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 September 30, 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 33-77108
MARVEL III HOLDINGS INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3751020
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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
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(Address of principal executive offices) (Zip Code)
305-772-4306
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(Registrant's telephone number, including area code)
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(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 November 8, 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 one affiliate.
MARVEL III HOLDINGS INC.
INDEX TO CONTENTS OF THE THIRD QUARTER 1996 FORM 10-Q
Page
Condensed Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 ..........3
Condensed Consolidated Statements of Operations for the quarters and nine months ended
September 30, 1996 and 1995 .................................................................4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995...................................................................5
Notes to Condensed Consolidated Financial Statements ..........................................6
Management's Discussion and Analysis of Financial Condition and Results of Operations ........12
Other Information ............................................................................20
Signatures ...................................................................................22
2
MARVEL III HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
September 30, December 31,
1996 1995
---------------- ----------------
ASSETS
Current assets:
Cash.......................................................................... $ 36.0 $ 53.9
Accounts receivable, net...................................................... 257.2 236.7
Inventories, net.............................................................. 99.1 82.4
Deferred income taxes......................................................... 32.8 50.8
Income taxes receivable....................................................... 18.2 24.6
Prepaid expenses and other.................................................... 58.2 43.1
---------- ----------
Total current assets....................................................... 501.5 491.5
Property, plant and equipment, net.............................................. 87.7 71.3
Goodwill and other intangibles, net............................................. 894.2 908.0
Deferred charges and other...................................................... 83.3 71.5
---------- ----------
$1,566.7 $1,542.3
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable............................................................. $ 95.8 $ 104.8
Accrued expenses and other................................................... 172.5 203.9
Short term borrowings (See Note 3)........................................... 28.7 13.3
Current portion of long-term debt (See Note 4)............................... 625.8 5.2
---------- ------------
Total current liabilities.................................................. 922.8 327.2
Long-term debt (See Note 4)..................................................... 772.9 1,302.5
Other long-term liabilities..................................................... 70.6 63.5
---------- ----------
1,766.3 1,693.2
---------- ----------
Minority interest in Toy Biz.................................................... 102.9 70.4
Minority interest in Marvel:
Held by affiliates............................................................ 4.2 2.8
Held by non-affiliates........................................................ 34.0 41.1
Stockholder's deficit:
Common stock................................................................... - -
Capital deficiency............................................................. (109.5) (125.5)
Accumulated deficit ........................................................... (231.6) (140.1)
Cumulative translation adjustment ............................................. 0.4 0.4
---------- ----------
Total stockholder's deficit................................................ (340.7) (265.2)
---------- ------------
$1,566.7 $1,542.3
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
MARVEL III HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions)
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- --------------------------------
1996 1995 1996 1995
----------- ------------- --------------- --------------
Net revenues....................................................... $209.4 $269.0 $581.2 $596.1
-------- ---------- ---------- ---------
Operating Expenses:
Cost of sales...................................................... 143.1 138.8 372.4 352.6
Selling, general & administrative expenses......................... 60.7 62.5 168.4 156.4
Depreciation and amortization...................................... 6.3 4.9 15.6 12.4
-------- ---------- ---------- ---------
Total Operating Expenses................. 210.1 206.2 556.4 521.4
Amortization of goodwill, intangibles and deferred charges......... 9.1 8.5 26.6 22.2
Interest expense, net.............................................. 35.3 30.3 102.2 84.3
Foreign exchange loss/(gain), net.................................. 0.6 - 2.1 (0.8)
Gain on sale of Toy Biz common stock (See Notes 6 and 8)........... 22.0 - 22.0 14.3
Equity in net (loss) income of unconsolidated subsidiaries......... (0.7) 0.8 (0.5) 1.6
-------- ---------- ---------- ---------
(Loss) income before provision (benefit) for income taxes, minority
interest and extraordinary item................................. (24.4) 24.8 (84.6) (15.1)
Provision (benefit) for income taxes............................... 3.0 21.0 (0.7) 25.6
-------- ---------- ---------- ---------
Loss before minority interest and extraordinary item............... (27.4) 3.8 (83.9) (40.7)
Minority interest in earnings of Toy Biz........................... 8.6 5.9 13.5 10.0
Minority interest in earnings of Marvel:
Attributable to affiliates....................................... (0.3) 0.3 (0.5) 0.2
Attributable to non-affiliates................................... (2.3) 3.9 (5.4) 2.0
-------- ---------- ---------- ---------
Loss before extraordinary item..................................... (33.4) (6.3) (91.5) (52.9)
Extraordinary item, net of taxes................................... - - - (3.3)
-------- ---------- ---------- ---------
Net loss........................................................... ($33.4) ($6.3) ($91.5) ($56.2)
======== ========== ========== =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
MARVEL III HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
Nine Months
Ended September 30,
-----------------------------
1996 1995
----------- --------------
Cash flows from operating activities:
Net loss....................................................................... ($91.5) ($56.2)
-------- ---------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................................... 42.6 34.4
Amortization of debt discount............................................... 50.9 45.5
Provision for deferred income taxes......................................... 8.5 19.6
Extraordinary item, net..................................................... - 3.3
Undistributed earnings of unconsolidated subsidiaries....................... 0.5 (1.6)
Distributions from unconsolidated subsidiaries.............................. - 3.0
Gain from Toy Biz IPO....................................................... (22.0) (14.3)
Minority interest in earnings of Toy Biz.................................... 13.5 10.0
Minority interest in earnings of Marvel..................................... (5.9) 2.2
Changes in assets and liabilities, net of effects in 1995 of
previously unconsolidated subsidiary and the SkyBox Acquisition........ (81.8) (75.7)
-------- ---------
Total adjustments.............................................................. 6.3 26.4
-------- ---------
Net cash used in operating activities..................................... (85.2) (29.8)
-------- ---------
Cash flows from investing activities:
Capital expenditures (including product development and package design costs) (32.9) (26.1)
Net proceeds from sale of investment in Toy Biz.............................. 35.7 -
Acquisition of SkyBox, net of cash and cash equivalents ..................... - (159.5)
Purchase of Marvel shares of common stock.................................... (0.7) (7.9)
Other acquisitions........................................................... - (14.4)
Other........................................................................ (8.0) (5.6)
-------- ---------
Net cash used in investing activities...................................... (5.9) (213.5)
-------- ---------
Cash flows from financing activities:
Net (repayments) borrowings under term portion of credit agreements........... (5.3) 184.9
Net borrowings (repayments) under revolving portion of credit agreement....... 17.0 (2.0)
Borrowings related to Adespan adhesives facility.............................. 6.3 -
Net borrowings (repayments) of other debt..................................... 30.5 (5.8)
Net proceeds from Toy Biz common stock offerings.............................. 9.7 44.2
Capital contributions from parent............................................. 15.6 8.9
Proceeds from exercise of stock options....................................... 0.5 8.3
Note receivable from parent................................................... - 8.3
Debt issuance costs........................................................... (1.4) (8.1)
Other financing activities.................................................... (1.0) -
-------- ---------
Net cash provided by financing activities.................................. 71.9 238.7
-------- ---------
Effect of exchange rate changes on cash......................................... 1.3 1.9
-------- ---------
Cash balance from previously unconsolidated subsidiary.......................... - 7.5
-------- ---------
Net (decrease) increase in cash................................................. (17.9) 4.8
Cash at beginning of period..................................................... 53.9 19.9
-------- ---------
Cash at end of period........................................................... $36.0 $24.7
======== =========
Supplemental disclosures of cash flow information:
Interest paid during the period.......................................... $57.3 $38.7
Income taxes paid during the period...................................... ($2.4) $7.3
The accompanying Notes to Condensed Consolidated
Financial Statements are an integral part of these statements.
