<PAGE>
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1995
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----- -----
Commission File Number 1-9357
------
TYCO TOYS, INC.
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3319358
------------------------ -------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
6000 Midlantic Drive, Mt. Laurel, New Jersey 08054
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (609) 234-7400
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----- -----
Number of shares outstanding of each class of Registrant's Stock as of July 31,
1995
Common, $.01 par value..................................... 34,789,226 shares
Preferred, $.10 par value.................................. 51,291 shares
<PAGE>
TYCO TOYS, INC.
FORM 10-Q
JUNE 30, 1995
INDEX
Part I. Financial Information Page
------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1995 and 1994
and December 31, 1994 3
Consolidated Statements of Operations - For the Quarters
and Six Months Ended June 30, 1995 and 1994 4
Consolidated Statements of Stockholders' Equity - For the
Six Months Ended June 30, 1995 and the Year
Ended December 31, 1994 5
Consolidated Statements of Cash Flows - For the Six Months
Ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Part II. Other Information
---------------------------
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
2
<PAGE>
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
TYCO TOYS, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30,
--------------------- December 31,
1995 1994 1994
--------- --------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents $ 14,387 $ 18,300 $ 30,476
Receivables, net 189,159 195,713 211,400
Inventories, net 87,641 111,605 66,284
Prepaid expenses and other current assets 22,025 23,472 24,389
Deferred taxes 17,271 17,636 17,231
-------- -------- --------
Total current assets 330,483 366,726 349,780
Property and equipment, net 42,637 52,551 47,240
Goodwill, net of accumulated amortization 229,420 234,258 231,292
Deferred taxes 30,288 25,635 23,732
Other assets 21,984 18,757 18,591
-------- -------- --------
Total assets $654,812 $697,927 $670,635
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Notes payable $ 87,337 $108,985 $ 77,831
Current portion of long-term debt 1,065 1,712 1,165
Accounts payable 53,092 46,482 51,325
Accrued expenses and other current liabilities 83,701 74,293 95,107
-------- -------- --------
Total current liabilities 225,195 231,472 225,428
Long-term debt 147,590 147,174 146,851
Other liabilities 2,342 1,449 2,124
Stockholders' equity
Preferred stock, $.10 par value, $1,050 liquidation value
per share, 1,000,000 shares authorized; 50,535, 47,619 and
49,055 shares issued and outstanding as of June 30, 1995
and 1994 and December 31, 1994, respectively 5 5 5
Common stock, $.01 par value, 75,000,000
shares authorized; 34,959,216, 34,852,316 and
34,893,516 shares issued as of June 30, 1995
and 1994 and December 31, 1994, respectively 349 348 349
Additional paid-in capital 344,920 342,143 343,213
Accumulated deficit (44,910) (5,495) (27,832)
Treasury stock, at cost (1,595) (1,595) (1,595)
Cumulative translation adjustment (19,084) (17,574) (17,908)
-------- -------- --------
Total stockholders' equity 279,685 317,832 296,232
-------- -------- --------
Total liabilities and stockholders' equity $654,812 $697,927 $670,635
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TYCO TOYS, INC.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $151,692 $158,454 $267,752 $265,245
Cost of goods sold 87,862 89,015 154,819 151,585
-------- -------- -------- --------
Gross profit 63,830 69,439 112,933 113,660
Marketing, advertising and promotion 36,239 34,201 65,107 64,464
Selling, distribution and administrative expenses 28,429 28,324 55,828 56,220
Restructuring charge 4,900 - 4,900 -
Amortization of goodwill 1,598 1,632 3,191 3,152
-------- -------- -------- --------
Total operating expenses 71,166 64,157 129,026 123,836
-------- -------- -------- --------
Operating income (loss) (7,336) 5,282 (16,093) (10,176)
Interest expense, net 6,084 7,117 11,949 13,129
Other (income) expense, net 139 (105) (4,190) (998)
-------- -------- -------- --------
Loss before income taxes (13,559) (1,730) (23,852) (22,307)
Income tax benefit (4,724) (2,937) (8,348) (10,139)
-------- -------- -------- --------
Net income (loss) (8,835) 1,207 (15,504) (12,168)
Preferred stock dividends 790 625 1,574 625
-------- -------- -------- --------
Net income (loss) applicable to common shareholders $ (9,625) $ 582 $(17,078) $(12,793)
======== ======== ======== ========
Net income (loss) per common share $(0.28) $0.02 $(0.49) $(0.37)
Weighted average number of common shares outstanding 34,762 34,677 34,760 34,676
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TYCO TOYS, INC.
Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 1995 (unaudited) and the Year Ended December
31, 1994
(in thousands, except share data)
<TABLE>
<CAPTION>
Preferred Retained
Stock Common Stock Additional Earnings
---------------- ------------------ Paid - In (Accumulated
Shares Amount Shares Amount Capital Deficit)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 - $- 34,847,316 $348 $294,499 $ 7,298
Exercise of stock options - - 46,200 1 208 -
Issuance of preferred stock 47,619 5 - - 46,995 -
Preferred stock dividends 1,436 - - - 1,511 (2,157)
Foreign currency translation adjustment - - - - - -
Net loss - - - - - (32,973)
------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 49,055 5 34,893,516 349 343,213 (27,832)
ISSUANCE OF RESTRICTED STOCK - - 40,000 - 161 -
EXERCISE OF STOCK OPTIONS - - 25,700 - 116 -
PREFERRED STOCK DIVIDENDS 1,480 - - - 1,430 (1,574)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - - - - -
NET LOSS - - - - - (15,504)
------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 50,535 $5 34,959,216 $349 $344,920 $(44,910)
============================================================================================================
Treasury Stock Cumulative
------------------- Translation
Shares Amount Adjustment Total
---------------------------------------------------------------------------------------------
Balance at December 31, 1993 (175,590) $(1,595) $(23,101) $277,449
Exercise of stock options - - - 209
Issuance of preferred stock - - - 47,000
Preferred stock dividends - - - (646)
Foreign currency translation adjustment - - 5,193 5,193
Net loss - - - (32,973)
---------------------------------------------------------------------------------------------
Balance at December 31, 1994 (175,590) (1,595) (17,908) 296,232
ISSUANCE OF RESTRICTED STOCK - - - 161
EXERCISE OF STOCK OPTIONS - - - 116
PREFERRED STOCK DIVIDENDS - - - (144)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT - - (1,176) (1,176)
NET LOSS - - - (15,504)
---------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1995 (175,590) $(1,595) $(19,084) $279,685
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TYCO TOYS, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net loss $(15,504) $(12,168)
Adjustments to reconcile net loss to net cash provided (utilized) by operating activities:
Non-cash interest expense 524 489
Depreciation 12,638 9,494
Amortization 5,237 4,086
Deferred tax benefit (6,427) (10,139)
Decrease in allowance for bad debts, returns, discounts and other
receivable reserves (20,515) (25,215)
Decrease in allowance for obsolescence and other inventory reserves (1,145) (6,234)
Change in assets and liabilities:
Decrease in receivables 41,851 54,195
Increase in inventories (22,030) (5,500)
Decrease in prepaid expenses and other current assets 4,317 4,194
Increase in other assets (1,913) (1,139)
Increase (decrease) in accounts payable 2,000 (17,260)
Decrease in accrued expenses and other current liabilities (11,082) (28,025)
-------- --------
Total adjustments 3,455 (21,054)
-------- --------
Net cash utilized by operating activities (12,049) (33,222)
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Disposition of property and equipment 700 1,200
Capital expenditures (7,551) (13,771)
Acquisition (1,144) -
-------- --------
Net cash utilized by investing activities (7,995) (12,571)
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Repayment of long-term debt (430) (7,297)
Increase in (repayment of) notes payable, net 8,967 (1,378)
Debt financing fees (5,222) -
Proceeds from issuance of preferred stock - 50,000
Proceeds from issuance of common stock 116 23
-------- --------
Net cash provided by financing activities 3,431 41,348
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 524 (9,291)
--------------------------------------- -------- --------
Net decrease in Cash and Cash Equivalents (16,089) (13,736)
Cash and Cash Equivalents, Beginning of Period 30,476 32,036
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,387 $ 18,300
======== ========
CASH PAYMENTS DURING PERIOD FOR:
Interest $ 13,174 $ 12,417
Taxes 300 282
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
TYCO TOYS, INC.
