UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 33-65496
MARVEL (PARENT) HOLDINGS INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3501047
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5900 NORTH ANDREWS AVENUE, FT. LAUDERDALE, FL 33309
- - ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
305-772-3152
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(Registrant's telephone number, including area code)
- - ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
At May 6, 1996, the number of outstanding shares of the registrant's common
stock, par value $1.00 per share, was 1,000 shares, all of which were held by
Marvel III Holdings.
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
INDEX TO CONTENTS OF THE FIRST QUARTER 1996 FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the quarters ended March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Other Information 15
Signatures 16
</TABLE>
2
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................ $ 13.5 $ 37.0
Accounts receivable, net........................ 218.4 240.0
Inventories..................................... 94.5 82.4
Deferred income taxes........................... 47.5 50.4
Income taxes receivable......................... 24.6 24.6
Prepaid expenses and other...................... 55.2 42.9
---------- -----------
Total current assets......................... 453.7 477.3
Property, plant and equipment, net................ 76.5 71.3
Goodwill and other intangibles, net............... 903.4 907.7
Deferred charges and other........................ 62.2 69.4
---------- -----------
$1,495.8 $1,525.7
========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................ $ 115.7 $ 104.8
Accrued expenses and other...................... 153.1 195.8
Current portion of long-term debt............... 5.3 5.2
---------- -----------
Total current liabilities..................... 274.1 305.8
Long-term debt..................................... 1,202.0 1,177.5
Other long-term liabilities........................ 61.8 63.6
---------- -----------
1,537.9 1,546.9
---------- -----------
Minority interest in Toy Biz........................ 72.5 70.4
---------- -----------
Minority interest in Marvel:
Held by affiliates................................ 2.8 2.8
---------- -----------
Held by non-affiliates............................ 40.3 41.1
---------- -----------
Stockholder's deficit:
Common stock........................................ - -
Capital deficiency.................................. (18.6) (19.4)
Accumulated deficit ................................ (139.3) (116.5)
Cumulative translation adjustment .................. 0.2 0.4
---------- -----------
Total stockholder's deficit..................... (157.7) (135.5)
---------- -----------
$1,495.8 $1,525.7
========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------------
1996 1995
---------- ---------
<S> <C> <C>
Net revenues.................................................. $189.0 $159.5
---------- ---------
Operating Expenses:
Cost of sales................................................. 113.9 96.9
Selling, general & administrative expenses.................... 52.3 43.5
Depreciation and amortization................................. 4.4 2.5
---------- ---------
Total Operating Expenses ........... 170.6 142.9
Amortization of goodwill, intangibles and deferred charges.... 8.4 6.2
Interest expense, net......................................... 30.2 22.5
Other income.................................................. - 14.0
Equity in net income of unconsolidated subsidiaries........... 0.1 0.2
---------- ---------
(Loss) income before provision for income taxes and
minority interest........................................... (20.1) 2.1
Provision for income taxes.................................... 1.7 10.2
---------- ---------
Loss before minority interest................................. (21.8) (8.1)
Minority interest in earnings of Toy Biz...................... 2.0 1.4
Minority interest in earnings of Marvel:
Attributable to affiliates.................................. (0.1) 0.1
Attributable to non-affiliates.............................. (0.9) 1.6
---------- ---------
Net loss...................................................... ($22.8) ($11.2)
========== =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1996 1995
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. ($22.8) ($11.2)
------- --------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization...................................... 12.8 8.7
Amortization of debt discount...................................... 16.4 14.6
Provision for deferred income taxes................................ 3.8 6.3
Undistributed earnings of unconsolidated subsidiaries.............. (0.1) (0.2)
Gain from Toy Biz IPO.............................................. - (14.0)
Minority interest in earnings of Toy Biz........................... 2.0 1.4
Minority interest in earnings of Marvel............................ (1.0) 1.7
Changes in assets and liabilities, net of effects in 1995 of
previously unconsolidated subsidiary........................... (26.3) (28.6)
------- --------
Total adjustments..................................................... 7.6 (10.1)
------- --------
Net cash used in operating activities............................ (15.2) (21.3)
------- --------
Cash flows from investing activities:
Capital expenditures............................................... (11.1) (6.1)
Purchase of Marvel shares of common stock.......................... (0.6) -
Other.............................................................. (3.4) (6.3)
------- --------
Net cash used in investing activities............................ (15.1) (12.4)
------- --------
Cash flows from financing activities:
Net repayments under term portion of credit agreements............. (2.6) (10.0)
Net borrowings under revolving portion of credit agreement......... 2.0 15.0
Borrowings related to Adespan adhesives facility.................... 6.3 -
Toy Biz IPO net proceeds............................................ - 45.5
Capital contributions from parent.................................. 0.6 -
Proceeds from exercise of stock options............................. 0.4 0.4
Other financing activities.......................................... 0.2 -
------- --------
Net cash provided by financing activities........................ 6.9 50.9 .