5
MARVEL III 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 III Holdings Inc., ("Holdings III", together with its subsidiaries the
"Company"), are unaudited. The Company, an indirect wholly owned subsidiary of
Andrews Group Incorporated ("Andrews Group"), which in turn is a wholly owned
subsidiary of MacAndrews & 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
marketing and distribution of sports and entertainment trading cards and
activity sticker collections, (iii) consumer products, media and advertising
promotions 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.
At February 15, 1996 and August 15, 1996, the Company received
capital contributions of $5.7 and $5.4, respectively, from its parent to make
scheduled interest payments on the Holdings III Notes.
2. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
ACCOUNTS RECEIVABLE, NET:
September 30, December 31,
1996 1995
---------------- ----------------
Accounts receivable............... $ 292.3 $ 314.5
Less: Allowances................. (35.1) (77.8)
---------------- ----------------
$ 257.2 $ 236.7
================ ================
INVENTORIES, NET:
Finished goods ................... $ 79.6 $ 58.8
Work in process .................. 19.3 22.3
Raw materials .................... 23.7 23.7
Less: Reserve for obsolescence ... (23.5) (22.4)
---------------- ----------------
$ 99.1 $ 82.4
================ ================
GOODWILL AND OTHER INTANGIBLES, NET:
Goodwill and other intangibles ... $ 974.5 $ 970.0
Less: Accumulated amortization ... (80.3) (62.0)
---------------- ----------------
$ 894.2 $ 908.0
================ ================
Goodwill and other intangibles, net related to the trading card
operations of the Company was approximately $365.0 and $375.0 as of September
30, 1996 and December 31, 1995, respectively.
6
MARVEL III HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ACCRUED EXPENSES AND OTHER:
September 30, December 31,
1996 1995
--------------- --------------
Royalties and incentives .. $ 29.1 $ 21.4
Reserve for returns ....... 40.3 59.0
Income taxes payable ...... -- 23.4
Other ..................... 103.1 100.1
--------------- --------------
$ 172.5 $ 203.9
=============== ==============
3. SHORT-TERM BORROWINGS
Under line of credit arrangements for short-term borrowings with a
group of banks, Panini may borrow up to Italian Lire 73.2 billion
(approximately $48.0 based on exchange rates at September 30, 1996) on such
terms as Panini and the banks may mutually agree upon. These arrangements do
not have termination dates but are reviewed annually for renewal. At September
30, 1996, the unused portion of the credit lines was Italian Lire 29.4 billion
(approximately $19.3 based on exchange rates at September 30, 1996). The
weighted average interest rate on short-term borrowings as of September 30,
1996 was 7.74%.
4. DEBT
Debt consists of the following:
September 30, December 31,
1996 1995
---------------- ----------------
U.S. Term Loan Agreement ................................... $ 350.0 $ 350.0
Term Loan Agreement ........................................ 139.9 139.5
Amended and Restated Credit Agreement:
Revolving credit facility ................................ 104.5 87.5
11-1/4% Series B Senior Secured Discount Notes, net of
unamortized discount of $80.3 at September 30, 1996 and
$114.6 at December 31, 1995 .............................. 437.2 402.8
11-7/8% Senior Secured Discount Notes, net of unamortized
discount of $40.9 at September 30, 1996 and $58.3 at
December 31, 1995 ........................................ 210.7 193.4
9-1/8% Senior Secured Notes .............................. 125.0 125.0
Capital lease obligations and other long term debt ......... 31.4 9.5
---------------- ----------------
1,398.7 1,307.7
Less current maturities .................................... 625.8 5.2
---------------- ----------------
Long-term debt ............................................. $ 772.9 $1,302.5
================ ================
7
MARVEL III HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Marvel has experienced greater than expected operating losses, and as
a result has failed to satisfy certain financial covenants contained in the
Credit Agreements (as defined below) and has commenced discussions with its
agent bank seeking waivers of these covenants and a restructuring of the
Credit Agreements to provide for its cash requirements. Marvel believes that
the restructuring of the Credit Agreements will require an infusion of new
equity capital and has received a proposal from Andrews Group Incorporated
("Andrews Group"), a parent corporation, regarding such equity infusion, which
is subject to a number of significant conditions (see Note 8). As a result of
Marvel's failure to satisfy certain financial covenants and in the absence of
waivers as of this date relating thereto, the balance of its long-term debt
has been reclassified to current liabilities. In addition, as a result of
Marvel's failure to satisfy the financial covenants contained in the Credit
Agreements, rollovers of existing Eurocurrency Rate Loans will be made as
Alternate Base Rate Loans or Negotiated Rate Loans thereby likely increasing
Marvel's borrowing costs. There can be no assurance that the debt can be
restructured on favorable terms to Marvel or that an additional capital
infusion will be received by Marvel.
