<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, 1998
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)
- --------------------------------------------------------------------------------
(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, 1998 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, December 31,
1998 1997 *
(unaudited)
---------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....................... $ 2,672 $ 7,596
Accounts receivable, net........................ 58,662 50,395
Inventories, net................................ 27,620 22,685
Colorforms assets held for resale............... - 4,136
Income tax receivable........................... 1,065 17,542
Deferred income taxes........................... 9,341 7,494
Prepaid expenses and other...................... 11,838 6,584
---------- ----------
Total current assets......................... 111,198 116,432
Molds, tools and equipment, net................... 17,883 17,013
Product and package design costs, net............. 7,331 7,616
Goodwill and other intangibles, net............... 10,566 9,305
---------- ----------
Total assets................................. $146,978 $150,366
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 3,708 $ 5,354
Accrued expenses and other...................... 23,107 25,031
Borrowings under credit facility................ 9,000 12,000
---------- ----------
Total current liabilities.................... 35,815 42,385
---------- ----------
Stockholders' equity:
Common stock.................................... 277 277
Additional paid-in capital...................... 70,578 70,578
Retained earnings............................... 40,308 37,126
---------- ----------
Total stockholders' equity................... 111,163 107,981
---------- ----------
Total liabilities and stockholders' equity... $146,978 $150,366
========== ==========
</TABLE>
* Derived from the audited Financial Statements for the year ended
December 31, 1997.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
TOY BIZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales.......................................... $48,675 $34,452 $91,316 $68,866
Cost of sales...................................... 25,780 22,257 49,013 42,158
---------- ---------- ---------- ----------
Gross profit....................................... 22,895 12,195 42,303 26,708
Operating expenses:
Selling, general and administrative.............. 14,469 16,976 28,691 27,830
Depreciation and amortization.................... 4,819 3,895 8,123 6,789
---------- ---------- ---------- ----------
Total operating expenses...................... 19,288 20,871 36,814 34,619
---------- ---------- ---------- ----------
Operating income (loss)............................ 3,607 (8,676) 5,489 (7,911)
Interest expense, net.............................. 56 100 123 73
---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes............................... 3,551 (8,776) 5,366 (7,984)
Provision (benefit) for income taxes............. 1,445 (3,510) 2,184 (3,193)
---------- ---------- ---------- ----------
Net income (loss).................................. $ 2,106 ($5,266) $ 3,182 ($4,791)
========== ========== ========== ==========
Basic and dilutive earnings (loss) per share....... $ 0.08 ($0.19) $ 0.11 ($0.17)
========== ========== ========== ==========
Weighted average number of common and
common equivalent shares outstanding,
(in thousands)................................... 27,746 27,746 27,746 27,745
========== ========== ========== ==========
</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,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $3,182 ($4,791)
---------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 8,123 6,789
Deferred income taxes................................. (1,847) -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable net....... (6,917) 13,534
Increase in inventories, net......................... (4,935) (4,483)
Decrease in income tax receivable.................... 16,477 -
Increase in prepaid expenses and other............... (5,254) (1,208)
(Decrease) increase in accounts payable.............. (1,646) 1,667
Decrease in accrued expenses and other............... (1,924) (11,231)
---------- ----------
Total adjustments........................................ 2,077 5,068
---------- ----------
Net cash provided by operating activities........... 5,259 277
---------- ----------
Cash flows from investing activities:
Purchases of molds, tools and equipment................ (5,898) (7,443)
Expenditures for product and package design costs...... (2,437) (2,260)
Sale (acquisition) of Colorforms assets................ 2,786 (3,947)
Other investments...................................... (1,634) (93)
---------- ----------
Net cash used in investing activities............... (7,183) (13,743)
---------- ----------
Cash flows from financing activities:
Exercise of stock options.............................. - 60
Net (repayments) borrowings under credit agreement..... (3,000) 12,000
---------- ----------
Net cash (used in) provided by financing activities. (3,000) 12,060
---------- ----------
Net decrease in cash..................................... (4,924) (1,406)
Cash and cash equivalents, at beginning of period........ 7,596 6,022
---------- ----------
Cash and cash equivalents, at end of period.............. $ 2,672 $ 4,616
========== ==========
Supplemental disclosures of cash flow information:
Interest paid during the period....................... $ 418 $ 287
Income taxes, net (refunded) paid during the period... ($12,679) $ 1,394
Other non-cash transactions:
Accretion of preferred dividend........................ - $ 47
</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
(Dollars in thousands, except per share data)
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Toy Biz, Inc. and its subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions 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 six months ended June 30, 1998
are not necessarily indicative of those for the full year ending December 31,
1998. For further information on the Company's historical financial results,
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, 1997, as filed with the Securities and Exchange Commission.