------- --------
Effect of exchange rate changes on cash............................... (0.1) 0.8 .
------- --------
Cash balance from previously unconsolidated subsidiary................ - 7.5
------- --------
Net (decrease) increase in cash....................................... (23.5) 25.5
Cash at beginning of period........................................... 37.0 18.1
------- --------
Cash at end of period................................................. $13.5 $43.6
======= ========
Supplemental disclosures of cash flow information:
Interest paid during the period................................ $18.6 $10.2
Income taxes paid during the period............................ $7.8 $6.1
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
5
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying condensed consolidated financial statements of Marvel
(Parent) Holdings Inc., ("Parent Holdings", together with its subsidiaries,
the "Company"), are unaudited. Parent Holdings is a direct wholly owned
subsidiary of Marvel III Holdings Inc., an indirect wholly owned subsidiary of
Andrews Group Incorporated ("Andrews Group"), which in turn is a wholly owned
subsidiary of Mac Andrews & Forbes Holdings Inc. ("MacAndrews Holdings"),
which in turn is wholly owned through Mafco Holdings Inc. ("Mafco" and
together with MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O.
Perelman. In the opinion of management, all adjustments and intercompany
eliminations necessary for a fair presentation of the results of operations,
financial position and cash flows have been made and were of a normal
recurring nature. The condensed consolidated financial statements of the
Company include the results of operations, financial position and cash flows
of Marvel Entertainment Group, Inc. and its subsidiaries ("Marvel"). The
Company's operations consist of (i) the publication and sale of comic books
and children's magazines, (ii) the manufacture and distribution of sports and
entertainment trading cards and children's activity sticker collections, (iii)
consumer products, media and advertising-promotion licensing of the various
characters owned by the Company, (iv) the design, marketing and distribution
of toys and (v) the manufacture and distribution of adhesives and
confectionery products. These interim condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes thereto contained in the Company's 1995 Annual
Report on Form 10-K. Certain prior year amounts have been reclassified to
conform with the current year presentation.
The condensed consolidated financial statements presented herein reflect
the ownership by the Company of approximately 79% of the outstanding shares of
Marvel common stock for all periods.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
ACCOUNTS RECEIVABLE, NET:
March 31, December 31,
1996 1995
----------- -----------
Accounts receivable....................... $ 267.9 $ 317.9
Less: Allowances......................... (49.5) (77.9)
----------- ------------
$ 218.4 $ 240.0
=========== ============
INVENTORIES:
Finished goods............................ $ 69.6 $ 58.8
Work in process........................... 21.4 22.3
Raw materials............................. 23.8 23.7
Less: Reserve for obsolescence............ (20.3) (22.4)
----------- ------------
$ 94.5 $ 82.4
=========== ============
GOODWILL AND OTHER INTANGIBLES, NET:
Goodwill and other intangibles............ $ 971.8 $ 969.5
Less: Accumulated amortization........... (68.4) (61.8)
----------- -----------
$ 903.4 $ 907.7
=========== ===========
6
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ACCRUED EXPENSES AND OTHER:
March 31, December 31,
1996 1995
----------- -----------
Royalties and incentives.................. $ 21.0 $ 33.5
Reserve for returns....................... 45.9 59.0
Income taxes payable...................... 7.7 19.7
Other..................................... 78.5 83.6
----------- -----------
$ 153.1 $ 195.8
=========== ===========
3. LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1996 1995
----------- --------------
U.S. Term Loan Agreement $ 350.0 $ 350.0
Term Loan Agreement .................... 139.0 139.5
Amended and Restated Credit Agreement:
Revolving credit facility ........ 89.5 87.5
Series B Senior Secured Discount Notes,
net of unamortized discount of
$103.5 at March 31, 1996 and
$114.6 at December 31, 1995 ...... 413.9 402.8
11-7/8 Senior Secured Discount Notes, net
of unamoritized discount of $52.8
at March 31, 1996 and $58.3 at
December 31, 1995 ................ 198.9 193.4
Capital lease obligations and other long
term debt ........................ 16.0 9.5
-------- --------
1,207.3 1,182.7
Less current maturities ................ 5.3 5.2
-------- --------
Long-term debt ......................... $1,202.0 $1,177.5
======== ========
Long-term debt includes the outstanding balance under the U.S. Term Loan
Agreement, as defined below, the Amended and Restated Credit Agreement
effective August 30, 1994 between Marvel, a syndicate of banks, the Co-Agents
and Chemical Bank, as administrative agent (the "Amended and Restated Credit
Agreement"), and the outstanding balance of the Term Loan Agreement, as
defined below. The U.S. Term Loan Agreement is repayable in six semi-annual
installments beginning August 31, 1999. The Term Loan Agreement is repayable
in fourteen increasing semi-annual installments, which began February 28,
1995. Portions of the revolving credit facility under the Amended and Restated
Credit Agreement mature on September 1, 1999, 2000 and 2001.