Marvel's indebtedness is principally represented by 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 The Chase Manhattan Bank (formerly named
Chemical Bank), as administrative agent (the "Amended and Restated Credit
Agreement"), and the outstanding balance of the Term Loan Agreement, as
defined below. The Applicable Margin under the Amended and Restated Credit
Agreement for Alternate Base Rate loans range from 0% to 1% and for Eurodollar
Rate loans 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 September
30, 1996 was approximately 7 5/16% to 7 23/32% per annum, depending upon the
length of the relevant interest period. 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.
In April 1995, Marvel entered into a $350.0 term loan agreement with
a syndicate of banks, the Co-Agents and The Chase Manhattan Bank (formerly
named Chemical Bank), as administrative agent (the "U.S. Term Loan
Agreement"). 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), or the Alternate Base Rate (as defined in the U.S. Term Loan
Agreement) plus, in each case, the Applicable Margin (as defined in this
paragraph). Eurodollar Rate Loans will, at the option of Marvel, 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
September 30, 1996, was approximately 8 1/16% to 8 3/16% 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.
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
based on exchange rates in effect on the date of acquisition) (the "Term Loan
Facility"). Through September 30, 1996, Marvel paid Italian Lire 31.2 billion
(approximately $20.5) due under the Term Loan Facility.
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
8
MARVEL III HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 September 30, 1996, was
approximately 10.46%. 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 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 change of control covenant. 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).
During March 1996 and August 1996, Marvel amended the U.S. Term Loan
Agreement, the Amended and Restated Credit Agreement and the Term Loan
Agreement to, among other things; 1) provide for an additional $25.0 revolving
credit facility which will expire on December 31, 1996; 2) secure the
borrowings with substantially all of Marvel's domestic assets, other than
Marvel's investment in common stock of Toy Biz, and all of the capital stock
of Marvel's domestic subsidiaries and 65% of the capital stock of Marvel's
first tier foreign subsidiaries; and 3) amend certain financial covenants. The
additional revolving credit facility is pari passu with the loans extended by
the banks pursuant to Marvel's existing loan agreements (collectively with the
U.S. Term Loan Agreement, the Amended and Restated Credit Agreement and the
Term Loan Agreement, the "Credit Agreements"). The additional revolving credit
facility bears interest at a rate per annum equal to the Eurodollar Rate (as
defined in the Term Loan Agreement), plus 2 3/4%, or the Alternate Base Rate
(as defined in the Term Loan Agreement) plus 1 3/4%. The interest rate on the
additional revolving credit facility at September 30, 1996 was 8 7/16%.
In conjunction with the Toy Biz IPO (as defined below), Toy Biz
entered into a three year $30.0 revolving line of credit with a syndicate of
banks for which The Chase Manhattan Bank (formerly named 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 The Chase Manhattan Bank's
alternate base rate or at the Eurodollar rate plus, in each case, 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 control Toy Biz 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.
5. 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
$6.5 has been paid as of September 30, 1996. Additionally, approximately $6.7
of the restructuring charges relates to facility closure and consolidation
costs, of which $5.4
9
MARVEL III HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
has been paid as of September 30, 1996, and $7.6 of the restructuring charges
relates to other costs, of which $4.6 has been paid as of September 30, 1996. A
substantial portion of the remaining amount of $8.5 as of September 30, 1996,
which is included in accrued expenses and other, is scheduled to be paid in the
fourth quarter of 1996 with the remainder to be paid in accordance with the
terms of various agreements.
6. TOY BIZ COMMON STOCK OFFERINGS
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. As part of the Toy Biz IPO, a
stockholder sold 700,000 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 subordinated notes held
by Marvel and the sole stockholder of the predecessor to Toy Biz and for
working capital and general corporate purposes. In 1995, Marvel recorded a
gain of $14.3 on the Toy Biz IPO in recognition of the net increase in value
of Marvel's investment in Toy Biz. In August, 1996, Toy Biz sold in an
offering 700,000 shares of its class A common stock at a price to the public
of $15 per share. As part of the Toy Biz offering, Marvel sold 2.5 million
shares of its Toy Biz class A common stock. In the third quarter of 1996,
Marvel recorded a gain on the sale of this common stock of approximately
$22.0. The net proceeds to Toy Biz and Marvel were approximately $9.1 and
$35.7, respectively, after deducting amounts accrued for estimated fees and
expenses.
In conjunction with the Toy Biz IPO, Marvel's equity ownership
percentage of Toy Biz decreased to 36.6% and its voting control increased to
85.3% and, as a result of the increase in voting control, 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. As a result of
Marvel's sale of class A common stock of Toy Biz in August 1996, Marvel's
ownership percentage of Toy Biz decreased to 26.7% and its voting control
decreased to 78.4% (See Note 8).
7. SKYBOX ACQUISITION
On April 27, 1995, Marvel acquired all of the issued and outstanding
shares of SkyBox common stock for $165.0. The SkyBox Acquisition was accounted
for using the purchase method of accounting. The purchase price has been
allocated to the identified assets and liabilities based on their respective
fair values. 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
currently being amortized over forty years on the straight-line basis.
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 $117.0 for the nine months ended September 30, 1995, of which $102.3 is
included in Marvel's consolidated net revenues.
For the Nine Months Ended
September 30, 1995
--------------------------
Net revenues......................................... $621.1
Loss before extraordinary item....................... $(56.6)
Net loss............................................. $(59.9)
10
MARVEL III HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. SUBSEQUENT EVENT
Marvel has experienced greater than expected operating losses in the
third quarter of 1996, and as a result has failed to satisfy certain financial
covenants contained in the Credit Agreements. Marvel has commenced discussions
with The Chase Manhattan Bank, the agent bank under the Credit Agreements,
seeking waivers of these covenants and a restructuring of the Credit
Agreements to provide for Marvel's cash requirements. Marvel believes that
such a restructuring will require an infusion of new equity capital and has
received a proposal from Andrews Group regarding such equity infusion, which
is subject to a number of significant conditions. As a result of Marvel's
failure to satisfy certain financial covenants and in the absence of waivers
as of this date relating thereto, the balance of long-term debt has been
reclassified to current liabilities.