Notes to Consolidated Financial Statements
(unaudited)
(1) BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The consolidated financial statements
include the accounts of Tyco Toys, Inc. (the Company, Tyco or Tyco Toys) and
its subsidiaries. All intercompany transactions have been eliminated in
consolidation. Investments in unconsolidated joint ventures and other companies
are accounted for on the equity method or cost basis depending upon the level of
the investment and/or the Company's ability to exercise influence over operating
and financial policies. In the opinion of management, all adjustments
(consisting of a normal recurring nature) considered necessary for a fair
presentation of results for interim periods have been made. Certain items in
the prior period's financial statements have been reclassified to conform with
the current period's presentation. Due to the seasonal nature of the Company's
business, the results of operations for interim periods are not necessarily
indicative of the results for a full year. The unaudited financial statements
herein should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 1994 which is on file with the Securities
and Exchange Commission.
(2) ACCOUNTING FOR INCOME TAXES
---------------------------
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109), effective January 1, 1993. In
accordance with SFAS 109, deferred income taxes reflect the impact of temporary
differences between values recorded for assets and liabilities for financial
reporting purposes and the values utilized for measurement in accordance with
current tax laws.
Management has determined, considering all available evidence, including the
Company's history of earnings from prior years, 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 $59,483,000. 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 the total net deferred tax
assets of $47,559,000.
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.
7
<PAGE>
TYCO TOYS, INC.
Notes to Consolidated Financial Statements
(unaudited)
(3) RECEIVABLES, NET (IN THOUSANDS):
----------------
<TABLE>
<CAPTION>
June 30,
------------------ December 31,
1995 1994 1994
-------- -------- ------------
<S> <C> <C> <C>
Trade receivables $208,038 $216,197 $251,141
Other receivables 11,387 10,967 11,040
Less:
Doubtful accounts 5,485 7,057 6,312
Returns, markdowns, discounts
and other reserves 24,781 24,394 44,469
-------- -------- --------
$189,159 $195,713 $211,400
======== ======== ========
</TABLE>
During 1994, the Company wrote-off receivables and corresponding reserves
established in prior years of approximately $8,800,000 related to certain
customers.
(4) INVENTORIES, NET (IN THOUSANDS):
----------------
<TABLE>
<CAPTION>
June 30,
----------------- December 31,
1995 1994 1994
------- -------- ------------
<S> <C> <C> <C>
Raw materials $16,905 $ 26,508 $16,655
Work-in-process 2,263 2,101 1,893
Finished goods 80,300 93,183 60,708
Less obsolescence and other
reserves 11,827 10,187 12,972
------- -------- -------
$87,641 $111,605 $66,284
======= ======== =======
</TABLE>
(5) ACQUISITION
-----------
In accordance with the Purchase Agreement dated April 30, 1993, Tyco purchased
the remaining 25% interest in its Mexican subsidiary, Ensueno-Tyco, for
approximately $1,100,000. This transaction was completed in March 1995.
(6) RESTRUCTURING CHARGE
--------------------
During the second quarter of 1995, the Company adopted a restructuring program
focused on reducing overhead costs of its European, United Kingdom and Tyco
Playtime units. The restructuring program is expected to generate annual
savings in excess of $10,000,000 through a combination of job eliminations,
facility consolidation and streamlined operations. The pre-tax restructuring
charge of $4,900,000 consists of approximately $3,000,000 in termination and
other employee benefits and $1,300,000 of facility consolidation costs which
includes moving and lease termination payments as well as a $350,000 non-cash
write-off of assets. The program, including related cash payments, is expected
to be substantially complete by the end of 1995.
