<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-10779
MARVEL ENTERTAINMENT GROUP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-3024816
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
387 PARK AVENUE SOUTH, NEW YORK, NY 10016
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
212-696-0808
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
INDEX TO CONTENTS OF THE SECOND QUARTER 1998 FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997-----------------------------------3
Condensed Consolidated Statements of Operations for the six months and three months
ended June 30, 1998 and 1997-------------------------------------------------------------------------------------4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997-------------------5
Condensed Consolidated Statements of Comprehensive Loss for the six months ended June 30, 1998 and 1997 ----------6
Notes to Condensed Consolidated Financial Statements--------------------------------------------------------------7
Management's Discussion and Analysis of Financial Condition and Results of Operations----------------------------15
Other Information------------------------------------------------------------------------------------------------24
Signatures-------------------------------------------------------------------------------------------------------26
</TABLE>
2
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 23.3 $ 21.7
Accounts receivable, net....................................... 95.4 86.8
Inventories, net............................................... 30.6 43.9
Prepaid expenses and other..................................... 34.6 36.1
------------ -----------
Total current assets......................................... 183.9 188.5
Property, plant and equipment, net................................ 47.4 55.5
Goodwill and other intangibles, net............................... 169.4 174.7
Investment in Toy Biz............................................. 33.0 33.0
Deferred charges and other........................................ 26.1 24.8
------------ -----------
Total Assets................................................. $459.8 $476.5
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Debtor-in-Possession Loan...................................... $ 81.4 $ 91.2
Accounts payable............................................... 82.3 78.3
Accrued expenses and other..................................... 153.7 127.3
Panini short term borrowings................................... 34.7 39.5
Panini debt.................................................... 115.3 121.9
----------- -----------
Total current liabilities.................................... 467.4 458.2
Long-term debt.................................................... 7.4 8.5
Other long-term liabilities....................................... 24.5 19.6
Liabilities subject to settlement under reorganization............ 502.8 502.2
------------ -----------
Total Liabilities............................................ 1,002.1 988.5
Stockholders' deficit:
Common Stock................................................... 1.0 1.0
Additional paid-in capital..................................... 93.1 93.1
Accumulated deficit............................................ (636.5) (604.6)
Comprehensive (loss)/gain ..................................... 0.1 (1.5)
------------ -----------
Total Stockholders' Deficit.................................. (542.3) (512.0)
------------ -----------
Total Liabilities and Stockholders' Deficit.................. $459.8 $476.5
============ ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
3
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues......................................................... $ 106.1 $ 129.6 $ 203.2 $ 286.3
Cost of sales........................................................ 76.2 96.4 148.9 200.9
Selling, general & administrative expenses........................... 22.8 51.5 46.1 100.0
Depreciation and amortization........................................ 1.8 7.7 3.9 12.5
Amortization of goodwill, intangibles and deferred charges........... 2.6 4.1 5.2 8.4
Interest expense, net (contractual interest for the three months
ended June 30, 1998 and 1997 was $19.4 and $19.6, respectively,
and contractual interest for the six months ended June 30, 1998
and 1997 was $39.0 and $32.5, respectively.)........................ 6.4 13.2 13.3 28.8
Foreign exchange loss, (gain)........................................ 0.9 (0.8) 0.6 (1.5)
Loss on sale of confectionery assets................................. 2.5 - 5.9 -
Equity in net (loss) income of unconsolidated subsidiaries
and other, net....................................................... 0.3 (5.3) 0.4 (5.2)
----------- ---------- ---------- ----------
Loss before reorganization items, provision for income taxes and
minority interest................................................... (6.8) (47.8) (20.3) (68.0)
Reorganization items................................................. 4.3 2.6 9.4 6.0
----------- ---------- ---------- ----------
Loss before provision for income taxes and minority interest......... (11.1) (50.4) (29.7) (74.0)
Provision (benefit) for income taxes................................. 1.7 (4.6) 2.2 (0.8)
----------- ---------- ---------- ----------
Loss before minority interest........................................ (12.8) (45.8) (31.9) (73.2)
Minority interest in earnings of Toy Biz............................. - (3.9) - (3.5)
----------- ---------- ---------- ----------
Net loss............................................................. ($12.8) ($41.9) ($31.9) ($69.7)
=========== ========== ========== ==========
Loss per Common Share-Basic and Diluted.............................. ($ .13) ($ .41) ($ .31) ($ .68)
=========== ========== ========== ==========
Common shares outstanding - Basic and Diluted (in millions) 101.8 101.8 101.8 101.8
=========== ========== ========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
4
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... ($ 31.9) ($ 69.7)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 9.1 20.9
Provision for deferred income taxes ...................................... 0.2 -
Undistributed earnings of unconsolidated subsidiaries..................... (0.4) 5.2
Minority interest in earnings of Toy Biz.................................. - (3.5)
Loss on sale of confectionery asset....................................... 5.9 -
Changes in assets and liabilities, net of effects of sale of
confectionery business:
Decrease (increase) in accounts receivable, net......................... (3.2) 43.3
Decrease (increase) in inventories...................................... 6.5 (1.3)
Decrease (increase) in prepaid expenses and other assets................ (2.7) (8.4)
(Decrease) increase in accounts payable ................................ 2.1 (7.5)
(Decrease) increase in accrued expenses and other...................... 25.5 (41.0)
------------ ------------
Total adjustments............................................................ 43.0 7.7
------------ ------------
Net cash provided by (used in) operating activities................... 11.1 (62.0)
------------ ------------
Cash flows from investing activities:
Capital expenditures......................................................... (1.8) (14.3)
Proceeds from sale of confectionery business, net of selling expenses
and cash of foreign subsidiary......................................... 12.4 -
Other investing activities, net.............................................. (0.2) (11.0)
------------ ------------
Net cash provided by (used in) investing activities................... 10.4 (25.3)
------------ ------------
Cash flows from financing activities:
Net repayments under term portion of credit agreements....................... - (5.1)
Net borrowings under Toy Biz credit facility................................. - 12.0
Net (repayments) borrowings under Debtor-in-Possession Loan.................. (9.8) 84.2
Net repayments under other debt.............................................. (9.8) (1.7)
Other financing activities................................................... - 0.1
------------ ------------
Net cash provided by (used in) financing activities................... (19.6) 89.5
------------ ------------
Effect of exchange rate changes on cash ..................................... (0.3) (2.0)
------------ ------------
Net increase in cash ........................................................ 1.6 0.2
Cash, at beginning of period.................................................... 21.7 25.1
------------ ------------
Cash, at end of period.......................................................... $ 23.3 $ 25.3
============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period.............................................. $ 7.1 $ 32.5
Income taxes (refunded) paid, net during the period.......................... ($ 0.1) $ 0.8
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss.................................................. ($ 12.8) ($ 41.9) ($ 31.9) ($ 69.7)
Foreign currency translation adjustments.............. 0.9 0.8 (0.4) (0.1)
=========== ========== ========== ==========
Comprehensive loss........................................ ($ 11.9) ($ 41.1) ($ 32.3) ($ 69.8)
=========== ========== ========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
6
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Marvel Entertainment Group, Inc. ("Marvel" and together with its
subsidiaries, the "Company") was incorporated on December 2, 1986, in the State
of Delaware. On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries (together with Marvel, the "Debtor Companies") commenced
cases (the "Marvel Cases") under chapter 11, Title 11 of the United States Code
(the "Bankruptcy Code") by filing voluntary petitions for relief in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). In
November 1997, the United States District Court for the District of Delaware
(the "District Court") withdrew the order referring the Marvel Cases to the
Bankruptcy Court. As more fully described in Note 2, on July 30, 1998 Marvel,
Toy Biz, the secured creditors, the official committee of unsecured creditors,
the official committee of equity holders and other interested parties reached a
global settlement and on July 31, 1998, the District Court approved the
settlement and confirmed the Fourth Amended Plan of Reorganization (the "Toy
Biz Plan"). The Company anticipates that the consummation of the Toy Biz Plan
should occur on or about September 30, 1998, subject to certain conditions
being satisfied. There can be no assurance however, that the consummation of
the Toy Biz Plan will occur as anticipated.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Marvel Entertainment Group, Inc. and its subsidiaries.
The unaudited condensed consolidated financial statements of the Company
include the consolidation of Toy Biz, Inc. and its subsidiaries (collectively
"Toy Biz") since its initial public offering on March 2, 1995 (the "Toy Biz
IPO") through June 30, 1997. Since July 1, 1997, due to the dispute over
Marvel's ability to control or influence Toy Biz and because Toy Biz ceased
reporting its financial information to the Company, the Company deconsolidated
Toy Biz (see Note 2). The Company's operations currently consist of (i) the
publication and sale of comic books and children's magazines, (ii) the
manufacture and distribution of sports and entertainment trading cards and
children's activity sticker collections, (iii) licensing of the various
characters owned by the Company for consumer products, media and
advertising-promotion and (iv) the manufacture and distribution of adhesive
paper products. 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. These interim condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements on Marvel's Form
10-K and amendment thereto for the year ended December 31, 1997. Certain prior
year amounts have been reclassified to conform to current year presentation.
The Condensed Consolidated Balance Sheet, as of June 30, 1998 reflects
Marvel's investment of approximately 7.4 million shares of Toy Biz common stock
at the historical cost adjusted for the equity method of accounting through the
date of deconsolidation. As of June 30, 1998 the Company's investment in Toy
Biz was $33.0. Had the Company reinstated accounting for its investment in Toy
Biz on the equity method, the carrying value would have been $27.3 at June 30,
1998 based on Toy Biz's published results through June 30, 1998.
The accompanying unaudited condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern.
Continuation of the Company as a going concern is contingent upon, among other
things, the consummation of the Toy Biz Plan (as defined below), the Company's
ability to comply with its debtor-in-possession financing agreement, resolution
of various litigation against the Company, the Company's ability to make its
information systems Year 2000 compliant, the Company's ability to generate
sufficient cash from operations and obtain financing sources to meet its future
obligations and the Company's ability to retain key employees and customers. In
addition, the Company has experienced recurring operating losses, working
capital deficiencies, negative operating cash flows and is currently in default
under substantially all of its debt agreements. In the absence of the
consummation of the Toy Biz Plan or any other plan of reorganization, these
matters raise substantial doubt about the Company's ability to continue as a
going concern.
If the Toy Biz Plan or any other plan of reorganization is
consummated, the consolidated results of operations and the financial position
of the Company may be materially affected.
