-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AU476BIsd4WHtzFYAf/hW3VC0S6rHZkFWQw8dUz7Hnw+8l1celVvngG7k7OdfvCm ZPCulxOJHZ8rJMImFGvE8A== 0000950109-96-001778.txt : 19960328 0000950109-96-001778.hdr.sgml : 19960328 ACCESSION NUMBER: 0000950109-96-001778 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TYCO TOYS INC CENTRAL INDEX KEY: 0000786130 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 133319358 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09357 FILM NUMBER: 96539398 BUSINESS ADDRESS: STREET 1: 6000 MIDLANTIC DR CITY: MT LAUREL STATE: NJ ZIP: 08054-1516 BUSINESS PHONE: 6092347400 MAIL ADDRESS: STREET 1: BAER MARKKS & UPHAM STREET 2: 805 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-K 1 FORM 10-K ================================================================================ 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, 1995 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 (I.R.S. Employer Identification No.) or organization) Tyco Toys, Inc. 6000 Midlantic Drive, Mt. Laurel, New Jersey (Address of principal executive offices) 08054 (Zip Code) (Registrant's Telephone number, including area code) (609)234-7400 Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered - ------------------------------------------------- --------------------------------------------------- Common Stock New York Stock Exchange 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, 1996 was $208,882,596 Numbers of shares of Common Stock outstanding as of March 22, 1996: 34,813,766 Documents Incorporated by Reference Proxy Statement for Annual Meeting of Stockholders to be held May 26, 1996 is incorporated by reference into Part III of this Form 10-K. ================================================================================ 1 Part I. Item 1. Business Tyco designs and markets, on a worldwide basis, a broad range of toy products. The Company includes Tyco Toys, Inc. (the Company, Tyco or Tyco Toys) and its direct and indirect wholly-owned subsidiaries. Principal subsidiaries include Tyco Industries Inc. (Tyco Industries), Tyco (Hong Kong) Ltd., Tyco Manufacturing Corp., Tyco Distribution Corp., Tyco Manufacturing (Europe) Inc., Tyco Funding I Corp., Tyco Funding II Corp., Tyco Toys (UK) Ltd., Matchbox Toys, Ltd., Tyco Toys (France) S.A., Tyco Toys (Canada) Inc., Tyco Toys Europe n.v., Tyco Toys (Benelux) n.v., Tyco Matchbox (Deutschland) GmbH, Tyco Toys (Espana) S.A., Tyco Preschool Toys Inc. (Tyco Preschool), Ensueno-Tyco Toys de Mexico, Tyco Services Inc., Universal Product Innovations, Inc., Tyco Toys (Switzerland) A.G., Tyco Toys GmbH and Tyco Toys (New Zealand) Pty. Ltd. Tyco owns a 75% interest in Croner-Tyco Toys Pty., Ltd., an Australian Company, and a 50% interest in Rivergate Partnership L.P., an operator of warehousing space in Portland, Oregon. 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. The Company markets its toys through three separate marketing groups: Domestic (Tyco U.S.), International, and Tyco Preschool. TYCO U.S. In 1995, Tyco's domestic sales rose approximately 3% and the U.S. division, which designs and develops most of the toys marketed by the Company around the world, improved its operating results for the second successive year. An ongoing focus on strengthening the Company's core brands and the successful introduction of new toys contributed to the improved results of this group in 1995. Radio Control ------------- Tyco maintains the largest market share in the radio control toy category. In 1995, Tyco's line featured the top selling 6.0V Jet Turbo/R/ Rebound 4x4/TM/ and the Harley-Davidson/R/ Radio Control Motorcycle. For 1996, Tyco's line will include the 6.0V Jet Turbo Dagger/TM/, a three wheeled dragster, the 6.0V Jet Turbo Samurai/TM/ racing motorcycle, the 9.6V Turbo Mutator/TM/ as well as the return of Rebound 4x4/TM/. 2 Matchbox/R/ ----------- Matchbox/R/ is among the Company's largest core brands. In 1996, Tyco is expanding this line to include Action System/TM/, a new track system featuring interconnecting, interchangeable track and traditional playsets. In 1995, the line grew by over 5% primarily as a result of the Collectibles business and the new Zero G/TM/ action track system. In addition, the Company is further developing the Matchbox Collectibles business in 1996 by adding new product to the core line of vehicles including Peterbilt/TM/ Tractor Trailer replicas and an expansion of its fire engine series. Large Dolls ----------- The Company is among the market leaders in the large doll category. In 1996, the Company will market several TV-advertised large dolls including a new version of My Newborn Nancy/TM/. Brand new for 1996 are the value-priced Baby Wiggles 'n Giggles/TM/, and Milk 'n Cookies Baby/TM/. Tyco is also expanding its line of promoted Kenya/R/ African- American dolls with Bedtime Kenya/TM/, which comes with a book featuring an African-American story, and Hairplay Fun Kenya/TM/, which allows girls to create designer hairstyles. Magna Doodle/R/ --------------- Magna Doodle/R/ continues to be the number one selling drawing toy worldwide. The Company's "try-me" packaging and second year of parent- directed advertising helped increase Magna Doodle sales in 1995. In 1995, the Company also introduced the Magna Doodle/R/ 3-in-1 Play Center, a child's table-top desk with three board surfaces for doodling, drawing and playing with building blocks. In 1996, the Color Doodler/TM/, an erasable color marker board set is being added to the line. Electric Racing --------------- Tyco continues to maintain a leading market share in the electric racing category. For 1996, the Company will feature 1995's successful Haunted Highway/TM/ race set which highlights a monster's rolling eyeball as an obstacle and Super Cliff Hangers/TM/ race sets with cars that race up a wall, upside down and through a loop. New in 1996 will be Gravity Twisting Cliff Hanger/R/ which, along with the existing race sets for 1996, will offer Tyco's faster Magnum X-3/TM/ cars. In 1996 Tyco will be introducing a new concept in racing. Combining Tyco's skills in both the radio control and racing categories, the Radio Control Speedway/TM/ features two full function radio control trucks and a racetrack layout. 3 Games ----- Tyco's core game business growth is based on the continued strength of classic 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 1996, four new games are being introduced: Pickin Chickens/TM/, an action game of collecting chicken eggs; Power Zone/TM/, an arcade-like turbo-disk shooting action game; Up for Grabs/TM/, an interactive word game; and Game Babies/TM/, a series of action games featuring miniature baby-shaped playing pieces. View-Master/R/ -------------- Tyco's View-Master/R/ line of 3-D viewers continues to hold the dominant market share in this category. In 1996, new story reels featuring Disney classics like the Hunchback of Notre Dame, 101 Dalmatians and Toy Story, along with titles based upon Flipper and Spiderman join the existing inventory of titles offered. Other Toys ---------- Girls' Toys Tyco's line of plush toys has continued to expand in 1995 led by the successful introduction of Doodle Bear/TM/. In 1996, Doodle Bear/TM/ is further expanded to include Doodle Pets/TM/ and Secret Message Doodle Bear/TM/. Two value-priced plush products, Doggie Bag Doggies/TM/, little puppies with a unique packaging concept and the Lil' Fursons/TM/ line of fluffy creatures will be added to the 1996 line. Tyco will also offer an electronic talking plush doll in 1996, Real Talkin' Bubba/TM. Tyco will be offering a new line of diecast kitchen, food and dining miniatures in 1996 called Kitchen Littles/TM/. The line is designed for girls' role-playing and is scaled to be compatible with all fashion dolls so that the products will also have a place in the fashion doll accessory market. Activity Toys Tyco's Doctor Dreadful/TM/ 'looks gross, tastes great' playsets were very successful in 1995, and an expanded line for 1996 will feature the new Doctor Dreadful MD/TM/ line of products. A more conventional cooking line is also available with Tyco's Betty Crocker/R/ Watch-It Bake/R/ Oven and 3-Minute Ice Cream Maker/TM/. In addition, Tyco's line of science and crafts sets returns in 1996. Fingernail Fun/TM/, which provides for fingernail decorating play, and Scrunch 'n Wear Minis/TM/, which allows girls to make the latest fashion hairwear, will also be joining the Fashion Magic/R/ girls' activity line. 4 Children's Electronics In 1996, Tyco will be entering a new category, Children's Electronics. The Company's proprietary product in this category is TycoVideoCam/TM/, a child's video camera. Key features of this product are its $100 retail price, which is significantly less than adult video cameras, its point- and-shoot, easy-to-use design, and its durability. Direct Import For 1996, Tyco US will be marketing a line of products offered on a letter of credit basis (direct import) which were previously sold by its Tyco Playtime division. Certain of the products are lower cost versions of Tyco's promoted brand names, for example, Matchbox/R/ or Doodle Bear/TM/. In addition, 1996 direct import products will continue to include well known dolls from the past, such as Tiny Tears/R/ and Betsy Wetsy/R/. A new line of plush toys also will be introduced in 1996 using the brand name of the successful direct marketing company, Vermont Teddy Bears/TM/. TYCO INTERNATIONAL In 1996, 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. The Company's International subsidiaries accounted for approximately 34% of 1995's consolidated sales. In order to reduce its operating costs, the Company extensively reorganized its International operations in 1995. As part of the restructuring, the Company consolidated the marketing and administrative functions of its subsidiaries in Germany, France and Benelux into the Company's newly created European Headquarters in Belgium. In the United Kingdom, the Company consolidated its Tyco and Matchbox operations. The Company is also closing its manufacturing facility located in Temse, Belgium and its distribution facility located in the United Kingdom. TYCO PRESCHOOL In 1996, new Sesame Street/R/ toys will be added to the historically popular line of Sesame Street products including new plush, talking and promotional lines. Tyco Preschool will also expand the product offering of its Looney Tunes Lovables/TM/ line, which is based on Warner Bros.' characters as toddlers. Two new Sesame Street products, 1-2-3 Melody Keys/TM/ and Tickle me Elmo/TM/, will be marketed with television advertising in 1996. During 1995, the Company also restructured its Tyco Playtime Unit whereby its non-preschool products and certain administrative functions were consolidated into Tyco U.S. As part of the program, Tyco Playtime was renamed Tyco Preschool with its focus on the profitable long-term growth of the preschool business, primarily Sesame Street/R/ toy products. In connection with this focus, Children's Television Workshop (CTW), designated the Company as its primary toy licensee in June 1995. Under the terms of the agreement, Tyco will nearly double the number of Sesame Street/R/ product categories, including the plush toy category. The Company was also awarded the rights to several additional categories including pop-up toys, figurines, talking phones, and diecast vehicles. 5 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 55% 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 $20,740,000, $17,519,000 and $19,062,000 in the years ended December 31, 1995, 1994 and 1993, 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 from inventors to market such items under agreements which provide for royalty payments to the designer or inventor for varying periods. 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 34%, 40% and 41% of the Company's sales in the three years ended December 31, 1995, 1994 and 1993, respectively. For the years ended December 31, 1995, 1994 and 1993, approximately 62%, 59% and 54%, respectively, of the Company's net sales were attributable to its ten largest customers. For the years ended December 31, 1995, 1994 and 1993, Toys "R" Us, Inc. (Toys "R" Us), a chain of retail toy stores, accounted for 25%, 27% and 24%, respectively, of Company revenues. During the three years ended December 31, 1995, Wal-Mart Stores, Inc. (Wal-Mart), a chain of discount stores, accounted for approximately 13%, 10% and 9%, 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. 6 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 1995, 1994 and 1993, the Company's expenditures for marketing, advertising and promotion were approximately 23%, 23% and 25% 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 1995, the most important of these were Tyco/R/, View- Master/R/, 9.6V Turbo/R/, Matchbox/R/, Doctor Dreadful/TM/, 6.0V Jet Turbo Rebound/TM/, Doodle Bear/TM/ and Kenya/R/, all of which are owned by the Company, and the licensed trademarks, Sesame Street/R/, Kitty Kitty Kittens/R/, Looney Tunes/R/, Magna Doodle/R/ and Harley- Davidson/R/. License agreements for certain trademarks require minimum guaranteed royalty payments over the term of the license. Reference is made to note 10 of the Notes to Consolidated Financial Statements. Competition The toy industry is highly competitive. Some of the Company's competitors are significantly 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 racing, drawing toys, and 3-D viewers. Other major product categories in which the Company holds a significant market share include diecast vehicles, plush toys, activity toys, action games and dolls. Manufacturing and Suppliers Tyco (Hong Kong) Ltd. negotiates with factories throughout the Orient for the manufacture of various Tyco products. Products obtained 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 an 18.5% ownership interest. Reference is made to note 14 of the Notes to Consolidated Financial Statements. The View-Master product line is manufactured in Beaverton, Oregon. The Matchbox product line is manufactured primarily at 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 7 with such countries. The most favored nation (MFN) status for China was extended until June 1996. 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, 1995, the Company employed approximately 2,200 people, including approximately 1,000 in various foreign countries. In the opinion of management, the Company has good working relations with its employees. Item 2. Properties The Company leases a total of 1,400,000 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 10 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 1995 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.