During March 1996, Marvel amended its credit agreements with its banks
to provide for, among other things, an additional $25.0 revolving credit
facility which expires on December 31, 1996. This revolving credit facility is
pari passu with the loans extended by the banks pursuant to Marvel's existing
loan agreements. Marvel also secured all of its bank loans with the domestic
assets of Marvel.
In April 1995, Marvel entered into a $350.0 term loan agreement with a
syndicate of banks, the Co-Agents and Chemical Bank, as administrative agent
(the "U.S. Term Loan Agreement"). Marvel borrowed $350.0 under the U.S. Term
Loan Agreement to finance the SkyBox Acquisition, as described in Note 6 below,
refinance the term loan portion of the Amended and Restated Credit Agreement,
and for general corporate purposes.
7
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Loans under the U.S. Term Loan Agreement bear interest at a rate per
annum equal to the Eurodollar Rate (as defined in the U.S. Term Loan
Agreement), plus the Applicable Margin (as defined in this paragraph), or the
Alternate Base Rate (as defined in the U.S. Term Loan Agreement). Eurodollar
Rate Loans will, at the option of Fleer Corp., have interest periods of one,
two, three or six months. Applicable Margin means (a) with respect to
Eurodollar Rate loans, 2% to 2 1/2% through the first Anniversary Date (as
defined in the U.S. Term Loan Agreement) and 1 1/8% to 2 1/2% thereafter, to
be determined based on Marvel's financial performance and (b) with respect to
Alternate Base Rate loans, 1% to 1 1/2% through the first Anniversary Date and
1/8 of 1% to 1 1/2% thereafter, to be determined based on Marvel's financial
performance. The interest rate on Eurodollar Rate Loans at March 31, 1996, was
approximately 7-7/8% to 8-1/8% depending upon the length of the relevant
interest period. Interest on Alternate Base Rate Loans is payable quarterly in
arrears, and interest on Eurodollar Rate Loans is payable at the end of the
applicable interest period, except that if the interest period is six months,
interest is payable ninety days after the commencement of the interest period
and at the end of the interest period.
In connection with the U.S. Term Loan Agreement, Marvel also entered
into an amendment to the existing Amended and Restated Credit Agreement which,
among other things, permitted Marvel to incur the indebtedness under the U.S.
Term Loan Agreement. Pursuant to this amendment, the Applicable Margin under
the existing Amended and Restated Credit Agreement for Alternate Base Rate
loans will range from 0% to 1% and for Eurodollar Rate loans will range from
5/8 of 1% to 2%, in each case depending on Marvel's financial performance. The
interest rate on Eurodollar Rate Loans at March 31, 1996 was approximately
7-5/16% to 7-3/8% per annum, depending upon the length of the relevant
interest period. The interest rate on Alternate Base Rate loans at March 31,
1996 was 9-1/4 %. The proceeds of loans incurred under the revolving credit
portion of the Amended and Restated Credit Agreement may be used for general
corporate purposes of Marvel and for investments within an aggregate limit.
Portions of the loans under the Amended and Restated Credit Agreement will
mature on September 1, 1999, 2000 and 2001.
