<PAGE>
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 June 30, 1997
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 1-13638
TOY BIZ, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3711775
- -------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
685 THIRD AVENUE, NEW YORK, NY 10017
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
212-588-5100
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
333 EAST 38TH STREET, NEW YORK, NY 10016
- -------------------------------------------------------------------------------
(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 August 1, 1997, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 27,746,127 shares of Class A Common
Stock.
<PAGE>
TOY BIZ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996*
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $4,616 $6,022
Accounts receivable, net......................... 82,057 95,591
Inventories, net................................. 26,046 20,935
Deferred income taxes............................ 6,173 6,173
Prepaid expenses and other....................... 7,275 6,067
-------- --------
Total current assets.......................... 126,167 134,788
Molds, tools and equipment, net.................... 20,972 17,680
Product and package design costs, net.............. 9,369 9,283
Goodwill and other intangibles, net................ 14,112 9,981
-------- --------
Total assets.................................. $170,620 $171,732
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................ $11,904 $10,237
Accrued expenses and other....................... 12,309 22,359
Borrowings under credit facility................. 12,000 --
-------- --------
Total current liabilities..................... 36,213 32,596
-------- --------
Redeemable preferred stock......................... 1,728 1,681
-------- --------
Stockholders' equity:
Common stock..................................... 277 277
Additional paid-in capital....................... 70,602 70,587
Retained earnings................................ 61,800 66,591
-------- --------
Total stockholders' equity.................... 132,679 137,455
-------- --------
Total liabilities and stockholders' equity.... $170,620 $171,732
======== ========
</TABLE>
* Derived from the audited Financial Statements for the year
ended December 31, 1996.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
TOY BIZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.................................. $34,452 $45,814 $68,866 $84,183
Cost of sales.............................. 22,257 22,939 42,158 42,672
------- ------- ------- -------
Gross profit............................... 12,195 22,875 26,708 41,511
Operating expenses:
Selling, general and administrative...... 16,976 12,961 27,830 24,330
Depreciation and amortization............ 3,895 2,442 6,789 4,586
------- ------- ------- -------
Total operating expenses.............. 20,871 15,403 34,619 28,916
------- ------- ------- -------
Operating (loss) income.................... (8,676) 7,472 (7,911) 12,595
Interest expense (income), net............. 100 (184) 73 (350)
------- ------- ------- -------
(Loss) income before (benefit) provision
for income taxes....................... (8,776) 7,656 (7,984) 12,945
(Benefit) provision for income taxes..... (3,510) 3,062 (3,193) 5,178
------- ------- ------- -------
Net (loss) income.......................... ($5,266) $4,594 ($4,791) $7,767
======= ======= ======= =======
(Loss) earnings per share.................. ($0.19) $0.17 ($0.17) $0.28
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding,
(in thousands)........................... 27,746 27,134 27,745 27,168
======= ======= ======= =======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
TOY BIZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.......................................... ($4,791) $7,767
-------- --------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 6,789 4,586
Changes in assets and liabilities:
Decrease in accounts receivable, net................... 13,534 3,045
Increase in inventories, net........................... (4,483) (3,618)
Increase in prepaid expenses and other................. (1,208) (4,019)
Increase (decrease) in accounts payable................ 1,667 (1,679)
Decrease in accrued expenses and other................. (11,231) (10,025)
-------- --------
Total adjustments.......................................... 5,068 (11,710)
-------- --------
Net cash provided by (used in) operating activities... 277 (3,943)
-------- --------
Cash flows from investing activities:
Purchases of molds, tools and equipment.................. (7,443) (5,297)
Expenditures for product and package design costs........ (2,260) (4,392)
Acquisition of Colorforms................................ (3,947) -
Other investments........................................ (93) (176)
-------- --------
Net cash used in investing activities................. (13,743) (9,865)
-------- --------
Cash flows from financing activities:
Redemption of preferred stock............................ - (1,440)
Exercise of stock option................................. 60 438
Net borrowings under credit agreement.................... 12,000 -
-------- --------
Net cash provided by (used in) financing activities... 12,060 (1,002)
-------- --------
Net decrease in cash....................................... (1,406) (14,810)
Cash, at beginning of period............................... 6,022 22,484
-------- --------
Cash, at end of period..................................... $4,616 $7,674
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period......................... $287 $28
Income taxes, net paid during the period................ $1,394 $8,460
Other non-cash transactions:
Accretion of preferred dividend.......................... $47 $58
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Toy Biz, Inc. and its subsidiary (collectively, the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instruction to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. The results of operations for the
three and six month periods ended June 30, 1997 are not necessarily
indicative of those for the full year ending December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, as filed with the Securities and Exchange
Commission.
