<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 September 30, 1996
[ ] 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 November
7, 1996.
Common, $.01 par value....................................34,826,668 shares
Preferred Stock Series B, $.10 par value......................53,631 shares
Preferred Stock Series C, $.10 par value.....................772,800 shares
<PAGE>
TYCO TOYS, INC.
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
<TABLE>
<S> <C> <C>
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996 and 1995
and December 31, 1995 3
Consolidated Statements of Operations - For the Quarters
and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Stockholders' Equity - For the
Nine Months Ended September 30, 1996 and the Year
Ended December 31, 1995 5
Consolidated Statements of Cash Flows - For the Nine Months
Ended September 30, 1996 and 1995 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
</TABLE>
2
<PAGE>
Part I. Financial Information.
Item 1. Financial Statements.
TYCO TOYS, INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- ------------
1996 1995 1995
-------- -------- --------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 29,830 $ 13,983 $ 27,604
Receivables, net 319,422 284,620 187,503
Inventories, net 89,054 91,050 56,710
Prepaid expenses and other current assets 22,571 21,048 19,738
Deferred taxes 13,011 16,733 13,008
-------- -------- --------
Total current assets 473,888 427,434 304,563
Property and equipment, net 31,726 37,069 33,021
Goodwill, net of accumulated amortization 220,936 228,249 226,112
Deferred taxes 31,484 26,929 28,560
Other assets 21,070 21,301 22,876
-------- -------- --------
Total assets $779,104 $740,982 $615,132
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable $105,421 $134,645 $ 60,923
Current portion of long-term debt 773 930 1,053
Accounts payable 38,254 53,280 45,557
Accrued expenses and other current liabilities 132,219 117,339 93,179
-------- -------- --------
Total current liabilities 276,667 306,194 200,712
Long-term debt 147,073 147,343 147,180
Other liabilities 2,001 2,350 1,900
Stockholders' equity
Preferred stock, Series B $.10 par value, $1,050 liquidation
value per share, 1,000,000 shares authorized; 53,631,
51,291 and 52,059 shares issued and outstanding as of
September 30, 1996 and 1995 and December 31, 1995,
respectively 6 5 5
Series C Mandatorily Convertible Redeemable Preferred Stock
$.10 par value, $125 liquidation value per share, 772,800
shares authorized, issued and outstanding as of
September 30, 1996 77 - -
Common stock, $.01 par value, 75,000,000 shares authorized;
35,017,158, 34,933,158 and 35,017,158 shares issued as
of September 30, 1996 and 1995 and December 31, 1995,
respectively 350 350 350
Additional paid-in capital 441,309 346,028 347,033
Accumulated deficit (64,258) (40,172) (58,261)
Treasury stock, at cost (1,676) (1,595) (1,676)
Cumulative translation adjustment (22,445) (19,521) (22,111)
-------- -------- --------
Total stockholders' equity 353,363 285,095 265,340
-------- -------- --------
Total liabilities and stockholders' equity $779,104 $740,982 $615,132
======== ======== ========
</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 Nine Months Ended
September 30, September 30,
------------------------- -----------------------
1996 1995 1996 1995
---------- ---------- --------- --------
<S> <C> <C> <C> <C>
Net sales $256,369 $226,285 $492,727 $494,037
Cost of goods sold 143,560 130,702 278,233 285,521
---------- ---------- --------- --------
Gross profit 112,809 95,583 214,494 208,516
Marketing, advertising and promotion expenses 52,919 44,423 110,315 109,530
Selling, distribution and administrative expenses 32,441 31,666 84,389 87,494
Restructuring charge - - - 4,900
Amortization of goodwill 1,576 1,634 4,799 4,825
---------- ---------- --------- --------
Total operating expenses 86,936 77,723 199,503 206,749
---------- ---------- --------- --------
Operating income 25,873 17,860 14,991 1,767
Interest expense, net 6,247 8,410 17,087 20,359
Other (income) expense, net 357 406 (274) (3,784)
---------- ---------- --------- --------
Income (loss) before income taxes 19,269 9,044 (1,822) (14,808)
Income tax provision (benefit) 6,746 3,498 (379) (4,850)
---------- ---------- --------- --------
Net income (loss) 12,523 5,546 (1,443) (9,958)
Preferred dividends 2,838 808 4,554 2,382
---------- ---------- --------- --------
Net income (loss) applicable to common shareholders $ 9,685 $ 4,738 $ (5,997) $(12,340)
========== ========== ========= ========
Net income (loss) per common share:
Primary $ 0.28 $ 0.14 $ (0.17) $ (0.35)
Fully Diluted $ 0.22 $ 0.14 $ (0.17) $ (0.35)
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TYCO TOYS, INC.