1995 1994 -------------- --------------- Quarter High Low High Low ------- ---- --- ---- --- First $5.750 $4.500 $9.750 $8.375 Second 7.375 4.625 9.000 6.625 Third 7.125 5.250 8.500 6.750 Fourth 5.875 4.250 8.125 5.375
Stockholders As of March 15, 1996, the number of shareholders of Tyco common stock was approximately 24,500. Dividends Total cash dividends declared on common stock during 1993 were $2,531,000. During 1994 and 1995, the Company was precluded from paying cash dividends pursuant to restrictions under its principal credit facilities. The new credit facilities entered into with General Electric Capital Corporation and affiliates on February 24, 1995 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 5 of the Notes to Consolidated Financial Statements. The terms of the Company's 6% Series B Voting Convertible Exchangeable Preferred Stock, 10.125% Senior Subordinated Notes and 7% Convertible Subordinated Notes also have limitations on the payment of dividends by the Company. The Company was required to pay stock dividends on its preferred stock. Dividends issued in shares of preferred stock in lieu of cash during 1995 and 1994 were $3,200,000 and $2,157,000, respectively. 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, ------------------------------------------------------ 1995 1994 1993 1992 1991 ---------- ---------- ---------- -------- -------- Operating Data: Net sales [1] $709,109 $753,098 $730,179 $768,589 $548,701 ======== ======== ======== ======== ======== Restructuring and other special charges [2] 8,900 4,700 28,214 2,797 6,938 Operating income (loss) (2,282) 635 (56,914) 44,082 46,277 Interest and other expense, net 25,952 32,108 26,426 13,946 19,083 -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary loss (28,234) (31,473) (83,340) 30,136 27,194 Provision (benefit) for income taxes [3] (1,005) 1,500 (13,400) 12,124 7,994 -------- -------- -------- -------- -------- Income (loss) before extraordinary item (27,229) (32,973) (69,940) 18,012 19,200 Extraordinary loss on retirement of debentures, net of tax benefit - - - - 759 -------- -------- -------- -------- -------- Net income (loss) (27,229) (32,973) (69,940) 18,012 18,441 Preferred stock dividends 3,200 2,157 - - - -------- -------- -------- -------- -------- Net income (loss) applicable to common shareholders $(30,429) $(35,130) $(69,940) $ 18,012 $ 18,441 ======== ======== ======== ======== ======== Net income (loss) per common share: Primary: Income (loss) before extraordinary loss $ (0.87) $ (1.01) $ (2.08) $ 0.60 $ 1.14 Extraordinary loss - - - - 0.04 -------- -------- -------- -------- -------- Net income (loss) $ (0.87) $ (1.01) $ (2.08) $ 0.60 $ 1.10 ======== ======== ======== ======== ======== Fully diluted: Income (loss) before extraordinary loss $ (0.87) $ (1.01) $ (2.08) $ 0.60 $ 0.97 Extraordinary loss - - - - 0.03 -------- -------- -------- -------- -------- Net income (loss) $ (0.87) $ (1.01) $ (2.08) $ 0.60 $ 0.94 ======== ======== ======== ======== ======== Dividends per common share $ - $ - $ 0.075 $ 0.10 $ - ======== ======== ======== ======== ======== Weighted average shares outstanding: Primary 34,788 34,687 33,595 29,743 18,412 ======== ======== ======== ======== ======== Fully diluted 34,788 34,687 33,595 31,127 25,152 ======== ======== ======== ======== ========
10
As of December 31, ------------------------------------------------ 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- Balance Sheet Data: Working capital $103,851 $124,352 $132,341 $212,616 $125,292 Total assets 615,132 670,635 715,169 749,229 390,338 Short-term debt 61,976 78,996 84,222 29,664 5,027 Long-term debt 147,180 146,851 179,771 198,865 91,017 Stockholders' equity 265,340 296,232 277,449 335,241 181,222
[1] See note 1 of the Notes to Consolidated Financial Statements of the Company. [2] See note 2 of the Notes to Consolidated Financial Statements of the Company. [3] See note 8 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, ----------------------------- 1995 1994 1993 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of goods sold 58.7 59.1 59.8 ----- ----- ----- Gross profit 41.3 40.9 40.2 Marketing, advertising and promotion 22.7 22.9 24.7 Selling, distribution and administrative expenses 16.8 16.4 18.5 Restructuring and other special charges 1.2 0.6 3.9 Amortization of goodwill 0.9 0.8 0.9 ----- ----- ----- Total operating expenses 41.6 40.7 48.0 ----- ----- ----- Operating income (loss) (0.3) 0.2 (7.8) Interest expense, net 4.0 4.2 3.2 Foreign exchange loss - 0.4 0.5 Other income, net (0.3) (0.3) (0.1) ----- ----- ----- Loss before income taxes (4.0) (4.1) (11.4) Provision (benefit) for income taxes (0.1) 0.2 (1.8) ----- ----- ----- Net loss (3.9)% (4.3)% (9.6)% ===== ===== =====
Results of Operations - --------------------- Year Ended December 31, 1995 vs. Year Ended December 31, 1994 The Company markets its toys through three separate groups: Domestic, International and Tyco Preschool (certain previously reported amounts have been reclassified to conform to the 1995 presentation). Net sales were $709,109,000 in 1995 compared to $753,098,000 in 1994, a decrease of $43,989,000 or 5.8%. In the Company's Domestic unit, sales increased $11,783,000 or 3.1% to $386,058,000. Sales of Radio Control products (12.3% increase), led by the new Rebound/TM/ product, Matchbox products (5.5% increase) particularly Collectibles and Drawing toys (9.6% increase), contributed to the majority of the sales growth. International sales, however, decreased in 1995 to $242,090,000 from $289,141,000 in the prior year. This decrease was primarily attributable to weaker sales in Europe, particularly in the United Kingdom, Germany, France and the Benelux Countries, which collectively represented over $50 million in reduced sales and offset increases in the Company's other International operations. The sales decrease in the United Kingdom and Benelux were primarily attributable to discontinued product lines (e.g. action figures). In Germany and France, the weak retail environment, particularly with respect to radio control and Matchbox products, together with certain inefficiencies resulting from the Company's restructuring program contributed to the sales declines. Sales of the Company's Tyco Preschool products were $84,171,000 in 1995, a $7,208,000 reduction from the 1994 level primarily as a result of reduced sales of non-Sesame Street(R) products. 12 Gross profit was $292,873,000 in 1995 compared to $307,704,000 in 1994, a decrease of $14,831,000 or 4.8%, primarily due to the reduced sales volume. Gross profit as a percentage of net sales increased marginally to 41.3% from 40.9% in 1994. Domestic margins improved by approximately 2% and International margins remained relatively unchanged. Preschool margins, however, declined by approximately 6.0%. Domestic margins improved for the year primarily as a result of reduced duty costs. Reduced margins in the Preschool business reflect increased tooling and royalty costs coupled with increased vendor costs for plastic resin. By year end 1995, resin costs had declined substantially from mid-year levels. Total operating expenses in 1995 were $295,155,000, representing an $11,914,000 improvement over the prior year despite a current year restructuring charge of $8,900,000. This reduction reflects the Company's continued cost containment efforts. On a business unit basis, Domestic operating expenses decreased slightly. Internationally, operating expenses were reduced by $12,090,000 over 1994. Approximately 70% of this reduction reflects volume-related reduced marketing costs with the remainder attributable to the Company's restructuring and streamlining initiatives. In the Preschool business, a $3,758,000 or 16% reduction in operating expenses was achieved. During the second quarter of 1995, the Company adopted a restructuring program focused on reducing the overhead costs of its European, United Kingdom and Tyco Playtime units. The restructuring program resulted in a pre-tax charge of $4,900,000 and is expected to generate annual savings in excess of $10,000,000 through the combined effect of job eliminations, facility consolidations and streamlined operations. The program included the elimination in 1995 of approximately 10% of the Company's worldwide salaried workforce. As part of the restructuring, the Company consolidated the marketing and administrative functions of its subsidiaries in Germany, France and Benelux into the Company's European Headquarters in Belgium. In the United Kingdom, the Company consolidated its Tyco and Matchbox operations. The restructuring also included a reorganization of the Tyco Playtime unit whereby its non-preschool products and certain administrative functions were consolidated into Tyco U.S. As part of the program, Tyco Playtime was renamed Tyco Preschool with its focus on the profitable long-term growth of the preschool business, primarily Sesame Street(R) toy products. The reduction in workforce included the elimination of 72 positions in Continental Europe and the United Kingdom and 61 positions at Tyco Preschool and Tyco U.S. The charge consisted primarily 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 as of December 31, 1995. During the fourth quarter of 1995, the Company adopted an additional restructuring program to further reduce European operating expenses. As part of this restructuring program, the Company will be closing its manufacturing facility located in Temse, Belgium and its distribution facility located in the United Kingdom. The program resulted in a pre-tax charge of $4,000,000 and is expected to generate annual savings primarily from reduced product costs resulting from the transfer of production to lower cost sources in the Far East and Portland. Approximately 75 positions have been eliminated as a result of this restructuring. The program is expected to be substantially completed by April 1996. The fourth quarter charge consisted primarily of termination benefits which totalled $3,500,000. As of December 31, 1995, $4,434,000 of the 1995 restructuring charges (primarily termination benefits) were reflected in accrued expenses. 13 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 10 of the Notes to Consolidated Financial Statements). Interest expense decreased $2,887,000 to $28,026,000 in 1995 due to reduced bank amendment fees and lower average borrowing rates. Total average borrowings were $235,909,000 in 1995 with an average borrowing rate of 10.9% compared to average borrowings of $235,560,000 with an average borrowing rate of 11.6% in 1994. Excluding long-term debt, average short-term borrowings were $89,501,000 and $90,015,000 in 1995 and 1994, respectively, with maximum seasonal borrowings of $170,122,000 and $156,971,000, respectively. Other income in 1995 included 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 increased focus on the continued development of its core brands. Realized and unrealized gains on foreign currency transactions were $250,000 in 1995 compared to a loss of $3,138,000 in the prior year which included an approximate $2,000,000 loss with respect to the December 1994 devaluation of the Mexican peso. As of December 31, 1995, the Company had domestic net operating loss carryforwards of $76,493,000. These net operating loss carryforwards are available to reduce the Company's future taxable income and expire in the years 2008 through 2010. 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. The reconciliation of the Company's loss before taxes for financial statement purposes to domestic taxable loss for the three years ended December 31, 1995 is as follows (in thousands):
1995 1994 1993 --------- --------- --------- Loss before taxes $(28,234) $(31,473) $(83,340) Differences between loss before taxes for financial statement purposes and taxable loss: Permanent differences (9,055) 13,768 14,608 Loss from subsidiaries not included in the consolidated tax return 24,821 18,174 42,022 Net change in temporary differences (2,510) (14,018) (30,813) Stock option deductions - - (1,264) -------- -------- -------- Taxable loss $(14,978) $(13,549) $(58,787) ======== ======== ========
Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), 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 of such benefits is more likely than not. Based on the weight of available evidence, management has concluded that it is more likely than not that the Company's future taxable income (by taxing jurisdiction) 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 carryforwards which will more likely than not be realized prior to their expiration dates. 14 Management believes that the Company's future taxable income will be at a level sufficient to fully utilize the 1995, 1994, and 1993 domestic net operating loss carryforwards and other temporary differences. Annual domestic 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, 1995 averaged approximately $2,600,000. This level of domestic taxable income, if earned each year over the carryforward period, would not be sufficient to realize approximately $13,000,000 of the tax benefits represented by the net domestic net operating loss and tax credit carryforwards and other temporary differences prior to their expiration. SFAS 109 includes the consideration of tax planning strategies in the determination of the amount of valuation allowance needed. Through the use of an appropriate tax planning strategy, which management would implement to prevent the expiration of tax benefits, an additional $3,500,000 of annual domestic taxable income would be realized. This additional taxable income, when added to the above average income, would be sufficient to fully realize the tax benefits represented by the net operating loss carryforwards and other temporary differences prior to their expiration. If no tax planning strategies were implemented, adjusted average annual domestic pre-tax income would have to grow at an average annual compound rate of 8% in order to fully realize the tax benefits prior to their expiration. Management believes that taxable income over a four-year period represents the cyclical pattern of the Company's core business. 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 1995, sales of core products approximated 70% of sales. 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 anticipates that the Company will be able to return to profitability. Management believes that the Company's domestic subsidiaries' royalty arrangements with its international subsidiaries will contribute to future domestic profitability. While management expects the Company 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 taxable income will be sufficient to utilize certain net operating loss carryforwards and other temporary differences prior to their expiration. Valuation allowances totalling $82,207,000 have been established due to management's analysis indicating that certain tax credit and net operating loss carryforwards, the use and life of 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. The Company also has general business and foreign tax credit carryovers of $625,000 and $7,101,000, respectively. The Company's future federal income tax liability can be reduced by the general business tax credits through the year 2009 and by the foreign tax credits through the year 2000. These credits expire as follows (in thousands):
Year of Expiration General Business Foreign ------------------ ---------------- ------- 1996 $ - $ 682 1997 24 1,338 1998 47 2,045 1999 112 1,883 2000 60 1,153 2001 to 2009 382 - ---- ------ $625 $7,101 ==== ======
15 Additionally, the Company's international subsidiaries had, in the aggregate, approximately $112,143,000 of tax loss carryforwards available at December 31, 1995. These tax losses are available to reduce the originating subsidiary's future taxable income and have varying expiration dates. 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. The Company reached a settlement that did not materially affect the results of operations (including realization of net operating losses 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. 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%. In the Domestic unit, sales increased $36,616,000 or 10.8% to $374,275,000. Sales of activity toys, led by the new Dr. Dreadful product line, contributed to a majority of the sales increase. A more than 30% increase in Matchbox-related product which included the Collectibles lines, 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 sales offset declines in the large doll and The Little Mermaid lines. International sales decreased slightly in 1994 to $289,141,000 from $295,354,000 in the prior year. The Company's continued worldwide focus on development of its core product lines resulted in a 50% increase in radio control and a 30% increase in View-Master sales internationally. 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 Playtime product lines were $91,379,000 in 1994, a more than $13,000,000 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. 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 an approximate 5% increase which was substantially offset by an approximate 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. Playtime 1994 gross profit as a percentage of net sales remained unchanged from 1993. 16 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 Playtime 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 10 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 non-cash in nature. 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 two separate Playtime operations in the U.S. and Hong Kong. The charges also included severance of $3,721,000 and facility consolidation costs totalling $2,255,000. The restructuring program and related cash payments were completed in 1994. Interest expense increased $7,426,000 to $30,913,000 in 1994, reflecting increased bank interest associated with greater utilization of the Company's credit facilities and the payment of bank amendment fees. Total average borrowings were $235,560,000 in 1994 with an average borrowing rate of 11.6% compared to average borrowings of $218,167,000 with an average borrowing rate of 10.3% in 1993. Excluding long-term debt, average short-term borrowings were $90,015,000 and $72,594,000 in 1994 and 1993, respectively, with maximum seasonal borrowings of $156,971,000 and $112,056,000, respectively. 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. Financial Condition and Liquidity - --------------------------------- Year Ended December 31, 1995 vs. Year Ended December 31, 1994 For the year ended December 31, 1995, cash and cash equivalents decreased $2,872,000 to $27,604,000. Non-cash depreciation and amortization of $37,021,000 and a significant reduction in receivables ($17,824,000) and inventories ($16,040,000) more than offset the $27,229,000 net loss and contributed to $40,219,000 in cash generated from operating activities. The cash provided by the Company's operating activities along with available cash balances were used primarily to fund capital expenditures of $15,959,000, to repay $17,779,000 of short-term debt, and to provide for the fees and expenses associated with the Company's New Credit Facilities. The effect of foreign exchange rate translation for the year ended December 31, 1995 accounted for a $3,849,000 reduction in cash. 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 domestic receivables securitization facility arranged through General Electric Capital Corporation (see note 5 of the Notes to Consolidated Financial Statements for a more detailed 17 discussion of these facilities). Borrowings under the New Credit Facilities were used to refinance outstanding indebtedness under the prior 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. 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 operating 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 cash 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. During the fourth quarter of 1995, the Company was not in compliance with certain financial covenants under the New Credit Facilities and received waivers from General Electric Capital Corporation and affiliates. The Company has amended the New 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 1996. At December 31, 1995 and 1994, certain foreign subsidiaries of the Company have agreements with various banks which provide for credit extensions of approximately $35,764,000 and $65,483,000, respectively. Short-term borrowings under these facilities were $15,503,000 and $24,216,000, at December 31, 1995 and 1994, respectively. 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 $7,826,000 and $15,534,000 at December 31, 1995 and 1994, respectively. 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 credit facilities with General Electric Capital Corporation, and proceeds from potential equity or debt offerings. The Company believes that its existing credit facilities as amended and internally- generated funds will provide adequate financing for its current and foreseeable levels of operation. Dividends During 1995 and 1994, the Company was precluded from paying cash dividends pursuant to restrictions under its bank credit facilities. Dividends declared on common stock were $2,531,000 in 1993. The New Credit Facilities 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 5 of the Notes to Consolidated Financial Statements. The terms of the Company's 6% Convertible Exchangeable Preferred Stock, 10.125% Senior Subordinated Notes and 7% Convertible Subordinated Notes also have limitations on the payment of dividends by the Company. During 1995, the Company was permitted to issue additional shares of Preferred Stock in lieu of cash dividends. Preferred Stock dividends valued at $3,200,000 and $2,157,000 were issued in 1995 and 1994, respectively. 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, 1995, 1994 and 1993, the Company incurred $33,016,000, $33,079,000 and $33,036,000 in royalty expense, respectively. Certain license agreements require minimum guaranteed royalty payments over the term of the license. At December 31, 1995, the Company is committed to pay total future minimum guaranteed royalties aggregating $88,204,000 which are payable as follows: 1996 - $14,726,000; 1997 - $11,660,000; 1998 - $12,067,000; 1999- $12,292,000; 2000 - $12,897,000, and thereafter - $24,562,000. 18 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 products. As of December 31, 1995, the Company was committed for future purchases aggregating $7,701,000 from its suppliers. Foreign Exchange Risk Management The primary focus of the Company's foreign exchange risk management program is to reduce earnings and cash flow 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, and various other intercompany transactions. The credit risks associated with the Company's foreign currency forward exchange contracts and options are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. Although the Company may be exposed to losses in the event of nonperformance by the counterparties, the Company does not expect such losses, if any, to be significant. At December 31, 1995, the Company had outstanding foreign currency forward exchange contracts totalling $33,141,000 to purchase U.S. dollars. In January 1996, the Company entered into an additional $32,432,000 of forward contracts which primarily provide for the purchase of U.S. dollars with foreign currencies. The principal currencies being hedged are the Belgian franc, British pound, Australian dollar and Canadian dollar. Foreign currency forward exchange contracts and options expire within twelve months. Legal Proceedings Italian Litigation In 1994, the former managing director of the Company's Italian subsidiary initiated court action against the Company in Italy, alleging breach of a letter of intent with the plaintiff for the sale of the subsidiary. The Company is awaiting the court's decision in this matter. In the opinion of management and its outside counsel, the Company has meritorious legal and factual defenses to the claims made in this litigation, and the outcome is not likely to have a material adverse impact on the Company's earnings, financial condition or liquidity. The Trustee liquidating the Italian subsidiary has also lodged claims against the former managing director on behalf of the subsidiary. 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. 19 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. New Accounting Pronouncements In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which will be adopted by the Company in 1996 as required by the statement. The Company has elected to continue to measure such compensation expense using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS 123. When adopted, SFAS 123 will not have a significant effect on the Company's financial position or results of operations but will require the Company to provide expanded disclosure regarding its stock-based-employee compensation plans. Cautionary Statement - Private Securities Litigation Reform Act of 1995 The Company desires to take full advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. For the cautionary statement intended to support any forward looking statements or projections which may be made from time to time by the Company or its officers, please refer to Exhibit 10.53 of this Annual Report on Form 10-K. 20 Item 8. Financial Statements and Supplementary Data