On October 17, 1996, Andrews Group announced that it had reached
agreement with each of Isaac Perlmutter and Avi Arad to purchase approximately
67% of the class A common stock of Toy Biz for cash and debt of Andrews Group.
On November 12, 1996, Marvel received a proposal from Andrews Group to acquire
from Marvel a number of shares of Marvel common stock (or its equivalent) that
would represent 80.1% of the shares of Marvel common stock after giving effect
to such acquisition. Based on the approximately 101.8 million shares of Marvel
common stock outstanding, this would require the issuance of approximately 410
million shares of Marvel common stock (or its equivalent). The purchase price
for the acquisition would be $350 in cash or, at the option of Andrews Group,
an equal value of the shares of class A common stock of Toy Biz or a
combination of the foregoing (the "Andrews Investment"). The Andrews Group
proposal states that the shares of Toy Biz class A common stock so transferred
would be valued on the basis of the cost to Andrews Group of acquiring such
stock. The Andrews Group proposal states that any contribution by Andrews
Group to Marvel of shares of Toy Biz class A common stock would be made in the
context of Toy Biz becoming a wholly owned subsidiary of Marvel.
The Andrews Group proposal states that the consummation of the
Andrews Group Investment would be subject to a number of significant
conditions, including the satisfaction of the conditions set forth in the
agreements between Andrews Group and Messrs. Perlmutter and Arad, an agreement
for the acquisition of Toy Biz having been executed and all conditions to that
agreement having been satisfied, receipt of certain consents and amendments
under the Credit Agreements, including to provide for the additional borrowing
capacity that Marvel requires, the satisfactory resolution by Andrews Group of
a number of issues under the Marvel parent holding company indentures,
including that any Marvel common stock (or its equivalent) purchased by
Andrews Group not be subject to the liens thereunder, and the execution of a
definitive agreement for the Andrews Group Investment which contains
appropriate representations, warranties, covenants and conditions customary
for transactions of the nature of the Andrews Group Investment. There can be
no assurance that agreement will be reached on the terms of any of the
foregoing transactions or that any of the foregoing transactions will be
consummated. See Management Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources.
A copy of the Andrews Group proposal has been forwarded to a special
committee of Marvel's board of directors comprised of outside directors, who
are not affiliated with Andrews Group, for consideration. In addition, in
anticipation of receiving a proposal, the board of directors of Toy Biz formed
a special committee of outside directors who are not affiliated with Andrews
Group or Marvel to consider, on behalf of the minority stockholders of Toy
Biz, any proposal that may be made.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Holdings III 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.
The Company is a leading creator, publisher and distributor of youth
entertainment products for domestic and international markets based on action
adventure characters owned by the Company, licenses from professional
athletes, sports teams and leagues and popular entertainment characters and
other properties owned by third parties. The Company also licenses its
characters and properties for consumer products, television and film and
advertising promotions. The Company's products include comic book and other
publications, sports and entertainment trading cards, 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. The Company's business has been augmented by the marketing and
distribution of sports and entertainment trading cards and 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, primarily associated with its publishing
and trading card businesses, have adversely affected the Company's net
revenues and operating results in recent periods.
In recent years there has been an overall decline in the comic book
specialty store industry, and more specifically, a significant reduction in
speculative purchases of comic books, which has adversely affected the
Company's publishing revenues. In response, the Company has undertaken several
strategic actions including: 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. However, to date these actions have not been sufficient to
overcome the overall decline in the comic book specialty store industry.
Similarly, there has been a significant 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 in 1994 and 1995, which adversely affected sports trading card
sales and increased 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 as the owners rejected in early November
1996 a proposed collective bargaining agreement. The level of fan interest,
although showing some signs of improvement during 1996, has not returned to
the levels experienced prior to the 1994 strike and the failure to enter into
a new collective bargaining agreement could result in a disruption of play in
1997. Along 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. The Company believes that all of these factors
have negatively affected the overall trading card industry, causing the
Company to experience lower sales, higher returns and higher inventory
obsolescence.
The level of demand for entertainment trading cards is dependent on
the commercial success and media exposure of the Company's characters and
third party licensed products, as well as the market conditions in the comic
book specialty stores. In 1994, the sale of entertainment cards based on
Marvel's characters and third party licensed characters offset and in 1995
such sales substantially offset the decline in sports trading cards. However,
in 1996, the Company's sales of entertainment trading cards has been adversely
affected by lower sales of cards
12
based on properties licensed from third parties as well as significantly lower
sales of cards based on comic book characters.
Throughout 1995, the lower sales and higher returns of the Company's
trading cards primarily related to distribution channels other than trading
card specialty stores. The Company has revamped its trading card business to
concentrate its distribution of trading card products in trading card
specialty stores and in select mass market accounts. The combination of the
contraction in the overall trading card industry, the lack of commercial
success of certain of the third party and Marvel licensed products, in part
driven by the softness in market conditions in the comic book specialty store
market, and the Company's change in distribution mentioned above have resulted
in substantially lower trading card sales by the Company in 1996.