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 1996 (unaudited)
and the Year Ended December 31, 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
Retained
Preferred Stock Common Stock Additional Earnings Treasury Stock Cumulative
---------------- ---------------- Paid -In (Accumulated ---------------- Translation
Shares Amount Shares Amount Capital Deficit) Shares Amount Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 49,055 $5 34,893,516 $349 $343,213 $(27,832) (175,590) $(1,595) $(17,908) $296,232
Issuance of restricted stock - - 42,342 - 338 - - - - 338
Exercise of stock options - - 81,300 1 328 - - - - 329
Acquisition of treasury stock - - - - - - (14,900) (81) - (81)
Preferred stock dividends 3,004 - - - 3,154 (3,200) - - - (46)
Foreign currency translation
adjustment - - - - - - - - (4,203) (4,203)
Net loss - - - - - (27,229) - - - (27,229)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 52,059 5 35,017,158 350 347,033 (58,261) (190,490) (1,676) (22,111) 265,340
Issuance of preferred stock 772,800 77 - - 92,625 - - - - 92,702
Preferred stock dividends 1,572 1 - - 1,651 (4,554) - - - (2,902)
Foreign currency translation
adjustment - - - - - - - - (334) (334)
Net loss - - - - - (1,443) - - - (1,443)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 826,431 $83 35,017,158 $350 $441,309 $(64,258) (190,490) $(1,676) $(22,445) $353,363
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TYCO TOYS, INC.
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,443) $(9,958)
Adjustments to reconcile net loss to net cash utilized by operating
activities:
Non-cash interest expense - 524
Depreciation 15,682 21,366
Amortization 7,763 7,522
Decrease in allowance for bad debts, returns, discounts and other receivable
reserves (10,749) (9,920)
Increase (decrease) in allowance for obsolescence and other inventory reserves 1,693 (2,649)
Change in assets and liabilities:
Increase in receivables (121,005) (64,918)
Increase in inventories (33,376) (23,690)
(Increase) decrease in prepaid expenses and other current assets (3,168) 4,646
Increase in deferred taxes (2,915) (5,194)
Increase in other assets (821) (836)
Increase (decrease) in accounts payable (7,516) 3,140
Increase in accrued expenses and other current liabilities 36,949 25,720
Increase in other liabilities 141 -
--------- ---------
Total adjustments (117,322) (44,289)
--------- ---------
Net cash utilized by operating activities (118,765) (54,247)
Cash Flows From Investing Activities
Disposition of property and equipment 145 -
Capital expenditures (15,418) (10,428)
Acquisition - (1,144)
--------- ---------
Net cash utilized by investing activities (15,273) (11,572)
Cash Flows From Financing Activities
Repayment of long-term debt (385) (829)
Increase in notes payable, net 44,450 56,706
Debt financing fees - (5,920)
Issuance of preferred stock 92,702 -
Issuance of common stock - 255
Preferred dividend payments (845) -
--------- ---------
Net cash provided by financing activities 135,922 50,212
--------- ---------
Effect of exchange rate changes on cash 342 (886)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 2,226 (16,493)
Cash and Cash Equivalents, Beginning of Year 27,604 30,476
--------- ---------
Cash and Cash Equivalents, End of Period $ 29,830 $ 13,983
========= =========
Cash Payments During Period For:
Interest $18,063 $22,702
Taxes 3,648 1,464
</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, 1995 which is on file with the Securities
and Exchange Commission.
(2) 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 common and common
equivalent shares outstanding during the period. Outstanding options were
determined to be anti-dilutive for all periods presented and the Company's
convertible notes and preferred securities were determined to be anti-dilutive
for the nine months ended September 30, 1996 and 1995 and were therefore
excluded from the per share calculations for those respective periods.
