,000 and selling, distribution and administrative
expenses increased $32,792,000 in 1993 reflecting additional operating costs of
the newly-established foreign sales and marketing subsidiaries. Amortization of
goodwill for 1993 increased $2,711,000 to $6,476,000 in connection with
additional goodwill recorded as part of the 1992 acquisitions of Matchbox and
Illco (referred to as Tyco Preschool). During the fourth quarter of 1993, the
Company recorded restructuring and other special charges aggregating $26,814,000
of which $22,238,000 were noncash in nature including a $14,669,000 write-off of
tooling assets. The restructuring plan involved the consolidation of the
Company's subsidiaries in Germany and Australia, the planned 1994 sale of the
Company's Italian subsidiary as well as the merger of the Playtime and Preschool
divisions in the U.S. and Hong Kong. The charges include an $8,511,000 write-
off of tooling and intangibles in conjunction with the Playtime/Preschool
reorganization, $2,497,000 for write-downs of inventories and equipment to
estimated realizable values and facility consolidation costs totaling
$2,281,000. Other special charges totaling $13,525,000 include the write-down
of obsolete tooling and the write-off of other assets predicated by management's
decision in the fourth quarter to discontinue certain products and product
lines. The third quarter of 1993 reflected a $1,400,000 restructuring charge
for severance in connection with reorganizing the Company's Direct Import
business. Total operating expenses expressed as a percentage of net sales
increased significantly to 48.0% in 1993 compared to 35.8% in 1992 due primarily
to additional operating costs incurred by the newly-established foreign
subsidiaries and restructuring and other special charges.
16
Interest expense increased $10,461,000 to $24,658,000 in 1993, reflecting a full
year of interest in 1993 on $126,500,000 of Senior Subordinated Notes issued in
August 1992, in addition to greater utilization of the Company's credit
facilities. Total average debt was $218,167,000 in 1993 with an effective
interest rate of 11.1% compared to total average debt of $81,909,000 with an
effective interest rate of 11.3% in 1992.
Income tax expense (benefit) as a percentage of pre-tax earnings (loss)
decreased in 1993 to 16.1% from 40.2% in 1992 reflecting limitations on the
utilization of income tax benefits.
Financial Condition and Liquidity
---------------------------------
Year Ended December 31, 1994 vs. Year Ended December 31, 1993
For the year ended December 31, 1994, cash and cash equivalents decreased
$1,560,000 to $30,476,000. The Company significantly reduced receivables and
inventories throughout 1994, providing $46,521,000 of cash which offset the 1994
loss of approximately $33,000,000 and contributed to the $18,273,000 generation
of cash from operating activities. Financing activities included the issuance
of 6% Series B Voting Convertible Exchangeable Preferred Stock (Preferred Stock)
which generated net proceeds of $47,000,000. These proceeds, along with the cash
generated by operations, were used to fund capital expenditures and to repay
$40,685,000 of debt, primarily the term-loan portion of the NationsBank Credit
Facility. Capital expenditures of $21,158,000 and $29,731,000 for the years
ended December 31, 1994 and 1993, respectively, represented purchases of
tooling, machinery and equipment and improvements primarily for the Company's
manufacturing facilities. The effect of foreign exchange rate translation for
the year ended December 31, 1994 accounted for a $5,777,000 reduction in cash.
The Company has the following sources of liquidity to support the cyclical
working capital requirements of its business: existing cash balances and
related interest earnings, internally-generated funds, available borrowings
under foreign lines of credit and the new credit facilities entered into with
General Electric Capital Corporation and affiliates in February and March 1995,
and proceeds from potential equity or debt offerings. The Company believes that
its new credit facilities, existing foreign facilities, and internally-generated
funds will provide adequate financing for its current and foreseeable levels of
operation.
Dividends
Total dividends declared on common stock during 1993 were $2,531,000. During
1994, the Company was unable to pay dividends on its common stock pursuant to
restrictions under its existing bank credit facility. The New Credit Facilities
entered into with General Electric Capital Corporation and affiliates on
February 24, 1995 similarly restrict the Company's ability to pay cash dividends
on common stock until the Company achieves a defined level of tangible net
worth. Reference is made to note six of the Notes to Consolidated Financial
Statements. The terms of the Preferred Stock, the 10.125% Senior Subordinated
Notes and the 7% Convertible Subordinated Notes also have limitations on the
payment of common stock dividends by the Company.
During 1994, the Company was, however, able to issue additional shares of
Preferred Stock in lieu of cash dividends on such preferred shares. Preferred
Stock dividends totalled $2,157,000 in 1994.
Commitments
Guaranteed Royalties
The Company markets its products under a variety of trademarks, some of which
are not owned by the Company and for which the Company pays a royalty. For the
years ended December 31, 1994, 1993 and 1992, the Company incurred $33,079,000,
$33,036,000 and $8,940,000 in royalty expense, respectively. Certain license
agreements require minimum guaranteed royalty payments over the term of the
license. At
17
December 31, 1994, the Company was committed to pay total minimum guaranteed
royalties aggregating $58,352,000 which are payable as follows: 1995 -
$10,890,000; 1996 - $7,967,000; 1997 - $7,185,000; 1998 - $6,470,000; 1999 -
$6,490,000; and thereafter - $19,350,000.
Guaranteed Purchases
In the ordinary course of business, the Company has entered into guaranteed
purchase agreements with certain suppliers to ensure the timely delivery and
availability of product. As of December 31, 1994, the Company was committed for
purchases aggregating $12,214,000 from its suppliers.
Commitment to Acquire Ensueno-Tyco Interest
In accordance with the Purchase Agreement dated April 30, 1993, the 25% owners
of Ensueno-Tyco have elected to sell such interest to Tyco for the sum of
approximately $1,100,000. This transaction is expected to be completed by the
end of the first quarter of 1995.
Foreign Exchange Risk Management
The primary focus of the Company's foreign exchange risk management program is
to reduce earnings volatility due to foreign exchange rate fluctuations. In
accordance with this policy, the Company enters into foreign currency forward
exchange contracts and options as hedges of inventory purchases, sales and
various other intercompany transactions.
At December 31, 1994, the Company has outstanding foreign currency forward
exchange contracts totaling $7,400,000 to purchase U.S. dollars. In February
and March 1995, the Company entered into $83,000,000 of forward currency options
which primarily provide for the sale of foreign currencies. The principle
currencies being hedged are the Belgium franc, British pound, Australian dollar
and Canadian dollar. The options expire within twelve months. The total cost
of acquiring these currency options was approximately $1,000,000.
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. The Company's Italian subsidiary has been closed and
is in the process of being liquidated. 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 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 and in the
appeal taken by Lego. The parties have reached an agreement for the dismissal
of all these proceedings.
18
Shareholder Suits
In October 1994, the U.S. District Court in New Jersey entered judgment 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
judgment.
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
In 1992, the U.S. Customs Service 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 periods 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, homeowners near the
GEMS Landfill have filed class action claims against approximately 150
defendants, including Tyco Industries, for various types of unspecified monetary
damages, including punitive damages. In management's opinion, there are
meritorious factual and legal defenses to these claims. 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 the opinion of management of the Company and its outside counsel, none of
these three matters is 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.
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 effect on the
Company's earnings, financial condition or liquidity.
Inflation
The effect of inflation on the Company's operations during 1994 was
insignificant. The Company will continue its policy of controlling costs and
adjusting prices to the extent permitted by competitive factors.
19
Item 8. Financial Statements and Supplementary Data
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets
December 31, 1994 and 1993 F-2
Consolidated Statements of Operations
Years ended December 31, 1994, 1993 and 1992 F-3
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1994, 1993 and 1992 F-4
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1993 and 1992 F-5
Notes to Consolidated Financial Statements F-6 to F-23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III.
Items 10, 11, 12 and 13.
Pursuant to Instruction G of Form 10-K, the definitive proxy statement for the
1994 Annual Meeting of Stockholders of Tyco Toys, Inc. to be held May 11, 1995
is hereby incorporated by reference.
20
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1). Financial Statements Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 1994
and 1993 F-2
Consolidated Statements of Operations for the
Three Years Ended December 31, 1994 F-3
Consolidated Statements of Stockholders' Equity
for the Three Years Ended December 31, 1994 F-4
Consolidated Statements of Cash Flows for the
Three Years Ended December 31, 1994 F-5
Notes to Consolidated Financial Statements F-6 to F-23
(a)(2). The Financial Statement Schedules
For the Three Years Ended December 31, 1994
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is set forth in the
Consolidated Financial Statements and Notes thereto.