On August 30, 1994, Marvel, Marvel Italia Srl (now Panini S.p.A.) and
Instituto Bancario San Paolo Di Torino S.p.A. (the "Lender"), entered into a
term loan and guarantee agreement (the "Term Loan Agreement") providing for a
term loan credit facility of Italian Lire 244.5 billion (approximately $154.0
million based on exchange rates in effect on the date of acquisition) (the
"Term Loan Facility"). Marvel Italia borrowed Italian Lire 244.5 billion under
the Term Loan Agreement, and Marvel borrowed additional funds under its
Amended and Restated Credit Agreement to finance the purchase of Panini and to
pay certain fees and expenses related to the acquisition.
On September 30, 1994, Marvel paid Italian Lire 15.0 billion
(approximately $9.4 million, based on exchange rates in effect on September
30, 1994) as a voluntary reduction of the principal balance under the Term
Loan Agreement. In addition, during 1995 Marvel paid Italian Lire 8.2 billion
(approximately $5.0 million) due under the Term Loan Facility and, on February
28, 1996 Marvel paid Italian Lire 4.1 billion (approximately $2.5 million) due
thereunder. The remaining amount outstanding under the Term Loan Facility is
repayable in 11 increasing semi-annual installments.
The Term Loan Facility bears interest at a rate per annum equal to the
Eurocurrency Rate (as defined in the Term Loan Agreement) or, in certain
limited circumstances, the Negotiated Rate (as defined in the Term Loan
Agreement), in each case plus the Applicable Margin (as defined in this
paragraph). Eurocurrency Rate Loans have, at the option of Panini, interest
periods of one, two, three or six months. Applicable Margin means (a) with
respect to Eurocurrency Loans, 5/8 of 1% to 2%, to be determined based on
Marvel's financial performance and (b) with respect to Negotiated Rate Loans,
1%. The interest rate on Eurocurrency Rate Loans at March 31, 1996, was
approximately 12-1/16% Interest on Negotiated Rate Loans is payable quarterly
in arrears and interest on Eurocurrency Rate Loans is payable at the end of
the applicable interest period, except that if the interest period is six
months, interest is payable ninety days after the commencement of the interest
period and at the end of the interest period.
The U.S. Term Loan Agreement (through incorporation by reference to the
Amended and Restated Credit Agreement), the Amended and Restated Credit
Agreement and the Term Loan Agreement include various restrictive
8
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
covenants prohibiting Marvel from, among other things, incurring additional
indebtedness, with certain limited exceptions, and making dividend, redemption
and certain other payments on its capital stock. The U.S. Term Loan Agreement,
the Amended and Restated Credit Agreement and the Term Loan Agreement also
contain certain customary financial covenants and events of default for
financing of this type, including a limitation of a change of ownership covenant
of more than 25% of the voting shares of Marvel. Mandatory prepayments are
required to be made out of net proceeds from sales of assets by Marvel, with
certain exceptions, and from certain excess cash flow (as defined in the Amended
and Restated Credit Agreement).
In conjunction with the Toy Biz IPO, Toy Biz entered into a three year
$30 million revolving line of credit with a syndicate of banks for which
Chemical Bank serves as administrative agent. Substantially all of the assets
of Toy Biz have been pledged to secure borrowings under the Toy Biz credit
facility. Borrowings under the credit facility bear interest at either
Chemical Bank's alternate base rate or at the Eurodollar rate plus the
applicable margin. The applicable margin is 1% unless Toy Biz meets specific
financial operating levels, in which case the applicable margin decreases to
3/4 of 1%. The credit facility requires Toy Biz to pay a commitment fee of 3/8
of 1% per annum on the average daily unused portion of the credit facility.
The Toy Biz credit facility contains various financial covenants, as
well as restrictions, on the incurrence of new indebtedness, prepaying or
amending subordinated debt, acquisitions and similar investments, the sale or
transfer of assets, capital expenditures, limitations on restricted payments,
dividends, issuing guarantees and creating liens. The credit facility also
requires that (a) Marvel maintain voting control of Toy Biz and have the power
to elect a majority of Toy Biz's Board of Directors and (b) that the exclusive,
royalty free perpetual worldwide license agreement between Toy Biz and Marvel
remain in effect. The Toy Biz credit facility is not guaranteed by Marvel.