2. CHAPTER 11 REORGANIZATION
7
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Refer to the Notes to Consolidated Financial Statements included in
Marvel's Form 10-K and amendments thereto for more information.)
Operating Companies
On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries, Fleer Corp. ("Fleer"), SkyBox International, Inc.
("SkyBox"), Marvel Characters, Inc., Heroes World Distribution, Inc. ("Heroes
World"), The Asher Candy Company, Malibu Comics Entertainment, Inc. ("Malibu"),
Frank H. Fleer Corp. and Marvel Direct Marketing Inc. (together with Marvel,
the "Debtor Companies") commenced the Marvel Cases in the Bankruptcy Court.
Panini S.p.A. ("Panini") and Marvel Restaurant Venture Corp. ("Marvel
Restaurants") (a general partner in the joint venture developing Marvel Mania
restaurants), which were then active subsidiaries of Marvel, and Toy Biz, as
well as certain other inactive subsidiaries, did not file petitions under the
Bankruptcy Code.
As a result of the several failed attempts at a plan of
reorganization, the acrimony among the parties involved, the conflicts of
interest between the parties and the significant amount of professional fees
and other bankruptcy related costs incurred by the Company, on December 22,
1997, John J. Gibbons was appointed as Chapter 11 Trustee (the "Chapter 11
Trustee") for the Company. The order appointing the Chapter 11 Trustee was
appealed by certain creditors of the Company and was affirmed on March 25, 1998
by the United States Court of Appeals for the Third Circuit ("Court of
Appeals").
The Chapter 11 Trustee has all of the powers of the Board of Directors
and management of the Debtor Companies to operate and manage the Debtor
Companies, but generally may not engage in transactions outside the ordinary
course of business without approval, after notice and hearing of the District
Court. Since the appointment of the Chapter 11 Trustee, the Board of Directors
of Marvel no longer controls the business of Marvel and as a result, the Board
of Directors resigned during 1998.
Plans of Reorganization
On October 8, 1997 Toy Biz and the senior secured lenders of the
Debtor Companies proposed an unsolicited merger plan to purchase Marvel. On
July 30, 1998 Toy Biz, Marvel, the senior secured creditors of the Debtor
Companies, the official committee of unsecured creditors, the official
committee of equity holders of Marvel and other interested parties reached a
global settlement, and on July 31, 1998 the District Court approved the
settlement and confirmed the Toy Biz Plan. The Toy Biz Plan contemplates the
combination of the Company with a wholly owned subsidiary of Toy Biz.
Following this combination, Toy Biz intends to change its name ("NEWCO").
In connection with the Toy Biz Plan, the Toy Biz stockholders, other than the
Company, would receive approximately 40% of the outstanding common stock of
NEWCO (assuming the conversion of all preferred stock to be issued by NEWCO
pursuant to the Toy Biz Plan but not assuming any exercise of warrants to be
issued pursuant to the Toy Biz Plan) and the senior secured lenders would
receive a combination of cash and common and preferred securities issued by
NEWCO which (under the same assumptions) would represent approximately 42% of
the common stock of NEWCO. Investors, including Mr. Perlmutter, the controlling
shareholder of Toy Biz, would purchase securities that (under the same
assumptions) would represent approximately 18% of the common stock of NEWCO.
Under the Toy Biz Plan, the unsecured creditors will receive (i) up to $8.0 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 NEWCO at
$17.25 per share. The exact amount of cash and warrants to be distributed to
the unsecured creditors will be determined by reference to the aggregate amount
of allowed unsecured claims. In addition, unsecured creditors will be entitled
to receive distributions from any future recovery on certain litigation.
Finally, the Toy Biz Plan provides that three series of warrants ("the
Stockholder Warrants") will be distributed to holders of shares of Marvel
common stock, to holders of certain class securities litigation claims arising
in connection with the purchase and sale of Marvel common stock and to La Salle
National Bank. The Stockholder Warrants consist of (a) three-year warrants to
purchase 4.0 million shares of common stock in NEWCO at $12.00 per share, (b)
six-month warrants to purchase 3.0 million shares of preferred stock to be
issued by NEWCO for $10.65 per share and (c) four-year warrants to purchase 7.0
million shares of common stock in NEWCO at $18.50 per share. The recipients of
the Stockholder Warrants will also be entitled to receive distributions from
any future recovery on certain litigation. Certain other cash distributions are
also
8
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
provided for by the Toy Biz Plan in connection with settling the disputes
arising out of the bankruptcy proceedings. The Toy Biz Plan was proposed by in
excess of two-thirds in amount of senior secured lenders and is supported by
the Chapter 11 Trustee, the unsecured creditors committee and the equity
committee. The Toy Biz Plan was confirmed by the District Court on July 31,
1998. Consummation of the Toy Biz Plan is subject to a number of conditions
including approval of the Toy Biz stockholders. Toy Biz has called a meeting of
its stockholders for September 11, 1998 for the purpose, among other things, of
considering and voting upon approval of the transactions contemplated by the
Toy Biz Plan.
Consummation of the Toy Biz Plan will provide for the restructuring of
the Company's existing liabilities and will result in the elimination of
substantially all of the Company's existing domestic senior debt obligations
and certain other pre-petition obligations of the Debtor Companies. In addition
to the Toy Biz securities issuance previously discussed, the Toy Biz Plan
provides for (i) the delivery of approximately $231.8 in cash to the fixed
senior secured lenders and up to $8.0 in cash to the unsecured creditors; (ii)
the creation of two litigation trusts for the benefit of NEWCO, the unsecured
creditors, the fixed senior secured lenders and the equity holders; (iii) the
payment in cash of all administration expense claims incurred in connection
with Marvel Cases, (in the event that the aggregate amount of such
administrative claims is in excess of $35.0, the receipt by NEWCO of cash in an
amount equal to such excess from an affiliate of Mr. Perlmutter in exchange for
a note from NEWCO for an equal amount) and; (iv) subject to certain
limitations, a guaranty from NEWCO to the senior secured lenders of up to $40.0
of deficiency in respect of restructured Panini debt obligations. In addition,
the Toy Biz Plan provides for the payment by NEWCO of $3.5 to certain claimants
in the Marvel Cases in settlement of disputes.
As part of the Toy Biz Plan two litigation trusts will be formed on
the consummation date. The purpose of the Avoidance Litigation Trust (the
"Avoidance Trust") is to pursue bankruptcy avoidance claims. The purpose of the
Mafco Litigation Trust (the "Mafco Trust") is to pursue certain litigation
claims against Ronald O. Perelman and various related entities and individuals.
The District Court will have jurisdiction over both of these trusts, their
trustees, the claims, and any other assets of the trusts. NEWCO will agree to
loan up to $1.1, on a revolving basis to the Avoidance Trust and up to $1.0 on
a revolving basis to the Mafco Trust to cover professional fees and expenses.
The Avoidance Trust will have one trustee designated, subject to the
consent of NEWCO, by the committee of unsecured creditors. The beneficiaries of
the Avoidance Trust will be NEWCO, the unsecured creditors committee, and the
fixed senior secured lenders. Pursuant to the agreement governing the Avoidance
Trust, the Debtor Companies will, on the consummation date, contribute to the
Avoidance Trust all of their interests in any causes of action under certain
avoidance sections of the Bankruptcy Code, but excluding those (i) relating to
any claims under any tax-sharing or other similar agreement to which Marvel has
been a party or; (ii) against any person or entity released or exculpated under
the Toy Biz Plan. The Avoidance Litigation Trustee agree to enforce these
claims for the benefit of the Avoidance Trust's beneficiaries and to hold any
proceeds from these claims in trust for those beneficiaries. The Avoidance
Litigation Trustee may be directed by NEWCO to choose not to pursue any
litigation claim that threatens to adversely affect NEWCO's business. The
existence of the Avoidance Trust will terminate five years after the
consummation date of the Toy Biz Plan unless the District Court approves an
extension of the term of the Avoidance Trust for good cause.
The Mafco Trust will have three trustees, one of which will be
designated by the equity committee, one designated by the unsecured creditors'
committee, and one designated by the Chapter 11 Trustee. The beneficiaries of
the Mafco Trust will be the Debtor Companies unsecured creditors and the Marvel
equity holders. Pursuant to the agreement governing the Mafco Trust, the Debtor
Companies will, on the consummation date, contribute to the Mafco Trust all
interests in any cause of action based upon claims against Ronald O. Perelman,
certain of his affiliates, and certain other former directors of Marvel
relating to the action filed by the Company on October 30, 1997, but excluding
those (i) relating to any claims under any tax-sharing or other similar
agreements to which Marvel has been a party or; (ii) against any person or
entity released or exculpated under the Toy Biz Plan. The Mafco Litigation
trustees agree to enforce these claims for the benefit of the Mafco Trust and
hold any proceeds from these claims in trust for those beneficiaries. The
existence of the Mafco Trust will terminate five years after the consummation
date of the Toy Biz Plan unless the District Court approves an extension of the
term of the Mafco Trust for good cause.
9
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
On May 12, 1998 a settlement was reached among Toy Biz, the Chapter 11
Trustee, representatives of the Company's secured lenders, and certain other
parties to settle litigation commenced by the Company against Toy Biz, the
secured lenders and those other parties (the "Governance Litigation"). As a
part of this settlement, the Chapter 11 Trustee agreed to attempt to have
vacated the appeal of the Governance Litigation concerning the Company's
alleged right to replace the Toy Biz board of directors currently pending in
the Court of Appeals and to support the Toy Biz Plan, which was amended to
reflect the settlement agreement. The Governance Litigation will, pursuant to
the Toy Biz Plan, be settled upon consummation of the Toy Biz Plan.
If the Toy Biz Plan is unable to be consummated, the Company's
creditors or equity security holders may seek other alternatives for the
Company, including bids for the Company or parts thereof through an auction
process, or possible liquidation.
Holding Companies
On March 3, 1998, the District Court entered an order permitting the
distribution to the holders of the Holding Companies debt obligations (the
"Noteholders") of up to 12.5 million outstanding shares of common stock of
Marvel which were pledged to secure the Holding Companies debt obligations (the
"Notes"). Further, the order authorized the sale by Marvel Holdings, Inc.
("Holdings"), for cash of an additional 2.5 million shares of common stock of
Marvel currently held by Holdings in escrow to pay certain administrative
expenses. The Indentures Trustee subsequently sought an order from the District
Court permitting the distribution to the Noteholders of additional shares of
common stock which were pledged to secure the Notes. By an order dated April 9,
1998, the District Court authorized the distribution to the Noteholders of an
additional 21.5 million shares of common stock and the sale of approximately
400,000 additional shares of common stock currently held by Holdings to pay
certain administrative expenses.