(3) 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 domestic 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 $82,207,000. 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 $44,495,000.
7
<PAGE>
TYCO TOYS, INC.
Notes to Consolidated Financial Statements
(unaudited)
(3) Accounting For Income Taxes (Cont'd)
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 $16,168,000 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.
(4) Receivables, net (in thousands):
September 30,
------------------- December 31,
1996 1995 1995
-------- -------- --------
Trade receivables $355,538 $315,231 $237,041
Other receivables 8,859 10,250 6,186
Less:
Doubtful accounts 5,501 6,563 6,052
Returns, markdowns, discounts
and other reserves 39,474 34,298 49,672
-------- -------- --------
$319,422 $284,620 $187,503
======== ======== ========
(5) Inventories, net (in thousands):
September 30,
------------------- December 31,
1996 1995 1995
------- ------- -------
Raw materials $14,007 $19,070 $15,483
Work-in-process 1,625 2,096 1,534
Finished goods 82,983 80,207 47,561
Less obsolescence and other
reserves 9,561 10,323 7,868
------- ------- -------
$89,054 $91,050 $56,710
======= ======= =======
(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
Preschool (formerly Tyco Playtime) units. The pre-tax restructuring charge of
$4,900,000 primarily consisted of approximately $3,000,000 in termination and
other employee benefits; $1,300,000 of facility consolidation costs and lease
termination payments; and an approximate $300,000 non-cash write-off of assets.
The program was substantially completed by December 31, 1995.
8
<PAGE>
TYCO TOYS, INC.
Notes to Consolidated Financial Statements
(unaudited)
(7) Preferred Offering
On June 28, 1996, the Company received net proceeds of $92,702,000 after fees
and expenses from the sale of 772,800 shares of Series C Mandatorily Convertible
Redeemable Preferred Stock (the Preferred Stock). Dividends are payable
quarterly commencing October 1, 1996 at a rate of 8 1/4% per annum. The net
proceeds were used to retire certain short-term indebtedness and for working
capital purposes. Depositary Shares, each representing one-twenty-fifth of a
share of Preferred Stock, were sold as part of the Preferred Stock offering at
an issue price of $5 per share. Each of the 19,320,000 Depositary Share issued
will mandatorily convert into 1.111 shares of the Company's Common Stock on July
1, 2000 unless previously converted by the holder or redeemed by the Company.
Holders may convert each Depositary Share into 0.8197 of a share of the
Company's Common Stock at any time prior to July 1, 2000. The Preferred Stock is
not redeemable by the Company prior to July 1, 1999. At that date until July 1,
2000, the Company may redeem the Preferred Stock and therefore the Depositary
Shares in whole or in part. Upon such redemption, each holder will receive in
exchange for each Depositary Share, the greater of (i) the number of shares of
the Company's Common Stock equal to the quotient of (a) the sum of (1) $5.103 at
July 1, 1999 declining to $5.00 at July 1, 2000 and (2) all accrued and unpaid
dividends thereon for each Depositary Share called divided by (b) the current
market price, as defined, of a share of the Company's Common Stock as of the
redemption date and (ii) 0.8197 of a share of the Company's Common Stock.
(8) Legal Proceedings
Italian Litigation
In 1994, court action was initiated against the Company in Milan, Italy by a
plaintiff who is the former managing director of the Company's Italian
subsidiary; the claims alleged breach of a letter of intent for the sale of the
subsidiary. In May 1996, the Company received a favorable ruling in this
litigation, and the Milan Tribunal assessed damages, certain costs, and
attorney's fees against the plaintiff. In the opinion of the management and its
outside counsel any appeal of this decision is not likely to have a material
adverse impact on the Company's earnings, financial condition or liquidity.
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)
(8) Legal Proceedings (cont'd)
Environmental Litigation
Tyco Industries, a subsidiary of the Company, has been a party to three matters
arising out of waste hauled by a transporter to various sites, including the
GEMS Landfill. Two of the matters have been settled for monetary amounts that
were not material to Tyco Industries. The third matter, a claim by the New
Jersey Department of Environmental Protection for a share of remediation costs
at a different site in Sewell, New Jersey, is still pending. The Company
believes that there are meritorious factual and legal defenses to this claim and
that its share of a negotiated settlement would not be material to the Company.