In response to the significant contraction in the sports trading card
market, the adverse conditions related to the sale of entertainment trading
cards and the overall decline in the comic book specialty store industry and
their negative effect on the Company's operating results, the Company is
considering further actions to mitigate these declines and their effect on
future operating results. Given the unfavorable market conditions in trading
cards and publishing, the Company is evaluating whether there has been an
impairment to goodwill and other intangible assets and is considering
restructuring and other actions, all of which could result in substantial 1996
year end charges.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's net revenues were $209.4 million and $269.0 million in
the 1996 and 1995 periods, respectively, an decrease of $59.6 million or
22.2%. This reflects a decrease of $59.0 million in net trading card and
sticker revenues, $16.6 million in licensing revenues, and $13.5 million in
net publishing revenues. This decrease was partially offset by a $26.2 million
increase in toy revenues and a $3.3 million increase in other revenues. The
decrease in trading card net revenues was primarily due to the continued
general decline in the demand for trading cards as well as the change in the
Company's distribution of its trading cards to concentrate in trading card
specialty stores and select mass market accounts which generally resulted in
lower gross sales in 1996. In addition, entertainment card sales decreased due
to lower sales of cards based on comic book characters due in part to market
conditions in the comic book specialty store market, as well as lower sales of
cards based on properties licensed from third parties resulting from lower
commercial success of such properties in 1996 as compared to 1995. However, as
compared to 1995, provisions for trading card sales returns were significantly
lower, reflecting the change in distribution. These decreases in trading card
net revenues were partially offset by a slight increase in net revenues of
stickers. This increase was due to the 1996 European Cup soccer tournament and
expansion into new markets such as Brazil and Russia, and was partially offset
by higher provisions for returns for stickers in 1996. In addition, the
Company experienced lower net revenues in certain European markets principally
due to lower net revenues from entertainment stickers based on properties
licensed from third parties as a result of lower commercial success of such
properties in 1996 as compared to 1995. Licensing revenues, which vary from
period to period, decreased primarily as a result of an insufficient amount of
new media exposure of the Company's characters. The Company and Fox Kid's
Worldwide ("FKW") entered into an arrangement under which the Company expects
to have a new animation series on the Fox Children's Network in the 1997-1998
broadcast seasons. Licensing revenues will vary depending on the volume and
extent of licensing agreements entered into during any particular financial
period, as well as the level and commercial success of the media exposure of
the Company's characters. The decrease in net publishing revenues was due to
the impact on the Company of the decline in the comic book specialty store
industry and the reduction of titles resulting from implementation of the
Company's business strategy. The increase in toy revenues was principally due
to Toy Biz's expanded product offerings and an increased international
distribution of products. The improvement in other revenues was due to
increased sales of adhesive paper by Panini.
Gross profit was $66.3 million and $130.2 million in the 1996 and
1995 periods, respectively, an decrease of $63.9 million. As a percentage of
net revenues, gross profit was 31.7% in the 1996 period as compared to 48.4%
in the 1995 period. The decrease in gross profit as a percentage of net
revenues was due primarily to the effect of higher return provisions for
stickers, the effect of lower licensing revenues, an unfavorable product mix
for trading cards and toys as compared to 1995 and the effect of lower net
revenues without a corresponding
13
decrease in royalty expense and advertising and promotion expense given
minimum payment obligations for trading cards in 1996.
Selling and general administrative expenses ("SG&A") were $60.7
million and $62.5 million in the 1996 and 1995 periods, respectively. The
decrease of $1.8 million was mainly attributable to a general reduction in
overhead expenses associated with the restructuring of the trading card,
publishing and confectionery operations partially offset by the increase in
Toy Biz's and Panini's advertising, promotion and selling costs. As a
percentage of net revenues, SG&A was 29.0% in the 1996 period as compared to
23.2% in the 1995 period. The increase in SG&A as a percentage of net revenues
was due primarily to lower publishing and licensing net revenues without a
corresponding reduction in SG&A.
Depreciation and amortization was $6.3 million and $4.9 million in
the 1996 and 1995 periods, respectively. The increase of $1.4 million was due
to higher depreciation primarily resulting from an increased investment in
product tooling to support Toy Biz's expanded product line.
Interest expense, net was $35.3 million and $30.3 million in the 1996
and 1995 periods, respectively. The increase in interest expense of $5.0
million primarily reflects increased borrowings under the Credit Agreements
including the $25.0 million revolving credit facility, borrowings for the
expansion of Panini's Adespan adhesives facility, and higher average borrowing
rates. The accretion of discount on the Marvel Holdings Notes and the Parent
Notes was $17.6 million and $15.8 million in the 1996 and 1995 periods,
respectively.
The gain on the sale of Toy Biz common stock was $22.0 million in the
1996 period (see Note 6).
Provision for income taxes was $3.0 million and $21.0 million in the
1996 and 1995 periods, respectively. The provision for income taxes in 1996
primarily represents a provision for income taxes related to the sale of
common stock of Toy Biz and the operations of Toy Biz partially offset by a
benefit for the Company's operating losses. The provision for income taxes in
1995 represents foreign, federal, state and local income taxes. In addition,
no benefit was recorded for the separate company losses of Holdings III,
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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
The Company's net revenues were $581.2 million and $596.1 million in
the 1996 and 1995 periods, respectively, an decrease of $14.9 million or 2.5%.
This reflects a decrease of $37.4 million in net publishing revenues, $31.0
million in net trading card and sticker revenues, and $20.4 million in
licensing revenues, partially offset by a $66.6 million increase in toy
revenues and a $7.3 million increase in other revenues. The decrease in net
publishing revenues was due to the impact on the Company of the decline in the
comic book specialty store industry, the reduction of titles resulting from
implementation of 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. The decrease in trading card net
revenues was primarily due to the continued general decline in the demand for
trading cards as well as the change in the Company's distribution of its
trading cards to concentrate in trading card specialty stores and select mass
market accounts which generally resulted in lower gross sales in 1996. In
addition, entertainment card sales decreased due to lower sales of cards based
on comic book characters due in part to market conditions in the comic book
specialty store market, as well as lower sales of cards based on properties
licensed from third parties resulting from lower commercial success of such
properties in 1996 as compared to 1995. However, as compared to 1995,
provisions for trading card sales returns were significantly lower, reflecting
the change in distribution and the inclusion in the second quarter of 1995 of
a significant increase in sales returns reserves. Such lower sales return
provisions, combined with the inclusion of net revenues from SkyBox for nine
months in 1996 versus only five months in 1995 (the SkyBox Acquisition was
consummated on April 27, 1995), partially offset the lower sales discussed
above. These decreases in trading card net revenues were partially offset by
an increase in net revenues of stickers. This increase was due to the 1996
European Cup soccer tournament and expansion into new markets such as Brazil
and Russia, and was partially offset by higher provisions for returns for
stickers in 1996. In addition, the Company experienced lower net
14
revenues in certain European markets principally due to lower net revenues
from entertainment stickers based on properties licensed from third parties as
a result of lower commercial success of such properties in 1996 as compared to
1995. Licensing revenues, which vary from period to period, decreased
primarily as a result of an insufficient amount of new media exposure of the
Company's characters. The Company and FKW entered into an arrangement under
which the Company expects to have a new animation series on the Fox Children's
Network in the 1997-1998 broadcast seasons. Licensing revenues will vary
depending on the volume and extent of licensing agreements entered into during
any particular financial period, as well as the level and commercial success
of the media exposure of the Company's characters. The increase in toy
revenues was principally due to Toy Biz's expanded product offerings,
increased international distribution of products and the consolidation of Toy
Biz for nine months in 1996 as compared to seven months in 1995. The
improvement in other revenues was due to increased sales of adhesive paper by
Panini.