On April 17, 1998 trading of the Marvel's common stock was suspended by
the New York Stock Exchange and application will be made to the Securities and
Exchange Commission to delist the stock. The Company understands that the New
York Stock Exchange reached the decision in view of the fact that Marvel is
below the Exchange's continued listing criteria. All issued and outstanding
shares of Marvel common stock will be canceled as of the consummation date of
the Toy Biz Plan.
Other
As part of the chapter 11 process, the Debtor Companies have received
a significant number of proofs of claims. The Company has commenced the process
of rejecting certain of these claims and further believes that a majority of
these claims may have been paid pursuant to first day orders of its bankruptcy
proceedings or are without merit. Although the Company believes that amounts
recorded as of June 30, 1998 are adequate to cover the ultimate liability under
these claims, there can be no assurance that these claims will not be settled
for amounts in excess of these amounts. The Toy Biz Plan provides for, among
other things, the delivery of $8.0 in cash to the unsecured creditors , the
creation of the Avoidance Trust and the Mafco Trust, both of which are, in part
for the benefit of the unsecured creditors, and the issuance of 1,750,000 plan
warrants which will entitle an unsecured creditor to purchase one share of
NEWCO stock for $17.25 within four years of the Toy Biz Plan's consummation. In
addition, three series of stockholder warrants will be issued to, among other
parties, the unsecured creditors which entitle the holder to purchase shares of
NEWCO common stock at various prices over certain periods of time.
Financial accounting and reporting during a chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be subject to settlement, have been
classified as obligations, subject to chapter 11 settlement under
reorganization and consist of the following estimated amounts:
10
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- --------------
<S> <C> <C>
Total accrued expenses------------------------------------- $ 13.7 $ 13.7
Debt:
U.S. Term Loan Agreement-------------------------------- $ 350.0 $ 350.0
Amended and Restated Credit Agreement------------------- 120.0 120.0
Additional Revolving Credit Facility-------------------- 15.0 15.0
Other debt---------------------------------------------- 0.6 --
---------- -----------
Total debt------------------------------------------- 499.3 498.7
Other long-term liabilities-------------------------------- 3.5 3.5
---------- -----------
Total liabilities subject to settlement under
reorganization--------------------------------------------- $ 502.8 $ 502.2
</TABLE>
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
ACCOUNTS RECEIVABLE, NET:
<TABLE>
<CAPTION>
June 30, December 31
1998 1997
---------- -----------
<S> <C> <C>
Accounts receivable---------------------------------------- $ 107.7 $ 109.6
Less: Allowances------------------------------------------ (12.3) (22.8)
---------- -----------
$ 95.4 $ 86.8
========== ===========
INVENTORIES, NET:
Finished goods--------------------------------------------- $ 16.5 $ 26.0
Work in process-------------------------------------------- 10.1 12.7
Raw materials---------------------------------------------- 9.5 13.9
Less: Reserve for obsolescence----------------------------- (5.5) (8.7)
---------- -----------
$ 30.6 $ 43.9
========== ===========
GOODWILL AND OTHER INTANGIBLES, NET:
Goodwill and other intangibles----------------------------- $ 241.6 $ 243.9
Less: Accumulated amortization----------------------------- (72.2) (69.2)
---------- -----------
$ 169.4 $ 174.7
========== ===========
</TABLE>
4. SALE OF ASSETS
On June 15, 1998, the Company sold the remaining portion of its
confectionery business for $13.0 in cash, plus certain assumed liabilities. The
Company transferred certain assets, rights and properties free of all liens of
its domestic operations as well as all capital stock of its interests in
foreign operations, as well as certain debt, liabilities and obligations.
The Company used $9.8 of the net proceeds from the sale to pay down a
portion of the principal balance of the DIP loan, and the balance was primarily
used to prepay DIP interest. A summary of the confectionery net assets sold is
illustrated below:
Current Assets-------------------------- $ 12.0
Long Term Assets------------------------ 9.5
Total Assets---------------------------- $ 21.5
--------
Current Liabilities--------------------- $ 4.4
11
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Long Term Liabilities------------------- 0.2
--------
Total Liabilities----------------------- $ 4.6
--------
Net Assets $ 16.9
========
During the six months ended June 30, 1998, the Company recognized a
loss on sale of approximately $5.9 which included $2.0 related to the
cumulative translation adjustment of the foreign confectionery business sold.
Included in the Condensed Consolidated Statements of Operations for
the six months ended June 30, 1998, are $8.4 of confectionery revenues.
Operating loss for the six months ended June 30, 1998 was $2.2.
12
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
5. FINANCIAL STATEMENTS OF ENTITIES OPERATING UNDER CHAPTER 11
The combined condensed balance sheet as of June 30, 1998 of the Debtor
Companies is as follows:
ASSETS
Current assets:
Cash..................................................... $ 16.6
Accounts receivable, net................................. 14.5
Inventories, net......................................... 8.8
Prepaid expenses and other............................... 5.4
---------
Total currrent assets............................... 45.3
Property, plant and equipment, net.......................... 3.1
Goodwill and other intangibles, net......................... 108.3
Investment in Toy Biz....................................... 33.0
Deferred charges and other.................................. 14.1
Investments in and advances to subsidiaries, at cost........ (38.7)
---------
Total Assets........................................ $165.1
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debtor-in-Possession Loan................................ $ 81.4
Accounts payable......................................... 20.5
Accrued expenses and other............................... 92.5
---------
Total current liabilities........................... 194.4
Other long-term liabilities................................. 10.2
Liabilities subject to settlement under reorganization...... 502.8
---------
Total Liabilities................................... 707.4
---------
Stockholders' deficit:
Common Stock............................................. 1.0
Additional paid-in capital............................... 93.1
Accumulated deficit...................................... (636.5)
Comprehensive loss....................................... 0.1
---------
Total Stockholders' Deficit......................... (542.3)
---------
Total Liabilities and Stockholders' Deficit......... $165.1
=========
13
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The combined condensed statement of operations for the six months ended June
30,1998 of the Debtor Companies is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net revenues................................................................ $ 75.2
Cost of sales............................................................... 59.3
Selling, general & administrative expenses.................................. 26.1
Depreciation and amortization............................................... 1.4
Amortization of goodwill, intangibles and deferred charges.................. 3.4
Interest expense, net (Contractual interest for the six months ended
June 30, 1998 was $30.5).................................................... 5.1
Loss on sale of confectionery business...................................... 5.9
Equity in net income of unconsolidated subsidiaries and other, net.......... 0.4
-------
Loss before reorganization items and provision for income taxes............. (25.6)
Reorganization items........................................................ 9.4
-------
Loss before provision for income taxes...................................... (35.0)
Provision for income taxes.................................................. 0.2
-------
Net loss Debtor Companies................................................... (35.2)
Equity in net income of non-Debtor Companies................................ 3.3
-------
Net loss.................................................................... ($31.9)
=======
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a leading creator, publisher and distributor of youth
entertainment products for domestic and international markets based on
fictional 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 the Marvel Characters and properties for consumer products, television
and film projects, on-line and interactive software, and advertising
promotions. The Company's products include comic book and other children's
publications, sports and entertainment trading cards, activity stickers, and
adhesive paper products.
On December 27, 1996, the Debtor Companies filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code as
debtors-in-possession under the control of the Bankruptcy Court. In November
1997 the District Court withdrew the order referring the Marvel Cases to the
Bankruptcy Court. Accordingly, the Marvel Cases are being heard in the District
Court. On December 22, 1997, the District Court appointed the Chapter 11
Trustee to replace the debtors-in-possession. On July 30, 1998, Marvel, Toy
Biz, the secured creditors, the official committee for the unsecured creditors,
the official committee for the equity holders and other interested parties
reached a global settlement. On July 31, 1998, the District Court approved the
settlement and confirmed the Toy Biz Plan. The Company anticipates the
consummation of the Toy Biz Plan should occur on or about September 30, 1998,
subject to certain conditions being satisfied. There can be no assurance,
however, that the consummation of the Toy Biz Plan will occur as anticipated.
RESULTS OF OPERATIONS:
BACKGROUND
In recent years there has been a rapid decline in the comic book
market. This decline was characterized by reduced readership and lower
speculative purchases of comic books, which has materially adversely affected
the Company's publishing business. In response, the Company has undertaken
several strategic actions to mitigate the effect of such contraction. The
Company believes that the comic book industry has continued to contract at a
slower rate, while beginning to show some signs of stabilization. The Company
has instituted marketing programs to bolster its position in the market place.
There can be no assurance that these new marketing programs will strengthen the
Company's current position in the market or overcome any contraction in the
comic book industry.
Similarly, over the past few years, there has been a significant
contraction in the sports trading card market related in part to fewer
speculative purchases. In addition, fan interest in overall sports declined
during that time, which adversely affected sports trading card sales and
increased returns for those periods. The Company believes that these factors
negatively affected the sports trading card business, which caused the Company
to experience lower sales, higher returns and higher inventory obsolescence and
the negative impact of fixed royalty minimum guarantees. In 1997, the Company
discontinued certain unprofitable sports products and continues to focus on
trading card specialty stores and select mass market accounts in an effort to
reduce costs and minimize the risk of returns and inventory obsolescence.
Since 1996, the Company's sale of entertainment trading cards has been
adversely affected by a lack of commercial success of properties licensed from
third parties as well as the lower demand for trading cards based on comic book
characters. Since 1997, as a result of these weak properties in the
entertainment trading card market, the Company discontinued certain
unprofitable entertainment products and focused primarily on profitable sports
trading card products.
The combination of minimum royalty and advertising contractual
commitments to licensors and declines in the Company's trading card net
revenues have continued to significantly and adversely affect the profit
margins of the trading card business. During the bankruptcy proceedings, the
Company had rejected various licenses and re-negotiated certain sports license
agreements. On July 31, 1998, the Company entered into a settlement agreement
with
15
<PAGE>
NBA Properties Inc. ("NBAP") as to future royalty minimum amounts, the
settlement of past due royalty amounts and the dismissal of the NBAP lawsuit
filed against Panini. The settlement agreement requires District Court approval
and will take effect on the consummation date of the Toy Biz Plan. There can be
no assurance that the District Court will approve the NBAP settlement
agreement. However, commencing August 1, 1998, the royalty obligation will
accrue as if the settlement agreement was in effect on such date. The Company
believes that the revised royalty commitment is consistent with current and
expected basketball trading card sales levels. The settlement agreement
provides for an $11.0 million payment to NBAP due on or before the consummation
date. In addition, the settlement agreement allows NBAP a $20.0 million claim
to be included in the unsecured creditors committee claim pool to be discharged
under the Toy Biz Plan. If the amount recovered by NBAP from this claim is less
than $1.0 million, NEWCO will pay the difference one year subsequent to the
consummation date of the Toy Biz Plan.