2. COMMON STOCK OFFERINGS
On August 13, 1996, the Company completed a public offering of
700,000 shares of its Class A Common Stock at $15.00 per share. As part of
such offering, Marvel Entertainment Group, Inc. ("Marvel"), a principal
stockholder of the Company, also sold 2,500,000 shares of Class A Common
Stock. The approximately $9.1 million net proceeds to the Company was intended
to fund the working capital of the Company and a portion of the Company's
capital commitment to Marvel Studios ("Marvel Studios"), the Company's
proposed joint venture with Marvel. At this time, the Company has no plans to
invest a material amount of funds in Marvel Studios in the short term, and
before the Company makes any material investment in Marvel Studios, the
Company intends to assess the developments in Marvel's bankruptcy proceeding.
See Notes 6, 7 and 8.
3. ACQUISITION
On March 25, 1997, pursuant to an Asset Purchase Agreement between
the Company and Colorforms, Inc. ("Colorforms"), the Company acquired certain
assets and assumed certain liabilities of Colorforms (the "Acquisition"). The
purchase price, including estimated fees related to the Acquisition, totaled
approximately $5.9 million. The Company utilized cash available under its
credit facility to finance the Acquisition. The Acquisition was accounted for
as a purchase and the results of Colorforms are included in the Company's
consolidated financial statements from the date of acquisition.
5
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable................................ $95,173 $110,932
Less allowances.................................... (13,116) (15,341)
-------- ---------
Total.......................................... $82,057 $95,591
======== =========
Inventories, net:
Finished goods, net................................ $19,284 $16,918
Component parts, raw materials and
work-in-process, net............................ 6,762 4,017
-------- ---------
Total.......................................... $26,046 $20,935
======== =========
Goodwill and other intangibles, net:
Goodwill. ......................................... $14,117 $9,815
Patents and other intangibles...................... 785 692
Less accumulated amortization...................... (790) (526)
-------- ---------
Total.......................................... $14,112 $9,981
======== =========
Accrued expenses and other:
Accrued advertising costs.......................... $1,900 $7,330
Income taxes (recoverable) payable................. (246) 4,343
Accrued inventory purchases........................ 3,961 7,366
Other accrued expenses............................. 6,694 3,320
-------- ---------
Total.......................................... $12,309 $22,359
======== =========
</TABLE>
5. EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average
number of common and common equivalent shares. In February, 1997, the
Financial Accounting Standards Board issued Statement No. 128 (SFAS 128),
"Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
The Company does not anticipate the effect of adopting this new standard will
have a material effect on the Company's earnings (loss) per share information
as currently presented.
6
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CHANGE OF CONTROL
On June 20, 1997, as a result of proceedings in the bankruptcy cases
of Marvel Holdings Inc. ("Marvel Holdings"), Marvel (Parent) Holdings Inc.
("Marvel (Parent)"), Marvel III Holdings Inc. ("Marvel III" and together with
Marvel Holdings and Marvel (Parent), the "Marvel Holding Companies") and
Marvel and certain of its subsidiaries, all of which are currently pending in
the United States Bankruptcy Court for the District of Delaware, creditors of
the Marvel Holding Companies (the "Marvel Creditors") obtained the right to
vote the shares of the common stock of Marvel which had been pledged to secure
indebtedness held by them to replace Marvel's board of directors with persons
nominated by the Marvel Creditors. Accordingly, on June 20, 1997, the board of
directors of Marvel Holdings, which was previously elected by the Marvel
Creditors, voted its majority of Marvel's common stock to elect a new board of
directors of Marvel. As a result of the proceedings in those bankruptcy cases,
culminating in the election of nine new members to Marvel's board of directors
replacing Ronald O. Perelman and the other then incumbent directors of Marvel,
Marvel's voting power as a stockholder of the Company was reduced from
approximately 78.4% to approximately 26.6%. With this reduction in voting
power, Marvel lost the ability to control, subject to the terms of the
Stockholders' Agreement, dated as of March 2, 1995 (the "Stockholders'
Agreement"), the election of directors to the Company's board of directors and
to control the affairs and operations of the Company.
