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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-13638
TOY BIZ, INC.
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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.)
685 THIRD AVENUE, NEW YORK, NY 10017
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
212-588-5100
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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 May 1, 1998, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 27,746,127 shares of Class A Common Stock.
TOY BIZ, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 31,
1998 1997 *
(unaudited)
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents............. $ 7,910 $ 7,596
Accounts receivable, net.............. 46,012 50,395
Inventories, net...................... 17,269 22,685
Colorforms assets held for resale..... 4,136
Income tax receivable................. 17,542 17,542
Deferred income taxes................. 7,494 7,494
Prepaid expenses and other............ 10,694 6,584
------------ -------------
Total current assets............... 106,921 116,432
Notes receivable - long term............ 375 -
Molds, tools and equipment, net......... 18,323 17,013
Product and package design costs, net... 7,895 7,616
Goodwill and other intangibles, net..... 10,107 9,305
------------ -------------
Total assets....................... $143,621 $150,366
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................... $ 4,431 $ 5,354
Accrued expenses and other............ 12,133 25,031
Borrowings under credit facility...... 18,000 12,000
------------ -------------
Total current liabilities.......... 34,564 42,385
------------ -------------
Stockholders' equity:
Common stock.......................... 277 277
Additional paid-in capital............ 70,578 70,578
Retained earnings..................... 38,202 37,126
------------ -------------
Total stockholders' equity......... 109,057 107,981
------------ -------------
Total liabilities and stockholders' $143,621 $150,366
============ =============
*Derived from the audited Financial Statements for the year ended December 31,
1997
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
2
TOY BIZ, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data
(unaudited)
Three Months
Ended March 31,
---------------------
1998 1997
-------- --------
Net sales............................... $42,641 $34,414
Cost of sales........................... 23,233 19,901
-------- ---------
Gross profit............................ 19,408 14,513
Operating expenses:
Selling, general and administrative... 14,222 10,854
Depreciation and amortization......... 3,304 2,894
-------- ---------
Total operating expenses........... 17,526 13,748
-------- ---------
Operating income........................ 1,882 765
Interest expense (income), net.......... 67 (27)
-------- ---------
Income before provision for income tax 1,815 792
Provision for income taxes............ 739 317
-------- ---------
Net income.............................. $ 1,076 $ 475
======== =========
Basic and dilutive earnings per share... $0.04 $0.02
======== =========
Weighted average number of common and common
equivalent shares outstanding......... 27,746 27,756
======== =========
The accompanying Notes to Condensed Consolidated Financial Statement 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,
-----------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income..................................... $ 1,076 $ 475
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization............... 3,304 2,894
Changes in assets and liabilities:
Decrease in accounts receivable, net....... 5,358 17,694
Decrease (increase) in inventories,........ 5,416 (3,042)
Increase in prepaid expenses and other..... (4,110) (2,748)
Decrease in accounts payable............... (923) (2,001)
Decrease in accrued expenses and other
activities ............................... (12,898) (10,079)
---------- ----------
Total adjustments.............................. (3,853) 2,718
---------- ----------
Net cash (used in) provided by operating.. (2,777) 3,193
---------- ----------
Cash flows from investing activities:
Purchases of molds, tools and equipment ..... (3,501) (3,930)
Expenditures for product and package design
costs ...................................... (1,226) (960)
Sale (acquisiton) of Colorforms assets....... 2,786 (4,160)
Other investments............................ (968) (22)
---------- ----------
Net cash used in investing activities .... (2,909) (9,072)
---------- ----------
Cash flows from financing activities:
Exercise of stock options.................... - 60
Net borrowings under credit agreement........ 6,000 5,000
---------- ----------
Net cash provided by financing activities. 6,000 5,060
---------- ----------
Net increase (decrease) in cash................ 314 (819)
Cash and cash equivalents, at beginning of
period ....................................... 7,596 6,022
---------- ----------
Cash and cash equivalents, at end of period.... $7,910 $5,203
========== ==========
Supplemental disclosures of cash flow
information:
Interest paid during the period............. $ 221 $ 26
Income taxes, net paid during the period.... $1,951 $1,394
Other non-cash transactions:
Accretion of preferred dividend.............. - $ 23
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 subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of those for the
full year ending December 31, 1998. For further information on the Company's
historical financial results, refer to the consolidated financial statements
and footnotes thereto contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, as filed with the Securities and
Exchange Commission.