After the conclusion of the 1997/98 basketball season, the NBA team
owners have enforced a "lockout" of the NBA players, due to a dispute between
the two parties over the current labor agreement. A lengthy disruption of the
basketball season due to this "lockout" could have a negative effect on the
Company's sales of basketball trading cards in the second half of 1998.
Primarily in the second half of 1997, the Company further reduced its
operating costs through the realignment of management functions which resulted
in among other things, the termination of a number of highly compensated
employees, the restructuring and consolidation of administrative staff and
editorial staff and the improvement of the distribution of the Company's
trading card products.
The Company believes that since, and in part as a result, of the
commencement of the Company's chapter 11 proceedings, the Company has continued
to experience weakness in all of its businesses.
There can be no assurance that any plan of reorganization, including
the Toy Biz Plan, will be consummated under the Bankruptcy Code. If the Company
is unable to obtain consummation of the Toy Biz Plan or any other plan of
reorganization, its creditors or equity security holders may seek other
alternatives for the Company, which includes soliciting bids for the Company or
parts thereof through an auction process or possible liquidation. There can be
no assurance that upon consummation of the Toy Biz Plan or another plan of
reorganization that there will be improvement in the Company's financial
condition or results of operations. The Company has, and will continue to
incur, professional fees and other cash demands typically incurred in
bankruptcy.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE THREE MONTHS ENDED JUNE 30,
1997
Basis For Management's Discussion And Analysis
Since July 1, 1997, due to the dispute over Marvel's ability to
control or influence Toy Biz and because Toy Biz ceased reporting its financial
information to the Company, the Company deconsolidated Toy Biz . The Condensed
Consolidated Financial Statements do not include any adjustments to its
investment in Toy Biz since July 1, 1997(see Note 2 of Notes to Condensed
Consolidated Financial Statements). Accordingly, Management's Discussion and
Analysis of Financial Condition and Results of Operations presented below
compares only the Company's publishing, licensing, trading card and sticker,
confectionery and adhesive businesses. The results of operations for Toy Biz
included in the Company's Condensed Consolidated Statements of Operations for
the quarter ended June 30, 1997 is illustrated below:
TOY BIZ:
--------
Quarter ended June
30, 1997
---------------------
Revenue $34.5
Cost of sales 22.3
Selling, general & administrative expenses 17.0
Depreciation and amortization 3.8
16
<PAGE>
Amortization of goodwill and intangibles .1
Interest Expense .1
Benefit for income taxes (3.5)
-----------------
Loss before minority interest (5.3)
Minority interest in loss (3.9)
-----------------
Net loss ($1.4)
=================
The Company's net revenues were $106.1 million and $95.1 million in
1998 and 1997, respectively, an increase of $11.0 million or 11.6%. This
reflects a net increase of $9.6 million in trading card and sticker revenues,
an increase of $0.3 million in licensing revenues, an increase of $1.3 million
in other revenues partially offset by a decrease of $0.2 million in net
publishing revenues.
The increase in net sticker revenues of $21.5 million was due to the
major marketing effort put forth to support the 1998 World Cup Soccer
Tournament which takes place once every four years, partially offset by the
lack of commercial success of other third party licensed sticker products. The
decrease in trading card net revenues of $11.9 million was due to the continued
contraction of the trading card market as well as the discontinuance of certain
unprofitable entertainment trading cards.
When comparing the second quarter of 1998 to the second quarter of
1997 publishing revenues have decreased by $0.2 million. The Company believes
that its publishing revenues have continued to stabilize at levels consistent
with the second half of 1997 and first quarter of 1998. The Company believes
that the market continues to contract at a slower rate and has instituted
marketing programs to bolster its position in the market place. The Company has
maintained approximately the same market share over the most recent quarters.
The Company continues to experience delays in the production and distribution
of theatrical film and animated television shows based on key properties of
Marvel by its movie and television licenses. Licensing revenues continued to be
hindered as a result of the lack of successful new media coupled with the
Company's bankruptcy proceedings. Licensing revenues will vary from period to
period depending on the commercial success and the media exposure of the Marvel
Characters.
Gross profit was $29.9 million and $21.0 million in the 1998 and 1997
periods, respectively, an increase of $8.9 million. As a percentage of net
revenues, gross profit was 28.2% in the 1998 period as compared to 22.1% in the
1997 period. The increase in gross profit as well as gross profit percentage
was due to increased sticker gross profit related to the World Cup Soccer
Tournament. Publishing gross profit margin for the quarter ended June 30, 1998
was approximately 35% of net publishing sales. The Company reduced its costs
which have offset the loss of efficiencies due to lower sales volumes. The
Company expects the publishing gross profit margin to be maintained given the
current level of volume. However, there can be no assurance that this level of
volume will continue.
Selling, General & Administrative ("SG&A") expenses were $22.8 million
and $34.5 million in the 1998 and 1997 periods, respectively. The decrease of
$11.7 million was mainly attributable to the impact of a decrease in
advertising, promotion and selling expenses, a realignment of management
functions which gave rise to the elimination of a number of highly compensated
employees, and a general reduction in overhead expenses associated with the
restructuring of the comic book publishing and distribution, and trading card
operations. As a percentage of net revenues, SG&A was 21.5% in the 1998 period
as compared to 36.3% in the 1997 period.
Depreciation and amortization was $1.8 million and $3.9 million in the
1998 and 1997 periods, respectively. The decrease of $2.1 million was due to
the amortization of film costs related to the Hulk animated television series
during the second quarter of 1997.
Amortization of goodwill, intangibles and deferred charges was $2.6
million and $4.0 million in the 1998 and 1997 periods, respectively. The
decrease of $1.4 million reflects the impact of the lower carrying value of
these assets and a change in their depreciable lives. In the fourth quarter of
1997, the Company recorded a write-down related to asset impairment which was
primarily due to the significant and long-term changes in the trading card and
sticker industries.
17
<PAGE>
Interest expense, net was $6.4 million and $13.1 million in the 1998
and 1997 periods, respectively, a decrease of $6.7 million. In June 1997, the
Bankruptcy Court suspended interest and adequate protection payments in
connection with the Company's various pre-petition Credit Agreements (excluding
the Panini Term Loan Agreement). In accordance with SOP 90-7 the unrecorded
interest for the period was $12.7 million. The Company incurred higher interest
costs in the second quarter of 1998 as compared to 1997 relating to increased
borrowings in the first half of 1997 under the DIP Loan Agreement as well as
higher interest rates charged due to the DIP Loan being in default.
In connection with the sale of the Company's confectionery business,
during the quarter ended June 30, 1998, the Company recorded an additional
loss of $2.5 million which included $2.0 million related to the cumulative
translation adjustment of the foreign confectionery business sold.
For the second quarter of 1998 the Company incurred reorganization
expenses of $4.3 million relating to professional fees and other expenses
including the Chapter 11 Trustee and his professionals, as well as professional
fees for the unsecured creditors committee and equity committee, bank fees and
other bankruptcy costs. In the second quarter of 1997 the Bankruptcy Court
ordered a suspension of the payment of professional fees associated with the
bankruptcy. Commencing in the first quarter of 1998, under Court order, the
Company resumed partial payment of these fees. As of June 30, 1998, the unpaid
professional fees were $11.7 million. However, the total amount of all
professional fees, whether partially paid or unpaid are subject to the District
Court's determination as to the final amounts due, if any, to these
professionals. For the second quarter of 1997, the Company incurred
reorganization expenses of $2.6 million.
Provision/(benefit) for income taxes was $1.7 million and ($1.1)
million in the 1998 and 1997 periods, respectively. In 1998, the tax provision
primarily represents foreign taxes. In 1997, the tax benefit primarily
represented benefits taken from the loss from foreign operations.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1997
Basis For Management's Discussion And Analysis
Since July 1, 1997, due to the dispute over Marvel's ability to
control or influence Toy Biz and because Toy Biz ceased reporting its financial
information to the Company, the Company deconsolidated Toy Biz . The Condensed
Consolidated Financial Statements do not include any adjustments to its
investment in Toy Biz since July 1, 1997(see Note 2 of Notes to Condensed
Consolidated Financial Statements). Accordingly, Management's Discussion and
Analysis of Financial Condition and Results of Operations presented below
compares only the Company's publishing, licensing, trading card and sticker,
confectionery and adhesive businesses. The results of operations for Toy Biz
included in the Company's Condensed Consolidated Statements of Operations for
the six months ended June 30, 1997 is illustrated below:
TOY BIZ:
Six Months ended
June 30, 1997
-------------------
Revenue $68.8
Cost of sales 42.2
Selling, general & administrative expenses 27.8
Depreciation and amortization 6.5
Amortization of goodwill and intangibles .3
Interest expense .1
Benefit for income taxes (3.2)
------------------
Loss before minority interest (4.8)
18
<PAGE>
Minority loss in earnings (3.5)
------------------
Net Loss ($1.3)
==================
The Company's net revenues were $203.2 million and $217.5 million in
1998 and 1997, respectively, a decrease of $14.3 million or 6.6%. This reflects
a net decrease of $11.1 million in trading card and sticker revenues, a
decrease of $4.8 million in net publishing revenues, offset by an increase of
$0.3 million in licensing revenues and an increase of $1.3 million in other
revenues.
The decrease in trading card net revenues of $25.6 million was
primarily due to the continued contraction of the trading card market as well
as the discontinuance of certain unprofitable entertainment trading cards. Net
sticker revenues increased by $14.5 million due to the World Cup soccer
tournament which takes place once every four years offset by the lack of
commercial success of entertainment stickers based on properties licensed from
third parties.
When comparing the first half of 1998 to the first half of 1997
publishing revenues are down. More recently, the Company believes that its
publishing revenues have begun to stabilize. The Company believes that the
market continues to contract at slower rates and has instituted marketing
programs to bolster its position in the market place. The Company has
maintained approximately the same market share over the most recent quarters.