Page ---- Independent Auditors' Report F-1 Consolidated Balance Sheets December 31, 1995 and 1994 F-2 Consolidated Statements of Operations Years ended December 31, 1995, 1994 and 1993 F-3 Consolidated Statements of Stockholders' Equity Years ended December 31, 1995, 1994 and 1993 F-4 Consolidated Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993 F-5 Notes to Consolidated Financial Statements F-6 to F-23
21 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 1995 Annual Meeting of Stockholders of Tyco Toys, Inc. to be held May 16, 1996 is hereby incorporated by reference. 22 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, 1995 and 1994 F-2 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 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, 1995 Schedule II - Valuation and Qualifying Accounts and Reserves 28
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 Certificate of Amendment of Restated Certificate of Incorporation of the Company (10) 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) (12) 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 (8) 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 (8)
23 4.6 Agreement of Purchase dated as of July 18, 1991 between the Company, First Chicago Investment Corporation and Madison Dearborn Partners IV (5) 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 (8) 10.4 Letter of Waiver dated January 31, 1994 from NationsBank of North Carolina, N.A. and other banks to the Company (8) 10.5 Amendment Agreement and letter dated February 10, 1994 between the Company and NationsBank of North Carolina, N.A. and other banks. (8) 10.6 Lease Amendment dated August 6, 1993 between Tyco Industries, Inc. and 6000 Midlantic Associates, L.P. 10.7 Lease Amendment dated January 9, 1996 between Tyco Industries, Inc. and 6000 Midlantic Associates, L.P. 10.11 Lease dated April 2, 1993, between Whitesell Enterprises and Tyco Industries, Inc. (8) 10.12 Lease Amendments dated November 11, 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. (8) 10.15 Lease dated March 23, 1992 between GP Portland Limited Partnership I and Tyco Manufacturing Corp. (9) 10.17 Lease Agreement dated June 10, 1995 between Tyco Asia Limited and Harrison Leasing Limited for the 12th floor, World Shipping Centre, Harbour City, Hong Kong. 10.25 Employment Agreement dated as of January 24, 1994 between Tyco Industries, Inc. and Karsten Malmos (8) 10.29 Employment Agreement dated as of January 24, 1993 between Tyco Industries, Inc. and B. James Alley (8) 10.30 Agreement dated February 1, 1994 between Tyco Industries and Arnold Thaler (8) 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)
24 10.33 Agreement of Purchase dated as of April 30, 1993 between the Company and Jaime Kopchinsky (8) 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 (8) 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) 10.41 Tyco Toys, Inc. Deferred Stock Unit Plan (10) 10.42 Tyco Toys, Inc. Executive Bonus Plan (10) 10.43 Employment Agreement dated as of October 3, 1994 between Tyco Industries and Gary Baughman (8) 10.44 Employment Agreement dated July 27, 1994 between Tyco Industries and Richard E. Grey (8) 10.45 Employment Agreement dated July 27, 1994 between Tyco Industries and Harry J. Pearce (8) 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 (12) 10.47 Receivables Transfer Agreement dated February 24, 1995 among Tyco Industries, Inc., Tyco Funding Corporation I, Inc., and Tyco Funding Corporation II, Inc. (12) 10.48 Receivables Funding Agreement dated February 24, 1995 among Tyco Funding I Corporation, Tyco Funding II Corporation, Redwood Receivables Corporation and Financial Security Assurance, Inc. (12) 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. (12) 10.50 Credit Agreement dated March 13, 1995 among Tyco Toys (UK) Ltd. and Matchbox Toys (UK) Ltd. as Borrowers, and Lloyd's Bank and General Electric Capital Corporation, as Lenders. (12) 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 (12) 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)
25 10.53 Cautionary Statement; Private Securities Litigation Reform Act of 1995 11 Computation of Loss Per Share Data 22 Subsidiaries of the Company 24.1 Consent of Deloitte & Touche LLP 27 Financial Data Schedule 26 (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 for the year ended December 31, 1991, 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. (8) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, as filed with the Securities and Exchange Commission on March 30, 1995. (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. (10) Exhibits 3.1, 10.40, 10.41 and 10.42 are incorporated by reference to Exhibits A, B, C & D respectively of the Registrants Proxy Statement dated April 7, 1995, as filed with the Securities and Exchange Commission on April 10, 1995. (11) Exhibits 3.1(b), 10.51 and 10.52 are incorporated by reference to Exhibits 5.2, 5.1 and 5.3 filed by the Registrant with Form 8-K, with the Securities and Exchange Commission on May 19, 1994. (12) Incorporated by reference to Exhibits of the same number filed by the Registrant with Form 8-K with the Securities and Exchange Commission on April 10, 1995. 27 (b). Reports on Form 8-K -------------------- None. (c). Exhibits -------- See (a) (3) above. (d). Financial Statement Schedules ----------------------------- See (a) (2) above. 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, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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. Deloitte & Touche LLP Philadelphia, Pennsylvania February 7, 1996 except for note 5, as to which the date is February 15, 1996 F-1 Tyco Toys, Inc. Consolidated Balance Sheets As of December 31, 1995 and 1994 (in thousands, except share amounts)
1995 1994 ---- ---- ASSETS - ------ Current assets Cash and cash equivalents (note 1) $ 27,604 $ 30,476 Receivables, net (note 3) 187,503 211,400 Inventories, net (note 1) 56,710 66,284 Prepaid expenses and other current assets 19,738 24,389 Deferred taxes (note 8) 13,008 17,231 -------- -------- Total current assets 304,563 349,780 Property and equipment, net (note 1) 33,021 47,240 Goodwill, net of accumulated amortization (note 1) 226,112 231,292 Deferred taxes (note 8) 28,560 23,732 Other assets 22,876 18,591 -------- -------- Total assets $615,132 $670,635 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities Notes and acceptances payable (note 5) $ 60,923 $ 77,831 Current portion of long-term debt (note 6) 1,053 1,165 Accounts payable 45,557 51,325 Accrued expenses and other current liabilities (note 4) 93,179 95,107 -------- -------- Total current liabilities 200,712 225,428 Long-term debt (note 6) 147,180 146,851 Other liabilities 1,900 2,124 Commitments and contingencies (notes 8, 9 and 10) Stockholders' equity (notes 5, 6, 7 and 8) Preferred stock, $.10 par value, $1,050 liquidation value per share, 1,000,000 shares authorized; 52,059 and 49,055 shares issued and 5 5 outstanding in 1995 and 1994 Common stock, $.01 par value, 75,000,000 shares authorized; 35,017,158 and 34,893,516 shares issued in 1995 and 1994 350 349 Additional paid-in capital 347,033 343,213 Accumulated deficit (58,261) (27,832) Treasury stock, at cost (1,676) (1,595) Cumulative translation adjustment (22,111) (17,908) -------- -------- Total stockholders' equity 265,340 296,232 -------- -------- Total liabilities and stockholders' equity $615,132 $670,635 ======== ========
See accompanying notes to consolidated financial statements. F-2 Tyco Toys, Inc. Consolidated Statements of Operations For the Years Ended December 31, 1995, 1994 and 1993 (in thousands, except per share amounts)
1995 1994 1993 ---- ---- ---- Net sales $709,109 $753,098 $730,179 Cost of goods sold 416,236 445,394 436,641 -------- -------- -------- Gross profit 292,873 307,704 293,538 Marketing, advertising and promotion 160,779 172,462 180,815 Selling, distribution and administrative expenses 119,066 123,622 134,947 Restructuring charges (note 2) 8,900 4,700 28,214 Amortization of goodwill 6,410 6,285 6,476 -------- -------- -------- Total operating expenses 295,155 307,069 350,452 -------- -------- -------- Operating income (loss) (2,282) 635 (56,914) Interest expense, net 28,026 30,913 23,487 Foreign currency (gain) loss (250) 3,138 3,746 Other income, net (1,824) (1,943) (807) -------- -------- -------- Loss before income taxes (28,234) (31,473) (83,340) Provision (benefit) for income taxes (note 8) (1,005) 1,500 (13,400) -------- -------- -------- Net loss (27,229) (32,973) (69,940) Preferred stock dividends 3,200 2,157 - -------- -------- -------- Net loss applicable to common shareholders $(30,429) $(35,130) $(69,940) ======== ======== ======== Net loss per common share (notes 1, 6 and 7) $ (0.87) $ (1.01) $ (2.08) Weighted average number of common shares outstanding 34,788 34,687 33,595 Dividends per common share $ - $ - $0.075
See accompanying notes to consolidated financial statements. F-3 Tyco Toys, Inc. Consolidated Statements of Stockholders' Equity For the Years Ended December 31, 1995, 1994 and 1993 (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, 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 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 ====================================================================================================================================
See accompanying notes to consolidated financial statements. F-4 Tyco Toys, Inc. Consolidated Statements of Cash Flows For the Years Ended December 31, 1995, 1994 and 1993 (in thousands)
1995 1994 1993 ---- ---- ---- Cash Flows From Operating Activities: Net loss $(27,229) $(32,973) $(69,940) Adjustments to reconcile net loss to net cash provided (utilized) by operating activities: Restructuring charges - - 7,569 Depreciation 27,086 24,566 24,837 Amortization 9,935 7,594 6,973 Non-cash interest expense 1,066 1,468 - Deferred income tax provision (benefit) - 1,161 (14,452) Increase (decrease) in allowance for bad debts, returns, markdowns, discounts and other receivable reserves 4,943 (5,885) (5,480) Increase (decrease) in allowance for obsolescence and other inventory reserves (5,104) (3,449) 2,974 Change in assets and liabilities, net of effects from acquisitions: Decrease in receivables 17,824 18,273 14,723 Decrease in inventories 16,040 37,582 504 Decrease in prepaid expenses and other current assets 5,381 3,011 4,513 Increase in other assets (3,503) (3,957) (1,803) Decrease in accounts payable (7,121) (13,354) (3,893) Increase (decrease) in accrued expenses and other current liabilities 1,086 (16,420) (9,234) Increase (decrease) in other liabilities (185) 656 - -------- -------- -------- Total adjustments 67,448 51,246 27,231 -------- -------- -------- Net cash provided (utilized) by operating activities 40,219 18,273 (42,709) Cash Flows From Investing Activities: Disposition of property and equipment 1,005 1,433 6,319 Capital expenditures (15,959) (21,158) (29,731) Acquisitions and earnout payments (1,144) (855) (6,343) -------- -------- -------- Net cash utilized by investing activities (16,098) (20,580) (29,755) -------- -------- -------- Cash Flows From Financing Activities: Financing costs (5,694) - - Repayment of long-term debt (1,700) (30,052) (10,827) Increase in (repayment of) notes payable, net (16,079) (10,633) 52,022 Proceeds from issuance of preferred stock - 50,000 - Preferred stock issuance costs - (3,000) - Proceeds from issuance of common stock, net 329 209 22,656 Payment of cash dividends on common stock - - (3,324) -------- -------- -------- Net cash provided (utilized) by financing activities (23,144) 6,524 60,527 -------- -------- -------- Effect of exchange rate changes on cash (3,849) (5,777) (7,208) -------- -------- -------- Net Decrease in Cash and Cash Equivalents (2,872) (1,560) (19,145) Cash and Cash Equivalents, Beginning of Year 30,476 32,036 51,181 -------- -------- -------- Cash and Cash Equivalents, End of Year $ 27,604 $ 30,476 $ 32,036 ======== ======== ======== Cash Payments During Year For: Interest $ 25,031 $ 30,863 $ 21,134 Taxes 1,523 2,843 5,158
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, 1995 and 1994 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, -------------------- 1995 1994 ---- ---- Raw materials $15,483 $16,655 Work-in-process 1,534 1,893 Finished goods 47,561 60,708 Less obsolescence and other reserves 7,868 12,972 ------- ------- $56,710 $66,284 ======= =======
Advertising Media costs are 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 the remaining lease term for assets under capital leases. Property and equipment, net, consists of (in thousands):
December 31, ----------------------- 1995 1994 ---- ---- Property and equipment owned: Land and buildings, machinery, equipment, and fixtures $114,436 $116,759 Leasehold improvements 10,309 10,767 Construction in progress 8,647 9,458 -------- -------- 133,392 136,984 Less accumulated depreciation and amortization 101,801 91,352 -------- -------- Net property and equipment owned 31,591 45,632 -------- -------- Machinery, equipment, and fixtures under capitalized leases: Machinery, equipment, and fixtures 2,602 2,959 Less accumulated amortization 1,172 1,351 -------- -------- Net property under capitalized leases 1,430 1,608 -------- -------- $ 33,021 $ 47,240 ======== ========
Goodwill Costs in excess of net assets acquired are amortized on a straight-line basis over forty years. Accumulated amortization of goodwill was $29,141,000 and $22,731,000 at December 31, 1995 and 1994, respectively. Deferred Costs Patent and trademark costs are deferred and amortized over a period of eighteen months. Deferred financing costs are amortized over the term of the related indebtedness. Carrying Value of Noncurrent Assets The Company periodically evaluates the carrying value of noncurrent assets, including goodwill and other intangible assets. The determination of potential impairment in carrying value is based upon current and anticipated undiscounted operating income which the Company has determined to approximate future undiscounted cash flows. Recognition of an impairment occurs when it is probable that such estimated future operating income will be less than the current carrying value of the asset being evaluated. Measurement of the amount of impairment loss, if any, is based upon the difference between the carrying value of the asset and its estimated fair market value. The Company must adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), in 1996. Adoption of SFAS 121 is not expected to have a significant effect on the financial position or results of operations of the Company. F-7 Revenue Recognition Sales are recorded as product is shipped, free on board from point of shipment. The Company provides for defective returns and other allowances 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 foreign currency forward exchange contracts and options as a hedge against currency fluctuations. Realized and unrealized foreign currency transaction gains and losses are included in earnings when incurred, except for those relating to intercompany transactions of a long-term investment nature which are accumulated in stockholders' equity. The Company does not speculate in foreign currencies. Income Taxes The Company has 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 8). 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 Loss Per Share Net loss per share is computed by dividing the loss applicable to common shareholders by the weighted average number of common and common equivalent shares outstanding during the year. Outstanding options, and the Company's convertible notes and preferred securities were determined to be anti-dilutive for the three years ended December 31, 1995, and were therefore excluded from the per share calculations. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions. New Accounting Pronouncements In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which will be adopted by the Company in 1996 as required by the statement. The Company has elected to continue to measure such compensation expense using the method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by SFAS 123. When adopted, SFAS 123 will not have a significant effect on the F-8 Company's financial position or results of operations but will require the Company to provide expanded disclosure regarding its stock-based employee compensation plans. Reclassifications Certain previously reported amounts have been reclassified to conform to the 1995 presentation. (2) Restructuring and Other Special Charges --------------------------------------- During the second quarter of 1995, the Company adopted a restructuring program focused on reducing the overhead costs of its European, United Kingdom and Tyco Preschool (formerly Tyco Playtime) units. The restructuring program is expected to generate annual savings through the combined effect of job eliminations, facility consolidations and streamlined operations. 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. During the fourth quarter of 1995, the Company adopted an additional restructuring program to further reduce European operating expenses. As part of the restructuring program, the Company will be closing its manufacturing facility located in Temse, Belgium and its distribution facility located in the United Kingdom. The program resulted in a pre-tax charge of $4,000,000 and is expected to generate annual savings primarily from reduced product costs resulting from the transfer of production to lower cost sources in the Far East and Portland. Approximately 75 positions will be eliminated as a result of this restructuring. The program is expected to be substantially completed by April 1996. The fourth quarter charge consists primarily of termination benefits which totalled $3,500,000. As of December 31, 1995, $4,434,000 of the 1995 restructuring charges (primarily termination benefits) were reflected in accrued expenses. 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 10). 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 non-cash in nature. 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 two separate Playtime operations in the U.S. and Hong Kong. The charges also included severance of $3,721,000 and facility consolidation costs totalling $2,255,000. The restructuring program and related cash payments were completed in 1994. F-9
(3) Receivables, Net ---------------- Receivables, net, consist of (in thousands): December 31, ------------------ 1995 1994 ---- ---- Trade receivables $237,041 $251,141 Other receivables 6,186 11,040 Less: Doubtful accounts 6,052 6,312 Returns, markdowns, discounts and other reserves 49,672 44,469 ------- ------- $187,503 $211,400 ======= ======= (4) Accrued Expenses and Other Current Liabilities ---------------------------------------------- Accrued expenses and other current liabilities consist of (in thousands): December 31, ----------------- 1995 1994 ---- ---- Advertising $23,295 $24,584 Income taxes 19,498 23,586 Royalties 13,825 13,344 Compensation 7,593 5,634 Taxes other than income 4,362 4,433 Interest 4,907 6,861 Reserves for restructuring costs 4,434 460 Other 15,265 16,205 ------ ------ $93,179 $95,107 ====== =======