The reduction in Marvel's stockholder voting power from 78.4% to
26.6% resulted from the automatic conversion of all of the shares of class B
common stock, par value $.01 per share ("Class B Common Stock"), of the
Company held by Marvel into shares of class A common stock, par value $.01 per
share ("Class A Common Stock" and together with the Class B Common Stock, the
"Common Stock"), of the Company. Under the Stockholders' Agreement, by and
among the Company, Marvel and the Company's two other principal stockholders,
Isaac Perlmutter (including two affiliates of Mr. Perlmutter) and Avi Arad,
the loss of control of Marvel by Mr. Perelman triggered the automatic
conversion of the shares of Class B Common Stock held by Marvel into an equal
number of shares of Class A Common Stock. Prior to the conversion of its
shares of Class B Common Stock, which afforded Marvel ten votes per share,
Marvel held approximately 78.4% of the voting power of the Company's Common
Stock. As a result of the conversion, Marvel holds approximately 26.6% of the
voting power of the Company, while Mr. Perlmutter and Mr. Arad each hold
approximately 33.4% and approximately 15%, respectively, of the voting power
of the Company.
Marvel disputes the enforceability of the automatic conversion
provisions of the Stockholders Agreement and maintains that it continues to
own its shares of Class B Common Stock. Marvel has purported to exercise the
78.4% voting power associated with those shares to remove a majority of the
Company's directors and to replace them with Marvel nominees. On June 23,
1997, the Company, Zib Inc., Isaac Perlmutter T.A., Isaac Perlmutter and Avi
Arad commenced adversary
7
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. CHANGE OF CONTROL (continued)
proceedings in the United States Bankruptcy Court for the District of Delaware
in the Marvel bankruptcy cases against Marvel, its wholly-owned subsidiary,
Marvel Characters, Inc. and one of Marvel's parents, Marvel Holdings Inc., for
a declaration that the Class B Common Stock owned of record by Marvel
Characters, Inc. converted to Class A Common Stock on or before June 20, 1997
and that the incumbent board of the Company is the Company's duly constituted
board and for an injunction enjoining the Marvel defendants from interfering
with the proper and orderly functioning of the Company's incumbent board of
directors. On July 7, 1997 the bankruptcy court issued an order indicating
that it intended to abstain from determining the issues presented in favor of
the matter being submitted to the Delaware Chancery Court. On the same date
the defendants filed a motion to dismiss the proceedings. Shortly thereafter,
the parties to these adversary proceedings and the bankruptcy court have by
stipulation deferred further action pending the resolution of overall
settlement discussions that would render these proceedings moot.
The change in control of the Company described above is an event of
default under the Company's credit facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".
On July 1, 1997, Andrews Group, Incorporated and Andrews Acquisition
Corp. terminated agreements entered into in 1996 (the "1996 Andrews
Acquisition Agreements") pursuant to which they would have acquired all of the
equity interests in the Company not already owned by Marvel. Andrews Group,
Incorporated and Andrews Acquisition Corp. are both entities controlled by Mr.
Perelman.
7. POSSIBLE REORGANIZATION PLANS
On April 25, 1997, the Company signed a letter of intent with Marvel
proposing a plan of reorganization for Marvel and its subsidiaries and, on May
7, 1997, the Company and Marvel filed a joint plan of reorganization with the
bankruptcy court seeking to implement the transactions contemplated by the
letter of intent. Under this Marvel/Toy Biz Plan, the Company would have
merged with Marvel's publishing and licensing businesses to form a new entity.
On May 20, 1997, the Company terminated the April 25, 1997 letter of intent
and withdrew from the plan of reorganization jointly filed by the Company and
Marvel.
On May 21, 1997, the Company signed a proposed term sheet with the
Official Bondholders Committee of the Marvel Holding Companies pursuant to
which Marvel and the Company would combine to become separate subsidiaries of
a new holding company. On May 29, 1997, the Company terminated that proposal.