The Company continues to experience delays in the production and distribution
of theatrical film and animated television shows based on key properties of
Marvel by its movie and television licenses. Licensing revenues continued to be
hindered as a result of the lack of successful new media coupled with the
Company's bankruptcy proceedings. Licensing revenues will vary from period to
period depending on the commercial success and the media exposure of the Marvel
Characters.
Gross profit was $54.3 million and $58.8 million in the 1998 and 1997
periods, respectively, a decrease of $4.5 million. As a percentage of net
revenues, gross profit was 26.7% in the 1998 period as compared to 27.0% in the
1997 period. The decrease in gross profit as well as gross profit percentage
was due to lower sales volume as well as the Company's inability to earn out
its minimum guarantees with certain of its critical license agreements. This
decrease was offset partially by increased sticker gross profit related to the
1998 World Cup Soccer Tournament. Publishing gross profit margin for the six
months ended June 30, 1998 was approximately 35% of net publishing sales. The
Company reduced its costs which have offset the loss of efficiencies due to
lower sales volumes. The Company expects the publishing gross profit margin to
be maintained given the current level of volume. However, there can be no
assurance that this level of volume will continue.
SG&A expenses were $46.1 million and $72.2 million in the 1998 and
1997 periods, respectively. The decrease of $26.1 million was mainly
attributable to the impact of a decrease in advertising, promotion and selling
expenses, a realignment of management functions which gave rise to the
elimination of a number of highly compensated employees, and a general
reduction in overhead expenses associated with the restructuring of the comic
book publishing and distribution, and trading card operations. As a percentage
of net revenues, SG&A was 22.7% in the 1998 period as compared to 33.2% in the
1997 period.
Depreciation and amortization was $3.9 million and $6.0 million in the
1998 and 1997 periods, respectively. The decrease of $2.1 million was due to
the amortization of film costs related to the Hulk animated television series
during the second quarter of 1997.
Amortization of goodwill, intangibles and deferred charges was $5.2
million and $8.1 million in the 1998 and 1997 periods, respectively. The
decrease of $2.9 million reflects the impact of the lower carrying value of
these assets and a change in their depreciable lives. In the fourth quarter of
1997, the Company recorded a write-down related to asset impairment which was
primarily due to the significant and long-term changes in the trading card and
sticker industries
Interest expense, net was $13.3 million and $28.7 million in the 1998
and 1997 periods, respectively, a decrease of $15.4 million. In June 1997 the
Bankruptcy Court suspended interest and adequate protection payments
19
<PAGE>
in connection with the Company's various pre-petition Credit Agreements
(excluding the Panini Term Loan Agreement). In accordance with SOP 90-7 the
unrecorded interest for the period was $25.2 million. The Company incurred
higher interest costs in the 1998 period as compared to the 1997 period
relating to increased borrowings under the DIP Loan Agreement as well as higher
interest rates due to the defaulted DIP Loan.
In connection with the sale of the Company's confectionery business,
the Company recorded a loss on the sale of $5.9 million which included $2.0
million related to the cumulative translation adjustment of the foreign
confectionery business sold during the six months ended June 30, 1998.
For the first six months of 1998 the Company incurred reorganization
expenses of $9.4 million relating to professional fees and other expenses
including the Chapter 11 Trustee and his professionals, as well as professional
fees for the unsecured creditors committee and equity committee, bank fees and
other bankruptcy costs. For the first six months of 1997, the Company incurred
reorganization expenses of $6.0 million.
Provision for income taxes was $2.2 million and $2.4 million in the
1998 and 1997 periods, respectively. In 1998, the tax provision primarily
represents foreign taxes. In 1997, the tax provision primarily represented
foreign taxes on income from Panini's operations and certain state and local
taxes.
LIQUIDITY AND CAPITAL RESOURCES
On December 27, 1996 in connection with the filing of their petition
in the Bankruptcy Court, the Debtor Companies received approval to pay on time
and in full undisputed pre-petition obligations, including salaries, wages and
benefits to all of its employees, and debts due to its trade creditors and
independent contractors and to continue funding strategic initiatives. In
November 1997, the unsecured creditors committee applied under Rule 60-b of the
Federal Rules of Civil Procedure for an order vacating the first day order
concerning the payment of pre-petition debt. No hearing occurred and none has
been scheduled by the District Court. In January, 1998, the Debtor Companies
discontinued the payment of such pre-petition debt and do not intend to make
any payments regarding such debt without first applying to the District Court
for approval.
On January 24, 1997, the Bankruptcy Court approved the $100 million
DIP Loan, which is provided by a syndicate of lenders, including The Chase
Manhattan Bank, as agent bank. The DIP Loan matured on June 30 ,1997 and no
repayment has occurred except for the cash proceeds of $12.8 million resulting
from the sale of Marvel's confectionery businesses and the current payment of
interest and administrative fees. The DIP Lenders have agreed to forbear from
taking any action. Such forbearance is continuing on a daily basis. With a full
reservation of all rights, the DIP Lenders and the pre-petition secured lenders
have agreed to the Debtor Companies continued use of cash collateral on the
same terms and conditions and with most of the same protections as set forth
in the current financing and cash collateral order approved by the Bankruptcy
Court through August 31,1998. There can be no assurance that the DIP Lenders
and the pre-petition secured lenders will allow Marvel to continue to use its
cash collateral beyond such date.
Management of the Company believes the Company has adequate near-term
working capital to fund normal operations through December 31, 1998. In July,
1998, the Company received net proceeds, of $12.8 million in connection with
the sale of the remaining portion of its confections business. The Company paid
down approximately $9.8 million of the principal portion of its DIP loan and
prepaid its DIP interest with the remaining amount. The Company believes it has
adequate resources through its use of cash collateral to fund operations, pay
DIP interest and to make partial payments for professional fees related to the
bankruptcy and adequate protection payments, as authorized by the District
Court. In the event the Toy Biz Plan is not consummated, and the Company does
not have sufficient funds, the Company may suspend payment of these
professional fees. In addition, the Company may also enter into a replacement
DIP agreement with The Chase Manhattan Bank. In connection with the appointment
of the Chapter 11 Trustee, The Chase Manhattan Bank advised the District Court
that it is willing to lead a syndicate to make loans to Marvel subject to
execution of definitive documentation and agreement on key terms and payment of
adequate protection amounts. In any event, District Court approval is required
for such additional loans to the Company. There can be no assurance that the
DIP Lenders and the pre-petition lenders will allow the Company to continue to
use its cash collateral or that the District Court will grant approval on such
additional loans.
20
<PAGE>
On June 5, 1997, the Bankruptcy Court approved an order suspending
adequate protection payments being made by Marvel to the Bank Lenders. As a
result, Marvel has ceased making interest payments on the U.S. Term Loan
Agreement, the Amended and Restated Credit Agreement, and the Chase Revolving
Line of Credit. The amount of the suspended adequate protection payment as of
June 30, 1998 was $59.6 million and is not included in the liabilities of
Marvel reflected in Marvel's Condensed Consolidated Balance Sheets. Marvel has,
however, continued paying interest on the DIP Loan.
On August 11, 1997, Panini entered into an agreement with The Chase
Manhattan Bank for a loan of lire 27 billion (approximately $15.3 million based
on exchange rates at August 3, 1998) to provide short term liquidity (the
"Chase Short-Term Facility"). On August 5, 1997, the Company received approval
from the Bankruptcy Court to guarantee the Chase Short-Term Facility. This
guarantee is junior to all liens of DIP Lenders but is senior to the Secured
Lenders. This loan is subject to a number of financial and other covenants and
conditions of borrowing. As of June 30, 1998, the credit line was fully used.
This loan expired on October 31, 1997, and by stipulation, the maturity date
was extended to March 31, 1998. As a result of Panini's significant operating
loss in 1997 and continued liquidity crisis, the Company was able to further
extend the payment date of this loan to the earlier of September 30, 1998 or
the consummation date of the Toy Biz Plan. During the quarter ended June 30,
1998, Panini continued to use its local bank lines and factoring lines. The
Company believes that Panini may need to enter into an additional credit
facility to meet its cash requirements for the near term. In the event that
Panini cannot obtain an additional credit facility, Panini may be required to
sell some of its assets or the Company may be forced to obtain a replacement
DIP Loan. However, there can be no assurance that the Company will be able to
obtain a replacement DIP Loan which would allow the Company to transfer funds
to Panini or that the Company will be successful in renegotiating additional
lines of credit outside of the Debtor Companies. In the event operating losses
continue in the future, there also can be no assurance that Panini will not
become subject to reorganization proceedings in Italy, which could result in
the Company writing off a portion of the remaining goodwill and other
intangibles in Panini of approximately $70.0 million while at the same time the
Company would remain a guarantor under the Panini Term Loan Agreement and the
Chase Short-Term Facility.
As of August 3, 1998, the Company's outstanding bank indebtedness was
approximately $724.1 million, of which $81.4 million related to borrowings
under the DIP Loan, $601.5 million related to borrowings under the credit
agreements, approximately lire 20.8 billion (approximately $11.8 million based
on exchange rates at August 3, 1998) relates to borrowings for Panini's Adespan
adhesives facility, approximately lire 20.6 billion (approximately $11.7
million based on exchange rates at August 3, 1998) relates to borrowings under
Panini's short term lines of credit, approximately lire 27 billion
(approximately $15.3 million based on exchange rates at August 3, 1998) relates
to borrowings under Panini's loan from The Chase Manhattan Bank and
approximately $2.4 million relates to drawdowns against outstanding letters of
credit. As of August 3, 1998, Panini had approximately lire 22.0 billion
(approximately $12.5 million based on exchange rates at August 3, 1998)
available under its short term lines of credit.
As part of the chapter 11 process, the Debtor Companies have received
a significant number of proofs of claims. The Company has commenced the process
of rejecting various claims and further believes that a majority of these
claims may have been paid pursuant to first day orders of its bankruptcy
proceedings or are without merit. Although the Company believes that amounts
recorded as of June 30, 1998 are adequate to cover the ultimate liability under
these claims, there can be no assurance that these claims will not be settled
for amounts in excess of these amounts.