2. ACQUISITION & SALE OF COLORFORMS
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 was approximately $5.0 million, excluding fees and expenses. The Company
utilized cash available under its credit facility to finance the Acquisition.
The Acquisition was accounted for as a purchase.
During 1997, the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash and used to reduce the
amounts due under the credit facility, with a promissory note representing the
remainder of $1.35 million due in August, 1998 through May, 1999. The results of
Colorforms are included in the Company's consolidated financial statements from
the date of acquisition to the date of sale.
5
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.............................. $70,824 $80,212
Less allowances.................................. (12,162) (29,817)
---------------- ----------------
Total........................................ $58,662 $50,395
================ ================
Inventories, net:
Finished goods................................... $22,520 $17,518
Component parts, raw materials and
work-in-process............................... 5,100 5,167
---------------- ----------------
Total........................................ $27,620 $22,685
================ ================
Goodwill and other intangibles, net:
Goodwill. ....................................... $9,453 $9,453
Patents and other intangibles.................... 2,452 818
Less accumulated amortization.................... (1,339) (966)
---------------- ----------------
Total........................................ $10,566 $9,305
================ ================
Accrued expenses and other:
Accrued inventory purchases...................... $12,257 $4,909
Accrued advertising costs........................ 787 11,544
Income taxes payable............................. 3,728 3,495
Other accrued expenses........................... 6,335 5,083
---------------- ----------------
Total........................................ $23,107 $25,031
================ ================
</TABLE>
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Net income per common share is
computed by dividing net income, less the amount applicable to preferred
dividends in the case of the first half of 1997, by the weighted average common
shares outstanding during the year. All income per share amounts for all periods
have been presented, and where appropriate, restated to conform to Statement 128
requirements.
6
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5.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 District Court for the District of Delaware, creditors of the Marvel
Holding Companies (the "Marvel Holding Companies 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 Holding Companies Creditors. Accordingly, on
June 20, 1997, the board of directors of Marvel Holdings, which was previously
elected by the Marvel Holding Companies 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 15%, respectively, of
the voting power of the Company.
The enforceability of the conversion provisions of the Stockholders'
Agreement was disputed by John J. Gibbons, the Chapter 11 trustee appointed in
the Marvel bankruptcy (the "Trustee") and by various other parties. Those
parties maintained that Marvel continued to own shares of Class B Common Stock.
On June 20, 1997, Marvel 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, Mr. Perlmutter, the
two affiliates of Mr. Perlmutter
7
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5.CHANGE OF CONTROL (continued)
who were parties to the Stockholders' Agreement and Avi Arad commenced adversary
proceedings in the Marvel bankruptcy cases against Marvel and the Marvel Holding
Companies for a declaration that the Class B Common Stock owned of record by
Marvel 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 those defendants from interfering with the proper
and orderly functioning of the Company's incumbent board of directors. On March
30, 1998, the United States District Court for the District of Delaware (the
"District Court") granted the Company's motion for summary judgement and
directed the entry of a judgement declaring that as a result of the June 20,
1997 change of control of Marvel, the Class B Common Stock owned by Marvel
converted, as of that date, into Class A Common Stock. The Trustee and various
other parties filed an appeal of this determination to the United States Court
of Appeals for the Third Circuit. On May 12, 1998, an agreement was reached
among the Company, the Trustee, representatives of Marvel's senior secured
lenders and certain other parties to settle this litigation as well as certain
litigation commenced by Marvel against the Company, Marvel's senior secured
lenders and such other parties. This settlement agreement was reached in
connection with the Joint Plan of Reorganization proposing the combination of
the Company and Marvel (as since amended, the "Plan"). (See Note 6 and Part II
Item 1).