8
<PAGE>
TYCO TOYS, INC.
Notes to Consolidated Financial Statements
(unaudited)
(7) LEGAL PROCEEDINGS
-----------------
Italian Litigation
------------------
In 1994, 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 decision in 1993 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 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. The
liquidating Trustee has also lodged claims against the former managing director
on behalf of the subsidiary.
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's appeal of this
judgment was dismissed.
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 cases were denied
class action certification and an agreement in principle has been reached
pursuant to which the cases will be dismissed with prejudice.
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.
9
<PAGE>
TYCO TOYS, INC.
---------------
Notes to Consolidated Financial Statements
(unaudited)
Environmental Litigation
------------------------
Tyco Industries, a subsidiary of the Company, 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.
(8) NET INCOME (LOSS) PER SHARE
---------------------------
Net income (loss) per share is computed by dividing the income (loss) applicable
to common shareholders by the weighted average number of shares of common stock
and dilutive common stock equivalents outstanding during the period.
Outstanding options, convertible subordinated notes and convertible preferred
stock were determined to be anti-dilutive for the quarters and six months ended
June 30, 1995 and 1994 and were therefore excluded from the per share
calculations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS.
-----------------------------------
RESULTS OF OPERATIONS
---------------------
Net sales for the quarter and six months ended June 30, 1995 were $151,692,000
and $267,752,000, respectively, compared to $158,454,000 and $265,245,000,
respectively, for the same periods last year. Sales for the Tyco Domestic unit
increased 5.6% to $90,616,000 for the quarter and 7.4% to $164,762,000 for the
six months over the comparable periods in the prior year. Increases during the
quarter were primarily attributable to the introduction of several new toy
lines, including the Casper and Little Kiddles lines, as well as improved sales
in both Soft Toys and Radio Control. The year to date increase resulted
primarily from sales of Radio Control, Soft Toys, Dr. Dreadful products and new
product introductions. In the International division, sales for the quarter and
year to date were 16.9% and 9.7% lower, respectively, than the 1994 comparable
periods. These decreases were primarily attributable to weaker sales in Europe,
particularly in France, Germany and the United Kingdom, which more than offset
the increases in the Company's other international operations. In the Company's
Playtime unit, sales for the quarter were $2,100,000 or 11% lower than the prior
year quarter. Year to date sales for Tyco Playtime were unchanged from 1994.
Improved shipments of Sesame Street toys (5% for the quarter and 13% for the
year) were offset by reduced sales in Playtime's non-core product lines.
Gross profit as a percentage of sales for the quarter and six months ended June
30, 1995 was 42.1% and 42.2%, respectively, compared to 43.8% and 42.9%,
respectively, for the same periods in 1994. Improved domestic margins were more
than offset by lower margins generated by the Company's International and
Playtime operations. Domestic margins improved for both the quarter and year to
date, respectively, as a result of higher margin products generating the sales
increases described above. Reduced duty costs also contributed to overall
margin improvement. International margins decreased for both the quarter and
year to date primarily as a result of the weak sales performance in France,
Germany and the United Kingdom described above. Each of these markets were
negatively impacted by carryover of product from the fourth quarter of 1994. At
Tyco Playtime, delays in the expected timing of price increases coupled with
increased vendor costs contributed to the decline in margins for both the
quarter and year to date.
Operating expenses were $71,166,000 and $129,026,000 for the quarter and six
months ended June 30, 1995, respectively, compared to $64,157,000 and
$123,836,000 for the same periods in 1994. The increase for the quarter and six
months was largely attributable to a $4,900,000 pre-tax restructuring charge.
During the second quarter of 1995, the Company adopted a restructuring program
focused on reducing overhead costs of its European, United Kingdom and Tyco
Playtime units. The restructuring program is expected to generate annual
savings in excess of $10,000,000 through a combination of job eliminations,
facility consolidation and streamlined operations.