As chapter 11 debtors, the Debtor Companies may sell (subject, in
certain circumstances, to District Court approval), or otherwise dispose of
assets, and liquidate or settle liabilities for amounts other than those
reflected in the Condensed Consolidated Financial Statements. The amounts
reported in the Condensed Consolidated Financial Statements do not give effect
to any adjustments to the carrying value of assets or amount of liabilities
that might result as a consequence of actions taken pursuant to the bankruptcy
or a plan of reorganization. If the Company is unable to obtain consummation of
the Toy Biz Plan or any other plan of reorganization, its creditors or equity
security holders may seek other alternatives for the Company, including bids
for the Company or parts thereof through an auction process or possible
liquidation. In that event it is possible that certain assets would not be
realized and additional liabilities and claims would be asserted which are not
presently reflected in the Condensed Consolidated Financial
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<PAGE>
Statements and which are not presently determinable. The effect of any such
assertion or non-realization could be material. These conditions raise
substantial doubt as to the Company's ability to continue as a going concern.
Net cash provided by (used in) operating activities was $11.7 million
and ($62.0) million for the six months ended June 30, 1998 and 1997
respectively. Although the Company incurred a net loss of $31.9 million for the
six months ended June 30, 1998, approximately $40.9 million of these losses
were either non-cash charges or reserves which were provided in accordance with
generally accepted accounting principles. The use of funds in 1997 was
principally due to the loss from operations and was partially offset by a
decrease in working capital. Cash used in investing activities, excluding net
proceeds from the sale of its confectionery business was $2.0 million and $25.3
million for the six months ended June 30, 1998 and 1997, respectively. The
primary use of these funds in 1998 was for capital expenditures for the
Company. The primary use of cash in 1997 was for capital expenditures for the
Company and for costs incurred with the construction of the Marvel Mania theme
restaurant in Los Angeles. Net cash (used in) provided by financing activities
was ($20.2) million and $89.5 million for the six months ended June 30, 1998
and 1997, respectively. The use of cash for the 1998 period was due primarily
to the paydown of DIP principal of $9.8 million and the paydown by Panini of
the current portion of its Adespan loan and other short-term lines. The source
of cash in the 1997 period was due primarily to the increased borrowings under
the DIP Loan.
Since the Debtor Companies entered into bankruptcy on December 27,
1996 through June 30, 1998, they have incurred approximately $25.7 million in
professional fees and other costs typical to those incurred by entities in
bankruptcy. On June 17, 1997, the Bankruptcy Court ordered a suspension of the
current payment of professional fees associated with the bankruptcy. However,
on March 4, 1998 and on June 10, 1998, the District Court ordered the Debtor
Companies to pay $1.2 million and $2.5 million respectively, of certain
professional fees. In addition, on June 10, 1998, the District Court ordered
the Company to pay $2.5 million to Chase Manhattan Bank as adequate protection
payments. All of these amounts have been fully paid as of August 15, 1998. The
Debtor Companies have received invoices of approximately $2.2 million for fees
rendered by professionals that have not been retained either by the Debtor
Companies or an official committee of the bankruptcy proceedings or appointed
by the District Court. These professionals filed a fee application with the
District Court for services performed in 1997. The Debtor Companies have not
accrued any amount for the payment of such fees. In the event the fees of such
professionals are approved by the District Court, the Debtor Companies would be
required to pay such fees. As of June 30, 1998, unpaid professional fees
included in accounts payable and accrued expenses were approximately $10.1
million.
On July 31, 1998, the Company entered into a settlement agreement with
NBAP as to future royalty minimum amounts, the settlement of past due royalty
amounts and the dismissal of the NBAP lawsuit filed against Panini. The
settlement agreement requires District Court approval and will take effect on
the consummation date of the Toy Biz Plan. However, the royalty obligation will
accrue as if the settlement agreement was in effect on August 1, 1998. The
Company has accrued unpaid minimum royalties due to NBAP through June 30, 1998
under its former NBAP agreement. There can be no assurance that the NBAP
settlement agreement will be approved.
The Company continues to generate tax net operating losses. These
losses may generally be carried forward and used against future taxable income
subject to certain limitations. One such limitation, which is triggered by an
ownership change, referred to as a Section 382 limitation, will likely occur as
the Company emerges from bankruptcy and is reorganized. The Section 382
limitation generally limits the amount of tax losses that can annually be used
to offset "post-change" income to an amount equal to the product of the
"long-term tax exempt rate" for ownership changes (which, for example, was
5.15% for August, 1998) and the fair market value of the Company as of the date
of the ownership change. Special rules for companies that undergo ownership
changes while in bankruptcy may partially alleviate the Section 382 limitation.
The Company's net operating losses may be further limited in future utilization
by the separate return limitation years ("SRLY") rules of the consolidated
return regulations. Additionally, to the extent that the Company has
cancellation of indebtedness income in bankruptcy, tax attributes such as net
operating losses will be reduced or eliminated. Consequently, there can be no
assurance that any of the Company's net operating losses will be available for
future use or that various limitations may limit their usage. Due to these
concerns, the debtors have fully reserved against any benefit for such losses
in their
22
<PAGE>
condensed consolidated financial statements. A more detailed description of
these limitations and other tax matters can be found in Marvel's Form 10-K
for the period ended December 31, 1997.
As part of the Toy Biz Plan, two litigation trusts will be formed on
the consummation date. The purpose of the Avoidance Litigation Trust (the
"Avoidance Trust") is to pursue bankruptcy avoidance claims. The purpose of the
Mafco Litigation Trust (the "Mafco Trust") is to pursue certain litigation
claims against Ronald O. Perelman and various related entities and individuals.
The District Court will have jurisdiction over both of these trusts, their
trustees, the claims, and any other assets of the trusts. NEWCO will agree to
loan up to $1.1 million, on a revolving basis to the Avoidance Trust and up to
$1.0 million on a revolving basis to the Mafco Trust to cover professional fees
and expenses.
The Avoidance Trust will have one trustee designated, subject to the
consent of NEWCO, by the committee of unsecured creditors. The beneficiaries of
the Avoidance Trust will be NEWCO, the unsecured creditors committee, and the
fixed senior secured lenders. Pursuant to the agreement governing the Avoidance
Trust, the Debtor Companies will, on the consummation date, contribute to the
Avoidance Trust all of their interests in any causes of action under certain
avoidance sections of the Bankruptcy Code, but excluding those (i) relating to
any claims under any tax-sharing or other similar agreement to which Marvel has
been a party or; (ii) against any person or entity released or exculpated under
the Toy Biz Plan The Avoidance Litigation Trustee agree to enforce these claims
for the benefit of the Avoidance Trust's beneficiaries and to hold any proceeds
from these claims in trust for those beneficiaries. The Avoidance Litigation
Trustee may be directed by NEWCO to choose not to pursue any litigation claim
that threatens to adversely affect NEWCO's business. The existence of the
Avoidance Trust will terminate five years after the consummation date of the
Toy Biz Plan unless the District Court approves an extension of the term of the
Avoidance Trust for good cause.
The Mafco Trust will have three trustees, one of which will be
designated by the equity committee, one designated by the unsecured creditors'
committee, and one designated by the Chapter 11 Trustee. The beneficiaries of
the Mafco Trust will be the debtor companies unsecured creditors and Marvel
equity holders. Pursuant to the agreement governing the Mafco Trust, the Debtor
Companies will, on the consummation date, contribute to the Mafco Trust all
interests in any cause of action based upon claims against Ronald O. Perelman,
certain of his affiliates, and certain other former directors of Marvel
relating to the action filed by the Company on October 30, 1997, but excluding
those (i) relating to any claims under any tax-sharing or other similar
agreements to which Marvel has been a party or; (ii) against any person or
entity released or exculpated under the Toy Biz Plan. The Mafco Litigation
trustees agree to enforce these claims for the benefit of the Mafco Trust and
hold any proceeds from these claims in trust for those beneficiaries. The
existence of the Mafco Trust will terminate five years after the consummation
date of the Toy Biz Plan unless the District Court approves an extension of the
term of the Mafco Trust for good cause.
YEAR 2000
As part of the Company's proposed merger with Toy Biz, as provided in
the Toy Biz Plan, Toy Biz has made representations to the Company that they are
currently installing a new information system that will be Year 2000 compliant.
Toy Biz has represented that as part of the merger they intend to convert
Marvel to their information systems and that Toy Biz and Marvel will both be
Year 2000 compliant by the early half of 1999. The Company's other operating
subsidiaries, Panini and Fleer/SkyBox are currently upgrading their individual
information systems to be Year 2000 compliant independently of Toy Biz and
anticipate completion in the early half of 1999. In addition, Panini is also
upgrading its information systems for the conversion of European currencies
into the Eurodollar. This schedule may not permit the Company and its
subsidiaries to make these systems compatible on a timely basis. There can be
no assurance that the Company will be successful in converting to Year 2000 or
Eurodollar capabilities, nor that it will have the funds necessary to perform
the conversion.
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued Statement of Financial Accounting Standards
No 131, "Disclosures about Segments of and Enterprise and Related Information"
("FAS 131"). The Company is not required to disclose
23
<PAGE>
segment information in accordance with FAS 131 until December 31, 1998, at
which time it will restate prior years' segment disclosures to conform with FAS
131 segment presentation.
FORWARD-LOOKING STATEMENTS
Statements in this quarterly report on Form 10-Q for the quarter ended
June 30, 1998 and in its Annual Report on Form 10-K and amendments thereto, for
the year ended December 31, 1997 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 future
financial performance. 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) the ability of the Debtor
Companies to successfully reorganize in bankruptcy and the timing and outcome
of such bankruptcy proceedings and the resolution of the Company's dispute with
Toy Biz, including but not limited to the contemplated consummation of the Toy
Biz Plan,, (ii) the ability of the Company to obtain an additional or new
debtor loan or other financing, (iii) continued weakness in the comic book
market which cannot be overcome by the Company's new editorial, production and
distribution initiatives in comic publishing; (iv) continued general weakness
in the trading card and children's activity sticker markets; (v) the
effectiveness of the Company's changes to its trading card and publishing
distribution; (vi) a decrease in the level of media exposure or popularity of
the Company's characters resulting in declining revenues based on such
characters; (vii) 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; (viii) 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; or (ix) the ability of the Company to make its information systems
year 2000 compliant.
PART II.
OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings and claims
described in previous filings. During the quarter ended June 30, 1998 there
were no material developments in any of such proceedings not previously
disclosed, except as indicated below. Although it is impossible to predict the
outcome of any outstanding legal proceeding, the Company believes that other
than the litigation involving the NBAP, all of its legal proceedings and
claims, individually and in the aggregate, are not likely to have a material
adverse effect on its financial condition or results of operations. As a result
of the Debtor Companies filing of petitions pursuant to the Bankruptcy Code,
the Company's legal proceedings, other than the Debtor Companies' bankruptcy
proceedings and those proceedings involving subsidiaries of Marvel who are not
Debtor Companies (principally, Panini), have been automatically stayed.