2. ACQUISITION & SALE OF COLORFORMS
On March 25, 1997, pursuant to an Asset Purchase Agreement between the
Company and Colorforms, Inc. ("Colorforms"), the Company acquired certain
assets and assumed certain liabilities of Colorforms (the "Acquisition"). The
purchase price was approximately $5.0 million, excluding fees and expenses. The
Company utilized cash available under its credit facility to finance the
Acquisition. The Acquisition was accounted for as a purchase.
During 1997, the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash and used to reduce the
amounts due under the credit facility, with a promissory note representing the
remainder of $1.35 million due in August, 1998 through May, 1999. The results
of Colorforms are included in the Company's consolidated financial statements
from the date of acquisition to the date of sale.
5
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
MARCH 31, DECEMBER 31,
1998 1997
---------------- ----------------
Accounts receivable, net:
Accounts receivable............................... $73,008 $80,212
Less allowances................................... (26,996) (29,817)
---------------- ----------------
Total................................... $46,012 $50,395
================ ================
Inventories, net:
Finished goods.................................... $13,241 $17,518
Component parts, raw materials and
work-in-process................................. 4,028 5,167
---------------- ----------------
Total................................... $17,269 $22,685
================ ================
Goodwill and other intangibles, net:
Goodwill.......................................... $9,453 $9,453
Patents and other intangibles..................... 1,786 818
Less accumulated amortization..................... (1,132) (966)
---------------- ----------------
Total................................... $10,107 $9,305
================ ================
Accrued expenses and other:
Accrued advertising costs......................... $3,155 $11,544
Income taxes payable.............................. 2,283 3,495
Accrued inventory purchases....................... 2,584 4,909
Other accrued expenses............................ 4,111 5,083
---------------- ----------------
Total................................... $12,133 $25,031
================ ================
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Net income per common share is
computed by dividing net income, less the amount applicable to preferred
dividends in the case of the first quarter of 1997, by the weighted average
common shares outstanding during the year. All income per share amounts for all
periods have been presented, and where appropriate, restated to conform to
Statement 128 requirements.
6
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. CHANGE OF CONTROL
On June 20, 1997, as a result of proceedings in the bankruptcy cases
of Marvel Holdings Inc. ("Marvel Holdings"), Marvel (Parent) Holdings Inc.
("Marvel (Parent)"), Marvel III Holdings Inc. ("Marvel III" and together with
Marvel Holdings and Marvel (Parent), the "Marvel Holding Companies") and Marvel
and certain of its subsidiaries, all of which are currently pending in the
United States Bankruptcy Court for the District of Delaware, creditors of the
Marvel Holding Companies (the "Marvel Holding Companies Creditors") obtained
the right to vote the shares of the common stock of Marvel which had been
pledged to secure indebtedness held by them to replace Marvel's board of
directors with persons nominated by the Marvel Holding Companies Creditors.
Accordingly, on June 20, 1997, the board of directors of Marvel Holdings, which
was previously elected by the Marvel Holding Companies Creditors, voted its
majority of Marvel's common stock to elect a new board of directors of Marvel.
As a result of the proceedings in those bankruptcy cases, culminating in the
election of nine new members to Marvel's board of directors replacing Ronald O.
Perelman and the other then incumbent directors of Marvel, Marvel's voting
power as a stockholder of the Company was reduced from approximately 78.4% to
approximately 26.6%. With this reduction in voting power, Marvel lost the
ability to control, subject to the terms of the Stockholders' Agreement, dated
as of March 2, 1995 (the "Stockholders' Agreement"), the election of directors
to the Company's board of directors and to control the affairs and operations
of the Company.
The reduction in Marvel's stockholder voting power from 78.4% to 26.6%
resulted from the automatic conversion of all of the shares of class B common
stock, par value $.01 per share ("Class B Common Stock"), of the Company held
by Marvel into shares of class A common stock, par value $.01 per share ("Class
A Common Stock" and together with the Class B Common Stock, the "Common
Stock"), of the Company. Under the Stockholders' Agreement, by and among the
Company, Marvel and the Company's two other principal stockholders, Isaac
Perlmutter (including two affiliates of Mr. Perlmutter) and Avi Arad, the loss
of control of Marvel by Mr. Perelman triggered the automatic conversion of the
shares of Class B Common Stock held by Marvel into an equal number of shares of
Class A Common Stock. Prior to the conversion of its shares of Class B Common
Stock, which afforded Marvel ten votes per share, Marvel held approximately
78.4% of the voting power of the Company's Common Stock. As a result of the
conversion, Marvel holds approximately 26.6% of the voting power of the
Company, while Mr. Perlmutter and Mr. Arad each hold approximately 33.4% and
15%, respectively, of the voting power of the Company.