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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
The Company markets its toys through three separate groups: Domestic,
International and Tyco Preschool. Net sales for the quarter and nine months
ended September 30, 1996 were $256,369,000 and $492,727,000, respectively,
compared to $226,285,000 and $494,037,000, respectively, for the same periods
last year. The consolidated decrease in 1996 nine month sales was primarily
attributable to the discontinuance of certain 1995 product categories, in
particular, action figures, small dolls and videos in conjunction with the
Company's focus on core product lines. Sales for the Company's Domestic unit
were $123,795,000 and $270,905,000 for the quarter and nine months ended
September 30, 1996, respectively, compared to $108,637,000 and $273,389,000 in
the prior year. Sales increases in boys' toys, activity toys and Tyco
VideoCam(TM) contributed to the majority of the sales increase in the quarter.
The decrease in sales for the nine month period was primarily attributable to
the discontinued product categories described above. International sales
increased $8,714,000 to $87,290,000 for the comparable three month period of
1996, but decreased $4,526,000 to $152,533,000 for the 1996 nine month period.
The increase in sales for the three months ended September 30, 1996 compared to
the same period in the prior year was primarily the result of increased sales in
Australia and the United Kingdom. The reduction over the nine month period
reflects the discontinuance of certain action figure categories in 1996.
Preschool sales were $5,914,000 and $6,381,000 higher than 1995 for both the
third quarter and nine month periods, respectively, reflecting strong sales of
the Sesame Street(R) product line, in particular, Tickle Me Elmo(TM). As part of
the Company's 1995 restructuring plan, the marketing and sales responsibility of
certain non-preschool products were transferred from the Preschool unit to the
Company's Domestic operations. Approximately $11,000,000 in sales of these
transferred non-preschool products were included in the Company's 1996 Domestic
operating results.
Gross profit for the quarter and nine months ended September 30, 1996 was
$112,809,000 and $214,494,000, respectively (44.0% and 43.5% of net sales),
compared to $95,583,000 and $208,516,000, respectively (42.2% of net sales), for
the comparable 1995 periods. Gross profit as a percent of net sales in the
Company's Domestic unit decreased when compared to 1995 by approximately 2.8% in
the quarter and 2.1% for the nine months ended September 30, 1996 primarily due
to close-outs and product mix. Gross profit margins increased in both the
International and Preschool units. International margins as a percent of sales
improved by 2.6% and 3.6% for the third quarter and nine months ended September
30, 1996, respectively, reflecting improved performance and product mix
particularly in Europe. Preschool margins improved by more than 13% and 11% in
1996 compared to both the three and nine month periods ended September 30, 1995.
Approximately one-third of the year-to-date increase is attributable to reduced
depreciation and the remainder is due to an improved product mix resulting from
new product introductions including two television-promoted items and the
exclusion of non-preschool products from the 1996 results.
11
<PAGE>
Total operating expenses for the quarter and nine months ended September 30,
1996 were $86,936,000 and $199,503,000, respectively, compared to $77,723,000
and $206,749,000, respectively, for the same periods last year. During the
second quarter of 1995, the Company adopted a restructuring program focused on
reducing overhead costs of its European, United Kingdom and Tyco Preschool
(formerly Tyco Playtime) subsidiaries. The related pre-tax restructuring charge
of $4,900,000 primarily consisted of approximately $3,000,000 in termination and
other employee benefits; $1,300,000 of facility consolidation costs and lease
termination payments; and an approximate $300,000 non-cash write-off of assets.
The program was substantially completed by December 31, 1995. On a consolidated
basis, the increase in operating expenses during the three months ended
September 30, 1996 compared to 1995 was primarily the result of volume-related
marketing expenses. Excluding the restructuring charge of $4,900,000, operating
expenses were reduced by $2,346,000 for the nine months ended September 30,
1996. In the Domestic business unit, operating expenses were comparable to 1995
in relation to the changes in sales volume for the three and nine month periods
ended September 30, 1996. For the three and nine month periods ended September
30, 1996, operating expenses in the International business unit, exclusive of
the restructuring charge, decreased by approximately 2% and 1% as a percent of
sales, respectively, reflecting the positive impact of the Company's 1995
restructuring program. Operating expenses in the Preschool unit increased by
approximately $2,243,000 and $1,674,000, respectively, for the three and nine
months ended September 30, 1996, primarily reflecting the increased sales volume
and the timing of marketing-related expenses on shipments of television-promoted
items.