8
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. SUBSEQUENT EVENT
On July 10, 1997, the Company along with the principal unsecured
creditors of the Marvel Holding Companies and The Chase Manhattan Bank, one of
Marvel's principal secured creditors, announced an agreement in principle on
certain key economic terms of an arrangement to combine the Company and
Marvel. In connection with the combination, Toy Biz stockholders, other than
Marvel, would receive 49% of the capital stock of the combined company and
Marvel stockholders, including holders of the Marvel Holding Companies bonds,
would receive 51% of the capital stock of the combined company, pursuant to a
rights offering. Marvel stockholders, including holders of the Marvel Holding
Companies bonds, would also provide the combined entity with $225 million in
term indebtedness pursuant to the rights offering. The success of the rights
offering would be guaranteed by the two largest holders of the Marvel Holding
Companies bonds (the "Stand-By Purchasers"). The Stand-By Purchasers would
purchase the debt held by Marvel's secured lenders in exchange for $395
million in cash and would have the right to elect a majority of the board of
directors of the combined entity. The debt purchased by the Stand-By
Purchasers from Marvel's secured lenders would be repaid with the proceeds of
the rights offering.
Marvel's secured lenders would also receive Marvel's Fleer/Skybox and
Panini subsidiaries and warrants to acquire 10% of the combined entity. The
warrants would have an exercise price based on the combined entity having a
net equity value of $525 million.
The agreement in principle is subject to, among other things,
negotiation and execution of definitive agreements, confirmation of the
bankruptcy court and approval by the Marvel board and the Company's board.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could cause actual results to differ materially from those
contained in forward-looking statements made in this Form 10-Q Quarterly
Report and in oral statements made by authorized officers of the Company. When
used in this Form 10-Q, the words "intend", "estimate", "believe", "expect"
and similar expressions are intended to identify forward-looking statements.
In addition, the following factors, among others, could cause the Company's
financial performance to differ materially from that expressed in any
forward-looking statements made by, or on behalf of, the Company: (i)
developments in the Marvel bankruptcy proceedings; (ii) a decrease in the
level of media exposure or popularity of Marvel characters resulting in
declining revenues of toys based on such characters; (iii) the lack of
continued commercial success of properties owned by major licensors which have
granted the Company toy licenses; (iv) consumer acceptance of new toy product
introductions; (v) the impositon of quotas or tariffs on toys manufactured in
China as a result of a deterioration in trade relations between the U.S. and
China; (vi) changing consumer preferences; (vii) production delays or
shortfalls; and (viii) general economic conditions.
GENERAL
The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool, and
activity toy categories featuring major entertainment and consumer brand name
properties. The Company also designs, markets, and distributes its own line of
proprietary toys.
On March 25, 1997, pursuant to an Asset Purchase Agreement between
the Company and Colorforms, the Company acquired certain assets and assumed
certain liabilities of Colorforms. The purchase price, including estimated
fees related to the Acquisition, totaled approximately $5.9 million. The
Company utilized cash available under its credit facility to finance the
Acquisition. The Acquisition was accounted for as a purchase and the results
of Colorforms are included in the Company's consolidated financial statements
from the date of acquisition.
RESULTS OF OPERATIONS
Three months ended June 30, 1997 compared with the three months ended
June 30,1996
The Company's net sales decreased to approximately $34.5 million for
the three months ended June 30, 1997 from approximately $45.8 million in the
1996 period. Net sales in the domestic boys' toys category, including
sublicense income, decreased approximately $9.7 million to approximately $6.2
million in the second quarter of 1997. The Company's sales of domestic boys'
toys have decreased since the first quarter of 1996 as compared to the
respective period in the prior year. The Company believes that the decrease in
this category has been accelerated by concerns among retailers as to the
impact of the Marvel bankruptcy on the future of the
10
<PAGE>
Marvel brand. Net sales in the domestic girls' toys category decreased
approximately $8.9 million in the second quarter of 1997 compared to the
second quarter of 1996. The decrease was due primarily to significant sales of
the Company's new 1996 promotional doll line, as well as continued strong
sales of promotional dolls introduced in 1995, in the second quarter of 1996,
while new product introductions for 1997 did not begin substantial shipments
until after the second quarter. Domestic activity toy net sales increased
approximately $1.1 million from the second quarter of 1996 to the second
quarter of 1997 due to sales from the new Colorforms division and increased
sales of the Company's Quest rockets in the 1997 period. International net
sales increased approximately $500,000 from approximately $13.3 million in the
second quarter of 1996 to approximately $13.8 million in the second quarter of
1997. Sales by the Company's import division, which was established in late
1996, accounted for approximately $10.2 million in sales in the 1997 period.
Net sales of other products decreased approximately $2.5 million due to sales
in the preschool category and closeout sales of various items in the second
quarter of 1996 which did not recur in the second quarter of 1997. The Company
recorded an additional $2.0 million of sales allowances in the 1997 period
related to the impact of the Marvel bankruptcy on the Company's relationships
with its distributors.