(5) Notes and Acceptances Payable ----------------------------- 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 domestic receivables securitization facility arranged by General Electric Capital Corporation. Borrowings under the New Credit Facilities were used to refinance outstanding indebtedness under the Company's prior principal credit facility (the Prior 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%. F-10 Under the securitization facility, Tyco Industries and Tyco Manufacturing Corporation sell substantially all of their accounts receivable to Tyco Funding I Corporation (TFC I) and Tyco Funding II Corporation (TFC II). These companies are bankruptcy remote subsidiaries of Tyco Industries and are 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 1.30%. The accounts receivable that are sold 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. At December 31, 1995, total utilization under the New Credit Facilities was $51,874,000 which included $45,420,000 in borrowings and $6,454,000 in letters of credit. 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 cash 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. During the fourth quarter of 1995, the Company was not in compliance with certain financial covenants under the New Credit Facilities and received waivers from General Electric Capital Corporation and affiliates. The Company has amended the New 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 1996. The Prior Facility between a subsidiary of the Company and a group of fifteen banks led by NationsBank of North Carolina, N.A. matured on February 24, 1995. The Prior Facility consisted of a $155,000,000 short-term revolving credit facility 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. The Company fully repaid its outstanding obligations under the Prior Facility at maturity. The Prior Facility provided for borrowings at various rates to a maximum of 3% over the prime rate. At December 31, 1994, total utilization of the Prior Facility included approximately $53,615,000 of borrowings ($20,300,000 of which represented the term-reducing facility) and $2,516,000 in letters of credit. At December 31, 1995 and 1994, certain foreign subsidiaries of the Company have agreements with various banks which provide for credit extensions of approximately $35,764,000 and $65,483,000, respectively. Short-term borrowings under these facilities were $15,503,000 and $24,216,000, at December 31, 1995 and 1994, respectively. 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 $7,826,000 and $15,534,000 at December 31, 1995 and 1994, respectively. F-11
(6) Long-Term Debt -------------- Long-term debt consists of (in thousands): December 31, -------------------- 1995 1994 ---- ---- Subordinated notes $142,534 $141,468 Mortgage 4,143 4,656 Other 1,556 1,892 ------- ------- 148,233 148,016 Less amounts due within one year 1,053 1,165 ------- ------- $147,180 $146,851 ======= =======
Subordinated notes include $126,500,000 of Senior Subordinated Notes and $16,034,000 of Convertible Subordinated Notes. The Senior Subordinated Notes mature in 2002 and bear interest at 10.125% payable on February 15 and August 15. The Notes are redeemable at the option of the Company in whole or in part after August 15, 1997, at redemption prices equal to 103.797% of the principal amount reducing annually to 100% by August 15, 2000. The Senior Subordinated Notes are guaranteed by Tyco Industries and certain of its subsidiaries. The Convertible Subordinated Notes, which are to be repaid in four equal annual payments commencing in 1998, bear interest at 7% payable on June 30 and December 31. The Notes are convertible at a price of $10 per share into approximately 1,603,000 shares of common stock of the Company at December 31, 1995. During 1995 and 1994, $1,066,000 and $1,467,691 of additional Convertible Subordinated Notes were issued in lieu of interest payments. The Company's 7.04% mortgage is secured by land and buildings having a net book value of approximately $4,457,000 at December 31, 1995. The mortgage is payable in annual installments of $478,000 and matures in 2004. Long-term debt is payable subsequent to December 31, 1995 as follows: 1996 - $1,053,000; 1997 - $1,096,000; 1998 - $4,835,000; 1999 - $4,498,000; 2000 - $4,491,000; and thereafter - $132,260,000. F-12 (7) 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, 1995, there are 764,505 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:
Range of Number Exercise Prices of Shares Per Share --------- ---------------------- Lowest Highest ------ ------- Outstanding at December 31, 1992 1,668,080 $ 4.50 - $17.00 Granted 12,000 11.50 - 12.88 Exercised (170,500) 4.50 - 4.50 Cancelled (58,020) 7.19 - 15.03 --------- ----- ----- Outstanding at December 31, 1993 1,451,560 4.50 - 17.00 --------- ----- ----- Granted 991,762 7.38 - 9.00 Exercised (46,200) 4.50 - 4.50 Cancelled (1,198,094) 7.21 - 17.00 --------- ----- ----- Outstanding at December 31, 1994 1,199,028 4.50 - 17.00 --------- ----- ----- Granted 706,009 5.63 - 7.25 Exercised (81,300) 4.50 - 4.50 Cancelled (162,566) 4.50 - 9.00 --------- ----- ----- Outstanding at December 31, 1995 1,661,171 5.63 - 17.00 ========= ===== =====
Options granted prior to 1995 are fully exercisable from the date of grant. Options granted in 1995 become excerciseable in equal installments on the first through third anniversaries of the date of grant. Of the options outstanding, 955,062 were exercisable as of December 31, 1995. In 1994, new stock options were issued subject to the surrender and cancellation of certain outstanding stock options. Long-Term Incentive Plan During 1995, the Board of Directors and shareholders 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 the authority to issue up to 2,000,000 restricted stock units (Restricted Stock Units). This Plan is designed to supplement the 1992 Non-Qualified Stock Option Plan of the Company through grants of Restricted Stock Units. Participants are 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. During 1995, the Company granted 759,000 Restricted Stock Units to senior executive managers of the Company pursuant to the Plan. The market price of the stock on the date of grant was $5.63. The aggregate fair market value of the Restricted Stock Units is being amortized to compensation expense over the restriction period. Total compensation expense reflected in the Consolidated Statements of Operations for 1995 was $464,000. During 1995, the Company issued 2,342 shares of Common Stock pursuant to the Long-Term Incentive Plan. F-13 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 net borrowings of the Company and for general corporate purposes. The Preferred Stock has an annual dividend yield of 6% which may be paid in the form of additional shares of Preferred Stock through April 15, 1996. Dividends issuable in shares of Preferred Stock in lieu of cash during 1995 and 1994 totalled $3,200,000 and $2,157,000, respectively. 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 is required to 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. The Registration Agreement, dated April 15, 1994, gives the Purchasers demand and incidental registration rights, as defined, with respect to the Preferred Stock, common stock issued upon conversion, or notes issued in an exchange for such Preferred Stock. Common Stock Dividends For the year ended December 31, 1993, the Company declared common stock dividends aggregating $2,531,000. As a result of the dividend restrictions imposed by its credit facilities, the Company was precluded from paying dividends for the years ended December 31, 1995 and 1994. The terms of the Company's Preferred Stock, 10.125% Senior Subordinated Notes and 7% Convertible Subordinated Notes also have limitations on the payment of cash dividends. (8) Income Taxes ------------ 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. 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. 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. F-14 The components of loss before income taxes consist of (in thousands):
Year ended December 31, --------------------------------------- 1995 1994 1993 ---- ---- ---- Domestic $ (3,337) $(14,539) $(42,002) Foreign (24,897) (16,934) (41,338) ------- ------ ------ $(28,234) $(31,473) $(83,340) ======= ====== ====== The provision (benefit) for income taxes consists of (in thousands): Year ended December 31, --------------------------------------- 1995 1994 1993 ---- ---- ---- Current: Federal $ - $ - $ (2,397) State - - 995 Foreign (1,005) 339 2,000 ----- --- ----- (1,005) 339 598 ----- --- --- Deferred: Federal (3,038) (127) (9,039) State - (1,327) (696) Foreign 3,038 2,615 (4,717) ----- ----- ----- - 1,161 (14,452) ----- ----- ------ Tax benefit from the exercise of employee stock options - - 454 ----- ----- ------ $(1,005) $ 1,500 $(13,400) ===== ===== ======
F-15 Income taxes recorded by the Company differ from the amounts computed by applying the statutory U.S. federal income tax rate to the loss before income taxes. The following schedule reconciles the income tax 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, ------------------------------- 1995 1994 1993 --------- --------- --------- Loss before income taxes $(28,234) $(31,473) $(83,340) ======== ======== ======== Tax benefit at the federal statutory rate (9,600) (10,701) (28,336) Tax on deemed repatriation of foreign earnings 861 3,233 1,241 State income taxes, net of the federal tax provision (benefit) - (2,567) (1,730) U.S. benefit for foreign tax credits - (798) (1,710) Impact of foreign operations 10,498 9,139 11,338 Limitation on utilization of domestic tax benefits 271 883 4,236 Deductible shutdown expenses (4,438) - - Amortization of nondeductible expenses 1,716 1,678 1,734 Other (313) 633 (173) -------- -------- -------- $( 1,005) $ 1,500 $(13,400) ======== ======== ========
The tax effects of the significant temporary differences giving rise to the Company's deferred tax assets (liabilities) for the years ended December 31, 1995, 1994 and 1993, which the adoption of SFAS 109 has required the Company to recognize, are as follows (in thousands):
1995 1994 1993 --------- --------- --------- Current: Sales and product allowances $ 3,524 $ 4,240 $ 4,790 Co-operative advertising 4,320 4,343 4,738 Receivable reserves 1,071 811 4,230 Obsolescence reserve 1,503 4,451 3,934 State temporary differences 3,195 3,307 - Other 2,865 3,551 - -------- -------- -------- 16,478 20,703 17,692 Valuation allowance (3,470) (3,472) (1,203) -------- -------- -------- $ 13,008 $ 17,231 $ 16,489 ======== ======== ======== Noncurrent: Net operating losses $ 85,337 $ 61,134 $ 48,461 State temporary differences 11,186 9,672 10,411 Foreign tax credits 7,221 6,068 5,269 Depreciation 1,517 (1,002) (1,885) Other 2,036 1,371 5,983 -------- -------- -------- 107,297 77,243 68,239 Valuation allowance (78,737) (53,511) (42,604) -------- -------- -------- $ 28,560 $ 23,732 $ 25,635 ======== ======== ========
F-16 Management believes, considering all available evidence, including the Company's history of earnings from prior years (after adjustments for nonrecurring items, restructuring charges, permanent differences, and other appropriate adjustments) and after considering appropriate tax planning strategies, it is more likely than not that the Company will generate sufficient taxable income in the appropriate carryforward periods to realize the benefit of certain net operating losses and future deductible 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 total net deferred tax assets of $41,568,000. The valuation allowances have been established due to management's analysis indicating that certain tax credit and net operating loss carryforwards, the use and life of 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. The net increase of $25,224,000 in the valuation allowance for deferred tax assets in 1995 relates primarily to foreign net operating loss carryforwards. As of December 31, 1995, the Company had domestic net operating loss carryforwards for federal income tax purposes of $76,493,000, exclusive of the Matchbox net operating loss carryforwards discussed below. These net operating loss carryforwards are available to reduce future federal taxable income and expire in the years 2008, 2009 and 2010. The Company's international subsidiaries have, in the aggregate, approximately $112,143,000 of tax loss carryforwards available at December 31, 1995. These tax losses are available to reduce the originating subsidiary's future taxable income and have varying expiration dates. The Company has general business and foreign tax credit carryovers of $625,000 and $7,101,000, respectively, at December 31, 1995. The Company's future federal income tax liability can be reduced by the general business tax credits through the year 2009 and by the foreign tax credits through the year 2000. These credits expire as follows (in thousands):
Year of Expiration General Business Foreign ------------------ ---------------- ------- 1996 $ - $ 682 1997 24 1,338 1998 47 2,045 1999 112 1,883 2000 60 1,153 2001 to 2009 382 - ---- ------ $625 $7,101 ==== ======
The Company also has nonexpiring alternative minimum tax credits totalling $1,412,000. 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. F-17 Accumulated net undistributed earnings of the Company's foreign subsidiaries included in accumulated deficit were $104,437,000 at December 31, 1995. The Company has not recognized a deferred tax liability of $26,002,000 for the undistributed earnings of its foreign subsidiaries at December 31, 1995 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 a foreign subsidiary's stock. 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. The Company reached a settlement that did 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. (9) 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. Aggregate rental expense for operating leases was $15,523,000, $14,945,000 and $14,836,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Future minimum lease commitments aggregating $65,375,000 are payable as follows: 1996 - $13,239,000; 1997 - $12,183,000; 1998 - $10,100,000; 1999 - $6,847,000; 2000 - $4,914,000 and thereafter - $18,092,000. (10) Commitments and Contingencies ----------------------------- Letters of Credit The Company was contingently liable for open letters of credit of approximately $14,280,000 at December 31, 1995. Foreign Exchange Risk Management The primary focus of the Company's foreign exchange risk management program is to reduce earnings and cash flow 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 and various other intercompany transactions. The credit risks associated with the Company's foreign currency forward exchange contracts and options are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. Although the Company may be exposed to losses in the event of nonperformance by the counterparties, the Company does not expect such losses, if any, to be significant. F-18 At December 31, 1995, the Company had outstanding foreign currency forward exchange contracts totalling $33,141,000 to purchase U.S. dollars. In January 1996, the Company entered into an additional $32,432,000 of forward contracts which primarily provide for the purchase of U.S. dollars with foreign currencies. The principal currencies being hedged are the Belgian franc, British pound, Australian dollar and Canadian dollar. Foreign currency forward exchange contracts and options expire within twelve months. 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, 1995, 1994 and 1993, the Company incurred $33,016,000, $33,079,000 and $33,036,000 in royalty expense, respectively. Certain license agreements require minimum guaranteed royalty payments over the term of the license. At December 31, 1995, the Company was committed to pay total minimum guaranteed royalties aggregating $88,204,000 which are payable as follows: 1996 - $14,726,000; 1997 - $11,660,000; 1998 - $12,067,000; 1999 - $12,292,000; 2000 - $12,897,000; and thereafter - $24,562,000. 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, 1995, the Company was committed for purchases aggregating $7,701,000 from its suppliers. Legal Proceedings Italian Litigation In 1994, the former managing director of the Company's Italian subsidiary initiated court action against the Company in Italy, alleging breach of a letter of intent with the plaintiff for the sale of the subsidiary. The Company is awaiting the court's decision in this matter. In the opinion of management and its outside counsel, the Company has meritorious legal and factual defenses to the claims made in this litigation, and the outcome is not likely to have a material adverse impact on the Company's earnings, financial condition or liquidity. The Trustee liquidating the Italian subsidiary has also lodged claims against the former managing director on behalf of the subsidiary. 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. F-19 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. (11) 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, 1995 and 1994. 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-issued 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, ------------------------------------------ 1995 1994 -------------------- -------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Publicly-issued $126,500 $114,324 $126,500 $94,400 Privately-issued 21,733 21,733 21,516 21,516
Investments - It was not practicable to estimate the fair value of privately- - ----------- held investments of $5,800,000, and $6,100,000 at December 31, 1995 and 1994, 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 had commitments under - ------------------------------------------- foreign currency forward exchange contracts in various foreign currencies totalling approximately $33,141,000 and $7,400,000 as of December 31, 1995, and 1994, respectively. Based on quoted market rates, the carrying amounts of these items approximated their fair value at December 31, 1995 and 1994. The fair value estimates presented herein were based on pertinent information available to management of the Company as of December 31, 1995 and 1994. 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 those dates and current estimates of fair value may differ significantly from the amounts presented herein. (12) Business Segment Information ---------------------------- Product Development and Packaging Design Costs The Company incurred product development and packaging design costs of approximately $20,740,000, $17,519,000 and $19,062,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Major Customer Information For the years ended December 31, 1995, 1994 and 1993, Toys "R" Us, Inc., a chain of retail toy stores, accounted for approximately 25%, 27% and 24%, respectively, of net sales. For the three years ended December 31, 1995, Wal- Mart Stores, Inc., a chain of discount stores, accounted for approximately 13%, 10% and 9%, respectively, of net sales. No other customer accounted for more than 10% of the Company's net sales for these periods. 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. F-21 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, 1995 is presented as follows (in thousands):
Year ended December 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net sales: North America $ 470,045 $ 464,751 $ 452,444 Far East 222,625 239,208 303,832 Europe and Pacific Rim 189,889 264,736 231,653 --------- --------- --------- 882,559 968,695 987,929 Intercompany (173,450) (215,597) (257,750) --------- --------- --------- $ 709,109 $ 753,098 $ 730,179 ========= ========= ========= Operating income (loss): North America $ 8,299 $ (11,240) $ (55,375) Far East 10,176 13,221 18,270 Europe and Pacific Rim (20,746) (1,830) (19,218) --------- --------- --------- (2,271) 151 (56,323) Intercompany (11) 484 (591) --------- --------- --------- $ (2,282) $ 635 $ (56,914) ========= ========= ========= Identifiable assets: North America $ 510,547 $ 525,389 $ 517,531 Far East 104,717 125,449 123,048 Europe and Pacific Rim 133,023 182,994 216,693 --------- --------- --------- 748,287 833,832 857,272 Intercompany (133,155) (163,197) (142,103) --------- --------- --------- $ 615,132 $ 670,635 $ 715,169 ========= ========= =========
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, Europe and the Pacific Rim. F-22 (13) Selected Quarterly Financial Data --------------------------------- (Unaudited) Summarized quarterly financial data for 1995 and 1994 is as follows (in thousands, except per share data):
Quarter ------------------------------------------------------------------- 1995 First Second Third Fourth - ---- ----- ------ ----- ------ Net Sales $116,060 $151,692 $226,285 $215,072 Gross profit 49,103 63,830 95,583 84,357 Net income (loss) (6,669) (8,835) [1] 5,546 (17,271) [2] Net income (loss) applicable to common shareholders (7,453) (9,625) [1] 4,738 (18,089) [2] Net income (loss) per common share (0.21) (0.28) [1] 0.14 (0.52) [2] 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) [3] (12,702) Net income (loss) applicable to common shareholders (13,375) 582 (8,853) [3] (13,484) Net income (loss) per common share (0.39) 0.02 (0.26) [3] (0.39)
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 1995 and 1994 may not necessarily equal the total for the years because of certain transactions which occurred during the respective periods. [1] Reflects a $4,900,000 restructuring charge representing the consolidations in the International and Preschool businesses. [2] Reflects a $4,000,000 restructuring charge primarily related to the closure of a manufacturing facility in Temse, Belgium. [3] Reflects a $4,700,000 restructuring charge related to the closure of Tyco Italy. (14) Related Parties --------------- Taiyo Kogyo The Company owns an 18.5% interest in Taiyo Kogyo Co., Ltd. (Taiyo Kogyo), the Company's exclusive radio control vehicle manufacturer. 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, 1995 (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, 1995 Allowances on: Accounts receivable $50,781 $67,937 $62,994 $55,724 Inventories 12,972 11,219 16,323 7,868 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
- ------------------------ (a) Amounts written-off against related assets. 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 /s/ Gary Baughman ----------------- Gary Baughman President, Chief Executive Officer, and Director March 26, 1996 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. /s/ Richard E. Grey /s/ Gary Baughman - ------------------- ----------------- Richard E. Grey Gary Baughman Chairman of the Board President, Chief Executive Officer, and Director and Director March 26, 1996 March 26, 1996 /s/ Harry J. Pearce - ------------------- Harry J. Pearce Vice Chairman, Chief Financial Officer, and Director March 26, 1996 /s/ Arnold Thaler /s/ Joel M. Handel - ----------------- ------------------ Arnold Thaler Joel M. Handel Director Director March 26, 1996 March 26, 1996 /s/ John A. Canning, Jr. /s/ David B. Golub - ------------------------ ------------------ John A. Canning, Jr. David B. Golub Director Director March 26, 1996 March 26, 1996 /s/ Jerome I. Gellman /s/ Jonathan H. Kagan - --------------------- --------------------- Jerome I. Gellman Jonathan H. Kagan Director Director March 26, 1996 March 26, 1996 /s/ Timothy J. Danis /s/ Dr. LaSalle D. Leffall, Jr. - -------------------- ------------------------------- Timothy J. Danis Dr. LaSalle D. Leffall, Jr. Director Director March 26, 1996 March 26, 1996