Interest expense, net, for the quarter and nine months ended September 30, 1996
was $6,247,000 and $17,087,000, respectively, compared to $8,410,000 and
$20,359,000, respectively, for the same periods last year. The decrease reflects
substantially lower average borrowings as a result of the application of
proceeds from the preferred stock offering completed in June 1996. Total average
borrowings for the nine months ended September 30, 1996 were $189,677,000
compared to total average borrowings of $221,421,000 for the first nine months
of 1995. The average borrowing rates for both 1996 and 1995 were 10.9%.
Excluding long-term debt, average short-term borrowings were $41,738,000 and
$75,009,000 during the first nine months of 1996 and 1995, respectively.
Included in other income for 1996 is a net foreign currency gain of $384,000
compared to a net gain of $1,341,000 in 1995. The prior year also included a
pre-tax profit of approximately $2,500,000 from the sale of the Company's
distribution rights for the Kidsongs(R) music video line.
The Company recorded an income tax provision of $6,746,000 for the quarter ended
September 30, 1996 compared to a provision of $3,498,000 for the same period
last year, reflecting a slightly lower overall effective tax rate in 1996
applied to the higher consolidated pre-tax profit. For the nine month periods, a
tax benefit of $379,000 was recorded for 1996 compared to a benefit of
$4,850,000 for 1995 due to the significantly lower pre-tax loss in 1996.
12
<PAGE>
In July 1996, the Internal Revenue Service completed their examination of the
consolidated federal income tax returns of Tyco Toys, Inc. for the fiscal years
ended December 31, 1990 through December 31, 1992. The resolution of this
examination was not material to the Company. In addition, the consolidated
federal income tax return of Tyco Toys, Inc. for the fiscal year ended December
31, 1993 is currently subject to examination. 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.
13
<PAGE>
Financial Condition and Liquidity
Nine Months Ended September 30, 1996
For the nine months ended September 30, 1996, cash and cash equivalents
increased $2,226,000 to $29,830,000. Cash provided from financing activities
included $92,702,000 in net proceeds from the issuance of Series C Mandatorily
Convertible Redeemable Preferred Stock on June 28, 1996 (see note 7 of the Notes
to Consolidated Financial Statements). The net proceeds were used to retire
approximately $56,000,000 in short-term bank borrowings, with the remainder
utilized for general corporate purposes. Cash utilized by operating activities
of $118,765,000 included the loss for the nine months ($1,443,000), and the
funding of seasonally-related increase in receivables ($131,754,000) and
inventories ($31,683,000), offset by the increase in accruals ($29,433,000).
Capital expenditures were $15,418,000 for the nine months ended September 30,
1996.
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, borrowings available under its
existing credit facilities, and proceeds from potential equity or debt
offerings. The Company believes that its cash balances, existing credit
facilities and internally-generated funds will provide adequate financing for
its current and foreseeable levels of operation.
Credit Facility
During the fourth quarter of 1995, the Company was not in compliance with
certain financial covenants under its principal credit facilities. The Company
received waivers from General Electric Capital Corporation and affiliates and
amended the credit facilities to reflect revisions to its financial covenants.
As a result of the amendment, the interest rate on the facilities was increased
by .25% beginning in January 1996. However on October 28, 1996, the facilities
were further amended to rescind the .25% interest rate adjustment.
Dividends
The Company's credit facilities restrict the Company's ability to pay cash
dividends on capital 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 8 1/4% Series C Mandatorily Convertible Redeemable
Preferred Stock, the 10.125% Senior Subordinated Notes and the 7% Convertible
Subordinated Notes also place limitations on the payment of cash dividends. The
Company during the nine months of 1996 and 1995 issued additional shares of
Series B Preferred Stock in lieu of cash dividends valued at $1,651,000 and
$2,382,000, respectively. Additionally, during the third quarter of 1996, the
Company, as permitted, commenced the payment of cash dividends on its Series B
Preferred Stock aggregating $845,000. On October 1, 1996 the Company also paid
in cash $2,058,000 of accrued dividends on its Series C Preferred Stock.