The Company was named as 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., by
four persons who allegedly purchased sports and entertainment cards
manufactured by Fleer/Skybox. The action was 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
alleged that these practices constituted illegal gambling activity in violation
of state and Federal law. Plaintiffs sought 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, the Company filed a motion to dismiss
the complaint. The Complaint was dismissed with prejudice on August 21,1997. On
October 17, 1997, the plaintiffs filed a motion to alter, amend or vacate the
dismissal. On April 28, 1998, plaintiff's motion was denied. Plaintiffs have
appealed the denial of the motion to the Second Circuit Court of Appeals.
On July 31, 1998, the Company entered into a settlement agreement with
NBAP as to future royalty minimum amounts, the settlement of past due royalty
amounts and the dismissal of the NBAP lawsuit filed against Panini. The
24
<PAGE>
settlement agreement requires District Court approval and will take effect on
the consummation date of the Toy Biz Plan. There can be no assurance that the
District Court will approve the NBAP settlement agreement. However, commencing
August 1, 1998, the royalty obligation will accrue as if the settlement
agreement was in effect on such date. The Company believes that the revised
royalty commitment is consistent with current and expected basketball trading
card sales levels. The settlement agreement provides for an $11.0 million
payment to NBAP due on or before the consummation date. In addition, the
settlement agreement allows NBAP a $20.0 million claim to be included in the
unsecured creditors committee claim pool to be discharged under the Toy Biz
Plan. If the amount recovered by NBAP from this claim is less than $1.0
million, NEWCO will pay the difference one year subsequent to the consummation
date of the Toy Biz Plan.
As reported in the Company's Form 10-K filed with the Securities and
Exchange Commission on April 15, 1998, an action was initiated by Toy Biz
against the Company in the District Court in June 1997 (the "Governance
Litigation"). Toy Biz was seeking a judicial determination as to the proper
composition of its board of directors and as to whether the Class B Common
Stock of Toy Biz owned by Marvel had automatically converted into Class A
Common Stock of Toy Biz. On March 30, 1998, the District Court entered a
judgment declaring that the supervoting rights associated with the Class B
Common Stock of Toy Biz owned by the Company to control the Toy Biz board,
terminated on June 20, 1997 when Carl C. Icahn took control of the Company.
This judgment was appealed by the Chapter 11 Trustee and others to the United
States Court of Appeals for the Third Circuit (the "Court of Appeals")..
Subsequent to the Company's filing of its Form 10-K on April 15, 1998,
the Company received notice that on April 13, 1998, the Court of Appeals
stayed, pending the outcome of the appeal, the previously scheduled
confirmation hearing on the Toy Biz Plan of reorganization that had been
proposed by Toy Biz and the Company's Secured Lenders, which provides for the
merger of Toy Biz and Marvel.
Pursuant to an Agreement and Stipulation of Settlement dated May 11,
1998, ("the Global Settlement") a settlement was reached among Toy Biz, the
Chapter 11 Trustee, representatives of the Company's Secured Lenders and
certain other parties to settle litigation commenced by the Company against Toy
Biz, the Company's Secured Lenders and those other parties. As a part of this
settlement, the Chapter 11 Trustee agreed to attempt to have vacated the appeal
of the Governance Litigation currently pending in the Court of Appeals and to
support the Toy Biz Plan, which has been amended to reflect the terms of the
settlement agreement. On June 12, 1998, the District Court held a hearing
regarding the settlement which was objected to by the unsecured creditors
committee, the equity committee, La Salle National Bank ("La Salle") and High
River Limited Partnership, Carl Icahn, Westgate International L.P. and Vincent
Intrieri (hereinafter collectively the "Icahn Interests"). The District Court
approved the settlement on June 25, 1998. Appeals were filed by all of the
objectors.
On June 30, 1998, and July 1, 1998, the District Court held hearings
regarding confirmation of the Third Amended Plan, which was objected to by the
unsecured creditors committee, the equity committee, La Salle and the Icahn
Interests. On July 13, 1998, the District Court entered an order confirming the
Third Amended Plan. Appeals were filed by all of the objectors.
Following extended negotiations, a global settlement was reached by
and between the proponents of the Toy Biz Plan, other Toy Biz parties, Mark
Dickstein and his related entities, the Chapter 11 Trustee, the Chase Manhattan
Bank on behalf of senior secured lenders, the DIP lenders, the Icahn Interests,
La Salle, the unsecured creditors committee, and the equity committee. Pursuant
to a stipulation (the "Stipulation") entered into by all of those parties, a
modified Third Amended Plan, filed as the Toy Biz Plan provided for, among
other things, enhanced payments to all classes of creditors in return for the
withdrawal of all objections, adversary proceedings and appeals. The
Stipulation also provides for mutual general releases by and between all of the
parties. A consent order was entered by the District Court on July 31, 1998,
approving the Stipulation and confirming the Toy Biz Plan. The Global
Settlement and the Toy Biz Plan are subject to certain conditions referred to
therein, which must be satisfied on or before the consummation date of the Toy
Biz Plan.
Pursuant to the foregoing, the Governance Litigation will be settled
upon the consummation date. Certain claims against Ronald O. Perelman and
certain of his affiliates will then become the property of the Mafco Trust.
25
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
Exhibit No. Description
----------- -----------
10.3 Assignment and Withdrawal Agreement dated March 6, 1998
between the Registrant and Ebco Management, Inc., Robert
Earl, Keith Barish, Universal Station, Inc. and Universal
Studios, Inc.
10.4 Settlement Agreement dated July 31, 1998 by and between NBA
Properties, the Registrant, Fleer/Skybox, the Chapter 11
Trustee and Panini.
*+10.5 Retail Product License Agreement dated July 31, 1998
between the Registrant and NBA Properties, Inc.
*27.1 Financial Data Schedule
- ---------------
* Filed herewith
+ Portions of this exhibit have been omitted and have been filed separately
with the Secretary of the Commission pursuant to the Company's Application
Requesting Confidential Treatment.
(B) Reports on Form 8-K
Form 8 K was filed with the SEC on August 3, 1998 reporting with
respect to Item 5, Other Events.
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 ENTERTAINMENT GROUP, INC.
(Registrant)
By: /s/ August J. Liguori
--------------------------------
Dated: August 20, 1998 August J. Liguori
Executive Vice President, Finance
Chief Financial Officer
(Principal Accounting Officer)
26
<PAGE>
FORM: NBAP
TRADING CARDS
LICENSEE: MARVEL ENTERTAINMENT GROUP, INC. RETAIL PRODUCT LICENSE AGREEMENT
ADDRESS: Executive Plaza, Suite 300
1120 Route 73
Mt. Laurel, NJ 08054
THIS RETAIL PRODUCT LICENSE AGREEMENT is entered into by NBA
Properties, Inc. ("NBAP"), with its principal office at 645 Fifth Avenue, New
York, New York 10022, and Marvel Entertainment Group, Inc. ("Marvel") on behalf
of its wholly-owned subsidiaries Fleer Corporation ("Fleer") and SkyBox
International, Inc. ("SkyBox") (collectively and individually, "LICENSEE"),
with regard to the commercial use by each LICENSEE of the names, logos,
symbols, emblems, designs and uniforms and all identifications, labels,
insignia or indicis thereof (the "Marks") of the National Basketball
Association (the "NBA") and its Member Teams (collectively, the "NBA Marks") in
combination with the names, nicknames, photographs, portraits, likenesses,
signatures or other identifiable features ("Attributes") of all current NBA
players. On the terms of this Agreement and subject to the attached NBAP
Standard Terms and Conditions, NBAP hereby grants to LICENSEE, and LICENSEE
hereby accepts, the non-exclusive (except as otherwise expressly provided in
this Agreement) right and license to use under the Fleer and SkyBox brands the
Marks of the Member Teams, the silhouetted dribbler logo (the "NBA Logo"), the
Marks of the NBA, NBA All-Star Weekend and NBA Playoffs and Finals
(collectively, the "Licensed Marks") in combination with the names, nicknames,
photographs, portraits, likenesses, signatures, NBA statistics and biographical
information (and such additional Attributes as NBAP may specifically approve on
a case-by-case basis from time-to-time) of all current (at the time of such
use) NBA players (on a group basis and to the extent NBAP can convey such
rights in accordance with the Group License Agreement between NBAP and the
National Basketball Players Association ("NBPA") (or its successor)) (the
"Licensed Attributes"), solely in connection with the manufacture,
distribution, advertisement, promotion and sale of the trading card products
described in Paragraph A below ("Licensed Products"). No license or right is
granted for the use of the Licensed Marks for any purpose other than on the
Licensed Products and in the distribution, advertisement, promotion and sale of
the Licensed Products in accordance with this Agreement.
A. LICENSED PRODUCTS: Trading card products as approved by NBAP.
For each Contract Year during the Term, LICENSEE shall make * (*)
trading card product "releases" (as defined in Paragraph 1 of the
attached NBAP Standard Terms and Conditions) under the Fleer/SkyBox
brands.
- ------------------
* Confidential treatment requested - portion has been omitted and filed
separately with the Securities and Exchange Commission.
<PAGE>
B. TERM: August 1, 1998 to July 31, 2001 (the "Term").
C. TERRITORY: The rights granted to LICENSEE hereunder shall be
exercisable on a worldwide basis (the "Territory").
D. ROYALTY RATES: LICENSEE shall pay monthly to NBAP a combined royalty
and advertising and royalty payment (hereinafter referred to as
"royalty") equal to *percent (*%) of "Net Sales" (as defined in
Paragraph 1 of the attached NBAP Standard Terms and Conditions).
E. MINIMUM GUARANTEES/REQUIREMENTS:
(1) Minimum Guarantees: LICENSEE guarantees that its aggregate
annual royalty payments to NBAP for each Contract Year under
this Agreement shall not be less than the amount set forth
opposite such Contract Year:
1st Contract Year $*
2nd Contract Year $*
3rd Contract Year $*
*
(2) *:
(3) International Minimum Requirements: If at any time after the
1st Contract Year, LICENSEE shall fail to exercise its good
faith best efforts to distribute and sell Licensed Products
within any of the European, Asia Pacific and Latin American
International regions, NBAP shall have the right, upon thirty
(30) days written notice, to terminate LICENSEE's rights with
respect to the sale of Licensed Products in any such
particular international region for the balance of the Term.