(a)(3). Exhibits
3.1 Restated Certificate of Incorporation of the Company
3.1a Certificate Of Designation of Preferred Stock
issued to First Chicago Investment Corporation and
Madison Dearborn Partners VII (1)
3.1b Certificate of Designation of Series B Voting Convertible
Exchangeable Preferred Stock (dated April 14, 1994)
3.2 By-Laws of the Company (2)
4.1 Rights Agreement dated as of September 8, 1988 between the Company
and Manufacturers Hanover Trust Company relating to Preferred Stock
Rights Plan (3)
4.2 Form of Indenture dated as of August 15, 1992 between the Company
and NationsBank of Virginia, N.A., as Trustee, as amended as of
October 17, 1992 (9)
4.3 Supplemental Indenture dated as of June 8, 1993, among the Company,
NationsBank of Virginia, N.A. as Trustee and certain subsidiaries
of the Company as Additional Guarantors
4.4 Supplemental Indenture dated as of October 7, 1993 among the
Company, NationsBank of Virginia, N.A. as Trustee, and certain
subsidiaries of the Company as additional Guarantors
4.5 Agreement of Successorship dated as of January 14, 1994 among the
Company, NationsBank of Virginia, N.A. as resigning trustee and
Bankers' Trust Company as successor trustee
21
4.6 Agreement of Purchase dated as of July 18, 1991 between the
Company, First Chicago Investment Corporation and Madison Dearborn
Partners IV (5)
4.7 Warrant Agent Agreement between the Company and American Stock
Transfer and Trust Company, dated November 30, 1988 (4)
10.1 Credit Agreement dated as of June 3, 1992 among the Company and
certain other subsidiaries as Guarantor, and Tyco Industries, Inc.
as Borrower, and NationsBank, N.A. as Agent for the Banks named
therein, as amended as of October 2, 1992 (9)
10.2 Letter of Waiver dated February 5, 1993 between the Company and
NationsBank N.A. and other banks to the Company (9)
10.3 Letter of Waiver dated November 12, 1993 from NationsBank of North
Carolina, N.A. and other banks to the Company
10.4 Letter of Waiver dated January 31, 1994 from NationsBank of North
Carolina, N.A. and other banks to the Company
10.5 Amendment Agreement and letter dated February 10, 1994 between the
Company and NationsBank of North Carolina, N.A. and other banks.
10.6 Credit Agreement dated as of October 2, 1992 between Midlantic
National Bank and Matchbox International (USA) Ltd. as Borrower
and certain affiliated corporations as Guarantors (9)
10.7 Agreement of Amendment and Consent dated as of February 5, 1993
between Midlantic National Bank and Matchbox International (USA)
Ltd. as borrower and certain affiliated corporations as Guarantors
(9)
10.11 Lease dated September 21, 1992 between Tyco Industries, Inc. and
6000 Midlantic Associates, L.P.
10.12 Lease Amendments dated November 16, 1992, December 18, 1992,
January 25, 1993 and February 1, 1993 between Tyco Industries,
Inc. and 6000 Midlantic Associates, L.P. (9)
10.13 Lease Agreement dated March 9, 1990 between Harbour City
Management Limited and Tyco (Hong Kong) Limited (5)
10.14 Amendment to lease dated June 16, 1993 between Tyco Industries,
Inc. and 6000 Midlantic Drive Associates, L.P.
10.15 Lease dated March 23, 1992 between GP Portland Limited
Partnership I and Tyco Manufacturing Corp. (9)
10.16 Lease Agreement dated December 9, 1993 between Tyco Preschool Ltd.
and Harrison Leasing Limited for the 13th floor, World Shipping
Centre, Harbour City, Hong Kong.
10.17 Lease Agreement dated December 9, 1993 between Tyco Playtime (HK)
Limited and Harrison Leasing Limited for the 12th floor, World
Shipping Centre, Harbour City, Hong Kong.
10.21 Employment Agreement dated as of January 1, 1992 by and between
Tyco Industries, Inc. and Richard E. Grey (5)
10.22 Employment Agreement dated as of January 1, 1992 between Tyco
Industries, Inc. and Harry J. Pearce (5)
10.24 Consulting Agreement dated as of June 3, 1992 between Illco Toy
Co., USA, Inc. and Marty Scheman (9)
22
10.25 Employment Agreement dated as of January 24, 1994 between Tyco
Industries, Inc. and Karsten Malmos
10.26 Employment Agreement dated January 24, 1994 between Tyco
Industries, Inc. and James A. Lenell
10.27 Employment Agreement dated January 24, 1994 between Tyco
Industries, Inc. and Jay Kahan
10.29 Employment Agreement dated as of January 24, 1993 between Tyco
Industries, Inc. and B. James Alley
10.30 Agreement dated February 1, 1994 between Tyco Industries and Arnold
Thaler
10.31 Asset Purchase Agreement dated September 10, 1990 between Tyco
Toys, Inc., TNI Inc., Playtime Electronics Limited, Playtime
Products, Inc., and Stanley Cohen (2)
10.31a Amendment Agreement dated October 31, 1990 between Tyco Toys, Inc.,
Playtime Acquisition Corp., Wide Frank Limited, Nasta
International, Inc., and Playtime Products, Inc., Playtime
Electronics Limited and Stanley Cohen (2)
10.33 Agreement of Purchase dated as of April 30, 1993 between the
Company and Jaime Kopchinsky
10.34 Agreement of Amalgamation between Universal Matchbox Group Limited
and the Company dated as of July 13, 1992 (9)
10.35 Agreement of Purchase between Illco Toy Company USA, Ltd. and the
Company dated as of June 3, 1992 (9)
10.36 Agreement of Purchase dated as of November 17, 1992 between and
among Tyco Toys, Inc., Croner Trading Pty. Ltd., Len Hunter Trading
Co. Pty. Ltd., J.V.H. Pty. Ltd. and John Victor Hunter and Pamela
Jean Hunter
10.37 Agreement and Plan of Merger dated as of May 22, 1989 among the
Company, VMIG Acquisition Corporation and View-Master Ideal Group,
Inc. (7)
10.38 Agreement and Plan of Merger dated as of September 18, 1990,
between Tyco Toys, Inc., TNI, Inc., and Nasta International, Inc.
(8)
10.39 Incentive Stock Option Plan of the Company (3)
10.40 1992 Non-Qualified Stock Option Plan of the Company
10.41 Agreement of Purchase dated as of July 19, 1991 between the Company
and Benson A. Selzer, John A. Selzer and Geoffrey T. Selzer (5)
10.42 Term Loan Agreement dated December 15, 1986 between Nasta Far East,
Ltd. and Tyco (Hong Kong) Limited (6)
10.43 Employment Agreement dated as of October 3, 1994 between Tyco
Industries and Gary Baughman
10.44 Employment Agreement dated July 27, 1994 between Tyco Industries
and Richard E. Grey
10.45 Employment Agreement dated July 27, 1994 between Tyco Industries
and Harry J. Pearce
23
10.46 Credit Agreement dated February 24, 1995 among Tyco Manufacturing,
Inc. and Tyco Distribution Corp., as borrowers, and General
Electric Capital Corporation, as lender
10.47 Receivables Transfer Agreement dated February 24, 1995 among Tyco
Industries, Inc., Tyco Funding Corporation I, Inc., and Tyco
Funding Corporation II, Inc.
10.48 Receivables Funding Agreement dated February 24, 1995 among Tyco
Funding Corporation I, Inc., Tyco Funding Corporation II, Inc.,
Redwood Receivables Corporation and Financial Security Assurance,
Inc.
10.49 Credit Agreement dated February 24, 1995 among Tyco Toys (Canada),
Inc., as borrower, and Royal Bank of Canada and General Electric
Capital Corporation (Canada), as lenders.
10.50 Credit Agreement dated March 13, 1995 among Tyco Toys (U.K.) Ltd.
and Matchbox Toys (U.K.) Ltd. as borrowers, and Lloyd's Bank and
General Electric Capital Corporation, as lenders.
10.51 Stock Purchase Agreement dated April 15, 1994 among Tyco Toys,
Inc., Corporate Partners, L.P., Corporate Offshore Partners, L.P.,
the State Board of Administration of Florida, and Corporate
Advisors, L.P. ( )
10.52 Registration Rights Agreement dated April 15, 1994 among Tyco Toys,
Inc., Corporate Partners, L.P., Corporate Offshore Partners, L.P.,
and The State Board of Administration of Florida. ( )
11 Computation of Earnings Per Share Data
22 Subsidiaries of the Company
24.1 Consent of Deloitte & Touche LLP
24
(1) Incorporated by reference to Exhibit 4.5 to Post Effective Amendment No. 1
on Form S-3 to the Company's Registration Statement on Form S-1 (File No.