6.COMBINATION WITH MARVEL
The Plan contemplates the combination of the Company and Marvel (the
"Combined Company"). In connection with the Plan, the Company stockholders,
other than Marvel, would receive approximately 40% of the outstanding common
stock of the Combined Company (assuming the conversion of all preferred stock to
be issued by the Combined Company pursuant to the Plan but not assuming any
exercise of warrants to be issued pursuant to the Plan) and the senior secured
lenders of Marvel would receive a combination of cash and common and preferred
securities issued by the Combined Company which (under the same assumptions)
would represent approximately 42% of the common stock of the Combined Company.
Investors, including Mr. Perlmutter would purchase securities that (under the
same assumptions) would represent approximately 18% of the common stock of the
Combined Company. Under the Plan, holders of allowed unsecured claims of Marvel
("Unsecured Creditors") will receive (i) up to $8.0 million in cash and (ii)
between 1.0 million and 1.75 million warrants having a term of four years and
entitling the holders to purchase common stock of the Combined Company at $17.25
per share. The exact amount of cash and warrants to be distributed to the
Unsecured Creditors will be determined by reference to the aggregate amount of
allowed unsecured claims. In addition, Unsecured Creditors will be entitled to
receive distributions from any future recovery on certain litigation. Finally,
the Plan provides that three series of warrants (the "Stockholder Warrants")
will be distributed to holders of shares of Marvel common stock, to holders of
certain class securities litigation claims arising in connection with the
purchase and sale of Marvel common stock and to LaSalle National Bank. The
Stockholder Warrants consist of (a) three-year warrants to purchase 4.0 million
shares of common stock in the Combined
8
<PAGE>
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6.COMBINATION WITH MARVEL (continued)
Company at $12.00 per share, (b) six-month warrants to purchase 3.0 million
shares of preferred stock to be issued by the Combined Company for $10.65 per
share and (c) four-year warrants to purchase 7.0 million shares of common stock
in the Combined Company at $18.50 per share. The recipients of the Stockholder
Warrants will also be entitled to receive distributions from any future recovery
on certain litigation. Certain other cash distributions are also provided for by
the Plan in connection with settling the disputes arising out of Marvel's
bankruptcy. The Plan was proposed by in excess of two-thirds in amount of
Marvel's senior secured lenders and is supported by the Trustee, the Official
Committee of the Unsecured Creditors of Marvel and the Official Committee of
Marvel Equity Holders. The Plan was approved by the District Court on July 31,
1998. Consummation of the Plan is subject to a number of conditions including
approval of the Company's stockholders. The Company has called a meeting of the
stockholders of the Company for September 11, 1998 for the purpose, among other
things, of considering and voting upon approval of the transactions contemplated
by the Plan. In connection with the scheduled meeting, the Company has
distributed proxy materials describing the transactions contemplated by the Plan
and the other circumstances in connection therewith. As part of the agreements
setting forth the terms of the Plan, Messrs. Perlmutter and Arad have agreed to
vote all shares of Common Stock owned by them in favor of the Plan.
