UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13638
TOY BIZ, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3711775
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 East 38th Street, New York, NY 10016
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(Address of principal executive offices) (Zip Code)
212-682-4700
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(Registrant's telephone number, including area code)
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(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At May 1, 1997, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 20,352,127 shares of Class A Common Stock
and 7,394,000 shares of Class B Common Stock, totaling 27,746,127 shares of
Common Stock.
TOY BIZ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1997 1996 *
(UNAUDITED)
----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 5,203 $ 6,022
Accounts receivable, net ........................... 78,722 95,591
Inventories, net ................................... 24,605 20,935
Deferred income taxes .............................. 6,173 6,173
Prepaid expenses and other ......................... 8,815 6,067
-------- --------
Total current assets ............................ 123,518 134,788
Molds, tools and equipment, net ...................... 19,936 17,680
Product and package design costs, net ................ 9,342 9,283
Goodwill and other intangibles, net .................. 14,131 9,981
-------- --------
Total assets .................................... $166,927 $171,732
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 8,236 $ 10,237
Accrued expenses and other ......................... 14,018 22,359
Borrowings under credit facility ................... 5,000 --
-------- --------
Total current liabilities ....................... 27,254 32,596
-------- --------
Redeemable preferred stock ........................... 1,704 1,681
-------- --------
Stockholders' equity:
Common stock ....................................... 277 277
Additional paid-in capital ......................... 70,626 70,587
Retained earnings .................................. 67,066 66,591
-------- --------
Total stockholders' equity ...................... 137,969 137,455
-------- --------
Total liabilities and stockholders' equity ...... $166,927 $171,732
======== ========
* Derived from the audited Financial Statements for the year ended December
31, 1996.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
TOY BIZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(unaudited)
Three Months
Ended March 31,
--------------------
1997 1996
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Net sales ............................................ $34,414 $38,369
Cost of sales ........................................ 19,901 19,733
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Gross profit ......................................... 14,513 18,636
Operating expenses:
Selling, general and administrative ................ 10,854 11,369
Depreciation and amortization ...................... 2,894 2,144
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Total operating expenses ........................ 13,748 13,513
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Operating income ..................................... 765 5,123
Interest income, net ................................. 27 166
------- -------
Income before provision for income taxes ........... 792 5,289
Provision for income taxes ......................... 317 2,116
------- -------
Net income ........................................... $ 475 $ 3,173
======= =======
Earnings per share ................................... $ 0.02 $ 0.12
======= =======
Weighted average number of common and common
equivalent shares outstanding ...................... 27,756 27,201
======= =======
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
TOY BIZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
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Cash flows from operating activities:
Net income .......................................................... $ 475 $ 3,173
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................... 2,894 2,144
Changes in assets and liabilities:
Decrease in accounts receivable, net ............................ 17,694 8,366
(Increase) decrease in inventories .............................. (3,042) 2,497
Increase in prepaid expenses and other .......................... (2,748) (3,274)
Decrease in accounts payable .................................... (2,001) (4,521)
Decrease in accrued expenses and other .......................... (10,079) (15,834)
-------- --------
Total adjustments ................................................... 2,718 (10,622)
-------- --------
Net cash provided by (used in) operating activities ............ 3,193 (7,449)
-------- --------
Cash flows from investing activities:
Purchases of molds, tools and equipment ........................... (3,930) (2,588)
Expenditures for product and package design costs ................. (960) (2,525)
Acquisition of Colorforms ......................................... (4,160) --
Other investments ................................................. (22) (98)
-------- --------
Net cash used in investing activities .......................... (9,072) (5,211)
-------- --------
Cash flows from financing activities:
Redemption of preferred stock ..................................... -- (1,440)
Exercise of stock option .......................................... 60 167
Net borrowings under credit agreement ............................. 5,000 --
-------- --------
Net cash provided by (used in) financing activities ............ 5,060 (1,273)
-------- --------
Net decrease in cash ................................................ (819) (13,933)
Cash, at beginning of period ........................................ 6,022 22,484
-------- --------
Cash, at end of period .............................................. $ 5,203 $ 8,551
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period .................................. $ 26 $ 28
Income taxes, net paid during the period ......................... $ 1,394 $ 6,979
Other non-cash transactions:
Accretion of preferred dividend ................................... $ 23 $ 35
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
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 subsidiary (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instruction to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. For further information, refer to
the consolidated financial statements and footnotes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996, as filed with the Securities and Exchange Commission.