33-24222), filed with the Securities and Exchange Commission on August 15,
1991.
(2) Incorporated by reference to the Exhibit of the same number to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1990 as filed
with the Securities and Exchange Commission on March 31, 1991.
(3) Incorporated by reference to the Exhibit of the same number to Amendments
No. 1 and 2 to the Registrant's Registration Statement on Form S-1,
Registration No. 33-24222, as filed with the Securities and Exchange
Commission on November 17 and 30, 1988.
(4) Exhibit 4.3 incorporated by reference to Exhibit 10.35 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988, as filed
with the Securities and Exchange Commission on March 31, 1989.
(5) Incorporated by reference to the Exhibit of the same number to the
Registrant's Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 31, 1992.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1986, as filed with the Securities and
Exchange Commission on March 31, 1987.
(7) Incorporated by reference to Exhibit (C)(4) to Amendment No. 2 to the
Schedule 13E-3 filed by Tyco Toys, Inc., TNI, Inc., and Nasta
International, Inc. with the Securities and Exchange Commission on
September 19, 1990.
(9) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992, as filed with the Securities and
Exchange Commission on March 30, 1993.
25
(b). Reports on Form 8-K
--------------------
None.
(c). Exhibits
--------
See (a) (3) above.
(d). Financial Statement Schedules
-----------------------------
See (a) (2) above.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused the report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TYCO TOYS, INC.
---------------
(Registrant)
By________________________
Richard E. Grey
Chairman of the Board,
Chief Executive Officer and Director
March 29, 1995
27
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
______________________________ ______________________________
Richard E. Grey Harry J. Pearce
Chairman of the Board, Vice Chairman, Chief Financial Officer,
Chief Executive Officer, and Director and Director
March 29, 1995 March 29, 1995
____________________________
Gary Baughman
President, Chief Operating Officer
and Director
March 29, 1995
______________________________ ______________________________
Arnold Thaler Ariel Gratch
Director Director
March 29, 1995 March 29, 1995
______________________________ ______________________________
Alan Vituli Joel M. Handel
Director Director
March 29, 1995 March 29, 1995
______________________________ ______________________________
John A. Canning, Jr. Jerome I. Gellman
Director Director
March 29, 1995 March 29, 1995
______________________________ ______________________________
Timothy J. Danis Dr. LaSalle D. Leffall, Jr.
Director Director
March 29, 1995 March 29, 1995
______________________________ ______________________________
David B. Golub Jonathan H. Kagan
Director Director
March 29, 1995 March 29, 1995
28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Tyco Toys, Inc.
Mount Laurel, New Jersey
We have audited the accompanying consolidated balance sheets of Tyco Toys, Inc.
and subsidiaries as of December 31, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. Our audits also included the
financial statement schedule listed in the index at Item 14(a)2. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Tyco Toys, Inc. and subsidiaries as
of December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects, the information set forth therein.
As discussed in the notes to the financial statements, the Company changed its
method of accounting for income taxes effective January 1, 1993 to conform with
Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 9, 1995, except for Note 6, as to
which the date is March 13, 1995.
F-1
Tyco Toys, Inc.
Consolidated Balance Sheets
As of December 31, 1994 and 1993
(in thousands, except share amounts)
1994 1993
---- ----
ASSETS
------
Current assets
Cash and cash equivalents (note 1) $ 30,476 $ 32,036
Receivables, net (note 4) 211,400 219,232
Inventories, net (note 1) 66,284 93,902
Prepaid expenses and other current assets 24,389 27,187
Deferred taxes (note 9) 17,231 16,489
-------- --------
Total current assets 349,780 388,846
Property and equipment, net (note 1) 47,240 50,182
Goodwill, net of accumulated amortization (notes 1
and 2) 231,292 235,824
Deferred taxes (note 9) 23,732 25,635
Other assets 18,591 14,682
-------- --------
Total assets $670,635 $715,169
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Notes and acceptances payable (note 6) $ 57,531 $ 68,963
Current portion of long-term debt (note 7) 21,465 15,259
Accounts payable 51,325 62,602
Accrued expenses and other current liabilities
(note 5) 95,107 109,681
-------- --------
Total current liabilities 225,428 256,505
Long-term debt (note 7) 146,851 179,771
Other liabilities 2,124 1,444
Commitments and contingencies (notes 9, 10 and 11)
Stockholders' equity (notes 6, 7, 8 and 9)
Preferred stock, $.10 par value, $1,050 liquidation
value per share, 1,000,000 shares authorized; 49,055 shares issued
and outstanding in 1994 5 -
Common stock, $.01 par value, 50,000,000 shares
authorized; 34,893,516 and 34,847,316 shares issued in 1994
and 1993 349 348
Additional paid-in capital 343,213 294,499
Retained earnings (accumulated deficit) (27,832) 7,298
Treasury stock, at cost; 175,590 shares (1,595) (1,595)
Cumulative translation adjustment (17,908) (23,101)
-------- --------
Total stockholders' equity 296,232 277,449
-------- --------
Total liabilities and stockholders' equity $670,635 $715,169
-------- --------
See accompanying notes to consolidated financial statements.
F-2
Tyco Toys, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 1994, 1993 and 1992
(in thousands, except per share amounts)
1994 1993 1992
---- ---- ----
Net sales $753,098 $730,179 $768,589
Cost of goods sold 445,394 436,641 449,693
-------- -------- --------
Gross profit 307,704 293,538 318,896
Marketing, advertising and
promotion 172,462 180,815 166,097
Selling, distribution and
administrative expenses 123,622 134,947 102,155
Restructuring and other special
charges (note 3) 4,700 28,214 2,797
Amortization of goodwill 6,285 6,476 3,765
-------- -------- --------
Total operating expenses 307,069 350,452 274,814
-------- -------- --------
Operating income (loss) 635 (56,914) 44,082
Interest expense 31,621 24,658 14,197
Foreign currency loss 3,138 3,746 765
Other income, net (2,651) (1,978) (1,016)
-------- -------- --------
Income (loss) before income taxes (31,473) (83,340) 30,136
Provision (benefit) for income
taxes (note 9) 1,500 (13,400) 12,124
-------- -------- --------
Net income (loss) (32,973) (69,940) 18,012
Preferred stock dividends 2,157 - -
-------- -------- --------
Net income (loss) applicable to
common shareholders $(35,130) $(69,940) $ 18,012
-------- -------- --------
Net income (loss) per common
share (notes 1, 7 and 8):
Primary $ (1.01) $ (2.08) $ 0.60
Fully diluted $ (1.01) $ (2.08) $ 0.60
Weighted average number of
common shares outstanding:
Primary 34,687 33,595 29,743
Fully diluted 34,687 33,595 31,127
Dividends per common share $ - $ 0.075 $ 0.10
See accompanying notes to consolidated financial statements.