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 (including the Company's proposal with respect thereto);
(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
entertainment companies that 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,
activity and electronic toy categories featuring major entertainment and
consumer brand name properties. The Company also designs, markets, and
distributes its own line of proprietary toys in certain of these categories. The
Company believes that its business in the boys' toys category domestically and
internationally continues to be negatively impacted as a result of the
proceedings surrounding Marvel's bankruptcy. This includes decreased retailer
interest in Marvel brand products and reduced consumer interest in these
products due to reduced promotional activity by Marvel. The Company believes
that the Marvel bankruptcy has had and until consummation of the Company's
proposal to combine with Marvel will continue to have an adverse impact on the
Company in various ways, included but not limited to, the following: concerns
among retailers about the future of the Marvel brand, the status of the Company
due to Marvel's ownership of 26% of the Company's Common Stock, potential impact
on the Company's relationship with its distributors, difficulty in obtaining new
licenses and excess legal and administrative expenses.
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 was approximately $5.0 million,
excluding fees and expenses. The Company utilized cash available under its
credit facility to finance the Acquisition. The Acquisition was accounted for as
a purchase. During 1997, the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash and used to reduce the
amounts due under the credit facility, with a promissory note representing the
remainder of $1.35 million due in August, 1998 through May, 1999. The results of
Colorforms are included in the Company's consolidated financial statements from
the date of acquisition to the date of sale.
10
<PAGE>
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared with the three months ended June 30,
- ------------------------------------------------------------------------------
1997
- ----
The Company's net sales increased to approximately $48.7 million for the
three months ended June 30, 1998 from approximately $34.5 million in the 1997
period. Net sales in the domestic boys' toys category increased approximately
$1.4 million to approximately $7.7 million in the second quarter of 1998. The
Company believes that this category continues to be adversely affected due to
concerns among retailers as to the impact of the Marvel bankruptcy on the future
of the Marvel brand and the reduced level of media exposure of the Marvel
characters. Net sales in the domestic girls' toys category increased
approximately $3.7 million in the second quarter of 1998 to approximately $6.0
million due primarily to initial shipments of the new 1998 dolls in the second
quarter of 1998, while new product introductions for 1997 did not begin
substantial shipments until after the second quarter of 1997. Domestic activity
toy and other product net sales increased approximately $2.4 million to
approximately $6.3 million in the 1998 period due primarily to shipments of
product related to the Godzilla feature film released in 1998. This increase was
partially offset by a reduction in sales of ride-on product. Net sales of
product sold through the import division increased approximately $10.1 million
to approximately $20.3 million in the second quarter of 1998, also due primarily
to shipments of Godzilla product in the 1998 period. International net sales,
which includes international distribution and sub-licensing revenues, decreased
approximately $5.4 million to approximately $8.4 million in the second quarter
of 1998 as a result of reduced distribution of animated Marvel television shows
in international markets. The Company believes that the reduced distribution of
these shows is a result of the Marvel bankruptcy. The Company recorded an
additional $2.0 million of sales allowances in the 1997 period, which did not
recur in the 1998 period, related to the impact of the Marvel bankruptcy on the
Company's relationships with its distributors.
Gross profit increased 88% to approximately $22.9 million for the second
quarter of 1998 from approximately $12.2 million in the second quarter of 1997.
Gross profit as a percentage of net sales increased to approximately 47% in the
second quarter of 1998 from approximately 35% in the second quarter of 1997.
This increase was due primarily to additional sales allowances in the 1997
period that resulted from retailers concerns over Marvel's bankruptcy and its
effect on the Company.
Selling, general and administrative expenses decreased 15% to approximately
$14.5 million (approximately 30% of net sales) in the second quarter of 1998
from approximately $17.0 million (approximately 49% of net sales) in the second
quarter of 1997. The decrease was primarily due to approximately $4.6 million of
additional professional fees expensed in the 1997 period due to the Marvel
bankruptcy. That decrease was offset by approximately $2.1 million in royalties
and advertising expenses in the 1998 period as a result of an increase of sales
during that period.
Depreciation and amortization expense increased to approximately $4.8
million in the second quarter of 1998 from approximately $3.9 million in the
second quarter of 1997. The increase of approximately $900,000 was primarily
attributable to increased amortization expense resulting from an increased
investment in product tooling and design costs to support the Company's expanded
product line.