2.COMMON STOCK OFFERINGS
On August 13, 1996, the Company completed a public offering of 700,000
shares of its Class A Common Stock at $15.00 per share. As part of such
offering, Marvel Entertainment Group, Inc. ("Marvel"), a principal stockholder
of the Company, also sold 2,500,000 shares of Class A Common Stock. The
approximately $9.1 million net proceeds to the Company was intended to fund
the working capital of the Company and a portion of the Company's capital
commitment to Marvel Studios ("Marvel Studios"), the Company's proposed joint
venture with Marvel. At this time, the Company has no plans to invest a
material amount of funds in Marvel Studios in the short term, and before the
Company makes any material investment in Marvel Studios, the Company intends
to assess the developments in Marvel's bankruptcy proceeding. See Notes 6 and
7.
3.ACQUISITION
On March 25, 1997, pursuant to an Asset Purchase Agreement between the
Company and Colorforms, Inc. ("Colorforms"), the Company acquired certain
assets and assumed certain liabilities of Colorforms (the "Acquisition"). The
purchase price, including estimated fees related to the Acquisition, totaled
approximately $5.9 million. The Company utilized cash available under its
credit facility to finance the Acquisition. The Acquisition was accounted for
as a purchase and the results of Colorforms is included in the Company's
consolidated financial statements from the date of acquisition.
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TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
MARCH 31, DECEMBER 31,
1997 1996
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Accounts receivable, net:
Accounts receivable .............. $ 91,245 $ 110,932
Less allowances .................. (12,523) (15,341)
--------- ---------
Total ........................ $ 78,722 $ 95,591
========= =========
Inventories, net:
Finished goods, net .............. $ 19,715 $ 16,918
Component parts, raw materials and
work-in-process ............... 4,890 4,017
--------- ---------
Total ........................ $ 24,605 $ 20,935
========= =========
Goodwill and other intangibles, net:
Goodwill ......................... $ 14,062 $ 9,815
Patents and other intangibles .... 714 692
Less accumulated amortization .... (645) (526)
--------- ---------
Total ........................ $ 14,131 $ 9,981
========= =========
Accrued expenses and other:
Accrued advertising costs ........ $ 2,576 $ 7,330
Income taxes payable ............. 3,264 4,343
Accrued inventory purchases ...... 4,907 7,366
Other accrued expenses ........... 3,271 3,320
--------- ---------
Total ........................ $ 14,018 $ 22,359
========= =========
5.EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average
number of common and common equivalent shares. In February, 1997, the
Financial Accounting Standards Board issued Statement No. 128 (SFAS 128),
"Earnings Per Share," which establishes new standards for computing and
presenting earnings per share. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
The Company does not anticipate the effect of adopting this new standard to
have a material effect on the Company's consolidated financial position or
results of operations.
6
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
6.POSSIBLE CHANGE OF CONTROL
Marvel owns approximately 26.6% of the outstanding common stock of the
Company and has 78.4% of the total voting power of the Company's outstanding
common stock. On December 27, 1996, Marvel and its subsidiaries, other than
Panini S.p.A. ("Panini"), Marvel Restaurant Venture Corp., a general partner
in Marvel's Marvel Mania restaurant joint venture, and certain inactive
subsidiaries, filed voluntary petitions for reorganization under Chapter 11
of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware ("the Petitions"). In separate cases, Marvel Holdings
Inc. ("Marvel Holdings"), Marvel (Parent) Holdings Inc. ("Marvel (Parent)")
and Marvel III Holdings Inc. ("Marvel III" and collectively with Marvel
Holdings and Marvel (Parent), the "Marvel Holding Companies") also filed
voluntary petitions for reorganization under Chapter 11.
On February 26, 1997, upon consideration of a motion made by the
Official Bondholder's Committee in the Marvel Holding Companies bankruptcy
cases, the bankruptcy court granted relief from the automatic stay,
allowing the Official Bondholder's Committee to exercise certain
creditors' remedies. Such remedies include the right to direct the indenture
trustee to vote the common stock of Marvel and the capital stock of Marvel
Holdings and Marvel (Parent) that is pledged under the indentures governing
the secured notes issued by the Marvel Holding Companies to the creditors
represented by the Official Bondholder's Committee. The Marvel Holding
Companies have collectively pledged approximately 80% of the outstanding
common stock of Marvel. The Marvel Holding Companies have appealed this
ruling. On March 20, 1997, the Official Bondholder's Committee notified
Marvel that it intended to exercise its voting rights to replace the board of
directors of Marvel. On March 24, 1997, the bankruptcy court ruled that the
Official Bondholder's Committee could exercise the voting rights associated
with the capital stock of Marvel Holdings and Marvel (Parent), but could not
exercise the voting rights associated with the common stock of Marvel until
authorized to do so by further order of the bankruptcy court. The Official
Bondholder's Committee appealed this ruling and on appeal the District Court
for the District of Delaware reversed the bankruptcy court's decision and
vacated effective at noon on May 23, 1997 the bankruptcy court's order
preventing Marvel Holdings and Marvel (Parent) from exercising voting rights
associated with the common stock of Marvel. The incumbent board of directors
of Marvel remains in office as of May 15, 1997. Marvel is a party to a
Stockholders' Agreement with the Company, Avi Arad and Isaac Perlmutter which
provides for Marvel's shares of Class B Common Stock to be submitted for
conversion into Class A Common Stock when Ronald O. Perelman no longer controls
Marvel.