EX-10.6 2 LEASE AMENDMENT #6 EXHIBIT 10.6 LEASE AMENDMENT #6 This Lease Amendment made and entered into this 6th day of August, 1993, by and between 6000 Midlantic Drive Associates, L.P., hereinafter referred to as "Lessor" and Tyco Industries, Inc., hereinafter referred to as "Lessee". Whereas Lessor leased certain premises known as 6000 Midlantic Drive, Mount Laurel, New Jersey pursuant to that certain Lease Agreement dated September 21, 1992, previously amended on November 11, 1992, December 18, 1992, January 5, 1993, February 1, 1993, and June 16, 1993, the terms and conditions being more particularly described therein, and Whereas, Lessor and Lessee wish to further amend the Lease Agreement, the parties hereby agree to the following: 1. Lessee shall temporarily lease from Lessor, 2,388 square feet of space on the first floor of 8000 Midlantic Drive, Mount Laurel, New Jersey. 2. The term of this agreement shall commence on June 9, 1993 and terminate on September 30, 1993. 3. Lessee shall pay Lessor the sum of $4.00 per square foot or $796.00 per month for the use of this space. All other terms and conditions of the original agreement, as amended, shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/18/96 c:lease#6.doc - word EX-10.7 3 LEASE AMENDMENT #7 EXHIBIT 10.7 LEASE AMENDMENT #7 This Lease Amendment made and entered into this 9th day of January, 1996, by and between 6000 Midlantic Drive Associates, L.P.(the "Lessor") and Tyco Industries, Inc.(the "Lessee"). Whereas, the Lessor leased certain premises known as 6000 Midlantic Drive, Mount Laurel, New Jersey (the "Property") to the Lessee pursuant to that certain Lease Agreement dated September 21, 1992, previously amended on November 11, 1992, December 18, 1992, January 5, 1993, February 1, 1993, June 16, 1993, and August 6, 1993, the terms and conditions being more particularly described therein (the Lease Agreement and amendments shall hereinafter be collectively referred to as the "Lease Agreement"). Whereas, paragraph 24 of the Lease Agreement provides that the Lessee may terminate the Lease Agreement if, due to foreclosure or sale or otherwise, the Lessor or its affiliate ceases to be the owner of or managing agent for the Property (this option to terminate the Lease Agreement shall hereinafter be referred to as the ("Termination Option"). Whereas, the Lessor has entered into negotiations with Lehman Brothers Holdings, Inc. ("LBHI") to obtain refinancing for the Property, and LBHI has indicated that as a condition of any refinancing the Lessee must waive the Termination Option. Now therefore, the Lessor and the Lessee wish to further amend the Lease Agreement, and intending to be bound hereby agree as follows: 1. The Lessee waives the Termination Option, such that if LBHI, its successors and/or assigns, due to foreclosure or sale or otherwise, becomes the owner or managing agent of the Property, the Lease Agreement shall not be subject to termination by the Lessee due to the Lessor's loss of ownership of the Property. Accordingly, the last five (5) lines of paragraph 24 of the Lease Agreement are hereby deleted in their entirety. All other terms and conditions of the original Lease Agreement, shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/20/96 c:lease #7.doc - word EX-10.11 4 LEASE AMENDMENT #1 EXHIBIT 10.11 LEASE AMENDMENT #1 This Lease Amendment made and entered into this 2nd day of April, 1993, by and between Whitesell Enterprises, hereinafter referred to as "Lessor" and Tyco Industries, Inc. hereinafter referred to as "Lessee". Whereas Lessor leased certain premises known as 823 Eastgate Drive, Unit #5, Mount Laurel, New Jersey to Lessee, pursuant to that certain lease agreement dated December 15, 1992, the terms and conditions being more particularly described therein, and Whereas, Lessor and Lessee wish to amend the Lease Agreement, the parties hereby agree to the following: 1. The Lease Commencement Date shall be changed to reflect receipt of the Certificate of Occupancy from February 1, 1993 to March 15, 1993. The termination date of March 1, 2000, will not change. All other terms and conditions of the original agreement shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/20/96 c:lease#1e.doc - word EX-10.12 5 LEASE AMENDMENT #1 EXHIBIT 10.12 LEASE AMENDMENT #1 This Lease Amendment made and entered into this 11th day of November, 1992, by and between 6000 Midlantic Drive Associates, L.P., hereinafter referred to as "Lessor" and Tyco Industries, Inc., hereinafter referred to as "Lessee". Whereas, Lessor and Lessee have entered into a Lease Agreement for the premises at 6000 Midlantic Drive, Mount Laurel, New Jersey dated September 21, 1992, the terms and conditions more particularly described therein, and Whereas, Lessor and Lessee wish to amend the Lease Agreement, the parties hereby agree to the following: 1. Lessee wishes to exercise its option, as indicated in Paragraph 43 - Option on Additional Space, to include 4,397 square feet located on the second floor, North Building, bringing the total square footage to 110,216 square feet. 2. At the time of occupancy the rental rate shall change according to the following schedule:
SQUARE RENTAL MONTHLY TERM FOOTAGE RATE RENTAL - ---------------------- ------- ---------- ----------- 3/01/93-3/01/94 110,216 $10.25 psf $ 94,142.83 3/01/94-3/01/95 110,216 $11.00 psf $101,031.33 3/01/95-3/01/96 110,216 $11.75 psf $107,919.83 3/01/96-3/01/97 110,216 $12.50 psf $114,808.33 3/01/97-3/01/98 110,216 $13.25 psf $121,696.83 3/01/98-3/01/99 110,216 $14.00 psf $128,585.33 3/01/99-3/01/00 110,216 $14.75 psf $135,473.83
All other terms and conditions of the original Agreement shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/18/96 c:lease #1.doc - word EXHIBIT 10.12 LEASE AMENDMENT #2 This Lease Amendment made and entered into this 18th day of December, 1992, by and between 6000 Midlantic Drive Associates, L.P., hereinafter referred to as "Lessor" and Tyco Industries, Inc., hereinafter referred to as "Lessee". Whereas, Lessor and Lessee have entered into a Lease Agreement for the premises at 6000 Midlantic Drive, Mount Laurel, New Jersey dated September 21, 1992, subsequently amended by Lease Amendment #1 on November 11, 1992, the terms and conditions more particularly described therein, and Whereas, Lessor and Lessee wish to further amend the Lease Agreement, the parties hereby agree to the following: 1. The square footage of the Mail Room on the first floor, North Tower, shall be reduced to 1,020 square feet to allow for the Telephone Room to be leased to others. The total area commitment by Lessee shall therefore be reduced to 109,487 square feet. 2. At the time of occupancy the rental rate shall change according to the following schedule:
SQUARE RENTAL MONTHLY TERM FOOTAGE RATE RENTAL - ---------------------- ------- ---------- ----------- 3/01/93-3/01/94 109,487 $10.25 psf $ 94,520.15 3/01/94-3/01/95 109,487 $11.00 psf $100,363.08 3/01/95-3/01/96 109,487 $11.75 psf $107,206.02 3/01/96-3/01/97 109,487 $12.50 psf $114,048.96 3/01/97-3/01/98 109,487 $13.25 psf $120,891.90 3/01/98-3/01/99 109,487 $14.00 psf $127,734.83 3/01/99-3/01/00 109,487 $14.75 psf $134,577.77
3. The pro rate share shall be adjusted to reflect this change in square footage from 64.13% to 63.71%. All other terms and conditions of the original agreement, as amended, shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/18/96 c:lease #2.doc - word EXHIBIT 10.12 LEASE AMENDMENT #3 This Lease Amendment made and entered into this 25th day of January, 1993, by and between 6000 Midlantic Drive Associates, L.P., hereinafter referred to as "Lessor" and Tyco Industries, Inc., hereinafter referred to as "Lessee". Whereas, Lessor and Lessee have entered into a Lease Agreement for the premises located at 6000 Midlantic Drive, Mount Laurel, New Jersey dated September 21, 1992, subsequently amended by Lease Amendment #1 on November 11, 1992 and Lease Amendment #2 on December 18, 1992, the terms and conditions being more particularly described therein, and Whereas, Lessor and Lessee wish to further amend the Lease Agreement, the parties hereby agree to the following: 1. As of January 1, 1993, Lessee's lease obligation shall be increased by 17,101 square feet from 65,256 square feet to 82,357 square feet reflecting the occupancy of Suite 400 North and the mailroom located on the first floor of the North Tower. The additional 17,101 square feet shall be leased at a rental rate of $10.25 per square foot or $14,607.10 per month net of operating expenses for January and February. All other terms and conditions of the original lease agreement shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/18/96 c:lease #3.doc - word EXHIBIT 10.12 LEASE AMENDMENT #4 This Lease Amendment made and entered into this 1st day of February, 1993, by and between 6000 Midlantic Drive Associates, L.P., hereinafter referred to as "Lessor" and Tyco Industries, Inc., hereinafter referred to as "Lessee". Whereas Lessor leased certain premises known as 6000 Midlantic Drive, Mount Laurel, New Jersey pursuant to that certain lease agreement dated September 21, 1992, previously amended by Lease Amendment #1 on November 11, 1992, Lease Amendment #2 on December 18, 1992 and Lease Amendment #3 on January 5, 1993, the terms and conditions being more particularly described therein, and Whereas, Lessor and Lessee wish to further amend the Lease Agreement, the parties hereby agree to the following: 1. As of January 1, 1993, Lessee's lease obligation shall be increased by 2,613 square feet for the temporary use of space occupied on the lower level of the four story tower formerly known as Midlantic Bank's "Executive Dining Rooms". The rent for this space shall be $4,420.33 per month for each month that Lessee occupies the space and until such time as Lessee returns same to Lessor in good clean condition except for normal wear and tear. All other terms and conditions of the original agreement, as amended, shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/18/96 c:lease #4.doc - word
EX-10.14 6 LEASE AMENDMENT #5 EXHIBIT 10.14 LEASE AMENDMENT #5 This Lease Amendment made and entered into this 16th day of June, 1993, by and between 6000 Midlantic Drive Associates, L.P., hereinafter referred to as "Lessor" and Tyco Industries, Inc., hereinafter referred to as "Lessee". Whereas Lessor leased certain premises known as 6000 Midlantic Drive, Mount Laurel, New Jersey pursuant to that certain Lease Agreement dated September 21, 1992, previously amended by Lease Amendment #1 on November 11, 1992, Lease Amendment #2 on December 18, 1992, Lease Amendment #3 on January 5, 1993, and Lease Amendment #4 on February 1, 1993, the terms and conditions being more particularly described therein, and Whereas, Lessor and Lessee wish to further amend the Lease Agreement, the parties hereby agree to the following: In accordance with the current and projected occupancy plan, Lessee's obligation shall be as follows:
A. 3/01/93-3/05/93 Existing 82,357 $10.25 = $ 70,346.60 B. 3/05/93-4/01/93 3rd Flr N 7,752 $10.25 (Partial) Total A+B = $ 76,968.10 C. 4/01/93-5/07/93 6th Flr N 5,540 $10.25 Total A+B+C = $ 81,700.18 D. 5/07/93-6/18/93 2nd Flr N 4,397 $10.25 Total A+B+C+D = $ 85,455.95 E. 6/18/93-2/01/94 3rd Flr N 8,541 $10.25 Total A+B+C+D+E = $ 92,751.39 F. 2/01/94-3/01/94 3rd Flr S 11,927 $10.25 Total A+B+C+D+E+F = $102,939.04 G. 3/01/94-3/01/95 All Above 120,514 $11.00 = $110,471.17 3/01/95-3/01/96 All Above 120,514 $11.75 = $118,003.29 3/01/96-3/01/97 All Above 120,514 $12.50 = $125,535.42 3/01/97-3/01/98 All Above 120,514 $13.25 = $133,067.54 3/01/98-3/01/99 All Above 120,514 $14.00 = $140,599.67 3/01/99-3/01/00 All Above 120,514 $14.75 = $148,131.79
Lessee exercises its option to lease additional space on the Third Floor-South in accordance with Section #43 "Option on Additional Space". All other terms and conditions of the original agreement, as amended, shall remain in full force and effect. LESSOR: 6000 Midlantic Drive Associates, L.P. By: ______________________________________ Thomas R. Whitesell LESSEE: TYCO INDUSTRIES, INC. By: ______________________________________ Fredrick Rudloff, V/P - MIS cp: 3/18/96 c:lease #5.doc - Word
EX-10.53 7 CAUTIONARY STATEMENT Ex. 10.53 CAUTIONARY STATEMENT; Private Securities Litigation Reform Act of 1995 TYCO TOYS, Inc. ("the Company") desires to take full adantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), and in order to do so is filing this Exhibit 10.53 as part of its Report on Form 10-K for the fiscal year ended December 31, 1995. From time to time the Company or its officers may issue forward-looking statements about the Company's sales, profits, operations, liquidity or prospects. It is important to note that there are a variety of important factors that could cause actual results to differ materially from projections or forward-looking statements issued by the Company. These factors include, among others, the following. "(1) The business operated by the Company is in a highly competitive industry, and the Company's principal competitors are much larger firms; many of the Company's competitors have financial resources greater than those of the Company. In addition, the large amounts of capital required to operate the business of the Company require extensive borrowings, which borrowings frequently necessitate agreement by the Company to various affirmative and negative covenants with lenders; these covenants may limit the flexibility of management in certain respects. The amount and type of financing available to the Company, changes in that financing and the costs of such financing are also important considerations which could materially affect the operations results of the Company in a given year. [See Business and Competition, pages 1 et ff. and 6, Annual Report on Form 10-K for Year Ended December 31, 1995 ("Report").] (2) Political or economic disruptions affecting the conduct of business in countries where the Company or its suppliers employ manufacturing facilities, or changes in monetary or fiscal policies in those countries, could adversely and materially affect the Company. For example, the imposition by the US congress of duties or other burdensome conditions on the importation of children's products made in the People's Republic of China, or the adoption by the European Community of additional limitations on the importation of such products, could materially affect the Company. [See Manufacturing and Suppliers, page 7, Report.] (3) As a result of the seasonality of the toy industry, much of the Company's manufacturing, packaging and distribution must be completed during short time periods and cannot be spread out evenly on a year-round basis. If the Company were prevented from acquiring its products from its joint venture partners or suppliers in the far east, or if issues arise having an effect on Page Two Ex. 10.53 the several joint ventures in which the Company has an interest, significant adverse financial impact could result, depending on the seriousness of the disruption or the issue. [See Business, pp. 1 et ff., Report.] (4) The cost of plastics, plastic resin, packaging and other raw materials or components could increase or the Company could experience shortages of supply of such materials; such increases or shortages could affect the profit margins associated with the Company's products. [See Manufacturing and Suppliers, p. 7, Report.] (5) Certain customers account for a disproportionately large share of net sales of the Company; if any such customer ceased doing business with the Company, or significantly reduced the amount of their purchases from the Company, the Company's business could be adversely impacted. Other similar factors which could have material adverse effects include pressures on the Company to provide financial incentives to its customers; pressures to reduce the price or change the terms of sale of the Company's products and the effects of such changes on the Company's profit margins; changes in the rate of growth associated with consumer purchases of the Company's products; decisions of third parties, such as retailers, relating to the price and promotion of the Company's products. [See Marketing and Distribution, p. 6, Report, and note 12, p. F-21 of Notes to Consolidated Financial Statements ("Notes").] (6) The Company has traditionally enjoyed good working relations with its employees throughout the world; labor strife or work disruptions could have a material adverse impact on the Company. Other factors of this type which could have a material effect include manufacturing constraints, production inefficiencies, higher costs of production and underutilization of manufacturing capacity. [See Employees, p. 7, Report.] (7) Consumer identification, play-value, price and the quality of manufacturing are all important factors with respect to the Company's products; in addition, the Company uses a high degree of product promotion, primarily through advertising, for commercial success of its products. The toy industry is subject to a constant need for creating and developing new products, which frequently are successfully marketed for only one or two years. Changes in consumer behavior patterns (which can occur quickly), including the potential for decrease in consumer demand for products which are seasonal in nature, or the imposition of additional restrictions on children-oriented television programming and advertising could adversely affect the Company. [See Seasonality and Backlog, p. 5 and Marketing and Distribution, pp. 5-6, Report.] Page Three Ex. 10.53 (8) The Company markets its products under a variety of trademarks, including some owned by third parties and covered by license agreements; certain license agreements require minimum guaranteed royalty payments regardless of the actual sales of the products in question. In addition, the inability of a particular licensed product or line of products to achieve a level of sales large enough to support the required minimum guarantee payments could adversely affect the Company's ability to retain the trademark license for that product or line. [See Trademarks, page 6, Committments - Guaranteed Royalties, p. 19, Report and also note 10, page F-18, Notes.] (9) The cost of acquisition by the Company of tangible and intangible assets, and changes in the tax laws, regulations or rates applicable to such acquisitions. [See pp. 14-16, Report.] (10) Difficulties which may be experienced by the Company in the testing, development, production or marketing of new products. [See Design and Development, p. 5, Report.] (11) The toy industry is highly competitive and barriers to entry are not significant. Increased competition may occur within categories in which the Company enjoys a substantial market share. [See Competition, p. 6, Report.] (12) The level of expenses associated with selling, distribution and administrative activities of the Company, growth in such expenses, and the impact of unusual items resulting from the ongoing evaluation by the Company of its organization and strategy. [See Management Discussion and Analysis, pp. 12 et ff., Report.] (13) Changes to the compensation and benefit plans at the Company, and changes in the accounting policies and the results of their application to the Company. [See note 1, pp. F-6 et ff., Notes.] (14) The ability of the Company to engage in hedging activities against various foreign currencies. [See Foreign Exchange Risk Management, p. 19, Report.] (15) The costs of legal and administrative proceedings involving the Company or its subsidiaries. [See Legal Proceedings, pp. 19-20, Report, and note 11, pp. F- 18,19, Notes.] EX-11 8 COMPUTATION OF PER SHARE EARNINGS (LOSS) Exhibit 11 TYCO TOYS, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) (in thousands except per share amounts)
1995 1994 1993 ---- ---- ---- Primary loss Per Share: 1. Net loss $(27,229) $(32,973) $(69,940) 2. Less preferred dividends 3,200 2,157 - -------- -------- -------- 3. Net loss applicable to common shareholders $(30,429) $(35,130) $(69,940) ======== ======== ======== 4. Weighted average shares outstanding 34,788 34,687 33,595 5. Add additional shares issuable upon the assumed exercise of outstanding stock options * - - - -------- -------- -------- 6. Adjusted weighted average shares outstanding 34,788 34,687 33,595 ======== ======== ======== 7. Net loss per share (3/6) $ (0.87) $ (1.01) $ (2.08) ======== ======== ======== Fully Diluted Loss Per Share: 8. Line 3 above $(30,429) $(35,130) $(69,940) 9. Add back preferred dividends (line 2 above) 3,200 2,157 - 10. Add back interest, net of tax, on assumed conversion of the Company's 7% Convertible Subordinated Notes 1,066 995 567 -------- -------- -------- 11. Adjusted net loss $(26,163) $(31,978) $(69,373) ======== ======== ======== 12. Line 4 above 34,788 34,687 33,595 13. Add additional shares issuable upon assumed conversion of preferred shares from dates of issuance 5,326 3,749 - 14. Add additional shares issuable upon assumed conversion of the Company's 7% Convertible Subordinated Notes from dates of issuance 1,523 1,430 1,350 15. Add additional shares issuable upon the assumed conversion of outstanding stock options * - - - -------- -------- -------- 16. Adjusted weighted average shares outstanding 41,637 39,866 34,945 ======== ======== ======== 17. Net loss per share (11/16) * $ (0.63) $ (0.80) $ (1.99) ======== ======== ========
* For the calculation of loss per share, the inclusion of the assumed exercise of options for the three years ended 1995, 1994 and 1993 did not result in a dilutive effect and were therefore excluded from the per share calculations. ** Fully diluted loss per share is not presented in the Consolidated Statements of Operations as the assumed conversion of the Company's Convertible Preferred Stock and Convertible Subordinated Notes is anti-dilutive.