11
<PAGE>
The Company's restructuring program includes the elimination of 10% of the
Company's worldwide salaried workforce. As part of the restructuring, the
Company has consolidated the marketing and administrative functions of its
subsidiaries in Germany, France and Benelux at the Company's recently
established European Headquarters in Belgium. In the United Kingdom, the
Company will consolidate its Tyco (UK) and Matchbox (UK) operations. The
restructuring also includes a reorganization of Tyco Playtime, with its non-
preschool products and certain administrative functions being consolidated into
Tyco U.S., and the newly-named Tyco Preschool division focusing on the
profitable long-term growth of the remaining preschool business, primarily
Sesame Street(R) toy products. The reduction in workforce includes the
elimination of 72 positions in Continental Europe and the UK and 61 positions at
Tyco Playtime and Tyco U.S.
The charge primarily consists of approximately $3,000,000 in termination and
other employee benefits and $1,300,000 of facility consolidation costs which
includes moving and lease termination payments as well as a $350,000 non-cash
write-off of assets. The program, including related cash payments, is expected
to be substantially complete by the end of 1995.
Interest expense, net, for the quarter and six months ended June 30, 1995 was
$6,084,000 and $11,949,000, respectively, compared to $7,117,000 and
$13,129,000, respectively, for the same periods last year. The decrease in
interest expense for the quarter and six months ended June 30, 1995 reflects
lower domestic borrowings as a result of the Company's continuing cost
management efforts coupled with lower effective borrowing rates. Total average
borrowings for the six months ended June 30, 1995 and 1994 were $205,520,000 and
226,803,000, respectively. The average interest rate for both periods was
approximately 10%.
Reflected in other income for the six months ended June 30, 1995 is a gain of
approximately $2,500,000 resulting from the Company's sale of its distribution
rights for Kidsongs Music Videos. The sale was made in conjunction with the
Company's focus on the continued development of its core brands. Also included
in other income in 1995 are foreign currency transaction gains of $1,407,000
primarily related to the devaluation of the dollar against most European
currencies.
The Company recorded income tax benefits of $4,724,000 and $ 8,348,000 for the
quarter and six months ended June 30, 1995, respectively, compared to $2,937,000
and $10,139,000 for the same periods last year.
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.
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.
12
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
---------------------------------
Six Months Ended June 30, 1995
------------------------------
For the six months ended June 30, 1995, cash and cash equivalents decreased
$16,089,000 to $14,387,000. Cash on hand and net borrowings of $8,967,000 under
the Company's credit facilities funded the Company's cash requirements. The
requirements consisted primarily of $12,049,000 of cash utilized by operations
which include the year to date loss of $15,504,000, capital expenditures of
$7,528,000 and fees and expenses associated with the Company's New Credit
Facilities.
New Credit Facilities
---------------------
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 through
General Electric Capital Corporation. Borrowings under the New Credit
Facilities were used to refinance outstanding indebtedness under the principal
credit facility with a bank group led by NationsBank of North Carolina, N.A. and
certain other credit facilities of the Company's 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 on 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 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. For the six months ended
June 30, 1995, the Company was not in compliance with certain covenants under
the New Credit Facilities and has received a waiver from General Electric
Capital Corporation. The Company is currently negotiating an amendment to the
New Credit Facilities regarding revised financial covenants. The Company
believes that it will satisfactorily finalize an amendment to the New Credit
Facility during the third quarter.
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 its credit facilities, and proceeds from potential equity or debt
offerings. The Company believes that its existing credit facilities (when
amended) and internally-generated funds will provide adequate financing for its
current and foreseeable levels of operation.
13
<PAGE>
Dividends
---------
The New Credit Facilities restrict the Company's ability to pay cash dividends
on common stock until the Company achieves a defined level of tangible net
worth. 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 common stock dividends by the
Company.
The Company was able to issue additional shares of Preferred Stock in lieu of
cash dividends on its preferred shares. Preferred Stock dividends totalled
$1,574,000 during the first six months of 1995.
14
<PAGE>
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
-----------------
Reference is made to note 7 of the Notes to Consolidated Financial
Statements included in Part I, Item 1 of this report.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
--------
11. Statements Regarding Computation of Income (Loss) Per Share-
Quarters and Six Months Ended June 30, 1995 and 1994.