The Company believes its sales and business continued to be adversely
affected in the second quarter of 1998 by concerns among retailers as to the
impact of the Marvel bankruptcy. While the Company is attempting to address
these concerns, to the extent they are not alleviated, it can be expected that
they will continue to adversely affect demand for the Company's products.
11
<PAGE>
Six months ended June 30, 1998 compared with the six months ended June 30, 1997
- -------------------------------------------------------------------------------
The Company's net sales increased to approximately $91.3 million for the
six months ended June 30, 1998 from approximately $68.9 million in the 1997
period. Net sales in the domestic boys' toys category increased approximately
$8.7 million to approximately $23.1 million in the first six months of 1998 due
primarily to continued sales of boys' accessories in early 1998 which were
introduced in the second half of 1997. The Company believes that this category
continues to be adversely affected due to concerns among retailers as to the
impact of the Marvel bankruptcy on the future of the Marvel brand and the
reduced level of media exposure of the Marvel characters. Net sales in the
domestic girls' toys category increased approximately $7.4 million in the six
months ended June 30, 1998 to approximately $11.6 million due primarily to the
introduction of the Lil' Splash 'n Shivers doll in early 1998 and to initial
shipments of the other new 1998 dolls in the first half of 1998, while new
product introductions for 1997 did not begin substantial shipments until the
second half of 1997. Domestic activity toy and other product net sales increased
approximately $3.4 million to approximately $16.5 million in the 1998 period due
primarily to shipments of product related to the Godzilla feature film released
in 1998. Net sales of product sold through the import division increased
approximately $11.3 million to approximately $25.8 million in the first six
months of 1998, also due primarily to shipments of Godzilla product in the 1998
period. International net sales, which includes international distribution and
sub-licensing revenues, decreased approximately $10.3 million to approximately
$14.2 million in the first six months of 1998 as a result of reduced
distribution of animated Marvel television shows in international markets. The
Company believes that the reduced distribution of these shows is a result of the
Marvel bankruptcy. The Company recorded an additional $2.0 million of sales
allowances in the 1997 period, which did not recur in the 1998 period, related
to the impact of the Marvel bankruptcy on the Company's relationships with its
distributors.
Gross profit increased 58% to approximately $42.3 million for the six
months ended June 30, 1998 from approximately $26.7 million in the six months
ended June 30, 1997. Gross profit as a percentage of net sales increased to
approximately 46% in the first half of 1998 from approximately 39% in the first
half of 1997 due primarily to additional sales allowances in the 1997 period
that resulted from retailers concerns over Marvel's bankruptcy and its effect on
the Company.
Selling, general and administrative expenses increased 3% to approximately
$28.7 million (approximately 31% of net sales) in the six months ended June 30,
1998 from approximately $27.8 million (approximately 40% of net sales) in the
six months ended June 30, 1997. Approximately $5.6 million of the increase was
due to an increase in advertising expenses as a result of additional promotional
products in the 1998 period and increased royalties as a result of increased
sales. This was offset by approximately $4.6 million in professional fees
expensed in the 1997 period due to the Marvel bankruptcy.
Depreciation and amortization expense increased to approximately $8.1
million in the first half of 1998 from approximately $6.8 million in the first
half of 1997. The increase of approximately $1.3 million was primarily
attributable to increased amortization expense resulting from an increased
investment in product tooling and design costs to support the Company's expanded
product line.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $5.3 million in
the six months ended June 30, 1998, while net cash provided by operating
activities was approximately $300,000 in the six months ended June 30, 1997. The
increase was due primarily to an increase of $8.0 million in net income when
comparing the 1998 period to the 1997 period, the collection of a $16.5 million
tax receivable in the 1998 period and a reduction in the decrease in accrued
expenses in the 1998 period offset by an increase in accounts receivable
resulting from increased sales in the 1998 period and an increase in prepaid
expenses in the 1998 period.