F-3
Tyco Toys, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1994, 1993 and 1992
(in thousands, except share data)
Preferred
Stock Common Stock Additional Retained Treasury Stock Cumulative
-------------- ------------------ Paid - In Earnings ------------------- Translation
Shares Amount Shares Amount Capital (Deficit) Shares Amount Adjustment Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1991 - $- 19,700,226 $197 $117,556 $ 64,611 (175,590) $(1,595) $ 453 $181,222
Exercise of stock options - - 382,700 4 2,215 - - - - 2,219
Exercise of warrants - - 2,887,918 29 23,183 - - - - 23,212
Conversion of debentures - - 6,111,892 61 75,184 - - - - 75,245
Issuance of stock to
acquire Matchbox - - 2,922,608 29 51,826 - - - - 51,855
Foreign currency
translation adjustment - - - - - - - - (15,123) (15,123)
Common stock dividends - - - - - (2,854) - - - (2,854)
Tax benefit from exercise
of stock options - - - - 1,453 - - - - 1,453
Net income - - - - - 18,012 - - - 18,012
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1992 - - 32,005,344 320 271,417 79,769 (175,590) (1,595) (14,670) 335,241
Exercise of stock options - - 170,500 1 611 - - - - 612
Exercise of warrants - - 2,671,472 27 22,017 - - - - 22,044
Foreign currency
translation adjustment - - - - - - - - (8,431) (8,431)
Common stock dividends - - - - - (2,531) - - - (2,531)
Tax benefit from exercise
of stock options - - - - 454 - - - - 454
Net loss - - - - - (69,940) - - - (69,940)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1993 - - 34,847,316 348 294,499 7,298 (175,590) (1,595) (23,101) 277,449
Exercise of stock options - - 46,200 1 208 - - - - 209
Issuance of preferred stock 47,619 5 - - 46,995 - - - - 47,000
Preferred stock dividends 1,436 - - - 1,511 (2,157) - - - (646)
Foreign currency
translation adjustment - - - - - - - - 5,193 5,193
Net loss - - - - - (32,973) - - - (32,973)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,
1994 49,055 $5 34,893,516 $349 $343,213 $(27,832) (175,590) $(1,595) $(17,908) $296,232
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
Tyco Toys, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1994, 1993 and 1992
(in thousands)
1994 1993 1992
---- ---- ----
Cash Flows From Operating Activities:
Net income (loss) $(32,973) $(69,940) $ 18,012
Adjustments to reconcile net income (loss)
to net cash provided (utilized) by operating
activities:
Restructuring and other special charges - 7,569 -
Depreciation 24,566 24,837 14,050
Amortization 7,594 6,973 3,842
Non-cash interest expense 1,468 - -
Deferred income tax provision (benefit) 1,161 (14,452) (3,989)
Increase (decrease) in allowance for bad
debts, returns, markdowns, discounts and
other receivable reserves (5,885) (5,480) 18,623
Increase (decrease) in allowance for
obsolescence and other inventory reserves (3,449) 2,974 7,178
Change in assets and liabilities, net of
effects from acquisitions:
(Increase) decrease in receivables 18,273 14,723 (61,006)
(Increase) decrease in inventories 37,582 504 (8,351)
Decrease in prepaid expenses and other
current assets 3,011 4,513 6,863
Increase in other assets (3,957) (1,803) (1,062)
Increase (decrease) in accounts payable (13,354) (3,893) 23,455
Increase (decrease) in accrued expenses and
other current liabilities (16,420) (9,234) 876
Increase in other liabilities 656 - -
-------- -------- ---------
Total adjustments 51,246 27,231 479
-------- -------- ---------
Net cash provided (utilized) by
operating activities 18,273 (42,709) 18,491
Cash Flows From Investing Activities:
Disposition of property and equipment 1,433 6,319 1,590
Capital expenditures (21,158) (29,731) (22,239)
Acquisitions and earnout payments (855) (6,343) (196,256)
-------- -------- ---------
Net cash utilized by investing
activities (20,580) (29,755) (216,905)
-------- -------- ---------
Cash Flows From Financing Activities:
Issuance of Senior Subordinated Notes - - 126,500
Debt issuance costs - - (4,000)
Repayment of long-term debt (30,052) (10,827) (2,197)
Increase in (repayment of) notes and
acceptances payable, net (10,633) 52,022 40,086
Proceeds from issuance of preferred stock 50,000 - -
Preferred stock issuance costs (3,000) - -
Proceeds from issuance of common stock, net 209 22,656 77,286
Dividends paid - (3,324) (2,061)
-------- -------- ---------
Net cash provided by financing
activities 6,524 60,527 235,614
-------- -------- ---------
Effect of exchange rate changes on cash (5,777) (7,208) (5,028)
-------- -------- ---------
Net Increase (Decrease) in Cash
and Cash Equivalents (1,560) (19,145) 32,172
Cash and Cash Equivalents, Beginning of Year 32,036 51,181 19,009
-------- -------- ---------
Cash and Cash Equivalents, End of Year $ 30,476 $ 32,036 $ 51,181
-------- -------- ---------
Cash Payments During Year For:
Interest $ 30,863 $ 21,134 $ 8,650
Taxes 2,843 5,158 11,189
See accompanying notes to consolidated financial statements.
F-5
TYCO TOYS, INC.
Notes to Consolidated Financial Statements
(1) Summary of Accounting Policies
------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. Investments in 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.
Cash and Cash Equivalents
The Company considers all short-term investments with a maturity at the date of
purchase of three months or less to be cash equivalents. Short-term investments
included in cash and cash equivalents primarily represent money market funds at
December 31, 1994 and 1993 and are valued at cost, which approximates market
value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories, net, consist of (in thousands):
December 31,
----------------
1994 1993
------- -------
Raw materials $16,655 $27,836
Work-in-process 1,893 2,355
Finished goods 60,708 80,132
Less obsolescence and
other reserves 12,972 16,421
------- -------
$66,284 $93,902
------- -------
Advertising
Media costs are deferred and charged to operations in the year in which the
related product is released.
F-6
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment is
provided on a straight-line basis over estimated useful lives which range from
10 to 50 years for buildings, 18 months to 10 years for machinery, equipment and
fixtures, the lease term or life of improvements (whichever is less) for
leasehold improvements and remaining lease term for assets under capital leases.
Property and equipment, net, consist of (in thousands):
December 31,
------------------
1994 1993
-------- --------
Property and equipment owned:
Land and buildings, machinery,
equipment, and fixtures $116,759 $118,381
Leasehold improvements 10,767 10,408
Construction in progress 9,458 13,853
-------- --------
136,984 142,642
Less accumulated depreciation
and amortization 91,352 93,279
-------- --------
Net property and equipment owned 45,632 49,363
-------- --------
Machinery, equipment, and fixtures under
capitalized leases:
Machinery, equipment, and fixtures 2,959 1,670
Less accumulated amortization 1,351 851
-------- --------
Net property under capitalized leases 1,608 819
-------- --------
$ 47,240 $ 50,182
-------- --------
Goodwill
Costs in excess of net assets acquired are amortized on a straight-line basis
over 40 years. Accumulated amortization of goodwill was $22,731,000 and
$16,446,000 at December 31, 1994 and 1993, respectively.
Deferred Costs
Patent and trademark costs are deferred and amortized over a period of 18
months. Deferred financing costs are amortized over the term of the related
indebtedness.
Carrying Value of Noncurrent Assets
The Company evaluates the carrying value of noncurrent assets, including
goodwill and other intangible assets, based upon current and anticipated
undiscounted operating income which the Company has determined to be equivalent
to undiscounted cash flows, and recognizes an impairment when it is probable
that such estimated future operating income will be less than the carrying value
of the asset. Measurement of the amount of impairment, if any, is based upon
the difference between the carrying value of the asset and its estimated fair
market value.
F-7
Revenue Recognition
Sales are recorded as product is shipped, F.O.B. point of shipment. The Company
provides for defective returns as a percentage of gross sales, based on
historical experience.
Foreign Currency Translation
Assets and liabilities of the Company's foreign subsidiaries are translated into
the U.S. dollar at exchange rates at the balance sheet date. Income, expenses
and cash flows are translated at exchange rates prevailing during the year. The
resulting currency translation adjustments are accumulated in a separate
component of stockholders' equity. The Company enters into forward exchange
contracts to hedge against foreign currency fluctuations. Foreign currency
transaction gains and losses are included in earnings for the period, except for
those relating to intercompany transactions of a long-term investment nature
which are accumulated in stockholders' equity. Unrealized gains or losses on
forward contracts which hedge identifiable foreign currency commitments are
deferred and accounted for as part of the transaction. The Company does not
speculate in foreign currencies.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse (see note 9).
Prior to 1993, the provision for income taxes, as prescribed in Accounting
Principles Board Opinion No. 11, "Accounting for Income Taxes" (APB 11), was
based on income and expenses included in the accompanying Consolidated
Statements of Operations. Differences between taxes so computed and taxes
payable were classified as deferred taxes arising from timing differences.
The Company does not provide deferred federal income taxes on the undistributed
earnings of its foreign subsidiaries since such earnings are not expected to be
remitted to the Company in the foreseeable future. Federal income taxes are
provided currently on that portion of undistributed foreign earnings required to
be included in accordance with the U.S. tax laws.
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing income (loss) applicable to
common shareholders by the weighted average number of common and common
equivalent shares outstanding during the year. Outstanding options, Convertible
Subordinated Notes and convertible preferred stock were determined to be anti-
dilutive for the years ended December 31, 1994 and 1993, as applicable, and were
therefore excluded from the per share calculations. For the 1992 calculations,
unexercised dilutive options and warrants were assumed to have been exercised at
the beginning of the period or at the date of issuance, if later. The assumed
proceeds were then assumed to be used to purchase common stock at the average
market price during the period (or ending market price, if higher, for fully
diluted purposes).