Gross profit decreased 47% to approximately $12.2 million for the
second quarter of 1997 from approximately $22.9 million in the second quarter
of 1996. Gross profit as a percentage of net sales decreased to approximately
35% in the second quarter of 1997 from approximately 50% in the second quarter
of 1996 due to changes in the Company's product mix, additional sales
allowances, various closeout sales and the effect of a higher percentage of
international sales and the introduction of the import division, both of which
typically have lower gross margins than domestic sales, in the 1997 period.
Without the $2 million of additional sales allowances relating to the Marvel
bankruptcy, gross profit for the second quarter of 1997 would have been
approximately $14.2 million and gross profit as a percentage of net sales
would be approximately 39%.
Selling, general and administrative expenses increased 31% to
approximately $17.0 million (approximately 49% of net sales) in the second
quarter of 1997 from approximately $13.0 million (approximately 28% of net
sales) in the second quarter of 1996. The increase was primarily due to
approximately $4.6 million of additional professional fees expensed in the
1997 period due to the Marvel bankruptcy, including the 1996 Andrews
Acquisition Agreements, which did not occur in the 1996 period. That increase
was offset by a net reduction in selling expenses due to a decrease in
domestic sales in the 1997 period, offset by additional salaries and related
expenses attributable to the Company's expanded product lines. Without the
Marvel related professional fees, selling, general and administrative expenses
would have been approximately $12.4 million (approximately 34% of net sales
before the $2 million of additional sales allowances relating to the Marvel
bankruptcy) in the second quarter of 1997.
Depreciation and amortization expense increased to approximately $3.9
million in the second quarter of 1997 from approximately $2.4 million in the
second quarter of 1996. The increase was primarily attributable to increased
amortization expense resulting from an increased investment in product tooling
and product design to support the Company's expanded product line.
Interest expense (income), net was $100,000 and ($184,000) for the
three months ended June 30, 1997 and 1996, respectively. The net change was
due primarily to the Company's borrowing funds in the 1997 period compared
with investing excess cash in the 1996 period.
The Company reported a net loss of approximately $5.3 million and a
loss per share of $0.19 for the three months ended June 30, 1997. Without the
approximately $4.6 million in additional professional fees and $2.0 million in
additional sales allowances associated with the Marvel bankruptcy and various
reorganization plans involving Marvel and Toy Biz, and without regard to other
impacts on the Company of the Marvel bankruptcy, the Company would have had a
net loss of approximately $1.3 million and a loss per share of $0.05 for the
three months ended June 30, 1997.
11
<PAGE>
The Company believes that the Marvel bankruptcy has had and will
continue to have an adverse impact on the Company in various ways including,
but not limited to, the following: concerns among retailers about the future
of the Marvel brand and the status of the Company, potential impact on the
Company's relationship with its distributors, difficulty in obtaining new
licenses and excess on-going expenses relating to the Company's
reorganization.
Six months ended June 30, 1997 compared with the six months ended June 30,1996
The Company's net sales decreased to approximately $68.9 million for
the six months ended June 30, 1997 from approximately $84.2 million in the
1996 period. Net sales in the domestic boys' toys category, including
sublicense income, decreased approximately $14.1 million to approximately
$14.4 million in the first six months of 1997. The Company believes that this
category was adversely affected by concerns among retailers as to the impact
of the Marvel bankruptcy on the future of the Marvel brand. Net sales in the
domestic girls' toys category decreased approximately $14.7 million in the six
months ended June 30, 1997 compared to the six months ended June 30, 1996. The
decrease was due primarily to significant sales of the Company's new 1996
promotional doll line, as well as continued strong sales of promotional dolls
introduced in 1995, in the six months ended June 30, 1996, while new product
introductions for 1997 did not begin substantial shipments until after June
30th. Domestic activity toy net sales increased approximately $900,000 from
the first half of 1996 to the first half of 1997 due to sales from the new
Colorforms division and increased sales of the Company's Quest rockets in the
1997 period. International net sales increased approximately $4.0 million from
approximately $20.5 million in the first half of 1996 to approximately $24.5
million in the first half of 1997. Sales by the Company's import division,
which was established in late 1996, accounted for approximately $14.5 million
in sales in the 1997 period. Net sales of other products decreased
approximately $3.9 million due to sales in the preschool category and closeout
sales of various items in the first six months of 1996 which did not recur in
the first six months of 1997. The Company recorded an additional $2.0 million
of sales allowances in the 1997 period related to the impact of the Marvel
bankruptcy on the Company's relationships with its distributors.