The enforceability of the conversion provisions of the Stockholders'
Agreement has been disputed by the bankruptcy trustee appointed in the
bankruptcy cases of the Marvel Holding Companies and by the equity committee of
Marvel Holdings. Those parties maintain that Marvel continues to own shares of
Class B Common Stock. On June 20, 1997, Marvel purported to exercise the 78.4%
voting power associated with those shares to remove a majority of the Company's
directors and to replace them with Marvel nominees. On June 23, 1997, the
Company, Mr. Perlmutter, the two affiliates of Mr. Perlmutter
7
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. CHANGE OF CONTROL (CONTINUED)
who were parties to the Stockholders' Agreement and Avi Arad commenced
adversary proceedings in the Marvel bankruptcy cases against Marvel and Marvel
Holding Companies for a declaration that the Class B Common Stock owned of
record by Marvel converted to Class A Common Stock on or before June 20, 1997,
and that the incumbent board of the Company is the Company's duly constituted
board and for an injunction enjoining those defendants from interfering with
the proper and orderly functioning of the Company's incumbent board of
directors. On March 30, 1998, the United States District Court for the District
of Delaware (the "District Court") granted the Company's motion for summary
judgement and directed the entry of a judgement declaring that as a result of
the June 20, 1997 change of control of Marvel, the Class B Common Stock owned
by Marvel converted, as of that date, into Class A Common Stock. Marvel filed
an appeal of this determination to the United States Court of Appeals for the
Third Circuit. This appeal is scheduled for hearing on June 11, 1998. On
May 12, 1998, an agreement, which is subject to the approval of the District
Court, was reached among the Company, John J. Gibbons, Chapter 11 trustee
of Marvel (the "Trustee"), representatives of Marvel's senior secured
lenders and certain other parties to settle this litigation as well as
certain litigation commenced by Marvel against the Company, Marvel's senior
secured lenders and such other parties. (See Part II Item 1).
6. COMBINATION WITH MARVEL
The Company and certain creditors of Marvel have announced a
proposal for the combination of the Company and Marvel (the "Combined
Company"). In connection with the Joint Plan of Reorganization proposing
the combination of the Company and Marvel (as since amended, the "Plan"),
the Company stockholders, other than Marvel, would receive approximately 41%
of the common stock of the Combined Company (assuming the conversion of all
preferred stock to be issued by the Combined Company pursuant to the Plan
but not assuming any exercise of warrants to be issued pursuant to the Plan
and without regard to shares held by the Combined Company or its
subsidiaries) and the senior secured lenders of Marvel would receive a
combination of cash and common and preferred securities issued by the Combined
Company which (under the same assumptions) would represent approximately 40%
of the common stock of the Combined Company. An investor group, in which
Mr. Perlmutter is expected to be a participant, would purchase securities
that (under the same assumptions) would represent approximately 19% of the
common stock of the Combined Company. Under the Plan, holders of allowed
unsecured claims of Marvel ("Unsecured Creditors") will receive (i) up to
$8.0 million in cash and (ii) between 1. 0 million and 1.75 million warrants
having a term of four years and entitling the holders to purchase common
stock of the Combined Company at $17.25 per share. The exact amount of cash
and warrants to be distributed to the Unsecured Creditors will be determined
by reference to the aggregate amount of allowed unsecured claims. In addition,
Unsecured Creditors will be entitled to receive distributions from any future
recovery on certain litigation. The Plan is being proposed by in excess of
two-thirds in amount of Marvel's senior secured lenders and is supported by
the Official. Committee of the Unsecured Creditors of Marvel. Consummation of
the Plan is subject to a number of conditions including approval of the
Company's stockholders and the District Court. A hearing had been ordered by
the District Court for May 4, 1998 to consider a motion by the Company to
confirm the Plan; however, the hearing has been postponed pending the
resolution of the hearing of the appeal on the corporate governance litigation
commenced by the Company. In connection with the proposed settlement of this
litigation as well as certain litigation brought by Marvel against the Company
and others, a further amendment to the Plan has been proposed. (See Note 5 and
Part II Item 1). The Company currently anticipates a meeting of the
stockholders of the Company will be held in the third quarter of 1998 for the
purpose of considering and voting upon approval of the Plan.