Gross profit was $208.8 million and $243.5 million in the 1996 and
1995 periods, respectively, a decrease of $34.7 million. As a percentage of
net revenues, gross profit was 35.9% in the 1996 period as compared to 40.8%
in the 1995 period. The decrease in gross profit as a percentage of net
revenues was due primarily to the effect of higher return provisions for
stickers, the effect of lower licensing revenues, an unfavorable product mix
for trading cards and toys as compared to 1995 and the effect of lower net
revenues without a corresponding decrease in royalty expense and advertising
and promotion expense given minimum payment obligations for trading cards in
1996.
SG&A were $168.4 million and $156.4 million in the 1996 and 1995
periods, respectively. The increase of $12.0 million was mainly attributable
to the increase in advertising, promotion and selling expenses of Panini and
Toy Biz, the consolidation of Toy Biz's results for nine months in 1996 as
compared to seven months in 1995, and the inclusion of Sky Box for nine months
in 1996 as compared to five months in 1995. This increase was partially offset
by a general reduction in overhead expenses associated with the restructuring
of the trading card, publishing and confectionery operations. As a percentage
of net revenues, SG&A was 29.0% in the 1996 period as compared to 26.2% in the
1995 period. The increase in SG&A as a percentage of net revenues was due
primarily to lower publishing and licensing net revenues without a
corresponding reduction in SG&A.
Depreciation and amortization was $15.6 million and $12.4 million in
the 1996 and 1995 periods, respectively. The increase of $3.2 million was
primarily due to the consolidation of Toy Biz for nine months in 1996 as
compared to only seven months in 1995 and higher depreciation primarily
resulting from an increased investment in product tooling to support Toy Biz's
expanded product line.
Amortization of goodwill, intangibles and deferred charges was $26.6
million and $22.2 million in the 1996 and 1995 periods, respectively. The
increase of $4.4 million mainly reflects the amortization related to the
SkyBox Acquisition in April 1995.
Interest expense, net was $102.2 million and $84.3 million in the
1996 and 1995 periods, respectively. The increase in interest expense of $17.9
million primarily reflects increased borrowings under the U.S. Term Loan
Facility in connection with the SkyBox Acquisition, increased borrowings under
the Credit Agreements including the $25.0 million revolving credit facility,
borrowings for the expansion of Panini's Adespan adhesives facility, and
higher average borrowing rates. The accretion of discount on the Marvel
Holdings and the Parent Notes was $51.7 million and $46.3 million in the 1996
and 1995 periods, respectively.
The gain on sale of Toy Biz common stock was $22.0 million in 1996
compared with $14.3 million from the Toy Biz IPO in 1995 (see Note 6).
(Benefit) provision for income taxes was ($0.7) million and $25.6
million in the 1996 and 1995 periods, respectively. The net tax benefit in
1996 primarily represents a benefit for the Company's operating losses
partially offset by a provision for income taxes related to the sale of common
stock of Toy Biz and the operations of Toy Biz. The provision for income taxes
in 1995 represents foreign, federal, state and local income taxes. In
addition, no benefit was recorded for the separate company losses of Holdings
III, Parent Holdings and Marvel Holdings as they
15
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.
In 1995, the Company recorded a $3.3 million extraordinary loss, net
of taxes of $2.1 million, which represented a write-off of the related
deferred financing costs associated with the term loan portion of the Amended
and Restated Credit Agreement.
LIQUIDITY AND CAPITAL RESOURCES
Marvel has experienced greater than expected operating losses in the
third quarter of 1996, and as a result has failed to satisfy certain financial
covenants contained in the Credit Agreements. Marvel has commenced discussions
with The Chase Manhattan Bank, the agent bank for the Credit Agreements,
seeking waivers of these covenants and a restructuring of the Credit
Agreements to provide for Marvel's cash requirements. Marvel believes that
such a restructuring will require an infusion of new equity capital and has
received a proposal from Andrews Group regarding such equity infusion, which
is subject to a number of significant conditions. As a result of Marvel's
failure to satisfy certain financial covenants and in the absence of waivers
as of this date relating thereto, the balance of long-term debt has been
reclassified to current liabilities.
At November 8, 1996, the Company's outstanding bank indebtedness was
approximately $665 million, of which $16.5 million relates to the borrowings
for Panini's Adespan adhesives facility. Until Marvel receives waivers of the
failure to satisfy financial covenants contained in the Credit Agreements, it
will not be able to borrow additional amounts under its domestic credit
facilities. Panini S.p.A. had approximately $11 million available under its
foreign credit facilities at November 8, 1996. In addition, there was $30.0
million available under the Toy Biz line of credit at November 8, 1996.
If the Transactions (as defined below) are not consummated or if
consummated, are not consummated on satisfactory terms, then Marvel
anticipates that it will be required to adopt one or more extraordinary
transactions in order to meet its consolidated cash requirements, including
debt service and repayment, for the foreseeable future. However, there can be
no assurance that such extraordinary transactions could be consummated or if
consummated, would be sufficient to allow Marvel to meet its consolidated cash
requirements.