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
1994 presentation.
F-8
(2) Acquisitions
------------
On June 3, 1992, the Company acquired the business of Illco Toy Co., U.S.A. and
related entities (collectively referred to as Tyco Preschool). The initial
acquisition price paid for Tyco Preschool was $52,100,000 in cash. On October
2, 1992, the Company acquired Matchbox for consideration totaling $106,000,000,
consisting of $53,500,000 in cash and 2,923,000 shares of Tyco common stock.
The Company accounted for the acquisitions of Tyco Preschool and Matchbox as
purchases. The results of operations of Tyco Preschool and Matchbox have been
consolidated with those of the Company since June 1992 and October 1992,
respectively.
On an unaudited pro forma basis, reflecting the acquisitions of Tyco Preschool
and Matchbox as if they had occurred on January 1, 1992, net sales of the
Company for the year ended December 31, 1992 would have been $902,716,000 and
net income would have been $4,215,000, or $0.13 per share.
(3) Restructuring and Other Special Charges
---------------------------------------
During 1994, the Company recorded a $4,700,000 pre-tax charge related to
additional costs to close its Italian subsidiary including legal costs
associated with the lawsuit filed by the former managing director of Tyco Italy
against the Company (see note 11). In 1994, the Company entered into a five-
year agreement with an Italian distributor to market the Company's products in
Italy. The Company is entitled to minimum royalty payments in accordance with
this agreement.
During 1993, the Company recorded restructuring and other special charges
aggregating $28,214,000, of which $22,238,000 were noncash in nature, including
a $14,669,000 write-off of tooling assets. The restructuring plan was based
upon consolidations of Company subsidiaries in Germany and Australia, the
planned sale of the Company's Italian subsidiary, as well as the integration of
the Playtime and Preschool operations in the U.S. and Hong Kong. The charges
included an $8,511,000 write-off of tooling and intangibles in conjunction with
the Playtime/Preschool reorganization, $2,497,000 for write-downs of inventories
and equipment to estimated realizable values and facility consolidation costs
totaling $2,281,000. Other special charges, totaling $13,525,000, included the
write-down of obsolete tooling and the write-off of other assets predicated by
management's decision in the fourth quarter to discontinue certain products and
product lines. The 1993 results also reflect a $1,400,000 charge for severance
in connection with reorganizing the Company's Direct Import business.
In 1992, the Company recorded a $2,797,000 restructuring charge, $1,846,000 net
of tax, associated with costs to relocate certain of the Company's Hong Kong and
United Kingdom facilities and to establish the Company's new domestic
distribution facilities in Portland, Oregon.
(4) Receivables, Net
Receivables, net, consist of (in thousands):
December 31,
------------------
1994 1993
---- ----
Trade receivables $251,141 $262,330
Other receivables 11,040 13,568
Less:
Doubtful accounts 6,312 11,201
Returns, markdowns,
discounts and other
reserves 44,469 45,465
-------- --------
$211,400 $219,232
-------- --------
F-9
In 1994, the Company wrote-off receivables and corresponding reserves
established in prior years of approximately $8,800,000 related to certain
customers.
(5) Accrued Expenses and Other Current Liabilities
----------------------------------------------
Accrued expenses and other current liabilities consist of (in thousands):
December 31,
-----------------
1994 1993
------- --------
Advertising $24,528 $ 30,847
Income taxes 23,586 22,002
Royalties 13,558 16,164
Compensation 5,974 4,597
Taxes other than income 4,679 6,595
Interest 6,861 6,103
Reserves for purchase accounting
adjustments and restructuring costs 1,558 10,460
Other 14,363 12,913
------- --------
$95,107 $109,681
------- --------
(6) Notes and Acceptances Payable
-----------------------------
In 1992, the Company, through a subsidiary, entered into a credit facility with
a group of fifteen banks led by NationsBank of North Carolina, N.A. (the Credit
Facility). The borrowings were secured by a lien on substantially all of the
Company's domestic assets and were guaranteed by Tyco and certain of its other
subsidiaries. The Credit Facility consisted of a $155,000,000 short-term
revolving credit and a $55,000,000 term-reducing facility with quarterly
installment payments of $3,400,000 which commenced in September 1993. During
April 1994, the Company prepaid $14,300,000 of the term-reducing facility with
part of the proceeds from the issuance of its preferred stock. As amended
February 9, 1995, the expiration date was extended to February 24, 1995. The
Company fully repaid its outstanding obligations under the Credit Facility at
maturity. The Credit Facility provided for borrowings at various rates to a
maximum of 3% over the prime rate. At December 31, 1994, total utilization of
the Credit Facility included approximately $62,653,000 of borrowings
($20,300,000 of which represented the term-reducing facility) and $2,516,000 in
letters of credit. At December 31, 1993, total utilization of the Credit
Facility included $26,000,000 of short-term borrowings, $48,200,000 outstanding
under the term loan and approximately $500,000 in letters of credit.
Under the terms of the Credit Facility, the Company was subject to customary
covenants and conditions relating to maintenance of working capital and current
ratios, net worth, consolidated debt, fixed charge coverage and profit levels.
The Company was not in compliance with certain covenants at the end of the third
and fourth quarters of 1994 and 1993 and obtained waivers and/or covenant
revisions from the bank group. As of December 31, 1994, the Company was unable
to pay dividends on its common stock pursuant to restrictions under the Credit
Facility. The Company was permitted, however, to pay dividends on preferred
stock.
F-10
In February and March 1995, the Company entered into $290,000,000 of new credit
facilities (the New Credit Facilities). The New Credit Facilities consist of
three separate three-year revolving credit facilities with General Electric
Capital Corporation and affiliates in an aggregate amount of $90,000,000 and a
$200,000,000 five-year receivables securitization facility arranged by General
Electric Capital Corporation. Borrowings under the New Credit Facilities were
used to refinance outstanding indebtedness under the Credit Facility and certain
credit facilities of foreign subsidiaries.
The revolving credit facilities consist of up to $35,000,000 for certain
domestic entities (of which up to $10,000,000 may be used for letters of
credit), $20,000,000 for Tyco Canada, and $35,000,000 for the Company's
subsidiaries in the United Kingdom (UK). Availability under the domestic
revolving credit is based upon inventory, as defined, and availability under the
foreign revolving credits is based upon an aggregate of eligible accounts
receivable and inventory, as defined. The revolving credit facilities are
secured by a lien on substantially all of the Company's domestic assets and are
also guaranteed by certain foreign subsidiaries. Subject to the maximum
commitment under each of these facilities, borrowings are permitted up to 60% of
eligible inventory and, in the Canadian and UK agreements, up to 80% of eligible
accounts receivable. Interest rates on borrowings are determined at the option
of the borrower based on various indices, including LIBOR or bankers' acceptance
rate, plus 2.5%.
Under the securitization facility, Tyco Industries and Tyco Manufacturing Corp.
will sell and transfer substantially all of their accounts receivable to Tyco
Funding I Corporation (TFC I) and Tyco Funding II Corporation (TFC II). These
companies are newly-formed bankruptcy remote subsidiaries of Tyco Industries and
will be consolidated in the financial statements of the Company. TFC I and TFC
II purchase the accounts receivable with proceeds from their borrowings under a
commercial paper facility (limited to a maximum of 75% of eligible accounts
receivable, as defined) and certain deferred payments. The interest rate on the
facility is the market rate for commercial paper plus 1.25%. The accounts
receivable to be sold and/or transferred are solely the assets of TFC I or TFC
II and are pledged as security for their borrowings. In the event of
liquidation of TFC I or TFC II, the creditors of TFC I or TFC II would be
entitled to satisfy their claims from the assets of TFC I or TFC II prior to any
distribution to Tyco Industries.
Under the terms of the New Credit Facilities, the Company and its subsidiaries
are (1) subject to covenants and conditions relating to the maintenance of net
worth, fixed charge coverage and income; (2) restricted from incurring
additional indebtedness or certain obligations and from acquiring any other
entities, whether by asset purchase, merger or otherwise; (3) restricted in the
ability to pay dividends on capital stock subject to certain limitations; and
(4) permitted to guarantee additional amounts of debt incurred by certain of its
subsidiaries up to an aggregate of $70,000,000.