In connection with any such meeting, the Company will distribute
separate proxy materials describing the transactions contemplated by the Plan
and the other circumstances in connection therewith. As part of the agreements
setting forth the terms of the Plan, Messrs. Perlmutter and Arad have agreed to
vote all shares of Common Stock owned by them in favor of the Plan.
8
TOY BIZ, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMBINATION WITH MARVEL (CONTINUED)
The Plan contemplates that for a period of 30 days after the
confirmation of the Plan, the Company will cooperate in efforts to sell Marvel
and the Company on a combined basis and that if a transaction can be arranged
which would result in stockholders of the Company (other than Marvel) receiving
approximately $13.75 in exchange for each share of Common Stock held by them,
the Company will be sold in that transaction. The Plan provides that any excess
proceeds payable by the buyer in that transaction will not increase the amount
to be received by holders of Common Stock, but instead will inure to the
benefit of claimants in the Marvel bankruptcy.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could cause actual results to differ materially from those
contained in forward-looking statements made in this Form 10-Q Quarterly Report
and in oral statements made by authorized officers of the Company. When used in
this Form 10-Q, the words "intend", "estimate", "believe", expect" and similar
expressions are intended to identify forward-looking statements. In addition,
the following factors, among others, could cause the Company's financial
performance to differ materially from that expressed in any forward-looking
statements made by, or on behalf of, the Company: (i) developments in the
Marvel bankruptcy proceedings (including the Company's proposal with respect
thereto); (ii) a decrease in the level of media exposure or popularity of
Marvel characters resulting in declining revenues of toys based on such
characters; (iii) the lack of continued commercial success of properties owned
by major entertainment companies that have granted the Company toy licenses;
(iv) consumer acceptance of new toy product introductions; (v) the impositon of
quotas or tariffs on toys manufactured in China as a result of a deterioration
in trade relations between the U.S. and China; (vi) changing consumer
preferences; (vii) production delays or shortfalls; and (viii) general economic
conditions.
GENERAL
The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool,
activity and electronic toy categories featuring major entertainment and
consumer brand name properties. The Company also designs, markets, and
distributes its own line of proprietary toys in certain of these categories.
The Company believes that its business in the boys' toys category domestically
and internationally continues to be negatively impacted as a result of the
proceedings surrounding Marvel's bankruptcy. This includes decreased retailer
interest in Marvel brand products and reduced consumer interest in these
products due to reduced promotional activity by Marvel. The Company believes
that the Marvel bankruptcy has had and will continue to have an adverse impact
on the Company in various ways, including but not limited to, the following:
concerns among retailers about the future of the Marvel brand, the status of
the Company due to Marvel's ownership of 26% of the Company's Common Stock and
its claim that it continues to control the Company through its ownership of
Class B Common Stock, potential impact on the Company's relationship with its
distributors, difficulty in obtaining new licenses and excess legal and
administrative expenses.
On March 25, 1997, pursuant to an Asset Purchase Agreement between the
Company and Colorforms, the Company acquired certain assets and assumed certain
liabilities of Colorforms. The purchase price was approximately $5.0 million,
excluding fees and expenses. The Company utilized cash available under its
credit facility to finance the Acquisition. The Acquisition was accounted for
as a purchase. During 1997, the Company concluded that Colorforms did not fit
the Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash and used to reduce the
amounts due under the credit facility, with a promissory note representing the
remainder of $1.35 million due in August, 1998 through May, 1999. The results
of Colorforms are included in the Company's consolidated financial statements
from the date of acquisition to the date of sale.