The indenture governing the Marvel Holdings Notes, which have a book
value of approximately $437.2 at September 30, 1996, requires Marvel Holdings
to hold a majority of the outstanding common stock of Marvel at all times. At
November 13, 1996, the value of the approximately 50.9 million shares of
Marvel held by Marvel Holdings was approximately $130.5. The indenture
governing the Parent Notes, which have a book value of approximately $210.7 at
September 30, 1996, requires Parent Holdings together with Marvel Holdings to
hold a majority of the outstanding common stock of Marvel at all times. In
addition, Parent Holdings guarantees the Holdings III Notes, which have a
principal amount of $125.0, on a non-recourse basis, secured by a first
priority lien of approximately 9.3 million common shares of Marvel. At
November 13, 1996, the value of the approximately 29.3 million common shares
of Marvel held by Parent Holdings was approximately $75.1.
Each of Holdings III, Parent Holdings and Marvel Holdings have no
business operations, source of income of their own or any committed sources of
funding from external sources. In light of the current financial condition of
Marvel described above, it is uncertain how Holdings III, Parent Holdings and
Marvel Holdings will meet their obligations on their debt instruments when
they mature in 1998 and, in the case of Holdings III, to meet its obligations
for semi-annual interest payments.
On October 17, 1996, Andrews Group announced that it had reached
agreement with each of Isaac Perlmutter and Avi Arad to purchase approximately
67% of the class A common stock of Toy Biz for cash and debt of Andrews Group.
On November 12, Marvel received a proposal from Andrews Group for the Andrews
Investment whereby Andrews Group would acquire from Marvel a number of shares
of Marvel common stock (or its equivalent) that would represent 80.1% of the
shares of Marvel common stock after giving effect to such acquisition. Based
on approximately 101.8 million shares of Marvel common stock outstanding, this
would require the issuance of approximately 410 million shares of Marvel
common stock (or its equivalent). The
16
purchase price for the Andrews Investment would be $350 million in cash or, at
the option of Andrews Group, an equal value of the shares of class A common
stock of Toy Biz or a combination of the foregoing. The Andrews Group proposal
states that the shares of Toy Biz class A common stock so transferred would be
valued on the basis of the cost to Andrews Group of acquiring such stock. The
Andrews Group proposal states that any contribution by Andrews Group to Marvel
of shares of Toy Biz class A common stock would be made in the context of Toy
Biz becoming a wholly owned subsidiary of Marvel.
The Andrews Group proposal states that the consummation of the
Andrews Group Investment would be subject to a number of significant
conditions, including the satisfaction of the conditions set forth in the
agreements between Andrews Group and Messrs. Perlmutter and Arad, an agreement
for the acquisition of Toy Biz having been executed and all conditions to that
agreement having been satisfied, receipt of certain consents and amendments
under the Credit Agreements, including to provide for the additional borrowing
capacity that Marvel requires, the satisfactory resolution by Andrews Group of
a number of issues under the Marvel parent holding company indentures,
including that any Marvel common stock (or its equivalent) purchased by
Andrews Group not be subject to the liens thereunder, and the execution of a
definitive agreement for the Andrews Group Investment which contains
appropriate representations, warranties, covenants and conditions customary
for transactions of the nature of the Andrews Group Investment. There can be
no assurance that agreement will be reached on the terms of any of the
foregoing transactions or that any of the foregoing transactions will be
consummated.
A copy of the Andrews Group proposal has been forwarded to a special
committee of Marvel's board of directors comprised of outside directors, who
are not affiliated with Andrews Group, for consideration. In addition, in
anticipation of receiving a proposal, the board of directors of Toy Biz formed
a special committee of outside directors who are not affiliated with Andrews
Group or Marvel to consider, on behalf of the minority stockholders of Toy
Biz, any proposal that may be made. (The restructuring of the Credit
Agreements, the proposed purchase of Marvel's equity capital by Andrews Group
(or an affiliate) and the proposed Toy Biz acquisition are collectively
referred to as the "Transactions".)
As of November 8, 1996, 79,407,725 shares, or 78.0%, of Marvel's
Common Stock were pledged by subsidiaries of Mafco Holdings Inc. ("Mafco"),
including Marvel Holdings and Parent Holdings, other than Marvel and its
subsidiaries, to secure indebtedness or letters of credit of such
subsidiaries. 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.
For the nine months ended September 30, 1996, the Company used $85.2
million of cash as a result of its operating activities. The use of funds was
principally due to an increase in accounts receivable, a reduction in accrued
expenses, a reduction in accounts payable and increased investments in
inventory and prepaid expenses. Cash shown on the Consolidated Balance Sheets
at September 30, 1996 of $36.0 million and December 31, 1995 of $53.9 million,
includes $7.3 million and $22.5 million, respectively, of Toy Biz cash.
Cash used for investing activities for the nine months ended
September 30, 1996, was $5.9 million. The primary use of these funds was for
capital expenditures for Panini's Adespan adhesives facility and tooling and
molds and capitalized product development costs primarily related to Toy Biz
partially offset by net proceeds from Marvel's sale of a portion of its
investment in Toy Biz.
Cash provided by financing activities for the nine months ended
September 30, 1996, was $71.9 million, primarily consisting of increased
borrowings under Marvel's credit facilities for working capital and investment
requirements, including the expansion of Panini's Adespan adhesives facility,
capital contributions from the Company's parent and the net proceeds to Toy
Biz from Toy Biz's sale of shares of its class A common stock in an offering.
In August 1996, Toy Biz sold in an offering 700,000 shares of its
class A common stock at a price to the public of $15 per share. As part of Toy
Biz's offering, Marvel sold 2.5 million shares of Toy Biz class A common
stock. The net proceeds to Toy Biz and Marvel were approximately $9.1 million
and $35.7 million, respectively,
17
after deducting amounts accrued for estimated fees and expenses. As a result
of the offering by Toy Biz and the sale of class A common stock of Toy Biz by
Marvel, Marvel's ownership percentage of Toy Biz decreased to 26.7% and its
voting control decreased to 78.4%.
Marvel expects to incur approximately $4 million in net production
costs for The Hulk animated series (which costs would be partially offset by
any sales of video cassettes and international distribution rights to the
series). In addition, with respect to Marvel's agreement with FKW, Marvel will
be required to reimburse FKW a portion of its production costs. The Hulk
animated series, which began broadcasting on United Paramount Network in
September 1996 and Marvel's projects with FKW, which will involve the
development and production of a variety of Marvel's characters to be broadcast
over the Fox Children's Network over a period of seven years (which could be
extended to ten years in certain circumstances), are expected to be projects
of Marvel Studios.