At December 31, 1994 and 1993, certain foreign subsidiaries of the Company have
agreements with various banks which provide for credit extensions of
approximately $76,000,000 and $96,000,000, respectively, in the aggregate, of
which $58,600,000 and $52,442,000, respectively, was utilized. Borrowings under
these agreements are subject to a variety of terms and conditions, including
collateral requirements. These subsidiaries also had outstanding letters of
credit aggregating $7,246,000 and $9,091,000, at December 31, 1994 and 1993,
respectively.
F-11
(7) Long-Term Debt
Long-term debt consists of (in thousands):
December 31,
------------------
1994 1993
---- ----
Subordinated notes $141,468 $140,000
Term loan (note 6) 20,300 48,200
Mortgage 4,656 4,859
Other 1,892 1,971
-------- --------
168,316 195,030
Less amounts due within one year 21,465 15,259
-------- --------
$146,851 $179,771
-------- --------
In August 1992, the Company issued $126,500,000 of 10.125% Senior Subordinated
Notes due 2002 with interest payable on February 15 and August 15. The Senior
Subordinated Notes are guaranteed by Tyco Industries and certain of its
subsidiaries.
On July 19, 1991, the Company issued $13,500,000 of 9% Convertible Exchangeable
Preferred Stock to First Chicago Investment Corporation. In September 1991,
First Chicago exchanged the Preferred Stock for $13,500,000 of 9% Convertible
Subordinated Notes, effective as of July 19, 1991. Beginning January 1992, the
interest rate on these Convertible Subordinated Notes was reduced to 7%. During
1994, $1,467,691 of additional Convertible Subordinated Notes were issued in
lieu of interest payments. The Convertible Subordinated Notes, which are to be
repaid in four equal annual payments commencing in 1998, are convertible at a
price of $10 per share into 1,496,800 shares of common stock of the Company at
December 31, 1994.
Long-term debt is payable subsequent to December 31, 1994 as follows: 1995 -
$21,465,000; 1996 - $1,007,000; 1997 - $840,000; 1998 - $4,535,000; 1999 -
$4,219,000; and thereafter - $136,250,000.
F-12
(8) Stockholders' Equity
--------------------
Stock Option Plans
The Company has four stock option plans: 1985 Tyco Toys Incentive Stock Option
Plan, 1986 Non-Qualified Stock Option Plan, 1986 Non-Qualified Stock Option Plan
2 and 1992 Non-Qualified Stock Option Plan. A total of 4,520,000 shares of
common stock were originally reserved for issuance pursuant to options to be
granted under these stock option plans. At December 31, 1994, there are
1,307,948 options available for grant. The plans provide for option grants at
exercise prices not less than the closing market value as listed on the New York
Stock Exchange on the date the option is granted, subject to adjustment for such
changes as stock splits. Transactions involving the plans are summarized as
follows:
Number Exercise Price
of Shares Per Share
--------- -------------------
Outstanding at December 31, 1991 1,367,728 $ 3.845 - $15.030
Granted 685,000 14.690 - 17.500
Exercised (379,148) 3.845 - 15.030
Cancelled (5,500) 14.690
----------
Outstanding at December 31, 1992 1,668,080 4.500 - 17.500
----------
Granted 12,000 11.500 - 12.880
Exercised (170,500) 4.500
Cancelled (58,020) 7.190 - 15.030
----------
Outstanding at December 31, 1993 1,451,560 4.500 - 17.500
----------
Granted 991,762 7.375 - 9.000
Exercised (46,200) 4.500
Cancelled (1,198,094) 7.210 - 17.500
----------
Outstanding at December 31, 1994 1,199,028 $ 4.500 - $17.500
----------
All of the options outstanding are available for exercise for each period
presented. In 1994, new stock options were issued subject to the surrender and
cancellation of certain outstanding stock options.
Long-Term Incentive Plan
On February 8, 1995, the Board of Directors of the Company approved the
establishment of a new Long-Term Incentive Plan for certain senior executive
managers of the Company. Under the Plan, the Company has authority to issue up
to 2,000,000 restricted stock units (Restricted Stock Units) of the Company.
This Plan is designed to supplement the 1992 Non-Qualified Stock Option Plan of
the Company through the grant of Restricted Stock Units. Participants will be
entitled to receive a prescribed number of shares of Company stock after seven
years of continued employment. A participant's vesting of Restricted Stock Units
can be accelerated if total return to shareholders exceeds targeted levels.
Preferred Stock
On April 15, 1994, the Company issued $50,000,000 of 6% Series B Voting
Convertible Exchangeable Preferred Stock (Preferred Stock) to an investment
group consisting of Corporate Partners, L.P., Corporate Offshore Partners, L.P.,
and the State Board of Administration of Florida, collectively referred to as
the Purchasers. The $47,000,000 of net proceeds after issuance costs were used
to reduce borrowings under the Company's credit facility with NationsBank and
for general corporate purposes .
F-13
The Preferred Stock has an annual dividend yield of 6% which may be paid in the
form of additional shares of Preferred Stock through the period April 15, 1996.
Dividends issuable in shares of Preferred Stock in lieu of cash, totalled
$2,157,000 in 1994. The Preferred Stock has a liquidation value of $1,050 per
share and is convertible into shares of common stock of the Company at a
conversion price of $10 per share. The Company has the option, at any time, to
exchange the Preferred Stock for 6% Convertible Subordinated Notes. The
Company, at its option, may redeem the Preferred Stock at any time after April
15, 1997 at an amount equal to 105.25% of the liquidation value which reduces
annually to 100% of the liquidation value in 2004. On April 15, 2004, the
Company shall redeem all outstanding Preferred Stock. The redemption price
shall be paid, at the Company's option, in cash or in shares of common stock.
The Preferred Stock issued to the Purchasers entitles the holder to vote on an
as converted basis with the common shares as a single class on all matters on
which the Company's common shareholders vote. Pursuant to the Purchase
Agreement, the Purchasers have designated two persons to the Company's Board of
Directors.
The Registration Agreement, dated April 15, 1994, gives the Purchasers demand
and incidental registration rights, as defined, with respect to the Preferred
Stock, or common stock issued upon conversion, or notes issued in an exchange
for such Preferred Stock.
Common Stock Dividends
For the years ended December 31, 1993 and 1992, the Company declared common
stock dividends aggregating $2,531,000 and $2,854,000, respectively. In the
fourth quarter of 1993, the Board of Directors elected to suspend common stock
dividends until further notice. As a result of the dividend restriction imposed
by the Credit Facility, the Company was unable to pay dividends as of December
31, 1994 or 1993. The terms of the Preferred Stock, the 10.125% Senior
Subordinated Notes and the 7% Convertible Subordinated Notes also have
limitations on the payment of common stock dividends by the Company.
(9) Income Taxes
------------
As discussed in note 1, the Company adopted SFAS 109 as of January 1, 1993.
There was no cumulative effect on the deferred tax balances as a result of
adopting this pronouncement. As permitted, the 1992 financial statements have
not been restated to reflect this change in accounting method.
In accordance with SFAS 109, deferred income taxes for 1994 and 1993 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. During 1992, a deferred income
tax provision was provided for timing differences in the recognition of revenues
and expenses for tax purposes and financial statement purposes, as prescribed in
APB 11. The temporary differences recorded under SFAS 109 may be more inclusive
than the timing differences utilized in the determination of deferred income
taxes under APB 11. Further, SFAS 109 requires the Company to record the net
deferred tax benefits of net operating loss and tax credit carryforwards, if
realization is more likely than not, which was not permitted under APB 11.