The aggregate maturities of the Company's long term debt are as follows:
For the Years Ending
December 31,
--------------------------
1996................................... $ 5.3
1997................................... 10.3
1998................................... 785.8
1999................................... 84.4
2000................................... 179.5
2001 and thereafter.................... 298.3
-----------
$ 1,363.6
===========
4. RESTRUCTURING OF OPERATIONS
In the fourth quarter of 1995, Marvel recorded restructuring charges of
$25.0 related primarily to publishing and confections operations. As part of
the restructuring, Marvel has terminated approximately 275 employees, covering
editorial, production, distribution and administrative employee groups and,
accordingly, provided for $10.7 of termination benefits, of which $4.9 has
been paid as of March 31, 1996. Additionally, approximately $6.7 relates to
facility closure and consolidation costs, of which $4.1 has been paid as of
March 31, 1996, and $7.6 relates to other costs, of which $4.0 has been paid
as of March 31, 1996. The remaining amounts, as of March 31, 1996, are
included in accrued expenses and other.
5. TOY BIZ IPO
On March 2, 1995, Toy Biz, Inc. ("Toy Biz") completed an initial public
offering (the "Toy Biz IPO") in which it issued and sold 2,750,000 shares of
class A common stock at $18 per share. The net proceeds to Toy Biz, after
deducting commissions and offering expenses, of $44.1 were used to pay
outstanding amounts due under
9
<PAGE>
MARVEL (PARENT) HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
subordinated notes held by Marvel and the sole stockholder of the predecessor
to Toy Biz and for working capital and general corporate purposes. In March
1995, Marvel recorded a gain of $14.0 on the Toy Biz IPO in recognition of the
net increase in value of Marvel's investment in Toy Biz. This amount was
reflected in other income in the financial statements. In conjunction with the
Toy Biz IPO, Marvel's equity ownership was reduced to approximately 36.6% and
its voting control increased to 85.3%, and, as a result of the increase, the
condensed consolidated financial statements of Marvel include the result of
operations, financial position and cash flows of Toy Biz. For periods prior to
the Toy Biz IPO, Toy Biz was accounted for under the equity method.
6. SKYBOX ACQUISITION
On April 27, 1995, pursuant to an Agreement and Plan of Merger dated as
of March 8, 1995 (the "SkyBox Merger Agreement"), among SkyBox, a Delaware
corporation, Marvel and an indirect wholly owned subsidiary of Marvel, Marvel
acquired all of the issued and outstanding shares of SkyBox common stock for
$16 per share. The purchase price, including fees, expenses and other
acquisition costs, totaled $165.0. The transaction was accomplished through a
tender offer (the "Tender Offer") and subsequent merger (the "Merger", and
collectively with the Tender Offer, the "SkyBox Acquisition"). The purchase
price includes an obligation to former SkyBox stockholders who did not exchange
their shares.
The SkyBox Acquisition was accounted for using the purchase method of
accounting. The purchase price has been allocated to assets and liabilities
based on their respective fair values at April 27, 1995. The fair values of
the assets and liabilities acquired are summarized below. The total purchase
price exceeded the fair value of the net assets of SkyBox by $158.4 and has
been assigned to goodwill, which is being amortized over forty years on the
straight-line basis.
Current assets.............................. $ 31.6
Noncurrent assets........................... $ 5.4
Current liabilities......................... $ 27.1
Noncurrent liabilities...................... $ 3.3
------------
$ 6.6
============
The following unaudited pro forma consolidated financial information
gives effect to the SkyBox Acquisition as if it had occurred at the beginning
of 1995. The pro forma results include certain adjustments, primarily
increased amortization and interest expense, and are not necessarily
indicative of what the results would have been had the SkyBox Acquisition
occurred at the beginning of the period. In addition, Toy Biz net revenues
were $27.9 for the three months ended March 31, 1995, of which $13.2 was
included in Marvel's consolidated net revenues.
For the Three Months Ended
March 31, 1995
--------------
Net Revenues.................... $ 185.6
Net Loss........................ $ (11.5)
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Parent Holdings is a holding company with no operations or source of
income of its own. Accordingly, except as otherwise indicated, the following
discussion relates to the results of operations of Marvel.