10
RESULTS OF OPERATIONS
Three months ended March 31, 1998 compared with the three months ended March
31, 1997
The Company's net sales increased to approximately $42.6 million for
the first quarter of 1998 from approximately $34.4 million in the first quarter
of 1997. Net sales in the domestic boys' toys category increased approximately
$7.8 million to approximately $15.5 million in the first quarter of 1998 due
primarily to continued sales of boys' accessories which were introduced in the
second half of 1997 as well as increased sales of new action figure
assortments. Net sales in the domestic girls' toys category increased
approximately $3.7 million in the first quarter of 1998 to approximately $5.6
million due primarily to the introduction of the Lil' Splash 'n Shivers doll in
the 1998 quarter, while no comparable products were introduced during the first
quarter of 1997. Domestic activity toy and other product net sales increased
approximately $900,000 to approximately $10.3 million. Net sales of product
sold through the import division increased approximately $600,000 to
approximately $5.5 million in the first quarter of 1998. International net
sales, which includes international distribution and sub-licensing revenues,
decreased approximately $4.8 million to approximately $5.7 million in the first
quarter of 1998 as a result of reduced distribution of animated Marvel
television shows in international markets. The Company believes that the
reduced distribution of those shows is a result of the Marvel bankruptcy.
Gross profit increased 34% to approximately $19.4 million for the
first quarter of 1998 from approximately $14.5 million in the first quarter of
1997. Gross profit as a percentage of net sales increased to approximately 46%
in the first quarter of 1998 from approximately 42% in the first quarter of
1997 due to changes in the Company's product mix and the effect of a lower
percentage of international sales and sales from the import division during the
1998 period, both of which typically have lower gross margins than domestic
sales.
Selling, general and administrative expenses increased 31% to
approximately $14.2 million (approximately 33% of net sales) in the first
quarter of 1998 from approximately $10.9 million (approximately 32% of net
sales) in the first quarter of 1997. The increase of approximately $3.4 million
was due to increased advertising expenses as a result of additional promotional
products in 1998 and increased royalties as a result of increased sales.
Depreciation and amortization expense increased to approximately $3.3
million in the first quarter of 1998 from approximately $2.9 million in the
first quarter of 1997. The increase of approximately $400,000 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 continue to be adversely
affected in the first quarter of 1998 by concerns among retailers as to the
impact of the Marvel bankruptcy. While the Company is attempting to address
these concerns, to the extent they are not alleviated, it can be expected that
they will continue to adversely affect demand for the Company's products.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $2.8 million
in the first quarter of 1998, while net cash provided by operating activities
was approximately $3.2 million in the first quarter of 1997. This change
results primarily from an increase in domestic receivables related to higher
domestic sales in the first quarter of 1998 on standard credit terms as
compared to the 1997 period which had a higher percentage of international
sales which generally provide for faster collection of receivables. This change
was partially offset by a decrease in inventory levels.
11
In March, 1998, the Company and The Chase Manhattan Bank entered into
an amendment to the Company's revolving line of credit (the "Amended Credit
Facility") extending the duration of the credit facility and modifying its
terms. The Amended Credit Facility provides that the Company can borrow an
aggregate amount of up to $20.0 million (increasing during October through
mid-November 1998 to up to $29.0 million), subject to certain borrowing base
limitations based upon the level of the Company's receivables and inventory.
Substantially all of the assets of the Company continue to be pledged to secure
borrowings under the Amended Credit Facility. Borrowings under the Amended
Credit Facility bear interest at either The Chase Manhattan Bank's alternative
base rate or at the Eurodollar rate plus the applicable margin. The applicable
margin is 1% with respect to base rate loans and 2% with respect to Eurodollar
loans. The Amended Credit Facility requires the Company to pay a commitment fee
of 3/8 of 1% per annum on the average daily unused portion of the Amended
Credit Facility. The Company had $4.0 million in outstanding borrowings under
the Amended Credit Facility as of May 11, 1998. The Amended Credit Facility
is scheduled to expire in February 1999.
The Amended Credit Facility contains various financial covenants, as
well as restrictions, on new indebtedness, prepaying or amending subordinated
debt, acquisitions and similar investments, the sale or transfer of assets,
capital expenditures, limitations on restricted payments, dividends, issuing
guarantees and creating liens. In addition, the Amended Credit Facility also
requires that (a) the current board of directors or successors designated by
them remain in office, (b) the Marvel license remain in effect and (c) Messrs.
Perlmutter and Arad continue to own at least 50% of the Common Stock held by
them as of February 21, 1998. The Amended Credit Facility is not guaranteed by
Marvel.