EX-22 9 SUBSIDIARIES OF THE COMPANY Exhibit 22 Tyco Toys, Inc. Subsidiaries of the Company Almat Toy Company, Inc. Croner-Tyco Toys Pty. Ltd. DI Hong Kong Limited Ensueno-Tyco Toys de Mexico, S.A.de C.V. Hingham Enterprises Ltd. Illco (UK) Ltd. Illco Acquisition Corp. LI & HE Manufacturing Hong Kong, Ltd. Macau Die-casting Toys Ltd. Macau Toys Ltd. Matchbox Acquisition Ltd. Matchbox Collectibles (Deutschland) GmbH Matchbox Collectibles (UK) Ltd. Matchbox Collectibles Pty. Ltd. Matchbox Collectibles, Inc. Matchbox International Ltd. Matchbox Japan Ltd. Matchbox Toys (USA), Inc. Matchbox Toys Pty. Ltd. Matchbox Toys, Ltd. Nasta Far East, Ltd. Playtime Toys UK, Ltd. TBL, Ltd. TVMI Service Corp. Tyco (Hong Kong) Ltd. Tyco Distribution Corp. Tyco Far East Ltd. Tyco Funding I Corp. Tyco Funding II Corp. Tyco Industries, Inc. Tyco Investment Corp. Tyco Management I, Inc. Tyco Manufacturing (Europe), Inc. Tyco Manufacturing Corp. Tyco Matchbox (Deutschland) GmbH Tyco Preschool Toys, Inc. Tyco Services, Inc. Tyco Toys (Benelux) n.v. Tyco Toys (Canada) Inc. Tyco Toys (Espana) S.A. Tyco Toys (France) S.A. Tyco Toys (Italy) S.p.A. Tyco Toys (New Zealand) Pty., Ltd. Tyco Toys (Switzerland) A.G. Tyco Toys (UK) Ltd. Tyco Toys Europe n.v. Tyco Toys GmbH Tyco Toys(Singapore) Pte., Ltd. Unitoys Company Ltd. Universal International (Holdings) Ltd. Universal Product Innovations, Inc. View-Master Ideal (UK) Ltd. View-Master International (Singapore) Pte., Ltd. EX-24.1 10 INDEPENDENT AUDITORS CONSENT 03/26/96 EXHIBIT 24.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33- 17857 of Tyco Toys, Inc. and subsidiaries on Form S-8 of our report dated February 7, 1996, except for Note 5, as to which the date is February 15, 1996 appearing in this Annual Report on Form 10-K of Tyco Toys, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Philadelphia, Pennsylvania March 26, 1996 (#7521) EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 27,604 0 243,227 (55,724) 56,710 304,563 135,994 (102,973) 615,132 200,712 147,180 0 51,661 295,727 (82,048) 615,132 709,109 709,109 416,236 416,236 289,293 3,788 28,026 (28,234) (1,005) (27,229) 0 0 0 (27,229) (0.87) (0.87)
EX-10.17 12 TENANCY AGREEMENT Office Exhibit 10.17 --------------- TENANCY AGREEMENT WORLD SHIPPING CENTRE --------------------- Suite: 1200 Tenant: Tyco Asia Limited Office INDEX ----- SECTION I INTERPRETATION AND AGREEMENT PAGE ---- 1 1(1) Interpretation 1 1(2) Headings and index 1 1(3) Gender 1 2 Term premises rent and charges 1 SECTION II RENT AND OTHER CHARGES 1 Rent and Charges 2 2 Rates 2 3 Gas water and electricity charges 3 SECTION III TENANT'S OBLIGATIONS 1 Compliance with Ordinances 3 2 Fitting out 3 2(1) Installations and alternations 3 2(2) Damage to walls, ceilings and floors 4 2(3) Floor covering 4 3 Good repair of interior 4 4 Replacement of windows 4 5 Repair of electrical installation 4 6 Repair of gas installation 5 7 Maintenance of sanitary and water apparatus 5 8 Cleaning of drains 5 9 Responsibility for defects 5 10 Third party insurance 5 11 Insurance of contents 6 12 Protection from typhoons 6 13 Entry by Landlord 6 14 Notice to repair 6 15 Outside windows 7 16 Inform Landlord of damage 7 17 Regulations 7 18 Cleaning contractors 7 19 Directory boards 7 20 Service entrances and lifts 7 21 Refuse and garbage removal 7 22 Title deeds 8 23 Yield up premises and handover 8 24 Indemnity against breach 8 - i - Office SECTION IV LANDLORD'S OBLIGATIONS 1 Quiet enjoyment 8 2 Crown rent and property tax 9 3 Roof and main structure 9 4 Building management services 9 5 Facilities 9 6 Air-conditioning services 9 7 Directory boards 9 SECTION V RESTRICTIONS AND PROHIBITIONS 1 Damage to common areas 10 2 Floor loading 10 3 Air-conditioning units 10 4 Structural stability 10 5 Locks 10 6 Loading of lifts 10 7 Use of lifts 10 8 Nuisance or annoyance 10 9 Noise 11 10 Signs 11 11 User 11 12 Illegal or immoral use 11 13 Sleeping or domestic use 12 14 Manufacture of storage of goods 12 15 Combustible or dangerous goods 12 16 Obstructions in passages 12 17 Toilet facilities 12 18 Wiring and cables in common areas 13 19 Preparation of food and prevention of odours 13 20 Animals, pets and infestation 13 21 Subletting and assigning 13 22 Breach of Conditions 14 23 Breach of insurance policy 14 24 Aerials 14 25 Parking 14 26 Use of building name 14 SECTION VI EXCLUSIONS OF LIABILITY 1 1.1 Lifts escalators and other services 15 1.2 Electricity/gas/water supply 15 1.3 Fire overflow of water and vermin 15 1.4 Water sprinklers 15 1.5 Services 15 - ii - Office SECTION VII ABATEMENT OF RENT 1 Abatement 16 SECTION VIII DEFAULT 1 Default 16 2 Exercise of right 17 3 Acceptance of rent 17 4 Acts of contractors servants agents licensees customers 17 5 Distraint 17 6 Interest and legal costs 17 SECTION IX DEPOSIT 1 Deposit 18 2 Increase in deposit 18 3 Repayment of deposit 18 4 Transfer of deposit 19 SECTION X REGULATIONS 1 Introduction of Regulations 19 2 Conflict 19 SECTION XI MARKET RENTAL 1 Determination of market rental 19 SECTION XII GENERAL 1 Landlord and tenant legislation 20 2 Condonation not a waiver 21 3 Letting notices 21 4 Service of notices 21 5 No fine 21 6 Exclusion of warranties 21 7 Name of building 22 8 Stamp Duty and costs 22 - iii - Office 9 Tenant's obligations not affected 22 10 No enforcement of third party covenants 22 11 No implied covenants 22 12 Changes in common areas 23 13 Reservations 23 14 Severance 24 15 Tenant's effects 24 16 Use of other premises 24 17 Deed of Mutual Covenant 24 18 Sale and Redevelopment 24 19 Special conditions 25 SCHEDULE 26 SIGNATURES 27 ANNEXURES 28 - iv - Section I AN AGREEMENT made the 10th day of JUNE 1995 BETWEEN the party described as the Landlord in the Schedule hereto (hereinafter called "the Landlord") of the one part and the party named and described as the Tenant in the Schedule hereto (hereinafter called "the Tenant") of the other part. WHEREBY IT IS AGREED as follows: SECTION I INTERPRETATION AND AGREEMENT 1 1(1) Interpretation In this Tenancy Agreement the expressions set out in the Schedule hereto shall where the context so admits have the meanings respectively ascribed to them therein. 1(2) Headings and index The headings and index are intended for guidance only and do not form part of this Agreement nor shall any of the provisions of this Agreement be construed or interpreted by reference thereto or in any way affected or limited thereby. 1(3) Gender Unless the context otherwise requires words herein importing the masculine gender shall include the feminine and neuter and vice versa and words herein in the singular shall include the plural and vice versa. 2 Term premises rent and charges The Landlord shall let and the Tenant shall take for the said term All Those the said premises as delineated in pink on the plan(s) annexed hereto Together with the use in common with the Landlord and all others having the like right of : 2(1) the entrances staircases landings passages and toilets in the said building, and 2(2) the lifts and escalators in the said building whenever the same shall be operating, insofar as the same are necessary for the proper enjoyment of the said premises but except as the Landlord may from time to time restrict such use YIELDING AND PAYING therefor throughout the said term the rent air- conditioning charge and service charge (all of which are unless the context otherwise requires hereinafter included under the term "rent") as are set out in the Schedule which sums shall be payable exclusive of rates and other out- goings and in advance on the first day of each calendar month the first of such payments to be apportioned according to the number of days then unexpired in the month in respect of which such payment is due and the - 1 - Section I/II last of such payments to be apportioned according to the number of days of the said term remaining in the month in respect of which such payment is due. SECTION II RENT AND OTHER CHARGES The tenant hereby agrees with the Landlord as follows: 1 Rent and charges 1(1) To pay the rent air-conditioning charge and service charge on the days and in the manner hereinbefore provided for payment thereof without deduction or set off (whether equitable or otherwise) and in banknotes or by bankers order if so required by the Landlord. 1(2) The Landlord shall be entitled at any time and from time to time during the said term to serve a notice upon the Tenant increasing either one or both of the air-conditioning charge and service charge by an amount which the Landlord shall deem appropriate having regard to all or any of the elements affecting the cost of providing the respective services, and thereafter such increased charge or charges shall be payable in lieu of the charge or charges provided for above. The Landlord's assessment of the appropriate increase shall be conclusive and binding on the Tenant. 2 Rates 2(1) To pay and discharge all rates taxes assessments duties charges impositions and outgoings of an annual or recurring nature now or hereafter to be assessed imposed or charged by the Government of Hong Kong or other lawful authority upon the said premises or upon the owner or occupier thereof (Crown Rent and Property Tax only excepted.) 2(2) In the event that an assessment to rates in respect of the said premises shall be raised upon the Landlord direct the Landlord shall during the month immediately preceding any quarter in respect of which such rates may fall due be at liberty to debit the Tenant with the amount thereof and the same shall forthwith be paid by the Tenant to the Landlord whereupon the Landlord shall account for the same to the Government of Hong Kong. 2(3) In the event that no valuation of the said premises shall have been made in accordance with the Rating Ordinance (Cap.116) or any statutory amendment or modification thereof for the time being in force the Landlord shall be at liberty to make an interim valuation thereof and to debit the Tenant with the amount which would be payable upon such interim valuation and the same shall forthwith be paid by the Tenant to the Landlord and any over-payment or under- payment by the Tenant on such interim valuation shall be adjusted when a valuation under the Rating Ordinance shall have been made known. - 2 - Section II/III 2(4) The Landlord shall be entitled to treat non-payment of any amount debited to the Tenant in accordance with the foregoing provisions of this Clause or any part thereof in all respects as non-payment of rent under this Agreement. 3 Gas water and electricity charges To pay and discharge all charges for gas water and electricity consumed in the said premises. SECTION III TENANT'S OBLIGATIONS The Tenant hereby agrees with the Landlord as follows: 1 Compliance with Ordinances To obey and comply with all ordinances regulations bye-laws rules and requirements of any Governmental or other competent authority relating to the conduct and carrying on of the Tenant's business on the said premises or to any other act deed matter or thing done permitted suffered or omitted therein or thereon by the Tenant or any employee agent contractor or licensee of the Tenant and to notify the Landlord forthwith in writing of any notice received from any statutory or public authority concerning or in respect of the said premises or any services supplied thereto. 2 Fitting out To fit out the said premises in accordance with such plans and specifications as shall have been first submitted to and approved in writing by the Landlord in a good and proper workmanlike fashion and in carrying out any approved work hereunder the Tenant shall and shall cause its servants agents contractors and workmen to cooperate fully with the Landlord and all servants agents contractors and workmen of the Landlord and with the building manager and other tenants and contractors carrying out any work on the said building and to obey and comply with all instructions and directions which may be given by the Landlord's architect or other authorized representative or by the building manager in connection with the carrying out of such work and in carrying out any work to the electrical or gas installations or to the air conditioning plumbing drainage fire fighting/detection building automation and/or security systems the Tenant shall use only those contractors nominated by the Landlord in writing for the purpose Provided That the Tenant shall not at any time during the said term without the prior written consent of the Landlord. 2(1) Installations and alterations erect install remove or alter any fixtures partitioning or other erection or installation in the said premises or any part thereof or without the like consent make or permit or suffer to be made alterations in or additions to the electrical - 3 - Section III or gas installations or to the air conditioning plumbing drainage fire fighting/detection or security systems or install or permit or suffer to be installed any equipment apparatus or machinery which requires any additional electrical/gas mains wiring/piping or which consumes electricity/gas not metered through the Tenant's separate meter or which imposes a weight on any part of the flooring in excess of that for which it is designed, it being agreed that the Landlord shall be entitled to prescribe the maximum weight and permitted location of safes and other heavy equipment and to require that the same stand on supports of such dimensions and material to distribute the weight as the Landlord may deem necessary, nor 2(2) Damage to walls ceilings and floors drive or insert or permit or suffer to be driven or inserted any nails screws hooks brackets or similar articles into the doors ceilings windows walls beams floors structural members or any part of the fabric of the said premises or any of the plumbing or sanitary or air-conditioning or fire fighting/detection apparatus or installation therein nor to cut maim injure drill into mark or deface the same or permit or suffer the same to be cut maimed injured drilled into marked or defaced, nor 2(3) Floor covering lay or use any floor covering or do anything which may damage or penetrate the existing flooring floor screed or slab. 3 Good repair of interior To keep all the interior of the said premises including the flooring and interior plaster or other finishes or rendering to walls floors and ceilings and the Landlord's fixtures therein and all additions thereto and including all doors windows electrical and gas and plumbing installations and wiring and piping in good clean and tenantable repair and condition and properly preserved and painted and so to maintain the same throughout the said term at the expense of the Tenant and to the satisfaction of the Landlord, and subject to Clause 23 of Section III to deliver up the same to the Landlord at the expiration or sooner determination of the said term in like condition. 4 Replacement of windows To reimburse to the Landlord and/or the building manager the cost of replacing all broken and damaged windows and glass whether or not the same be broken or damaged by the negligence of the Tenant. 5 Repair of electrical installation To repair or replace any electrical installation or wiring of the Tenant if the same becomes dangerous or unsafe or if so reasonably required by the Landlord or by the relevant utility company and in so doing the Tenant shall use only a contractor approved by the Landlord in writing for the purpose. - 4 - Section III 6 Repair of gas installation To repair or replace any gas installation or piping of the Tenant if the same becomes dangerous or unsafe or if so reasonably required by the Landlord or by the relevant utility company and in so doing the Tenant shall use only a contractor approved by the Landlord in writing for the purpose. 7 Maintenance of sanitary and water apparatus To keep the sanitary and water apparatus used exclusively by the Tenant and its servants agents licensees and customers in good clean and tenantable repair and condition to the satisfaction of the Landlord and in accordance with the regulations or bye-laws of all Public Health and other Government Authorities concerned. 8 Cleaning of drains To pay to the Landlord on demand all costs incurred by the Landlord and/or the building manager in cleansing clearing repairing or replacing any of the drains pipes or sanitary or plumbing apparatus choked or stopped up owing to the careless or improper use or neglect by the Tenant or any employee agent licensee or customer of the Tenant. 9 Responsibility for defects To be wholly responsible for any loss damage or injury caused to any person whomsoever or any property whatsoever whether directly or indirectly: 9(1) through the defective or damaged condition of any part of the interior of the said premises or any fittings fixtures wiring or piping therein, or 9(2) through or in any way owing to the spread of fire or smoke or the leakage or overflow of water including storm or rain water into or from the said premises or any part thereof, or 9(3) through the negligence or the act neglect default or omission of the Tenant, or 9(4) through the use of the said premises by the Tenant, or 9(5) through the operation by the Tenant of its business at or from the said premises. 10 Third party insurance To effect and maintain throughout the said term insurance cover in respect of the Tenant's obligations under Section III Clause 9 with a reputable insurance company to the satisfaction of the Landlord and to produce to the Landlord as and when so required by the Landlord the policy of such insurance together with the receipt for the last payment of premium and a certificate from the relevant insurance company that the policy is fully paid up and in all respects valid and subsisting, in default of which - 5 - Section III the Landlord shall be entitled (but not obliged) at the Tenant's expense to effect such insurance cover. The policy of such insurance shall be in the name of the Tenant and endorsed to show the interest of the Landlord in the said building and shall be in such amount as the Landlord shall from time to time stipulate and shall contain a clause to the effect that the insurance cover thereby effected and the terms and conditions thereof shall not be cancelled modified or restricted without the prior written consent of the Landlord. 11 Insurance of contents To be wholly responsible for any loss or damage to property within the said premises including without limitation all furniture fixtures fittings goods chattels samples personal effects contents and stock and to effect with a reputable insurance company adequate insurance cover for the same in their full replacement value against all risks including without limitation those risks perils or under circumstances for which the Landlord's liability is expressly or impliedly excluded under this Agreement. The Tenant undertakes to produce and make available to the Landlord as and when so required by the Landlord the policy of such insurance together with the receipt for the last payment of premium and a certificate from the relevant insurance company that the policy is fully paid up and in all respects valid and subsisting. 12 Protection from typhoons To take all reasonable precautions to protect the interior of the said premises against damage by storm typhoon heavy rainfall or the like and in particular to ensure that all exterior doors and windows are securely fastened upon the threat of such adverse weather conditions. 13 Entry by Landlord To permit the Landlord and all persons authorised by it at all reasonable times to enter and view the state of repair of the said premises to take inventories of the fixtures therein to carry out any works repairs or maintenance which require to be done and to show the said premises to prospective tenants during the last three months of the said term or to pro- spective purchasers at any time during the said term Provided that in the event of an emergency the Landlord its servants or agents may enter without notice and forcibly if need be. 14 Notice to repair On receipt of any notice from the Landlord or its authorised representative specifying any works or repairs which require to be done and which are the responsibility of the Tenant hereunder forthwith to put in hand and execute the same with all possible despatch and without any delay. Failure by the Tenant so to do will entitle the Landlord or its servants or agents to enter upon the said premises and forcibly if need be to carry out such works or repairs at the sole expense of the Tenant. - 6 - Section III 15 Outside windows To keep all outside windows closed. 16 Inform Landlord of damage To give notice in writing to the Landlord or its agent of any damage that may be suffered to the said premises or to persons thereon and of any accident to or defects in the water pipes gas pipes electrical wiring or fittings fixtures or other facilities provided by the Landlord. 17 Regulations To observe and comply with such regulations as the Landlord and/or the building manager may introduce for the better operation and management of the commercial part of the said building as office premises and/or for the use of the carpark in the said building and/or its recreational areas and outdoor facilities. 18 Cleaning contractors To engage as cleaning contractors for the said premises only such contractors as may be nominated by the Landlord, provided that the Tenant may in addition to or substitution for such contractors employ its own direct staff for cleaning. Such cleaning contractors shall be employed at the sole expense of the Tenant and at the rates agreed between the Landlord and the contractors. 19 Directory boards To pay the Landlord immediately upon demand the cost of affixing repairing altering or replacing as necessary the Tenant's name on the directory boards provided by the Landlord. 