Gross profit decreased 36% to approximately $26.7 million for the six
months ended June 30, 1997 from approximately $41.5 million in the six months
ended June 30, 1996. Gross profit as a percentage of net sales decreased to
approximately 39% in the first half of 1997 from approximately 49% in the
first half of 1996 due to changes in the Company's product mix, additional
sales allowances, various closeout sales and the effect of a higher percentage
of international sales and the introduction of the import division, both of
which typically have lower gross margins than domestic sales, in the 1997
period. Without the $2 million of additional sales allowances relating to the
Marvel bankruptcy, gross profit for the first half of 1997 would have been
approximately $28.7 million and gross profit as a percentage of net sales
would be approximately 41%.
Selling, general and administrative expenses increased 14% to
approximately $27.8 million (approximately 40% of net sales) in the six months
ended June 30, 1997 from approximately $24.3 million (approximately 29% of net
sales) in the six months ended June 30, 1996. The increase was primarily due
to approximately $4.6 million of additional professional fees expensed in the
1997 period due to the Marvel bankruptcy, including the 1996 Andrews
Acquisition Agreements, which did not occur in the 1996 period. That increase
was offset by a net reduction in selling expenses due to the decrease in
domestic sales in the 1997 period, offset by additional salaries and related
expenses attributable to the Company's expanded product lines. Without the
Marvel related professional fees, selling, general and administrative expenses
would have been approximately $23.3 million (approximately 33% of net sales
before the $2 million of additional sales allowances relating to the Marvel
bankruptcy) in the six months ended June 30, 1997.
12
<PAGE>
Depreciation and amortization expense increased to approximately $6.8
million in the first half of 1997 from approximately $4.6 million in the first
half of 1996. The increase was primarily attributable to increased
amortization expense resulting from an increased investment in product tooling
and product design to support the Company's expanded product line.
Interest expense (income), net was $73,000 and ($350,000) for the six
months ended June 30, 1997 and 1996, respectively. The net change was due
primarily to the Company's borrowing funds in the 1997 period compared with
investing excess cash in the 1996 period.
The Company reported a net loss of approximately $4.8 million and a
loss per share of $0.17 for the six months ended June 30, 1997. Without the
approximately $4.6 million in additional professional fees and $2.0 million in
additional sales allowances associated with the Marvel bankruptcy and various
reorganization plans involving Marvel and Toy Biz, and without regard to other
impacts on the Company of the Marvel bankruptcy, the Company would have had a
net loss of $861,000 and a loss per share of $0.03 for the six months ended
June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $300,000
with a net loss of approximately $4.8 million in the six months ended June 30,
1997, while net cash used in operating activities was approximately $3.9
million with a net income of approximately $7.8 million in the six months
ended June 30, 1996. The decrease in net income was more than offset by, among
other things, higher depreciation, improved accounts receivable balances as a
result of increased collections of receivables and decreased sales in 1997 as
compared to 1996, slower growth in prepaid expenses, and less paydown of
accounts payable and accrued expenses.
In March, 1995, the Company entered into a three year $30 million
revolving line of credit with a syndicate of banks for which The Chase
Manhattan Bank serves as administrative agent. Substantially all of the assets
of the Company were pledged to secure borrowings under this credit facility.
Borrowings under the credit facility bear interest at either The Chase
Manhattan Bank's alternate base rate or at the Eurodollar rate plus the
applicable margin. The applicable margin is 3/4 of 1% to 1% to be determined
based on the Company's financial performance. The credit facility requires the
Company to pay a commitment fee of 3/8 of 1% per annum on the average daily
unused portion of the credit facility. The Company had $12.0 million
outstanding indebtedness under the line of credit as of August 1, 1997.
The credit facility contains various financial covenants, as well as
restrictions, on 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 an annual
reduction of outstanding borrowings to zero for a period of 45 consecutive
days, commencing during the first six months of each calendar year. In
addition, the credit facility also requires that (a) Marvel continue to
control the Company and (b) the toy license agreement between the Company and
Marvel remain in effect. The credit facility is not guaranteed by Marvel.