(b) Reports on Form 8-K.
-------------------
On April 5, 1995, the Company filed a current report on Form 8-K with
the Securities and Exchange Commission for the purpose of updating the
exhibits relating to certain of the Company's credit facilities.
15
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TYCO TOYS, INC.
---------------
Registrant
Date: August 14, 1995 By: /s/ Harry J. Pearce
--------------- -------------------
Harry J. Pearce
Vice Chairman,
Chief Financial Officer,
and Director
16
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
11 Statements regarding computation of income
(loss) per share for the quarters and six
months ended June 30, 1995 and 1994. 17
17
<PAGE>
Exhibit 11
TYCO TOYS, INC.
Computation of Income (Loss) Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1995 1994 1995 1994
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
PRIMARY INCOME (LOSS) PER SHARE:
1. Net income (loss) $(8,835) $ 1,207 $(15,504) $(12,168)
2. Less preferred dividends 790 625 1,574 625
------- ------- -------- --------
3. Net income (loss) applicable to common shareholders $(9,625) $ 582 $(17,078) $(12,793)
======= ======= ======== ========
4. Weighted average shares outstanding 34,762 34,677 34,760 34,676
5. Add additional shares issuable upon the assumed exercise
of outstanding stock options * - - - -
------- ------- -------- --------
6. Adjusted weighted average shares outstanding 34,762 34,677 34,760 34,676
======= ======= ======== ========
7. Net income (loss) per share (3 + 6) $ (0.28) $ 0.02 $ (0.49) $ (0.37)
======= ======= ======== ========
FULLY DILUTED INCOME (LOSS) PER SHARE:
8. Line 3 above $(9,625) $ 582 $(17,078) $(12,793)
9. Add back preferred dividends (line 2) 790 625 1,574 625
10. Add back interest, net of tax, on assumed conversion of
the Company's 7% Convertible Subordinated Notes 170 147 341 293
------- ------- -------- --------
11. Adjusted net income (loss) $(8,665) $ 1,354 $(15,163) $(11,875)
======= ======= ======== ========
12. Weighted average shares outstanding (line 4) 34,762 34,677 34,760 34,676
13. Add additional shares issuable upon the assumed exercise
of outstanding stock options* - - - -
14. Add additional shares issuable upon assumed
conversion of the Company's 7% Convertible
Subordinated Notes 1,498 1,397 1,497 1,397
15. Add additional shares issuable upon assumed
conversion of preferred shares 5,039 4,121 4,969 2,072
------- ------- -------- --------
16. Adjusted weighted average shares outstanding 41,299 40,195 41,226 38,145
======= ======= ======== ========
17. Net income (loss) per share (11+16) ** $ (0.21) $ 0.03 $ (0.37) $ (0.31)
======= ======= ======== ========
</TABLE>
* For the calculation of income (loss) per share, the inclusion of the assumed
exercise of options for the quarters ended June 30, 1995 and 1994 is anti-
dilutive and, therefore, such assumed exercise is excluded from the per
share calculations.
** Fully diluted income (loss) per share is not presented in the Consolidated
Statements of Operations as the assumed conversions of the Company's
Convertible Preferred Stock and Convertible Subordinated Notes are anti-
dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 14,387
<SECURITIES> 0
<RECEIVABLES> 219,425
<ALLOWANCES> (30,266)
<INVENTORY> 87,641
<CURRENT-ASSETS> 330,483
<PP&E> 133,543
<DEPRECIATION> (90,906)
<TOTAL-ASSETS> 654,812
<CURRENT-LIABILITIES> 225,195
<BONDS> 147,590
<COMMON> 349
0
5
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 267,752
<TOTAL-REVENUES> 267,752
<CGS> 154,819
<TOTAL-COSTS> 129,026
<OTHER-EXPENSES> (4,190)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,949
<INCOME-PRETAX> (23,852)
<INCOME-TAX> (8,348)
<INCOME-CONTINUING> (15,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,504)
<EPS-PRIMARY> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