20 Service entrances and lifts To load and unload goods only at such times and through such service entrances and by such service lifts as shall be designated by the Landlord and/or the building manager for this purpose from time to time. 21 Refuse and garbage removal To be responsible for the removal of garbage and refuse from the said premises to such location as shall be specified by the Landlord and/or the building manager from time to time and to use only that type of refuse container as is specified by the Landlord and/or the building manager from time to time. In the event of the Landlord and/or the building manager providing a collection service for garbage and refuse the same shall be used by the Tenant to the exclusion of any other similar service and the use of such service provided by the Landlord and/or the building manager shall be at the sole cost of the Tenant. - 7 - Section III/IV 22 Title deeds To observe and perform the covenants terms conditions and restrictions under which the said Lot(s) is/are held from the Crown or as referred to in any deed of mutual covenant or deed of dedication or other deed or instrument affecting the said building and/or its recreational areas and outdoor facilities for the time being in force (whether or not executed prior to the date of this Tenancy Agreement) so far as they relate to the said premises or the use thereof or the use of the common areas and facilities of the said building and/or its recreational areas and outdoor facilities but except always to the extent that the Landlord is obliged to observe and comply with the same pursuant to Section IV. 23 Yield up premises and handover At the expiration or sooner determination of this tenancy to deliver up to the Landlord vacant possession of the said premises notwithstanding any rule of law or equity to the contrary together with such fittings fixtures alterations or additions thereto as the Landlord in its absolute discretion may be willing to retain by without payment of any compensation for such fittings fixtures alterations or additions and deliver to the Landlord all keys giving access to all parts of the said premises. The Tenant shall be entitled to remove its own trade fixtures subject to making good all damage including damage to the decoration caused by such removal and shall if required by the Landlord reinstate the said premises to their original state and condition as at the date of commencement of this tenancy. 24 Indemnity against breach To keep the Landlord indemnified from and against all actions claims losses damages and expenses arising from any breach non-observance or non- performance of any of the agreements or convenants on the part of the Tenant herein contained or from the operation by the Tenant of its business at or from the said premises or from the use of the said premises or of the electrical or gas installation or apparatus therein or out of any works carried out at any time during the said term to the said premises or out of anything now or during the said term attached to or projecting from the said premises or arising from the negligence or the act neglect default or omission of the Tenant. SECTION IV LANDLORD'S OBLIGATIONS The Landlord hereby agrees with the Tenant as follows: 1 Quiet enjoyment That the Tenant paying the rent on the days and in the manner herein provided for payment of the same and observing and performing the agreements stipulations and conditions herein contained and on the Tenant's part to be observed and performed shall peaceably hold and enjoy the said premises during the said term without any - 8 - Section IV interruption by the Landlord or any person lawfully claiming under or in trust for the Landlord. 2 Crown rent and property tax To pay the Crown rent payable in respect of the said Lot(s) and the property tax payable in respect of the said building. 3 Roof and main structure To use all reasonable endeavours to keep the roof of the said building and the main structure and walls thereof and the mains drains pipes and cables therein in a proper state of repair provided that the Landlord shall not incur any liability under this Clause unless and until written notice of any defect or want of repair has been given by the Tenant to the Landlord and the Landlord shall have after the lapse of a reasonable time from the date of service of such notice either failed to take reasonable steps to repair or remedy the same or failed to give due notice of the defect or want of repair to the building manager. 4 Building management services To carry out or arrange for such building management services as the Landlord may in its absolute discretion think fit with a view to maintaining the commercial part of the said building as first class office premises. 5 Facilities To use all reasonable endeavours to maintain the escalators lifts and fire fighting/detection and air-conditioning plant and other facilities of the said building in proper working order. 6 Air-conditioning services Subject to Clause 5 of this Section IV and to Clauses 1(1) and 1(2) of Section VI to provide or arrange for air-conditioning services to the said premises from 8:30 a.m. until 6:00 p.m. daily from Monday to Friday (both inclusive) and from 8:30 a.m. to 2:00 p.m. on Saturdays. If the Tenant shall require additional air-conditioning services on Sundays and public holidays or outside the times specified the Landlord shall on receiving reasonable notice of the Tenant's requirements and subject as aforesaid provide the same to the Tenant or request the building manager to arrange for the same. The charges for air-conditioning services on Sundays and public holidays and outside the times specified shall be determined by the Landlord and/or the building manager and notified to the Tenant from time to time. 7 Directory boards To supply directory boards and to allot space thereon for the Tenant's name to be affixed in such uniform lettering or characters as shall be designated by the Landlord. - 9 - Section V SECTION V RESTRICTIONS AND PROHIBITIONS The Tenant hereby agrees with the Landlord as follows: 1 Damage to common areas Not to damage injure or deface any part of the fabric or walls or roof of the said building or of the common areas stairs and lifts and other facilities of the said building. 2 Floor loading Not to load the floor of the said premises or any part thereof beyond the designed weight as stated in Clause 5 of the Schedule hereto. 3 Air-conditioning units Not to install air-conditioning units at the said premises without the prior written consent of the Landlord. 4 Structural stability Not to dig any hole or holes in or otherwise damage the concrete floor slab of the said premises. 5 Locks Not without the prior written consent of the Landlord to alter the existing locks bolts and fittings on the entrance doors to the said premises nor to install any additional locks bolts or fittings thereon. 6 Loading of lifts Not to place in any of the lifts in the said building anything the weight of which shall exceed the maximum weight as shown inside the said lifts. 7 Use of lifts Not to load or unload or receive delivery of or despatch any goods or merchandise or permit or suffer the same to be loaded unloaded delivered or despatched in any of the lifts designated from time to time by the Landlord and/or the building manager as passenger lifts. 8 Nuisance or annoyance Not to do or permit or suffer to be done any act or thing which may be or become a nuisance or annoyance or cause damage or danger to the Landlord or to the tenants - 10 - Section V or occupiers of other premises in the said building or in any adjoining or neighbouring building. 9 Noise Not to produce or suffer or permit to be produced at any time in the said premises any noise which may in the opinion of the Landlord or the building manager (which opinion shall be conclusive) constitute a nuisance or give cause for reasonable complaint from the occupants of any other premises in the said building or persons using or visiting the same. 10 Signs Not without the prior written consent of the Landlord to affix or display or permit or suffer to be affixed or displayed within or outside the said premises any signboard sign decoration advertising matter or other device whether illuminated or not save that: 10(1) the Tenant shall be entitled to have its name displayed in English and Chinese in uniform lettering or characters designated by the Landlord on the directory boards such lettering and characters and any additions or alterations thereto to be placed thereon be the Landlord at the Tenant's expense, and 10(2) the Tenant shall be entitled at its own expense to have its name affixed in lettering and/or characters approved by the Landlord on the entrance door or doors to the said premises such lettering and/or characters thereon and any additions or alterations thereto or thereon to be made by the Landlord at the Tenant's expense. If the Tenant carries on business under a name other than its own name it shall notify the Landlord of the name under which its business is carried on and shall be entitled to have that name displayed as aforesaid, but the Tenant shall not be entitled to change its business name without the prior written consent of the Landlord which the Landlord may give or withhold at its discretion, and without prejudice to the foregoing, the Landlord may in connection with any application for consent under this Clause require the Tenant to produce such evidence as it may think fit to show that no breach of Clause 21 of this Section V has taken place or is about to take place. 11 User Not to use or permit or suffer the said premises to be used for any purpose other than as described in Clause 5 of the Schedule hereto. 12 Illegal or immoral use Not to use or permit or suffer the said premises to be used for any illegal or immoral purpose. - 11 - Section V 13 Sleeping or domestic use Not to use or permit or suffer the said premises or any part thereof to be used as sleeping quarters or as domestic or residential premises within the meaning of any landlord and tenant legislation for the time being in force nor to allow any person to remain in the said premises overnight. 14 Manufacture or storage of goods Not to use or permit or suffer the said premises to be used for the purpose of the production manufacture or working of goods and merchandise or for the storage of goods and merchandise other than samples reasonably required in connection with the Tenant's business carried on therein. 15 Combustible or dangerous goods Not to keep or store or permit or suffer to be kept or stored in the said premises any arms ammunition gun-powder salt-petre kerosene or other explosive or combustible substance or hazardous goods or any dangerous goods (as defined in the Dangerous Goods Ordinance Cap. 295 or any legislation replacing the same or any orders or regulations made thereunder) other than in accordance with the appropriate legislation from time to time in force and in such areas as the Landlord shall designate for such purposes. 16 Obstructions in passages Not to encumber or obstruct or permit or suffer to be encumbered or obstructed with any boxes packaging rubbish or other obstruction of any kind or nature nor cause or permit any of its servants agents contractors licensees or customers to obstruct or use for any purpose other than that for which they are intended any of the entrances staircases landings passages lifts lobbies or other parts of the said building in common use and the Landlord and the building manager shall be entitled without notice and at the Tenant's risk and expense to remove dispose of or clear as it sees fit any such material or obstruction and neither the Landlord nor the building manager shall thereby incur any liability to the Tenant or any other person whomsoever and the Tenant shall indemnify the Landlord and the building manager against all losses claims damages or expenses of and against the Landlord and the building manager in respect thereof. 17 Toilet facilities Not to use or permit or suffer the toilet facilities in the said building, whether used exclusively by the Tenant or not, to be used for any purpose other than that for which they are intended and not to throw or permit or suffer to be thrown therein any foreign substance of any kind and the Tenant shall on demand pay to the Landlord or the building manager as the case may be the whole expense of any breakage blockage or damage resulting from a violation of this Clause. - 12 - Section V 18 Wiring and cables in common areas Not to lay install affix or attach any wiring cables or other articles or thing in or upon any of the entrances staircases landings passages lobbies or other parts of the said building in common use. 19 Preparation of food and prevention of odours Not to prepare or permit or suffer to be prepared any food in the said premises or to cause or permit any odours which shall in the sole opinion of the Landlord be offensive or unusual to be produced upon permeate through or emanate from the said premises. 20 Animals pets and infestation Not to keep or permit or suffer to be kept any animals or pets inside the said premises and at the Tenant's expense to take all such steps and precautions as shall be required by the Landlord and/or the building manager to prevent the said premises or any part thereof from becoming infested by termites rats mice roaches or any other pests or vermin. The Tenant shall employ at the Tenant's cost such pest extermination contractors as the Landlord or the building manager may require and at such intervals as the Landlord and/or the building manager may direct and to the exclusion of all others. 21 Subletting and assigning Not to assign underlet share part with the possession of or transfer the said premises or any part thereof or any interest therein nor permit or suffer any arrangement or transaction whereby any person who is not a party to this Agreement obtains the use possession occupation or enjoyment of the said premises or any part thereof irrespective of whether any rental or other consideration is given therefor. The tenancy shall be personal to the Tenant named in this Agreement and without in any way limiting the generality of the foregoing the following acts and events shall unless approved in writing by the Landlord be deemed to be breaches of this Clause 21: 21(1) In the case of a tenant which is a partnership the taking in of one or more new partners whether on the death or retirement of an existing partner or otherwise; 21(2) In the case of a tenant who is an individual (including a sole surviving partner of a partnership tenant) the death insanity or other disability of that individual to the intent that no right to use possess occupy or enjoy the said premises or any part thereof shall vest in the executors administrators personal representatives next of kin trustee or committee of any such individual; 21(3) In the case of a tenant which is a corporation any take-over reconstruction amalgamation merger voluntary liquidation or change in the person or persons who directly or indirectly owns or own or controls or control a majority of its voting shares or who otherwise has or have effective control thereof. - 13 - Section V 21(4) The giving by the Tenant of a power of attorney or similar authority whereby the donee of the power obtains the right to use possess occupy or enjoy the said premises or any part thereof or does in fact use possess occupy or enjoy the same; 21(5) The change of the Tenant's business name. 21(6) Notwithstanding any provisions to the contrary herein contained, it 22 is hereby expressly agreed and declared that the said premises may be occupied or used by the holding, subsidiary or associated companies of the Tenant and/or of Tyco Toys, Inc. If the said premises are occupied or used by the holding, sub-sidiary or associated companies of the Tenant and/or Tyco Toys, Inc., the Tenant shall notify the Landlord accordingly and such notification shall be certified by a Director of the Tenant (namely, a member of the Board of Directors of the Tenant). It is hereby expressly and specifically agreed and declared that the notification will be merely a notification requirement and that no approval or consent of the Landlord will be required. 23 Breach of insurance policy Not to do or permit or suffer to be done any act deed matter or thing whatsoever whereby the insurance on the said building against loss or damage by fire and/or other insurable perils and/or claims by third parties for the time being in force may be rendered void or voidable or whereby the premium thereon may be increased Provided that if as the result of any act deed matter or thing done permitted or suffered by the Tenant the premium on any such policy of insurance shall be increased the Landlord shall be entitled without prejudice to any other remedy hereunder to recover from the Tenant the amount of any such increase. 24 Aerials Not to erect or permit or suffer to be erected on or from any part of the said building or on or within or from any part of the said premises any aerial antenna satellite dish or other device for any telepoint network or telecommunication purpose or otherwise, and not to interfere with remove dismantle or alter those common aerials (if any) provided by the Landlord and/or the building manager. 25 Parking Not to park in obstruct or otherwise use nor permit any employee agent or licensee of the Tenant to park in obstruct or otherwise use those areas of the said building allocated to the parking or movement of or access for vehicles or designated as loading/unloading areas otherwise than in accordance with the Regulations from time to time made by or on behalf of the Landlord and/or the building manager. 26 Use of building name Not without the prior written consent of the Landlord to use or permit to be used the name/logo or any part of the name/logo of the Landlord or of the said building or any picture representation or likeness of the whole or any part of such name/logo or of the - 14 - Section V/VI said building or of the said premises in connection with the business or operations of the Tenant or for any purpose whatsoever other than to indicate the address and place of business of the Tenant. SECTION VI EXCLUSIONS OF LIABILITY 1 The Landlord shall not be liable to the Tenant in respect of any claim loss or damage or expense by or to person or property sustained by the Tenant by or through or in any way owing to: 1(1) Lifts escalators and other services any defect in or breakdown or suspension of the lifts escalators fire fighting/detection or water sprinkler equipment air- conditioning plant or other facilities or the said building or any of them, or 1(2) Electricity/gas/water supply any failure malfunction explosion or suspension of the electricity gas or water supply to the said building or the said premises, or 1(3) Fire overflow of water and vermin fire or the overflow or leakage of water including rain, storm or sea water from anywhere within the said building or the influx of water including rain, storm or sea water into the said building or the said premises or the activity of termites pests rats or other vermin in the said building, or 1(4) Water sprinklers any use of water sprinkler devices whether by intentional operation or as a result of mechanical failure or malfunction, or 1(5) Services the adequacy or otherwise of any of the management services (including security) rendered by the Landlord and/or the building manager or the failure to render the same or the suspension or interruption thereof for whatever reason, whether or not the same may be caused by the negligence of the Landlord or any of its servants agents contractors or licensees, nor shall the rent or air-conditioning charge or service charge or any part thereof cease to be payable other than in the circumstances set out in Section VII. - 15 - Section VII SECTION VII ABATEMENT OF RENT 1 Abatement If: 1(1) the said building or the said premises or any part thereof shall be destroyed or so damaged by fire typhoon Act of God Force Majeure or other cause so as to be rendered unfit for use and occupation, or 1(2) the said building is made the subject of a closure order or demolition order, then provided the insurance on the said building shall not be vitiated by the act neglect default or omission of the Tenant the rent or a part thereof proportionate to the damage sustained shall cease to be payable until the said premises shall have been restored or reinstated. 2 The Landlord shall be under no obligation to repair or reinstate the said premises if in its opinion it is not reasonably economical or practicable so to do. 3 If the whole or substantially the whole of the said premises shall in the circumstances set out in Clause 1 of this Section VII have been destroyed or rendered unfit for use and occupation and shall not have been repaired and reinstated within six months of the occurrence of the destruction or damage either party shall be entitled at any time thereafter before the same are so repaired and reinstated to terminate this Agreement by notice in writing to the other. SECTION VIII DEFAULT It is hereby further expressly agreed and declared as follows: 1 Default If the rent or any part thereof shall be unpaid for fourteen days after the same shall become payable (whether legally or formally demanded or not) or if the Tenant shall fail or neglect to observe or perform any of the agreements stipulations or conditions herein contained and on the Tenant's part to be observed and performed or if the Tenant shall become bankrupt or being a corporation shall go into liquidation or if any petition shall be filed for the winding up of the Tenant or if the Tenant shall otherwise become insolvent or make any composition or arrangement with creditors or shall suffer any execution to be levied on the said premises or otherwise on the Tenant's goods then and in any such case it shall be lawful for the Landlord at any time - 16 - Section VII thereafter to re-enter on the said premises or any part thereof in the name of the whole whereupon this Agreement shall absolutely cease and determine but without prejudice to any right of action by the Landlord in respect of any outstanding breach or non-observance or non-performance of any of the agreements stipulations and conditions herein contained and on the Tenant's part to be observed and performed and to the Landlord's right to deduct all loss and damages thereby incurred from the deposit paid by the Tenant in accordance with Section IX hereof and without prejudice to the Landlord's right of forfeiture thereof. 2 Exercise of right A written notice served by the Landlord on the Tenant in manner hereinafter mentioned to the effect that the Landlord thereby exercises the power of re- entry herein contained shall be a full and sufficient exercise of such power without physical entry on the part of the Landlord. 3 Acceptance of rent Acceptance of rent by the Landlord shall not be deemed to operate as a waiver by the Landlord of any right to proceed against the Tenant in respect of any breach non-observance or non-performance by the Tenant of any of the agreements stipulations and conditions herein contained and on the Tenant's part to be observed and performed. 