14
<PAGE>
Part II. Other Information.
Item 1. Legal Proceedings.
Reference is made to note 8 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 Nine Months Ended September 30, 1996 and 1995.
(b). Reports on Form 8-K
None
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: November 11, 1996 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 nine
months ended September 30, 1996 and 1995. 17
17
<PAGE>
Exhibit 11
TYCO TOYS, INC.
Computation of Income (Loss) Per Share
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarters Ended Nine Months Ended
September 30, September 30,
---------------------- ---------------------
1996 1995 1996 1995
--------- --------- -------- ---------
<C> <C> <C> <C> <C>
Primary Income (Loss) Per Share:
1. Net income (loss) $12,523 $ 5,546 $(1,443) $ (9,958)
2. Less preferred dividends 2,838 808 4,554 2,382
--------- --------- -------- ---------
3. Net income (loss) applicable to common shareholders $ 9,685 $ 4,738 $(5,997) $(12,340)
--------- --------- -------- ---------
4. Weighted average shares outstanding 34,827 34,803 34,827 34,774
5. Add additional shares issuable upon the assumed exercise
of outstanding stock options * - - - -
--------- --------- -------- ---------
6. Adjusted weighted average shares outstanding 34,827 34,803 34,827 34,774
--------- --------- -------- ---------
7. Net income (loss) per share (3 / 6) $ 0.28 $ 0.14 $ (0.17) $ (0.35)
========= ========= ======== =========
Fully Diluted Income (Loss) Per Share:
8. Line 3 above $ 9,685 $ 4,738 $(5,997) $(12,340)
9. Add back preferred dividends (line 2) 2,838 808 4,554 2,382
10. Add back interest, net of tax, on assumed conversion of
the Company's 7% Convertible Subordinated Notes 208 165 547 535
--------- --------- -------- ---------
11. Adjusted net income (loss) $12,731 $ 5,711 $ (896) $ (9,423)
--------- --------- -------- ---------
12. Weighted average shares outstanding (line 4) 34,827 34,803 34,827 34,774
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 1,603 1,549 1,603 1,515
15. Add additional shares issuable upon assumed
conversion of preferred shares 22,431 5,373 11,235 5,294
--------- --------- -------- ---------
16. Adjusted weighted average shares outstanding 58,861 41,725 47,665 41,583
--------- --------- -------- ---------
17. Net income (loss) per share (11/16) ** $ 0.22 $ 0.14 $ (0.02) $ (0.23)
========= ========= ======== =========
</TABLE>
* For the calculation of income (loss) per share, the inclusion of the assumed
exercise of options is not dilutive for the periods presented and, therefore,
such assumed exercise is excluded from the per share calculations.
** For the nine months ended September 30, 1996 and 1995, fully diluted loss per
share amounts are not presented in the Consolidated Statement of Operations
since the results are anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000786130
<NAME> TYCO TOYS INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 29,830
<SECURITIES> 0
<RECEIVABLES> 364,397
<ALLOWANCES> (44,975)
<INVENTORY> 89,054
<CURRENT-ASSETS> 473,888
<PP&E> 147,587
<DEPRECIATION> (115,861)
<TOTAL-ASSETS> 779,104
<CURRENT-LIABILITIES> 276,667
<BONDS> 142,534
92,702
53,313
<COMMON> 295,727
<OTHER-SE> (88,379)
<TOTAL-LIABILITY-AND-EQUITY> 779,104
<SALES> 492,727
<TOTAL-REVENUES> 492,727
<CGS> 278,233
<TOTAL-COSTS> 199,503
<OTHER-EXPENSES> (274)
<LOSS-PROVISION> 2,631
<INTEREST-EXPENSE> 17,087
<INCOME-PRETAX> (1,822)
<INCOME-TAX> (379)
<INCOME-CONTINUING> (1,443)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,443)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