12
<PAGE>
In March, 1998, the Company and The Chase Manhattan Bank entered into an
amendment to the Company's revolving line of credit (the "Amended Credit
Facility") extending the duration of the credit facility and modifying its
terms. The Amended Credit Facility provides that the Company can borrow an
aggregate amount of up to $20.0 million (increasing during October through
mid-November 1998 to up to $29.0 million), subject to certain borrowing base
limitations based upon the level of the Company's receivables and inventory.
Substantially all of the assets of the Company continue to be pledged to secure
borrowings under the Amended Credit Facility. Borrowings under the Amended
Credit Facility bear interest at either The Chase Manhattan Bank's alternative
base rate or at the Eurodollar rate plus the applicable margin. The applicable
margin is 1% with respect to base rate loans and 2% with respect to Eurodollar
loans. The Amended 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 Amended Credit
Facility. The Company had $15.0 million in outstanding borrowings under the
Amended Credit Facility as of August 10, 1998. The Amended Credit Facility is
scheduled to expire in February 1999.
The Amended 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. In addition, the Amended Credit Facility also requires that
(a) the current board of directors or successors designated by them remain in
office, (b) the Marvel license remain in effect and (c) Messrs. Perlmutter and
Arad continue to own at least 50% of the Common Stock held by them as of
February 21, 1998. The Amended Credit Facility is not guaranteed by Marvel.
If the Plan is consummated, the Company expects that the Combined Company
will be required to incur approximately $200.0 million in long term debt, enter
into a new $50.0 million working capital facility and sell $90.0 million in new,
8% convertible exchangeable preferred stock ("8% Preferred Stock"). The Combined
Company will also be required to issue additional shares of 8% Preferred Stock,
common Stock and warrants to creditors and stockholders of Marvel.
The Company believes that it has sufficient funds available from cash and
cash equivalents, operating activities and borrowings under the Amended Credit
Facility to meet peak working capital needs and capital expenditure
requirements.
13
<PAGE>
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
On May 12, 1998, the Company and Marvel announced that an agreement, approved by
the District Court on June 25, 1998, had been reached among the Company, the
Trustee, representatives of Marvel's Senior Secured Lenders and certain other
parties to settle litigation commenced by Marvel against the Company, Marvel's
Senior Secured Lenders and those other parties as well as litigation commenced
by the Company against Marvel. (See Note 5 to the Condensed Consolidated
Financial Statements of the Company included elsewhere in this Report on Form
10-Q). This settlement agreement was reached in connection with the Plan. (See
Note 6 to the Condensed Consolidated Financial Statements of the Company
included elsewhere in this Report on Form 10-Q). Under the terms of the
settlement agreement, the Trustee, the Senior Secured Lenders of Marvel, and
others will exchange releases, including releases from the lawsuit commenced by
Marvel. The lawsuit was commenced by Marvel when it was controlled by the Icahn
interests against the Senior Secured Lenders, the Company and others. Among the
parties against whom Marvel brought its lawsuit are Ronald O. Perelman and
certain of his affiliates and associates, who are not being released. As
approved by the District Court on July 31, 1998, the Plan provides that Marvel
equityholders and entities entitled to securities litigations claims will
receive three series of warrants upon consummation of the Plan entitling them to
purchase common stock and 8% Preferred Stock to be issued by the Combined
Company. The first series of four million warrants will have a term of three
years and will allow the recipients to purchase common stock in the Combined
Company at a price of $12.00 per share. The second series of three million
warrants will have a term of six months and will allow the recipients to
purchase 8% Preferred Stock in the Combined Company at a price of $10.65 per
share (subject to increase based on the issuance date of the warrants). The
final series of seven million warrants will have a term of four years and will
allow the recipients to purchase common stock in the Combined Company at a price
of $18.50 per share. Finally, the equity holders and class securities litigation
claimants will be entitled to receive distributions from any recovery on certain
future litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<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, 1998 By: /s/ David J. Fremed
--------------------------------
David J. Fremed
Chief Financial Officer
and Treasurer
15
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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.
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<NAME> TOY BIZ, INC.
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<FISCAL-YEAR-END> DEC-31-1998
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