7
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
7.SUBSEQUENT EVENT
On April 25, 1997, the Company signed a letter of intent with Marvel
proposing a plan of reorganization for Marvel and its subsidiaries and, on
May 7, 1997, the Company and Marvel filed a joint plan of reorganization with
the bankruptcy court seeking to implement the transactions contemplated by
the letter of intent. Under this Marvel/Toy Biz Plan, the Company would merge
with Marvel's publishing and licensing businesses to form a new entity. This
new entity would obtain a $250 million term loan and would issue a 5-year
$170 million note to satisfy certain claims of Marvel's current secured
lenders. In addition, Marvel's secured lenders would receive 28% of the equity
of the new entity and all of the stock of Marvel's Fleer/Skybox and Panini
subsidiaries. Marvel shareholders would receive two series of three-year
warrants: the first entitles them to acquire 7.5% of the common stock of the
new entity with an exercise price based upon the new entity having an
enterprise value of $950 million, the second entitles them to acquire an
additional 5% with an exercise price based upon an enterprise value of $1.1
billion.
The Marvel/Toy Biz Plan allows for an auction process with a minimum
acceptable bid for the new entity that would yield net cash proceeds to the
Marvel pre-petition secured lenders of approximately $430 million and yield
the non-Marvel stockholders of the Company $285 million, or approximately $14
per share. Alternatively, Marvel may auction its publishing and licensing
businesses with its 26.6% interest in Toy Biz separately, but in the event of
the consummation of such auction, the Company would receive a breakup fee of
$7 million provided that certain conditions are met.
Completion of the transactions contemplated by the Marvel/Toy Biz Plan
are subject to, among other things, completion of due diligence, approval by
the Marvel board and the Company's board, negotiation and execution of
definitive documentation, confirmation of the bankruptcy court and approval of
the Company's shareholders.
8
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", "estimated", "believe", "expect"
and similar expressions are intended to identify forward-looking statements.
In addition, the following factors, among others, could cause the Company's
financial performance to differ materially from that expressed in any
forward-looking statements made by, or on behalf of, the Company: (i)
developments in the Marvel bankruptcy proceedings; (ii) a decrease in the
level of media exposure or popularity of Marvel characters resulting in
declining revenues of toys based on such characters; (iii) the lack of
continued commercial success of properties owned by major licensors which have
granted the Company toy licenses; (iv) consumer acceptance of new toy product
introductions; (v) the impositon of quotas or tariffs on toys manufactured in
China as a result of a deterioration in trade relations between the U.S. and
China; (vi) changing consumer preferences; (vii) production delays or
shortfalls; and (viii) general economic conditions.
GENERAL
The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool, and
activity toy categories featuring major entertainment and consumer brand name
properties. The Company also designs, markets, and distributes its own line
of proprietary toys.
On March 25, 1997, pursuant to an Asset Purchase Agreement between the
Company and Colorforms, the Company acquired certain assets and assumed
certain liabilities of Colorforms. The purchase price, including estimated
fees related to the Acquisition, totaled approximately $5.9 million. The
Company utilized cash available under its credit facility to finance the
Acquisition. The Acquisition was accounted for as a purchase and the results
of Colorforms is included in the Company's consolidated financial statements
from the date of acquisition.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 compared with the three months ended March
31, 1996
The Company's net sales decreased to approximately $34.4 million for
the first quarter of 1997 from approximately $38.4 million in the first
quarter of 1996. Net sales in the domestic boys' toys category decreased
approximately $5.0 million to approximately $7.6 million in the first quarter
of 1997. The Company believes that this category was adversely affected by
concerns among retailers as to the impact of the Marvel bankruptcy on the
future of the Marvel brand. Net sales in the domestic girls' toys category
decreased approximately $5.6 million in the first quarter of 1997 due
primarily to the introduction of the Take Care of Me Twins(R) doll and the
Flipper(TM) product line in the 1996 quarter, while new product introductions
for 1997 are scheduled to begin after the first quarter. Activity toy net
sales, which consist primarily of kite sales from the Spectra Star division,
remained constant from the first quarter of 1996 to the first quarter of
1997. International net sales increased approximately $3.4 million from the
first quarter of 1996 to the first quarter of 1997. The introduction of the
import division also accounted for approximately $4.9 million increase in net
sales in the 1997 period. Net sales of other products decreased approximately
$1.7 million due to sales in the preschool category and closeout sales of
various items in the first quarter of 1996 which did not recur in the first
quarter of 1997.