Marvel is a leading creator, publisher and distributor of youth
entertainment products for domestic and international markets based on action
adventure characters owned by Marvel, licenses from professional athletes,
sports teams and leagues and popular entertainment characters and other
properties owned by third parties. Marvel also licenses its characters and
properties for consumer products, television and film and advertising
promotions. Marvel's products include comic book and other publications,
sports and entertainment trading cards, children's activity stickers, toys,
adhesives and confectionery products.
RESULTS OF OPERATIONS
Over the past five years, the Company has diversified into a broadly
based youth entertainment company. As a result, an increasing portion of the
Company's net revenues have been derived from businesses other than comic book
publishing. For example, in 1991, net revenues from publishing were
approximately 86.0% of the Company's total net revenues as compared to
approximately 17.8% in 1995. The Company's business has been augmented by the
manufacture, marketing and distribution of sports and entertainment trading
cards and children's activity stickers and the licensing of the Company's
characters for consumer products, television and film, advertising promotions
and toys. Although the Company's consolidated net revenues have increased as a
result of diversification, certain changes in market conditions associated
with its publishing and trading card operations have adversely affected the
Company's net revenues and operating results in recent periods.
As a result of a significant reduction in speculative purchases of comic
books, the Company has undertaken several strategic actions which it believes
will have the long-term effect of bolstering its publishing business. The
Company is eliminating unprofitable and marginally profitable titles to create
a strong line-up comprising Marvel's most popular and most profitable titles;
focusing its comic books more on editorial content and less on physical
product features and enhancements; and streamlining operations through
introduction of new technology and consolidation of facilities. Combined with
the reduction in titles, these measures will reduce editorial, production,
distribution, manufacturing and administrative overhead expense. The Company
believes these actions, together with the exclusive distribution by Heroes
World of the Company's comic books to the direct market, which commenced July
1995, are expected to improve the future operating results of the Company's
publishing business.
For 1994 and 1995, the Company believes that there was a general
contraction in the sports trading card market, related in part to lower
speculative purchases. This contraction was compounded by the baseball, hockey
and basketball labor situations, which adversely affected sports trading card
sales and returns for those periods. Although Major League Baseball resumed in
April 1995, there still is no collective bargaining agreement in effect
between the owners and players, and the level of fan interest has not returned
to the levels experienced prior to the 1994 strike. Consistent with decreased
fan interest, the Company believes that the labor situations in professional
sports have contributed to decreased trading card consumer interest and,
therefore, generally decreased levels of consumer purchases of all trading
cards. Accordingly, the Company believes that the overall trading card
industry has been negatively affected, causing the Company to experience lower
sales, higher returns and higher inventory obsolescence during 1995, including
an increase in reserves in the second quarter of 1995 of approximately $40.0
million for trading card returns and inventory obsolescence.
Throughout 1995, these conditions resulted in the Company and the trading
card industry in general continuing to experience lower sales and higher
returns, primarily related to distribution channels other than trading card
specialty stores. The Company has revamped its trading card business such that
distribution of trading card products will be concentrated in trading card
specialty stores and selected mass market accounts. In
11
<PAGE>
connection therewith, the Company increased reserves as of December 31, 1995
by an additional amount of approximately $70.0 million, principally for
product returns from the points of distribution being eliminated and for the
obsolescence of certain 1995 inventory. As a result of this change in
strategy, Fleer/SkyBox is focusing its sales efforts on those retailers and
distributors with strong performance histories. The Company believes that
these distribution channels, with their focused customer base and proven
efficiencies, should allow Fleer/SkyBox to realize an improvement in operating
income in the future.
Also as part of the revamping of Fleer, operational overhead has been
reduced through the closure of Fleer's Philadelphia facility, which had been
used for confections and trading card manufacturing. The confections operation
has been consolidated at Fleer's Byhalia, Mississippi plant and all of the
trading card manufacturing has been outsourced. The Company anticipates
additional reductions in future operating expenses of Fleer/SkyBox due to the
concentration of sales activities to trading card specialty stores and
selected mass market accounts.
As a result of the Company's restructuring activities, the Company
reflected in results of operations for the fourth quarter of 1995 an
additional $25.0 million related to severance, consolidation and closure of
facilities and other costs associated with its publishing, confections and
trading card businesses.