Marvel, along with its joint venture partner, is continuing
development of Marvel theme restaurants. Five restaurants are currently under
development, with the first restaurant expected to open in the first half of
1997. Marvel expects to invest approximately $36 million over the next three
years to fund the development of such restaurants.
18
FORWARD-LOOKING STATEMENTS
Statements in this quarterly report on Form 10-Q for the quarter
ended September 30, 1996 such as "intend", "estimated", "believe", "expect",
"anticipate" and similar expressions which are not historical are
forward-looking statements that involve risks and uncertainties. Such
statements include, without limitation, the Company's expectation as to
financial performance for the remainder of 1996 and for 1997. In addition to
factors that may be described in the Company's Securities and Exchange
Commission filings, including this filing, 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) continued weakness in the comic book market which cannot
be overcome by the Company's new editorial and production initiatives in comic
publishing; (ii) continued general weakness in the trading card market; (iii)
the failure of fan interest in baseball to return to traditional levels that
existed prior to the 1994 baseball strike and the potential for decreased fan
interest due to a possible disruption of play in 1997 as a result of the
failure of the owners and players to agree on a collective bargaining
agreement, thereby negatively impacting the Company's baseball card business;
(iv) the effectiveness of the Company's changes to its trading card and
publishing distribution; (v) a decrease in the level of media exposure or
popularity of the Company's characters resulting in declining revenues based
on such characters; (vi) the lack of continued commercial success of
properties owned by major licensors which have granted the Company licenses
for its sports and entertainment trading card and sticker businesses; (vii)
unanticipated costs or delays in completing projects associated with the
Company's new ventures including media, interactive software and on-line
services and theme restaurants; (viii) consumer acceptance of new product
introductions, including those for toys; (ix) imposition of tariffs or import
quotas on toys manufactured in China as a result of a deterioration in trade
relations between the U.S. and China; and (x) the outcome of Marvel's
discussions for the restructuring of Marvel's Credit Agreements and related
anticipated transactions.
19
PART II.
OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
Marvel is a defendant in a purported class action filed on July 26,
1996 in the United States District Court for the Eastern District of New York
entitled Fishman, et al v. Marvel Entertainment Group, Inc., CV-96-3757 (SJ),
by four persons who allegedly purchased sports and entertainment cards
manufactured by Fleer and SkyBox. The action is directed against standard
business practices in the trading card industry, including the practice of
randomly placing insert cards in packages of sports and entertainment trading
cards, and alleges that these practices constitute illegal gambling activity
in violation of state and federal law. Each of Fleer and SkyBox's principal
competitors in the trading card industry has been separately sued for
employing the same or similar practices. In addition, certain of the various
sports organizations and entertainment companies that issue licenses to Fleer
and SkyBox (as well as the other major trading card companies) in connection
with the manufacture of sports and entertainment trading cards have also been
separately sued and are alleged to be engaged in aspects of the purportedly
illegal gambling operations. Plaintiffs seek certification of a class of
persons who within four years prior to the filing of the complaint purchased
packages of trading cards that might contain randomly inserted cards, and
recovery of treble damages. On September 30, 1996, Marvel filed a motion to
dismiss the complaint. No discovery has commenced. Plaintiffs have not
specified the amount of damages sought, but generally allege that members of
the purported class have been damaged as a result of their purchases of
trading cards during the four years preceding the commencement of the action.
It is not possible at this early stage of the case to predict the outcome with
certainty. In the opinion of Marvel, the action lacks merit and Marvel intends
to defend it vigorously.
In addition, the Company is a party to various legal proceedings
described in previous filings. During the quarter ended September 30, 1996
there were no material developments in any of such proceedings. Other than the
item described above there were no new reportable legal proceedings. Although
it is impossible to predict the outcome of any outstanding legal proceeding,
the Company believes that all legal proceedings and claims, individually and
in the aggregate, are not likely to have a material effect on its financial
condition or results of operations.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The information required by Part II, Item 3, of Form 10-Q is
incorporated by reference from Notes 4 and 8 of the Condensed Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources, set
forth herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
10.1 Consent, dated as of September 24, 1996 to the (a)
Participation Agreement, dated as of August
30,1994, among Instituto Bancario San Paolo Di
Torino, S. p. A., New York Limited Branch ("San
Paolo"), the financial institutions party thereto
and The Chase Manhattan Bank (formerly named
Chemical Bank), as administrative agent and (b) the
Term Loan and Guarantee Agreement among Panini S.
p. A. (formerly named Marvel Comics Italia S. r.
L.), Marvel and San Paolo. Incorporated by
reference to Exhibit 10.1 to the September 30, 1996
Marvel Quarterly Report on Form 10-Q.
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10.2 Employment Agreement dated as of August 13, 1996,
between Marvel and David J. Schreff.
Incorporated by reference to Exhibit 10.2 to the
September 30, 1996 Marvel Quarterly Report on Form
10-Q.
10.3 Amendment dated February 7, 1996, to License
Agreement dated December 22, 1994, between Major
League Baseball Players Association and Fleer Corp.
Confidential treatment has been granted for
portions of this document. Incorporated by
reference to Exhibit 10.3 to the September 30, 1996
Marvel Quarterly Report on Form 10-Q.
10.4 Retail Product License Agreement dated July 21,
1995, between NBA Properties, Inc. and Marvel.
Confidential treatment has been granted
for portions of this document. Incorporated by
reference to Exhibit 10.4 to the September 30, 1996
Marvel Quarterly Report on Form 10-Q.
10.5 License Agreement dated June 30, 1995, between
SkyBox International Inc. and National Football
League Players Incorporated, as amended June 30,
1995. Confidential treatment has been granted for
portions of this document. Incorporated by
reference to Exhibit 10.5 to the September 30, 1996
Marvel Quarterly Report on Form 10-Q.
(B) Reports on Form 8-K
None.
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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 III HOLDINGS INC.
(Registrant)
By:/s/Laurence Winoker
---------------------------------
Dated: November 14, 1996 Laurence Winoker
Vice President and Controller
(Principal Accounting Officer)
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