Proceedings in the Marvel bankruptcy have resulted in a change in control in
the Company (See Note 6) which could cause the credit facility to be
terminated. The Company did not reduce its borrowings to zero for a period of
45 consecutive days commencing during the first six months of 1997 and the
Company did not satisfy all the financial covenants by maintaining an EBITDA
in excess of $30 million for the four consecutive fiscal quarters ending June
30, 1997. The Company is seeking a waiver of the foregoing provisions and
believes it could obtain a replacement credit facility if a termination of the
credit facility were to occur, although there can be no assurance of the
Company's ability to do so or the terms of such a replacement facility.
13
<PAGE>
On March 25, 1997, the Company acquired certain assets and assumed
certain liabilities of Colorforms. As of June 30, 1997, the Company used
approximately $3.9 million in borrowings under the credit facility to satisfy
Colorform's liabilities and recognized approximately $4.3 million in goodwill
from the Acquisition.
In March, 1996, the Company acquired, pursuant to a put right, 53,030
shares of Series A Preferred Stock of the Company for approximately $1.4
million.
The Company has authorized the repurchase of up to three million
shares of Class A Common Stock. The Company has not commenced the repurchase
program and has no current intention to do so.
Provided that the Company obtains a waiver of its current default
under its credit facility or obtains a replacement credit facility, then the
Company believes that the funds available to it under its credit facility or
under a replacement credit facility, together with its funds available from
cash and cash equivalents and cash flow from operating activities, will allow
the Company to meet its peak working capital needs and capital expenditure
requirements.
14
<PAGE>
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K, dated as of April
28, 1997, under Item 5 "Other Events" reporting the Company's
issuance of a press release announcing that the Company had signed a
letter of intent with Marvel with respect to a proposed plan of
reorganization of Marvel and certain of its subsidiaries.
The Registrant filed a Current Report on Form 8-K, dated as of May
20, 1997, under Item 5 "Other Events" reporting the Company's
issuance of a press release announcing that the Company had
terminated its letter of intent, dated April 28, 1997, with Marvel
with respect to the Company's participation in a plan of
reorganization of Marvel. The Company issued a press release on May
21, 1997 announcing that it had signed a proposed term sheet with the
Official Bondholders Committee of the holding companies of Marvel,
pursuant to which Marvel and the Company would combine to become
separate subsidiaries of a new holding company.
The Registrant filed a Current Report on Form 8-K, dated as of May
30, 1997, under Item 5 "Other Events" reporting the Company's
issuance of a press release announcing that the Company and the
Official Bondholders Committee of the holding companies of Marvel had
terminated their joint proposal made on May 21, 1997 for the
reorganization of Marvel.
The Registrant filed a Current Report on Form 8-K, dated as of June
10, 1997, under Item 1 "Change in Control of the Registrant"
reporting the change in control of Marvel's board of directors as of
June 20, 1997 that automatically converts all the Company's Class B
shares into Class A shares; and thus, Marvel's stockholder voting
power of the Company reduces from 78.4% to 26.6%. The Registrant also
reported under Item 5 "Other Events" the Company's issuance of a
press release on June 23, 1997 announcing that five members of the
board of directors resigned as of June 20, 1997, as well as the
issuance of a press release on June 24, 1997 announcing the
appointment of four new directors.
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, thereto duly authorized.
TOY BIZ, INC.
(Registrant)
Dated: August 14, 1997 By: /s/ David J. Fremed
-------------------------------
David J. Fremed
Chief Financial Officer
and Treasurer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Toy Biz, Inc. Condensed Consolidated Balance Sheets and Statements of
Income and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000933730
<NAME> TOY BIZ, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,616
<SECURITIES> 0
<RECEIVABLES> 95,173
<ALLOWANCES> 13,116
<INVENTORY> 26,046
<CURRENT-ASSETS> 126,167
<PP&E> 34,790
<DEPRECIATION> 13,818
<TOTAL-ASSETS> 170,620
<CURRENT-LIABILITIES> 36,213
<BONDS> 0
1,728
0
<COMMON> 277
<OTHER-SE> 132,402
<TOTAL-LIABILITY-AND-EQUITY> 170,620
<SALES> 68,866
<TOTAL-REVENUES> 68,866
<CGS> 42,158
<TOTAL-COSTS> 42,158
<OTHER-EXPENSES> 34,619
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 254
<INCOME-PRETAX> (7,984)
<INCOME-TAX> (3,193)
<INCOME-CONTINUING> (4,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,971)
<EPS-PRIMARY> ($0.17)
<EPS-DILUTED> 0
</TABLE>