With these actions, the Company has simplified and refocused its
publishing and trading card operations by concentrating on the strongest
elements of the businesses, delivering popular products to a motivated
customer base and using more efficient channels of distribution. The Company
believes that these actions will position the Company for an improvement in
future operating performance of these businesses. The extent of improvement
will be determined by, among other things, the state of the markets in which
the Company's products are sold and the level of reception by consumers to the
Company's changes in these businesses and to the Company's products.
The Company expects that there will continue to be year to year
fluctuations in the net revenues and profitability of its individual
businesses. However, the Company believes that its continued diversification
into a broad based youth entertainment company will help to mitigate the
effects of such fluctuations on overall net revenues and profitability.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1995
The Company's net revenues were $189.0 million and $159.5 million in the
1996 and 1995 periods, respectively, an increase of $29.5 million or 18.5%.
This increase reflects an increase of $25.3 million in toy revenues, a $14.5
million increase in trading card and sticker net revenues and $2.2 million in
other revenues, partially offset by an $11.9 million decrease in net
publishing revenues and a $0.6 million decrease in licensing revenues. The
increase in trading card and sticker net revenues was primarily attributable
to the SkyBox Acquisition and, to a lesser extent, the international sale of
trading cards by Panini. The increase in toy revenues was principally due to
the consolidation of Toy Biz for a full quarter in 1996 as compared to only
one month in 1995, or from the date of Toy Biz's IPO in March 1995, and its
expanded product line. The decrease in net publishing revenues was due to the
reduction of titles, in accordance with the Company's business strategy, and
the discontinuance commencing in July 1995 of the distribution by Heroes World
of comic book publications other than the Company's titles. Licensing revenues
will vary depending on the volume and extent of licensing agreements entered
into during any particular financial period.
Gross profit was $75.1 million and $62.6 million in the 1996 and 1995
periods, respectively, an increase of $12.5 million or 20.0 %. As a percentage
of net revenues, gross profit increased to 39.7% in the 1996 period from 39.2%
in the 1995 period. The increase in gross profit as a percentage of revenues
was due to a reduction of unprofitable titles in the Company's publishing
business, a reduction in distribution at Heroes World and an improvement in
licensing margins, offset by an unfavorable product mix for trading cards and
sticker collections and toys as compared to 1995.
Selling and general administrative expenses ("SG&A") were $52.3 million
and $43.5 million in the 1996 and 1995 periods, respectively. The increase of
$8.8 million was mainly attributable to the consolidation of Toy Biz's results
for a full quarter in 1996, the Sky Box Acquisition in the second quarter of
1995 and the effects of the
12
<PAGE>
expansion of the Company's Heroes World operations, partially offset by a
reduction in SG&A as a result of the restructuring of its publishing and
confectionery operations. As a percentage of net revenues, SG&A increased to
27.7 % in the 1996 period from 27.3% in the 1995 period.
Depreciation and amortization was $4.4 million and $2.5 million in the
1996 and 1995 periods, respectively. The increase of $1.9 million was
primarily due to the consolidation of Toy Biz.
Amortization of goodwill, intangibles and deferred charges was $8.4
million and $6.2 million in the 1996 and 1995 periods, respectively. The
increase of $2.2 million mainly reflects the amortization related to the
SkyBox Acquisition in April, 1995.
Interest expense, net was $30.2 million and $22.5 million in the 1996
and 1995 periods, respectively. The increase in interest expense of $7.7
million primarily reflects the increased borrowings under the U.S. Term Loan
Facility in connection with the SkyBox Acquisition and, to a lesser extent,
the interest associated with a Panini loan for the expansion of the Adespan
adhesives facility and higher average borrowing rates. The accretion of the
discount on the Marvel Holdings Notes and the Parent Notes was $11.1 million
and $5.5 million for the three months ended March 31, 1996.
In 1995, other income of $14.0 million represents the net increase in
value of the Company's investment in Toy Biz as a result of the Toy Biz IPO.
Provision for income taxes was $1.7 million and $10.2 million in the
1996 and 1995 periods, respectively. The lower income taxes in the 1996 period
are due primarily to the Company's loss. In 1996, the tax provision primarily
was a result of taxes on income from foreign sources and Toy Biz operations,
offset by a benefit from remaining operations. In addition, no benefit has been
recorded for the separate company losses of Parent Holdings and Marvel Holdings
as they would not be able to file a consolidated return with Marvel and they are
not assured that they will ultimately receive a benefit on a separate company
basis.