The components of income (loss) before income tax provision (benefit) consist of
(in thousands):
Year ended December 31,
------------------------------
1994 1993 1992
---------- --------- -------
Domestic $(14,539) $(42,002) $ 848
Foreign (16,934) (41,338) 29,288
-------- -------- -------
$(31,473) $(83,340) $30,136
-------- -------- -------
F-14
The provision (benefit) for income taxes consists of (in thousands):
Year ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
Current:
Federal $ - $ (2,397) $ 496
State - 995 11
Foreign 339 2,000 8,131
------- -------- -------
339 598 8,638
------- -------- -------
Deferred:
Federal (127) (9,039) (4,039)
State (1,327) (696) 325
Foreign 2,615 (4,717) (275)
------- -------- -------
1,161 (14,452) (3,989)
------- -------- -------
Reduction of goodwill due to:
-utilization of net
operating loss
carryforwards - - 2,680
-reduction in purchase
accounting reserves - - 3,342
Tax benefit from the exercise
of employee stock options - 454 1,453
------- -------- -------
- 454 7,475
------- -------- -------
$ 1,500 $(13,400) $12,124
------- -------- -------
Income taxes recorded by the Company differ from the amounts computed by
applying the statutory U.S. federal income tax rate to income (loss) before
income taxes. The following schedule reconciles the income tax provision
(benefit) at the statutory rate and the actual income tax provision (benefit) as
reflected in the Consolidated Statements of Operations (in thousands):
Year ended December 31,
-----------------------------
1994 1993 1992
---- ---- ----
Income (loss) before income taxes $(31,473) $(83,340) $30,136
-------- -------- -------
Tax at the federal statutory rate (10,701) (28,336) 10,246
Tax on deemed repatriation of
foreign earnings 3,233 1,241 3,353
State income taxes, net of the
federal tax provision (benefit) (2,567) (1,730) 572
U.S. benefit for foreign tax credits (798) (1,710) (4,029)
Effect of foreign income tax rate differential (2,987) (1,559) 681
Limitation on the utilization of foreign tax
benefits 12,126 12,897 -
Limitation on the utilization of U.S. tax
benefits 883 4,236 -
Amortization of non-deductible expenses 1,678 1,734 1,149
Other 633 (173) 152
-------- -------- -------
$ 1,500 $(13,400) $12,124
-------- -------- -------
F-15
The tax effects of the significant temporary differences giving rise to the
Company's deferred tax assets (liabilities) for the years ended December 31,
1994 and 1993, which the adoption of SFAS 109 has required the Company to
recognize, are as follows (in thousands):
1994 1993
---- ----
Current:
Sales and product allowances $ 4,240 $ 4,790
Co-operative advertising 4,343 4,738
Receivable reserves 811 4,230
Obsolescence reserve 4,451 3,934
State temporary differences 3,307 -
Other 3,551 -
-------- --------
20,703 17,692
Valuation allowance (3,472) (1,203)
-------- --------
$ 17,231 $ 16,489
-------- --------
Noncurrent:
Net operating losses $ 61,134 $ 48,461
State temporary differences 9,672 10,411
Foreign tax credits 6,068 5,269
Depreciation (1,002) (1,885)
Other 1,371 5,983
-------- --------
77,243 68,239
Valuation allowance (53,511) (42,604)
-------- --------
$ 23,732 $ 25,635
-------- --------
For the year ended December 31, 1992 the deferred tax provision (benefit)
recorded by the Company under APB 11 resulted from the following timing
differences (in thousands):
Co-operative advertising $(2,999)
Obsolescence reserve (771)
Compensation 4,286
Depreciation (327)
Receivable reserves (3,984)
Other (194)
-------
$(3,989)
-------
Management has determined, 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
loss and tax credit carryforwards, and other temporary differences. The total
net deferred tax assets (both current and noncurrent) have been reduced to the
amount management considers realizable by establishing valuation allowances
aggregating $56,983,000. Based on the weight of available evidence, management
has concluded that more likely than not, its future taxable income will be
sufficient to support the current recognition of total net deferred tax assets
of $40,963,000.
F-16
The valuation allowances have been established due to management's analysis
indicating that certain tax credit and net operating loss carryforwards, which
are limited under the 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. Any subsequently recognized
benefits related to these net operating losses will be allocated to reduce
goodwill. The net increase of $13,176,000 in the valuation allowance for
deferred tax assets in 1994 relates primarily to foreign net operating loss
carryforwards generated in the current year.
Provisions for U.S. and foreign income taxes are reduced by available tax
credits and deductions that may be incurred on remittance of the Company's share
of subsidiaries' undistributed earnings, less those deemed to be indefinitely
reinvested. The Company has not recognized a deferred tax liability of
$25,573,000 for the undistributed earnings of its foreign subsidiaries at
December 31, 1994 since the Company currently does not expect these earnings to
be remitted to the U.S. in the foreseeable future. A deferred tax liability
will be recognized when the Company expects that it will recover the
undistributed earnings in a taxable manner, such as through receipt of
dividends, a loan of the unremitted earnings to the Company or one of its U.S.
affiliates, or a sale of the foreign subsidiaries' stock. Accumulated net
undistributed earnings of the Company's foreign subsidiaries included in
accumulated deficit were $98,887,000 at December 31, 1994.
The Internal Revenue Service has examined the consolidated federal income tax
returns of Tyco Toys, Inc. for the fiscal years ended August 31, 1987 through
August 31, 1990 and has proposed an assessment which the Company has elected to
appeal. 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.
Additionally, the consolidated federal income tax returns of Tyco Toys, Inc. for
the years ended December 31, 1990 through December 31, 1992 are presently being
examined by the Internal Revenue Service. While the final outcome of this
examination is not determinable at this time, management of the Company believes
that any proposed adjustments, if sustained, will not materially affect the
financial condition, results of operations (including realization of net
operating loss carryforwards) or liquidity of the Company.
As of December 31, 1994, the Company has domestic net operating loss
carryforwards of $45,900,000, exclusive of the Matchbox net operating loss
carryforwards discussed below, for federal income tax purposes. These net
operating loss carryforwards are available to reduce future federal taxable
income and expire in the years 2008 and 2009. The Company's international
operating subsidiaries have, in the aggregate, approximately $94,036,000 of tax
loss carryforwards available at December 31, 1994. These tax losses are
available to reduce the originating subsidiary's future taxable foreign income
and have varying expiration dates.
The Company also has general business and foreign tax credit carryovers of
$625,000 and $6,068,000, respectively, at December 31, 1994. The Company's
future federal income tax liability can be reduced by the general business tax
credits through the year 2008 and by the foreign tax
F-17
credits through the year 1999. These credits expire as follows (in thousands):
Year of Expiration General Business Foreign
------------------ ---------------- -------
1995 $ - $ 120
1996 - 682
1997 24 1,338
1998 47 2,045
1999 112 1,883
2000 to 2008 442 -
---- ------
$625 $6,068
---- ------
The Company also has nonexpiring alternative minimum tax credits totaling
$747,000. Additionally, as of the October 2, 1992 acquisition date, the Matchbox
domestic companies have regular and alternative minimum tax net operating loss
carryforwards of approximately $47,500,000 which may expire during the years
2001 to 2004. These Matchbox loss carryforwards are subject to an annual
limitation and can only be used to offset taxable income of the Matchbox
domestic companies.
(10) Lease Commitments
-----------------
The Company leases facilities and equipment under noncancellable operating
leases with terms of up to ten years. Most leases contain escalation and
renewal clauses and require the Company to pay real estate taxes and utility
charges.
Future minimum lease commitments aggregating $69,946,000 are payable as follows:
1995 - $12,305,000; 1996 - $10,247,000; 1997 - $9,109,000; 1998 - $7,231,000;
1999 - $6,562,000; and thereafter - $24,492,000.
Aggregate rental expense for operating leases was $14,945,000, $14,836,000 and
$11,133,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
(11) Commitments and Contingencies
-----------------------------
Letters of Credit
The Company was contingently liable for open letters of credit of approximately
$9,762,000 at December 31, 1994.
Foreign Exchange Risk Management
The primary focus of the Company's foreign exchange risk management program is
to reduce earnings volatility due to foreign exchange rate fluctuations. In
accordance with this policy, the Company enters into foreign currency forward
exchange contracts and options as hedges of inventory purchases, sales and
various other intercompany transactions.
At December 31, 1994, the Company has outstanding foreign currency forward
exchange contracts totaling $7,400,000 to purchase U.S. dollars. In February
and March 1995, the Company entered into $83,000,000 of forward currency options
which primarily provide for the sale of foreign currencies. The principle
currencies being hedged are the Belgium franc, British pound, Australian dollar
and Canadian dollar. The options expire within twelve months. The total cost
of acquiring these currency options was approximately $1,000,000.
F-18
Guaranteed Royalties
The Company markets its products under a variety of trademarks, some of which
are not owned by the Company and for which the Company pays a royalty. For the
years ended December 31, 1994, 1993 and 1992, the Company incurred $33,079,000,
$33,036,000 and $8,940,000 in royalty expense, respectively. Certain license
agreements require minimum guaranteed royalty payments over the term of the
license. At December 31, 1994, the Company was committed to pay total minimum
guaranteed royalties aggregating $58,352,000 which are payable as follows:
1995 - $10,890,000; 1996 - $7,967,000; 1997 - $7,185,000; 1998 - $6,470,000;
1999 - $6,490,000; and thereafter - $19,350,000.
Guaranteed Purchases
In the ordinary course of business, the Company has entered into guaranteed
purchase agreements with certain suppliers to ensure the timely delivery and
availability of product. As of December 31, 1994, the Company was committed for
purchases aggregating $12,214,000 from its suppliers.