4 Acts of contractors servants agents licensees customers For the purpose of these presents the negligence or act neglect default or omission of any contractor servant agent licensee or customer of the Tenant shall be deemed to be the negligence or act neglect default or omission of the Tenant. 5 Distraint For the purposes of distress for rent in terms of Part III of the Landlord and Tenant (Consolidation) Ordinance (Cap.7) or any statutory modification or re-enactment for the time being in force and of these presents the rent payable in respect of the said premises shall be and be deemed to be in arrears if not paid in advance at the times and in manner hereinbefore provided for payment thereof. 6 Interest and legal costs The Landlord shall have the right without prejudice to any other right or remedy hereunder to charge interest at three per cent over the best lending rate from time to time of The Hongkong & Shanghai Banking Corporation Limited in respect of any payments to be made to the Landlord under Clauses 1 and 2 of Section II as shall be more than fourteen days in arrears and such interest shall be payable from the date upon which such payment in arrears fell due and not fourteen days thereafter. The Landlord shall further be entitled to recover from the Tenant as a debt all Solicitors' and/or Counsel's fees (on a solicitor and own client basis) and court fees incurred by the Landlord for the purpose of recovering any rent in arrears and/or other moneys - 17 - Section VIII/IX unpaid or any part thereof from the Tenant or in enforcing any of the provisions of this Agreement against the Tenant. SECTION IX DEPOSIT 1 Deposit The Tenant shall on the signing hereof deposit with the Landlord the sum specified as the deposit in the Schedule to secure the due observance and performance by the Tenant of the agreements stipulations and conditions herein contained and on the Tenant's part to be observed and performed. The said deposit shall be retained by the Landlord throughout the said term free of any interest to the Tenant and in the event of any breach or non- observance or non-performance by the Tenant of any of the agreements stipulations or conditions aforesaid the Landlord shall be entitled to terminate this Agreement in which event the said deposit may be forfeited to the Landlord by way of liquidated damages. Notwithstanding the foregoing the Landlord may at its option elect not to terminate this Agreement but to deduct from the deposit the amount of any monetary loss incurred by the Landlord in consequence of the breach non-observance or non-performance by the Tenant in which event the Tenant shall as a condition precedent to the continuation of the tenancy deposit with the Landlord the amount so deducted and if the Tenant shall fail so to do the Landlord shall forthwith be entitled to re-enter on the said premises or any part thereof in the name of the whole and to determine this Agreement in which event the deposit may be forfeited to the Landlord as hereinbefore provided. 2 Increase in deposit If there shall for whatever reason be any increase or increases in the rent and/or rates and/or air-conditioning charge and/or service charge during the said term the Tenant shall upon such increase becoming applicable pay to the Landlord by way of an increase in the said deposit a sum proportional to the said increase in rent rates air-conditioning charge and/or service charge and the payment of such amount shall be a condition precedent to the continuation of the tenancy. 3 Repayment of deposit Subject as aforesaid the said deposit shall be refunded to the Tenant by the Landlord without interest within thirty days after the expiration of this Agreement and the delivery of vacant possession to the Landlord or within thirty days of the settlement of the last outstanding claim by the Landlord against the Tenant in respect of any breach non-observance or non-performance of any of the agreements stipulations or conditions herein contained and on the part of the Tenant to be observed and performed whichever is the later. - 18 - Section IX/X/XI 4 Transfer of deposit On an assignment by the Landlord of its reversionary interest the Landlord may transfer the said deposit to the assignee of the Landlord's reversion (The "Assignee") subject to the Landlord procuring prior to the transfer a covenant from the Assignee in favour of the Tenant that the Assignee shall hold the said deposit upon and subject to the terms of this Section IX whereupon the Landlord shall thereby be released from any and all further obligations to the Tenant or otherwise in respect of the said deposit. SECTION X REGULATIONS 1 Introduction of Regulations The Landlord reserves the right for itself and/or for the building manager from time to time and by notice in writing to the Tenant to make and introduce and subsequently amend adapt or abolish if necessary such Regulations as it may consider necessary for the better operation and management of the commercial part of the said building as office premises and/or for the use of the carpark in the said building and/or its recreational areas and outdoor facilities. 2 Conflict Such Regulations shall be supplementary to the terms and conditions contained in this Agreement and shall not in any way derogate from such terms and conditions. In the event of conflict between such Regulations and the terms and conditions of this Agreement the terms and conditions of this Agreement shall prevail. SECTION XI MARKET RENTAL 1 Determination of market rental In respect of each period of the said term in relation to which reference is made to market rental the same shall be determined as follows: 1(1) During the penultimate month of the period immediately preceding the period in question the Landlord shall notify the Tenant of the Landlord's assessment of the market rental for the period in question and the Tenant shall within fourteen days of such notice lodge with the Landlord a written notice accepting or objecting to the Landlord's assessment. If the Tenant shall fail to lodge such notice within the time limit as aforesaid then the Landlord's assessment shall - 19 - Section XI/XII be and be deemed to be the market rental for the period in question. 1(2) If within fourteen days of the lodging of the Landlord's notice the parties fail or are otherwise unable to agree the market rental for the period in question either party may by notice in writing require the same to be determined by arbitration. 1(3) The arbitration shall be held before a single arbitrator and shall be conducted in accordance with the provisions of the Arbitration Ordinance (Cap. 341) or any statutory amendment or modification thereof for the time being in force. 1(4) The arbitrator shall be a chartered surveyor practicing in Hong Kong to be appointed in default of agreement between the parties by the Chairman for the time being of the Royal Institution of Chartered Surveyors (Hong Kong Branch). 1(5) The arbitrator shall be required to determine the sum which in his opinion represents a fair market rental for the said premises for the period in question and such sum shall be and be deemed to be the market rental for the period in question. Pending determination of the arbitration the minimum rental specified in the Schedule hereto for the period in question shall be payable. Upon determination of the arbitration the rent for the period in question shall be adjusted and any increase due by the Tenant shall be paid within twenty one days. 1(6) The expenses of the arbitration shall be borne by the Tenant unless the market rental determined by the arbitrator shall be less that assessed by the Landlord in accordance with Clause 1(1) of this Section XI in which case the expenses of the arbitration shall be borne by the Landlord and the Tenant in equal shares and each party shall bear its own costs. SECTION XII GENERAL 1 Landlord and tenant legislation To the extent that the Tenant can lawfully so do the Tenant hereby expressly agrees to deprive itself of all rights (if any) to protection against eviction or ejectment afforded by any existing or future legislation from time to time in force and applicable to the said premises or to this tenancy and the Tenant agrees to deliver up vacant possession of the said premises to the Landlord on the expiration or sooner termination of the tenancy hereby created notwithstanding any rule of law or equity to the contrary. - 20 - Section XII 2 Condonation not a waiver No condoning excusing or overlooking by the Landlord of any default breach or non-observance or non-performance by the Tenant at any time or times of any of the Tenant's obligations herein contained shall operate as a waiver of the Landlord's rights hereunder in respect of any continuing or subsequent default breach or non-observance or non-performance or so as to defeat or affect in any way the rights and remedies of the Landlord hereunder in respect of any such continuing or subsequent default or breach and no waiver by the Landlord shall be inferred from or implied by anything done or omitted by the Landlord unless expressed in writing and signed by the Landlord. Any consent given by the Landlord shall operate as a consent only for the particular matter to which it relates and in no way shall be considered as a waiver or release of any of the provisions hereof nor shall it be construed as dispensing with the necessity of obtaining the specific written consent of the Landlord in the future unless expressly so provided. 3 Letting notices During the three months immediately preceding the expiration of the said term the Landlord shall be at liberty to affix and maintain without interference upon any external part of the said premises a notice stating that the said premises are to be let and such other information in connection therewith as the Landlord shall reasonably require. 4 Service of notices Any notice required to be served hereunder shall if to be served on the Tenant be sufficiently served if addressed to the Tenant and sent by prepaid post to or delivered at the said premises or the Tenant's last known place of business or residence in Hong Kong and if to be served on the Landlord shall be sufficiently served if addressed to the Landlord and sent by prepaid post to or delivered at its registered office or any other address which the Landlord may notify to the Tenant from time to time. 5 No fine The Tenant acknowledges that no fine premium key money or other consideration has been paid by the Tenant to the Landlord for the grant of this tenancy. 6 Exclusion of warranties 6(1) This Agreement sets out the full agreement reached between the parties and no other representations have been made or warranties given relating to the Landlord or the Tenant or the said building or the said premises and if any such representation or warranty has been made given or implied the same is hereby waived. 6(2) Nothing herein contained or implied nor any statement or representation made by or on behalf of the Landlord prior to the date hereof shall be taken to be a covenant warranty or representation that the said premises can lawfully be - 21 - Section XII used for the use specified herein. 7 Name of building The Landlord reserves the right to name the said building with any such name or style as it in its sole discretion may determine and at any time and from time to time to change alter substitute or abandon any such name and without compensation to the Tenant provided that the Landlord shall give the Tenant and the Postal and other relevant Government Authorities not less than three months notice of its intention so to do. 8 Stamp Duty and costs The stamp duty and registration fees (if any) on this Agreement and its counterpart shall be borne by the Landlord and the Tenant in equal shares and each party shall pay its own legal costs (if any) of and incidental to the preparation and completion of this Agreement. 9 Tenant's obligations not affected This tenancy and the obligation of the Tenant to observe and perform the covenants and agreements on the part of the Tenant herein contained shall in no way be affected impaired or excused because the Landlord is unable to fulfill or is delayed in fulfilling any of its obligations under this tenancy or is unable to make or is delayed in making any repair addition alteration or decoration or is unable to supply or is delayed in supplying any equipment or service hereunder. 10 No enforcement of third party covenants Nothing herein contained shall confer on the Tenant any right to the benefit of or to enforce any covenant or agreement contained in any lease or tenancy agreement or any other instrument relating to any other part or parts of the said building or to any other premises belonging to the Landlord or limit or affect the right of the Landlord to deal with the same now or at any time hereafter in any manner which the Landlord may think appropriate and this tenancy shall not be deemed to include and shall not operate to convey or let to the Tenant any ways liberties privileges easements rights or advantages whatsoever in through over or upon any land or premises adjoining or near to the said premises except as herein expressly provided. 11 No implied covenants 11(1) The Landlord shall be under no obligation to provide or supply to the Tenant or arrange for the same services or other things as the Landlord may be providing or supplying or arranging to any other part or parts of the said building or to any other premises belonging to the Landlord or to the tenants or occupiers thereof, nor to provide or supply or arrange for any services or other things save those services or things which the Landlord hereinbefore expressly covenants to provide or supply or arrange for. - 22 - Section XII 11(2) Notwithstanding anything in any provision contained in this tenancy the Landlord shall not be liable to the Tenant nor shall the Tenant have any claim against the Landlord in respect of any interruption in any of the services or things which the Landlord provides or supplies or arranges by reason of: (i) any necessary inspection overhaul repair or maintenance of any plant equipment installation or apparatus or damage thereto or destruction thereof by reason of electrical mechanical or other defect or breakdown, or (ii) inclement conditions or shortage of fuel materials water or labour, or (iii) whole or partial failure or stoppage of any mains supply, or (iv) any other circumstances of whatsoever nature beyond the control of the Landlord or the building manager. 12 Changes in common areas The Landlord shall be entitled at any time and from time to time to extend or reduce the areas of the entrances landings staircases passages lobbies or other parts of the said building intended for common use or to make or cause to be made changes or alterations thereto for whatsoever reason as may be determined by the Landlord without incurring any liability to the Tenant on any account whatsoever. 13 Reservations There is reserved to the Landlord and all other persons at any time authorized by the Landlord or otherwise so entitled full right and liberty at all times without the necessity of obtaining consent and without compensation: 13(1) to enter upon and/or pass through the said premises for the purpose of access to and egress from any part of the said building (including without prejudice to the generality thereof the roof plant rooms and meter rooms ducts shafts and lightwells) to which access cannot be readily obtained without entry upon the said premises, and 13(2) to enter upon and be in the said premises for the purpose of carrying out any inspection repairs or maintenance of or other necessary works to any services installations or facilities upon over in through or under the said premises and serving other premises within the said building where such work cannot reasonably be carried out from outside the said premises, the persons exercising such right causing as little inconvenience as reasonably practicable and making good all damage thereby occasioned to the said premises or anything thereon, and 13(3) to use the external surfaces of the walls windows window frames and other parts of the said premises for the purposes of repairs maintenance improvements and decoration (whether permanent or seasonal) or otherwise - 23 - Section XII together with the right to erect attach and retain scaffolding or other structures as shall be convenient for such purposes. 14 Severance If any part of any provision of this Agreement shall to any extent be invalid or unenforceable the remainder of such provision and all other provisions of this Agreement shall remain valid and enforceable to the fullest extent permitted by law. 15 Tenant's effects The Tenant hereby irrevocably appoints the Landlord as its agent to deal with at the Tenant's risk and expense any of the Tenant's effects left on or about the said premises for more than seven days after the end of the said term to the intent that the Landlord may without liability to the Tenant dispose of or destroy or otherwise deal with the same as the Landlord shall think fit. 16 Use of other premises The Tenant shall not be entitled to complain about nor shall the Tenant have any claim against the Landlord in respect of any alleged noise or nuisance or interference with its user of the said premises due to any operations being carried on in other parts of the said building, whether by the Landlord or any other owner or by any of their respective tenants licensees or occupiers. 17 Deed of Mutual Covenant If the Landlord shall at any time cease to be the sole registered owner of the said Lot(s) and/or the said building the Landlord shall be at liberty to enter into any deed(s) of mutual covenant and/or management agreement(s) in relation to the said building as it sees fit provided that no such deed of mutual covenant or management agreement shall contain any covenant term or condition which shall unreasonably limit or restrict the proper use by the Tenant of the said premises pursuant to and in accordance with the whole provisions of this Tenancy Agreement. 18 Sale and redevelopment If at any time during the tenancy hereby created the Landlord shall enter into a contract for the sale of the said building or of any part thereof which shall include the said premises or if the Landlord shall resolve to redevelop the said building or any part thereof whether wholly by demolition and rebuilding or otherwise, or partially by renovation, refurbishment or otherwise (which intention so to redevelop shall be sufficiently evidenced by a copy of a Resolution of its Directors certified to be a true and correct copy by its Secretary) then in either of such events the Landlord shall be entitled to give six clear calendar months' notice in writing expiring at the end of any calendar month during the tenancy hereby created terminating this Agreement and immediately upon the expiration of such notice this Agreement and everything herein contained shall cease and be void but without prejudice to the rights and remedies of either party against the other in respect of any antecedent claim or breach of any of - 24 - Section XII the agreements or stipulations herein set out. 19 Special conditions AS WITNESS the hands of the parties hereto the day and year first above written. - 25 - SCHEDULE -------- 1. The Landlord means the registered owner of the said Lot (including where the context so admits its successors and assigns) acting by its duty authorised agent, Harriman Leasing Limited. 2. The Tenant means TYCO ASIA LIMITED 3. The said Lot means SECTION B OF KML NO. 11 & THE EXTENSION THERETO 4. The said building means WORLD SHIPPING CENTRE, HARBOUR CITY 5. The said premises means 12TH FLOOR where shall be used for no purpose other than AS COMMERCIAL OFFICES ONLY and the floor loading of which shall not exceed 60 lbs. per square foot. 6. The said term means the period commencing on the 1ST day of AUGUST 1995 and expiring on the 31ST day of JULY 1998 7. The rent means (a) in respect of the period from the date of commencement of the said term to the 31ST day of JULY 1998 the sum of Hong Kong Dollars FIVE HUNDRED AND SIXTY THOUSAND FOUR HUNDRED AND EIGHTEEN (HK$ 560,418.00 ) per calendar month, and 8. The air-conditioning charge means the sum payable from time to time for the provision of air-conditioning services, being Hong Kong Dollars THIRTY SEVEN THOUSAND NINE HUNDRED AND SIXTY THREE AND EIGHTY CENTS (HK$ 37,963.80) per calendar month at the date of commencement of the said term, subject to increase from time to time in accordance with the provisions of Clause 1(2) of Section II. 9. The service charge means the sum payable from time to time for the provision of building management services, being Hong Kong Dollars TWENTY FIVE THOUSAND THREE HUNDRED AND NINE AND TWENTY CENTS (HK$ 25,309.20) per calendar month at the date of commencement of the said term, subject to increase from time to time in accordance with the provisions of Clause 1(2) of Section II. 10.The deposit means the sum of Hong Kong Dollars ONE MILLION NINE HUNDRED AND FORTY TWO THOUSAND EIGHT HUNDRED AND FORTY EIGHT (HK$ 1,942,848.00) subject to increase from time to time in accordance with the provisions of Clause 2 of Section IX. 11.The building manager means the person company or firm (if any) from time to time responsible for the proper management of the said building pursuant to any appointment either by the Landlord or under a deed of mutual covenant or management agreement. - 26 - SIGNATURES SIGNED by ) For and on behalf of ) HARRIMAN LEASING LIMITED as the duly authorized agent ) for and on behalf of the ) /s/ Signature appears here Landlord ) ................................ in the presence of: ) Director & General Manager STEPHEN Y.H. LAU /s/ Stephen Lau For and on behalf of TYCO ASIA LIMITED SIGNED by ) ) the Tenant/for and ) /s/ Signatures appear here on the behalf of the Tenant ) .................................... in the presence of: ) Authorized Signature(s) KENNETH WORSDALE MANAGING DIRECTOR For and on behalf of TYCO ASIA LIMITED ............................... Authorized Signature(s) LAM KIN KWOK DIRECTOR OF FINANCE & ADMIN. 12/F WORLD SHIPPING CENTRE HARBOUR CITY - 27 - ANNEXURES [FLOOR PLAN OF WORLD SHIPPING CENTRE, SUITE NO. 1200 APPEARS HERE] FOR IDENTIFICATION PURPOSES ONLY - 28 -
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