Minority interest in earnings of Toy Biz increased due to the
consolidation of Toy Biz since the Toy Biz IPO in March 1995.
Minority interest in the earnings of Marvel decreased due to the
decrease in Marvel's net income.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1996, the Company used $15.2
million of cash as a result of its operating activities. On a cash basis,
results of operations generated $11.1 million while working capital changes
resulted in a use of funds of $26.3 million. The use of funds was principally
due to the payment of fourth quarter 1995 advertising and promotion expenses
and income taxes of Toy Biz and restructuring costs payments. Cash as shown on
the Consolidated Balance Sheets includes $8.6 million and $22.5 million of Toy
Biz cash at March 31, 1996 and December 31, 1995, respectively.
As a result of its investing activities for the three months ended March
31, 1996, the Company used $15.1 million. The primary use of these funds were
for capital expenditures for its Adespan adhesives facility and tooling and
molds and capitalized product development costs primarily related to Toy Biz.
During the quarter, as a result of its financing activities, cash
provided was $6.9 million, primarily as a result of increased borrowings for
the expansion of its Adespan adhesives facility.
During March 1996, Marvel amended its credit agreements with its lenders
to provide for, among other things, an additional $25.0 million revolving
credit facility which will expire on December 31, 1996. This revolving credit
facility is pari passu with the loans extended by the banks pursuant to
Marvel's existing loan agreements. Marvel also secured all of its bank loans
with the domestic assets of Marvel.
13
<PAGE>
At May 6, 1996, Marvel's outstanding bank indebtedness was $609.1
million, of which $15.9 million relates to the borrowings for the Adespan
adhesives facility. Marvel had $40.5 million available under its credit
facilities. In addition, there was $30.0 million available under the Toy Biz
line of credit at May 6, 1996.
At May 6, 1996, 78,007,725 shares, or 76.6%, of Marvel's common stock
were pledged to secure indebtedness or letters of credit of subsidiaries of
Mafco. In addition, 2,932,167 shares, or 2.9% of Marvel's common stock, are
subject to a negative pledge under the terms of the Marvel Holdings Notes
indenture. The indentures governing this indebtedness contain various
covenants relating to Marvel, including certain limitations on Marvel's
indebtedness.
Management anticipates that borrowings under its various credit
agreements will be paid from internally generated funds of Marvel or from
other sources, which may include the sale of debt securities of Marvel.
Management also anticipates that internally generated funds, as well as
proceeds from borrowings under the Amended and Restated Credit Agreement and
the Toy Biz credit facility or any amendment thereto will be sufficient to
meet working capital and capital expenditure requirements.
In order to meet principal payments upon the final maturity of its various
debt facilities outstanding, which occur in 1998, Parent Holdings and Marvel
Holdings will be required to adopt one or more alternatives, such as borrowing
funds, selling its equity securities or seeking capital contributions or loans
from Mafco Holdings or affiliates.
14
<PAGE>
PART II.
OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings as described in
previous filings. During the quarter there were no material developments in any
of such proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARVEL (PARENT) HOLDINGS INC.
(Registrant)
By: /s/ Laurence Winoker
----------------------
Dated: May 13, 1996 Laurence Winoker
Vice President and Controller
(Principal Accounting Officer)
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<ARTICLE> 5
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This schedule contains summary financial information
extracted from the Marvel (Parent) Holdings Inc.
Condensed Consolidated Balance Sheets and Statements
of Operations .
</LEGEND>
<S> <C>
<CIK> 0000909169
<NAME> Marvel (Parent) Holdings, Inc.
<MULTIPLIER> 1,000,000
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<PERIOD-TYPE> 3-MOS
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 268
<ALLOWANCES> 50
<INVENTORY> 95
<CURRENT-ASSETS> 454
<PP&E> 104
<DEPRECIATION> 27
<TOTAL-ASSETS> 1,496
<CURRENT-LIABILITIES> 274
<BONDS> 0
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<COMMON> 0
<OTHER-SE> (158)
<TOTAL-LIABILITY-AND-EQUITY> 1,496
<SALES> 189
<TOTAL-REVENUES> 189
<CGS> 114
<TOTAL-COSTS> 114
<OTHER-EXPENSES> 57
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30
<INCOME-PRETAX> (20)
<INCOME-TAX> 2
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