Commitment to Acquire Ensueno-Tyco Interest
In accordance with the Purchase Agreement dated April 30, 1993, the 25% owners
of Ensueno-Tyco have elected to sell such interest to Tyco for the sum of
approximately $1,100,000. This transaction is expected to be completed by the
end of the first quarter of 1995.
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. The Company's Italian subsidiary has been closed and
is in the process of being liquidated. 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 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 and in the
appeal taken by Lego. The parties have reached an agreement for the dismissal
of all these proceedings.
Shareholder Suits
In October 1994, the U.S. District Court in New Jersey entered judgment 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
judgment.
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.
F-19
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
In 1992, the U.S. Customs Service 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 periods 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, homeowners near the
GEMS Landfill have filed class action claims against approximately 150
defendants, including Tyco Industries, for various types of unspecified monetary
damages, including punitive damages. In management's opinion, there are
meritorious factual and legal defenses to these claims. 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 the opinion of management of the Company and its outside counsel, none of
these three matters is 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.
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 effect on the
Company's earnings, financial condition or liquidity.
(12) Disclosure About Fair Value of Financial Instruments
-----------------------------------------------------
The estimated fair value amounts have been determined by the Company using
available market information and appropriate methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The Company believes that the carrying amounts of cash and cash
equivalents, accounts receivable, accounts payable and other current liabilities
are a reasonable estimate of their fair values at December 31, 1994 and 1993.
F-20
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Long-term debt - The fair value of the Company's publicly-traded debt is
--------------
based on the quoted market prices for that debt. Interest rates that are
currently available to the Company for issuance of debt with similar terms
and remaining maturities are used to estimate fair value for debt issues
not quoted on an exchange. The carrying amounts and estimated fair values
of long-term debt are as follows (in thousands):
December 31,
------------------------------------------
1994 1993
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Publicly issued $126,500 $94,400 $126,500 $124,128
Privately issued 41,816 41,816 68,530 68,530
Investments - It was not practicable to estimate the fair value of
-----------
privately-held investments of $11,600,000 and $7,400,000 at December 31,
1994 and 1993, respectively, due to the lack of quoted market prices and
the excessive cost involved in determining such fair value.
Foreign currency forward exchange contracts - The Company has commitments
-------------------------------------------
under foreign currency forward exchange contracts in various foreign
currencies totaling approximately $7,400,000 and $60,000,000 as of December
31, 1994 and 1993, respectively. Based on quoted market rates, the
carrying amounts of these items approximate their fair value at December
31, 1994 and 1993.
The fair value estimates presented herein are based on pertinent information
available to management of the Company as of December 31, 1994 and 1993.
Although management is not aware of any factors that would have a significant
adverse effect on the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date and current estimates of fair value may differ significantly from the
amounts presented herein.
(13) Business Segment Information
----------------------------
Product Development and Packaging Design Costs
The Company incurred product development and packaging design costs of
approximately $17,519,000, $19,062,000 and $15,096,000 for the years ended
December 31, 1994, 1993 and 1992, respectively.
Major Customer Information
For the years ended December 31, 1994, 1993 and 1992, Toys "R" Us, Inc., a
chain of retail toy stores, accounted for approximately 27%, 24% and 31%,
respectively, of net sales. For the three years ended December 31, 1994, Wal-
Mart Stores, Inc., a chain of discount stores, accounted for approximately 10%,
9% and 12%, respectively, of net sales. No other customer accounted for more
than 10% of the Company's net sales for these periods.
F-21
Product Line Information
The Company is engaged primarily in one segment which is the design,
development, manufacture and distribution of a variety of toy products.
Geographic Information
Information with respect to legal entity net sales, operating income (loss), and
identifiable assets by geographic area for the three years ended December 31,
1994 is presented as follows (in thousands):
Year ended December 31,
----------------------------------
1994 1993 1992
---- ---- ----
Net sales:
North America $ 489,986 $ 452,444 $ 608,303
Far East 239,208 303,832 310,556
Europe and Pacific Rim 239,501 231,653 115,461
--------- --------- ----------
968,695 987,929 1,034,320
Intercompany (215,597) (257,750) (265,731)
--------- --------- ----------
$ 753,098 $ 730,179 $ 768,589
--------- --------- ----------
Operating income (loss):
North America $ (10,363) $ (55,375) $ 4,655
Far East 13,221 18,270 33,529
Europe and Pacific Rim (2,707) (19,218) 6,363
--------- --------- ----------
151 (56,323) 44,547
Intercompany 484 (591) (465)
--------- --------- ----------
$ 635 $ (56,914) $ 44,082
--------- --------- ----------
Identifiable assets:
North America $ 532,652 $ 517,531 $ 786,844
Far East 125,449 123,048 155,320
Europe and Pacific Rim 175,731 216,693 162,053
--------- --------- ----------
833,832 857,272 1,104,217
Intercompany (163,197) (142,103) (354,988)
--------- --------- ----------
$ 670,635 $ 715,169 $ 749,229
--------- --------- ----------
Intercompany Pricing
Intercompany sales are made on a basis intended to reflect the market value of
the products. Sales generated by the Company's operations in the Far East
substantially represent export sales to the Company's subsidiaries and
unaffiliated customers in North America and Europe and the Pacific Rim.
F-22
(14) Selected Quarterly Financial Data
---------------------------------
(Unaudited)
Summarized quarterly financial data for 1994 and 1993 is as follows (in
thousands, except per share data):
Quarter
--------------------------------------------
1994 First Second Third Fourth
---- ----- ------ ----- ------
Net sales $106,791 $158,454 $241,085 $246,768
Gross profit 44,221 69,439 97,584 96,460
Net income (loss) (13,375) 1,207 (8,103) [1] (12,702)
Net income (loss) applicable to
common shareholders (13,375) 582 (8,853) [1] (13,484)
Net income (loss) per common
share:
Primary (0.39) 0.02 (0.26) [1] (0.39)
Fully diluted (0.39) 0.02 (0.26) [1] (0.39)
1993
----
Net sales $100,322 $146,665 $235,251 $247,941
Gross profit 44,054 65,181 100,638 83,665
Net income (loss) (12,950) (3,530) 4,686 [2] (58,146) [3]
Net income (loss) per common
share:
Primary (0.39) (0.11) 0.14 [2] (1.68) [3]
Fully diluted (0.39) (0.11) 0.13 [2] (1.68) [3]
Note: The calculation of net income (loss) per share is prepared independently
for each of the quarters presented. Therefore, the sum of the quarterly per
share amounts in 1994 and 1993 may not necessarily equal the total for the years
because of certain transactions which occurred during the respective periods.
[1] Reflects a $4,700,000 restructuring charge related to the closure of Tyco
Italy.
[2] Reflects a $1,400,000 charge for severance in connection with reorganizing
the Company's Direct Import business.
[3] Reflects $26,814,000 of restructuring and other special charges including
restructuring costs associated with the consolidation of the Company's
German and Australian operations, the projected sale of the Company's
Italian subsidiary in 1994, as well as the merger of the Playtime and
Preschool divisions in the U.S. and Hong Kong. The special charges reflect
the write-down of obsolete tooling and write-off of other assets predicated
by management's decision in the fourth quarter to discontinue certain
products and product lines.
(15) Related Parties
---------------
Taiyo Kogyo
In April 1992, the Company acquired a 9% interest in Taiyo Kogyo Co., Ltd., the
Company's exclusive radio control vehicle manufacturer and in April 1993,
increased its investment to approximately 16%. No single manufacturer other
than Taiyo Kogyo supplies the Company with more than 10% of its products.
F-23
Schedule II
Tyco Toys, Inc.
Valuation and Qualifying Accounts and Reserves
For the three years ended December 31, 1994
(in thousands)
Balance at Charged to Balance at
Beginning Costs and Deductions End of
of Period Expenses (a) Period
---------- ---------- ----------- ----------
For the year ended December 31, 1994
Allowances on:
Accounts receivable $56,666 $69,088 $74,973 $50,781
Inventories 16,421 19,921 23,370 12,972
For the year ended December 31, 1993
Allowances on:
Accounts receivable $62,146 $52,320 $57,800 $56,666
Inventories 13,447 28,566 25,592 16,421
For the year ended December 31, 1992
Allowances on:
Accounts receivable $36,144 $54,561 $28,559 $62,146
Inventories 6,269 12,773 5,595 13,447
_______________________
(a) Amounts written-off against related assets.