The Company believes that it has sufficient funds available from cash
and cash equivalents, operating activities and borrowings under the Amended
Credit Facility to meet peak working capital needs and capital expenditure
requirements.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
On May 12, 1998, the Company and Marvel announced that an
agreement, subject to District Court approval had been
reached among the Company, the Trustee, representatives of
Marvel's Senior Secured Lenders and certain other parties
to settle litigation commenced by Marvel against the
Company, Marvel's Senior Secured Lenders and those other
parties as well as litigation commenced by the Company
against Marvel. See Note 5 to the Condensed Consolidated
Financial Statements of the Company included elsewhere in
this Report on Form 10-Q. On March 30, 1998, the District
Court entered a judgment declaring that the supervoting rights
associated with the Class B Common Stock owned by Marvel,
which enabled Marvel to control the board, terminated on
June 20, 1997 when Carl C. Icahn took control of Marvel.
This judgment has been appealed by the Trustee and others to
the United States Court of Appeals for the Third Circuit. On
April 13, 1998, the Court of Appeals stayed, pending the
outcome of the appeals, the previously scheduled confirmation
hearing on the Plan that had been proposed by the Company and
Marvel's Senior Secured Lenders.
If the settlement agreement is approved by the District Court,
the Trustee has agreed to seek to have the stay of the
confirmation hearing vacated, to defer consideration of the
appeals and to move to dismiss all appeals upon consummation
of the Plan. Under the terms of the proposed settlement
agreement, the Trustee, the Senior Secured Lenders of Marvel,
and others will exchange releases, including releases from
the lawsuit commenced by Marvel. The lawsuit was commenced
by Marvel when it was controlled by the Icahn interests
against the Senior Secured Lenders, the Company and others.
Among the parties against whom Marvel brought its lawsuit are
Ronald O. Perelman and certain of his affiliates and
associates, who are not being released. The proposed
settlement also provides for the amendment of the Plan so that
Marvel equityholders and entities entitled to securities
litigations claims will receive three series of warrants
upon consummation of the amended Plan entitling them to
purchase common and convertible/exchangeable preferred stock
to be issued by the Combined Company. The first series of
four million warrants will have a term of six months and
will allow the recipients to purchase common stock in the
Combined Company at a price of $12.00 per share (subject to
increase based on the issuance date of the warrants). The
second series of three million warrants will have a term of
six months and will allow the recipients to purchase
convertible/exchangeable preferred stock in the Combined
Company at a price of $10.65 per share (also subject to
increase based on the issuance date of the warrants). The
final series of five million warrants will have a term of
four years and will allow the recipients to purchase common
stock in the Combined Company at a price of $18.50 per share.
Finally, the equity holders and class securities litigation
claimants will be entitled to receive distributions from any
recovery on certain future litigation. The proposed amendment
to the Plan does not affect the terms of the Plan regarding
the distributions to be made to Marvel's Senior Secured or
Unsecured Lenders or the Company's stockholders.
In addition to the approval of the District Court, the
agreement is subject to the approval of the Senior Secured
Lenders that have agreed to support the Plan. The company
expects to receive the Senior Secured Lenders approval
shortly and will be seeking court approval of the
settlement together with the Trustee expeditiously.
The agreement is subject to confirmation of the amended Plan
by June 30, 1998, which will require the Court of Appeals to
lift its stay, and consummation of the amended Plan by
August 15, 1998. The Trustee has the right to terminate the
agreement prior to the confirmation of the amended Plan for
the purpose of accepting an alternative transaction involving
the sale of Marvel, but only if the Trustee determines that
the alternative transaction will provide greater recoveries
to the Senior Secured Lenders and Marvel's unsecured creditors
and equityholders and the transaction provides that the
pending dispute involving the conversion of the Class B
Common Stock is resolved in favor of the Company, or the
alternative transaction provides for payment in full in cash
to the Senior Secured Lenders and Marvel's debtor in
possession lenders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.32 Sixth Amendment to the Credit Agreement
between the Company and The Chase Manhattan
Bank, as administrative agent for the banks,
dated as of March 25, 1998.
10.33 Stipulation and Agreement of Settlement, among
John J. Gibbons, Chapter 11 Trustee of Marvel,
the Company and other parties thereto, dated
May 12, 1998.
(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, thereto duly authorized.
TOY BIZ, INC.
(Registrant)
Dated: May 13, 1998 By: /s/David J. Fremed
-------------------------------
David J. Fremed
Chief Financial Officer
and Treasurer
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