Gross profit decreased 22% to approximately $14.5 million for the first
quarter of 1997 from approximately $18.6 million in the first quarter of
1996. Gross profit as a percentage of net sales decreased to approximately
42% in the first quarter of 1997 from approximately 49% in the first quarter
of 1996 due to changes in the Company's product mix, additional sales
allowances and the effect of a higher percentage of international sales and
the introduction of products from the import division, both of which
typically have lower gross margins than domestic sales, in the 1997 period.
Selling, general and administrative expenses decreased 5% to
approximately $10.9 million (approximately 32% of net sales) in the first
quarter of 1997 from approximately $11.4 million (approximately 30% of net
sales) in the first quarter of 1996. The decrease of approximately $500,000
was due to decreased royalties and advertising expenses as a result of
decreased sales, offset by additional salaries and related expenses
attributable to the Company's expanded product lines.
9
Depreciation and amortization expense increased to approximately $2.9
million in the first quarter of 1997 from approximately $2.1 million in the
first quarter of 1996. The increase of $800,000 was primarily attributable to
increased amortization expense resulting from an increased investment in
product tooling to support the Company's expanded product line.
The Company believes its sales and business were adversely affected in
the first quarter of 1997 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $3.2
million in the first quarter of 1997, while net cash used in operating
activities was approximately $7.4 million in the first quarter of 1996. The
net increase results primarily from the increased collections of receivables
in the first quarter of 1997.
In March, 1995, the Company entered into a three year $30 million
revolving line of credit with a syndicate of banks for which The Chase
Manhattan Bank (formerly named Chemical Bank) serves as administrative agent.
Substantially all of the assets of the Company were pledged to secure
borrowings under this credit facility. Borrowings under the credit facility
bear interest at either The Chase Manhattan Bank's alternate base rate or at
the Eurodollar rate plus the applicable margin. The applicable margin is 3/4
of 1% to 1% to be determined based on the Company's financial performance.
The credit facility requires the Company to pay a commitment fee of 3/8 of 1%
per annum on the average daily unused portion of the credit facility. The
Company had $5.0 million outstanding indebtedness under the line of credit as
of May 1, 1997.
The credit facility contains various financial covenants, as well as
restrictions, on new indebtedness, prepaying or amending subordinated debt,
acquisitions and similar investments, the sale or transfer of assets, capital
expenditures, limitations on restricted payments, dividends, issuing
guarantees and creating liens. The credit facility also requires an annual
reduction of outstanding borrowings to zero for a period of 45 consecutive
days, commencing during the first six months of each calendar year. In
addition, the credit facility also requires that (a) Marvel continue to
control the Company and (b) the toy license agreement between the Company and
Marvel remain in effect. The credit facility is not guaranteed by Marvel.
Proceedings in the Marvel bankruptcy could result in a change in control in
the Company which could cause the credit facility to be terminated. If such an
event occurred, the Company could seek a waiver of the foregoing provisions
and believes it could obtain a replacement credit facility if a termination of
the credit facility were to occur, although there can be no assurance of the
Company's ability to do so or the terms of such a replacement facility.
On March 25, 1997, the Company acquired certain assets and assumed
certain liabilities of Colorforms. As of March 31, 1997, the Company used
approximately $4.2 million in borrowings under the credit facility to satisfy
Colorform's liabilities and recognized approximately $4.2 million in goodwill
from the Acquisition.
In March, 1996, the Company acquired, pursuant to a put right, 53,030
shares of Series A Preferred Stock of the Company for approximately $1.4
million.
10
The Company has authorized the repurchase of up to three million shares
of Class A Common Stock. The repurchase program requires the consent of Marvel
Characters, Inc., a subsidiary of Marvel, and the consent of the lenders under
the credit facility. The Company has not commenced the repurchase program
pending the outcome of the Marvel/Toy Biz reorganization plan. See Note 7 of
the Notes to Condensed Consolidated Financial Statements.
The Company believes that it has sufficient funds available from cash
and cash equivalents, cash flow from operating activities and borrowings
under the credit facility to meet peak working capital needs and capital
expenditure requirements.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
11
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: May 14, 1997 By: /s/David J. Fremed
-----------------------
David J. Fremed
Chief Financial Officer
and Treasurer
12