LICENSEE shall be deemed not to have used its best efforts,
if NBAP can demonstrate that LICENSEE has generally failed to
make marketing and distribution efforts in support of the
Licensed Products as shall be required to enable retailers to
meet consumer demand for the Licensed Products. LICENSEE
acknowledges that LICENSEE's Minimum Guarantee obligations
under subparagraph (1) above shall not change or be affected
in any way in the event any of LICENSEE's rights to sell
Licensed Products is terminated pursuant to this
subparagraph.
- ------------------
* Confidential treatment requested - portion has been omitted and filed
separately with the Securities and Exchange Commission.
-2-
<PAGE>
F. ADVERTISING & PROMOTION:
(1) *
(2) Fleer shall exhibit, at its sole cost and expense, a fair and
representative selection of Licensed Products at the National
Sports Collectors Convention and every other trade show where
Fleer (in its discretion) exhibits licensed products.
G. SELLING PRACTICES: LICENSEE acknowledges NBAP's legitimate and reasonable
interest in protecting the value of the NBA Marks and maximizing the
effectiveness of its advertising, promotion and distribution efforts by
segmenting the classes of trade into which its licensees sell NBAP-licensed
products. Therefore, LICENSEE shall only sell Licensed Products to a buyer
that to its best knowledge, (i) purchases Licensed Products from LICENSEE
solely for sale directly to the consumer and operates a retail
establishment that supports the high quality and image of NBA officially
licensed products with appropriate merchandising displays, promotion and/or
customer service, or (ii) distributes to retailers that support the high
quality and image of NBA officially licensed products with appropriate
merchandising displays, promotion and/or customer service. LICENSEE
acknowledges that a failure to comply with the selling practices set forth
in this Paragraph shall cause significant harm to NBAP's efforts to
effectively and efficiently distribute NBAP-licensed products.
AGREED TO AND ACCEPTED, subject AGREED TO AND ACCEPTED:
to and incorporating the attached NBAP NBA PROPERTIES, INC.
Standard Terms and Conditions which
the undersigned has read:
MARVEL ENTERTAINMENT GROUP, INC. By:/s/ Harvey E. Benjamin
Sr. Vice President,
Business Affairs
By:/s/ August J. Liguori
Title: E.V.P. Dated: 7/31/98
- ------------------
* Confidential treatment requested - portion has been omitted and filed
separately with the Securities and Exchange Commission.
-3-
<PAGE>
NBAP STANDARD TERMS AND CONDITIONS
1. ADDITIONAL DEFINITIONS
For the purposes of this Agreement:
(a) "Contract Year" shall mean a twelve (12) month accounting period
commencing August 1 and concluding July 31. The first Contract Year
shall commence August 1, 1998.
(b) "Counterfeit Goods" shall mean and include: (i) goods that bear any
NBA Mark that has been reproduced and/or affixed without
authorization from NBAP; (ii) goods that bear any NBA Mark produced
by any source in excess of an amount ordered by an NBAP licensee;
and (iii) goods that bear any NBA Mark that have been rejected by
NBAP or an NBAP licensee and nevertheless enter the stream of
commerce.
(c) "Diverted Goods" shall mean and include any goods produced by
someone acting on behalf of an NBAP licensee, which goods are not
delivered by the producer to such licensee or to a person
designated by such licensee to receive such goods.
(d) "NBA Photo" means any photograph of a current NBA player taken by
any party during an NBA game, competition, event or NBA-coordinated
activity (e.g., Pre-Draft Camps, Rookie Orientation, player
appearances etc.), or in which such a player is pictured in his NBA
team or League-issued uniform or practice wear, or NBA-identified
merchandise or setting.
(e) "Net Sales" shall mean*
(f) "Parallel Goods" shall mean and include Licensed Products
transferred outside of the Territory or brought into the Territory
in violation of this Agreement.
(g) "Premium" shall mean anything given free or sold at substantially
less than its usual selling price (but does not include sales made
pursuant to periodic price reductions resulting from "specials,"
"sales," or volume pricing discounts) for the purpose of increasing
the sale of, or publicizing, any product or service, or other
giveaway or promotional purpose. Other giveaway or promotional
purposes include, but are not limited to, self-liquidating offers,
uses of Licensed Products as sales force or trade incentives and
sales of Licensed Products through distribution schemes involving
earned discounts or "bonus" points based on the consumer's use of
the offeror's product or service.
- ------------------
* Confidential treatment requested - portion has been omitted and filed
separately with the Securities and Exchange Commission.
-4-
<PAGE>
(h) "Release" means each series of a Licensed Product issued in
series (for example, NBA Hoops Series I and NBA Hoops Series
II would each be counted as a release) and each Licensed
Product not issued in series (for example, Flair Showcase
would be counted as a release).
(i) "Set" means all cards in all series of a Licensed Product
issued in series and in each Licensed Product not issued in
series.
2. TEAM REPRESENTATION: LIMITATIONS ON LICENSE
(a) Unless otherwise approved in writing by NBAP, each NBA Set
must include individual cards of a minimum of six (6) players
form each Member Team and utilize the respective team's full
logo on a mutually agreeable location on the card. All
designs of the Licensed Products using the Licensed Marks,
including any packages, containers or tags, shall be subject
to NBAP's prior written approval and shall be used solely in
furtherance of this Agreement, and such designs will not be
used in any other respect by LICENSEE nor will LICENSEE
authorize any third party to use such designs.
Notwithstanding the foregoing, NBAP acknowledges that
LICENSEE may hold other licenses pursuant to which LICENSEE
manufactures, distributes or sells products similar in design
to the Licensed Products and nothing in this Agreement is
intended to prohibit LICENSEE's manufacture, distribution or
sale of such products not bearing or relating to the Licensed
Marks.
(b) LICENSEE acknowledges that nothing contained herein shall be
construed as granting to any photographer engaged by LICENSEE
the right to enter any NBA arena for the purpose of
photographing game action, it being understood that NBAP does
not control arena access. Upon LICENSEE's request, NBAP shall
provide LICENSEE with reasonable amounts of NBA Photos for
use by LICENSEE in the production of the Licensed Products;
such NBA Photos to be provided to LICENSEE at NBAP's
prevailing search and edit charges for NBAP licensees.
3. STATEMENTS AND PAYMENTS: REPORTING
(a) Statement and Payments: By the fifteenth (15th) day following
the end of each month, LICENSEE shall wire transfer to NBAP
the "Monthly Minimum Payment" (as defined below), and within
fifteen (15) days (i.e., by the 30th day following the end of
each month) of each such payment, Fleer and SkyBox shall each
furnish (on forms provided by or approved by NBAP) full and
accurate statements (on a country-by-country and brand
basis), certified by an officer of each respective company,
showing all information relating to the calculation of Net
Sales for the preceding month. Simultaneously with the
submission of such statement, each company shall wire
transfer to NBAP the overage, if any, with respect to the
Monthly Minimum Payment made and the actual earned royalty
required for the preceding month. The minimum amount of each
monthly royalty
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payment shall be the amount which, when added to payments of
royalties previously made for the Contract Year, shall be
equal to one-twelfth (8.34%) of the Minimum Guarantee for
such Contract Year required under Paragraph E above,
multiplied by the number of calendar months then elapsed (the
minimum payments under this sentence shall be collectively
referred to as the "Monthly Minimum Payment"). Aggregate
royalties paid each Contract Year may exceed the Minimum
Guarantee for such Contract Year. Such monthly statements
shall be furnished and the required payments made by LICENSEE
whether or not there are any Net Sales for that month. All
payments made by LICENSEE to NBAP under this Agreement shall
be made free and clear of, and without deduction or
withholding for or on account of, any income, stamp or other
taxes, charges, fees, deductions or withholdings. If any such
taxes, charges, fees, deductions or withholdings are required
by law to be withheld from any amounts payable to NBAP
hereunder, the amounts so payable shall be increased to the
extent necessary to yield to NBAP the amounts specified in
this Agreement. All payments shall be in U.S. dollars, from a
U.S. source approved by NBAP. All computations and payments
shall be in U.S. dollars, at the spot rate for the local
currency as published in the Wall Street Journal for the last
business day of the preceding month. If LICENSEE shall fail
to timely pay any amount due under this Paragraph, LICENSEE
shall pay interest on such amount at a rate equal to the
lesser of (i) * percent (*%) per annum over the highest prime
rate (announced by Chase Bank, New York branch) prevailing
during the period between the date the payment first became
due and the date such payment is actually paid or (ii) the
highest rate permitted by law during the period between the
date the payment first became due and the date such payment
is actually paid. The receipt or acceptance by NBAP of any of
the statements furnished or royalties paid by LICENSEE
(including the cashing of any royalty checks) shall not
preclude NBAP from questioning their accuracy, auditing
LICENSEE's books and records pursuant to Paragraph 12 or
claiming any shortfall in royalty payments, or advertising
and promotion payments all during the Term and for a period
of two (2) years after the expiration or termination hereof.
In order to assist with NBAP's annual budget process, by
April 15 of each Contract Year, each LICENSEE company shall
deliver a statement detailing its projections for sales of
each Licensed Product for the following Contract Year, broken
down on a quarterly basis. If LICENSEE fails to comply with
the reporting and payment requirements contained in this
Paragraph, subject to notice and opportunity to cure as
provided under Paragraph 13(a) below, NBAP may charge
LICENSEE, as liquidated damages, * U.S. dollars (USD *) for
each instance of non-compliance with this Paragraph.
- ------------------
* Confidential treatment requested - portion has been omitted and filed
separately with the Securities and Exchange Commission.
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(b) Cross-Collateralization: Any royalty payment for Licensed
Product sold shall only be applied against the Minimum
Guarantee for the Contract Year in which such Licensed
Product was sold (i.e., any shortfall in, or payment in
excess of, the Minimum Guarantee for a Contract Year may not
be offset or credited against the Minimum Guarantees for any
other Contract Year or against any other NBA license
(including premium license agreements entered into pursuant
to Paragraph 5 hereof) held by LICENSEE).
4. NON-RESTRICTIVE GRANT; RIGHTS RESERVED
Nothing in this Agreement shall prevent NBAP from granting any other
licenses and rights. All rights not specifically granted in this
Agreement are expressly reserved by NBAP. No right of renewal or
option to extend is granted or implied and LICENSEE shall have no
right to continue manufacturing or selling Licensed Products or to
continue holding itself out as a licensee of NBAP after the expiration
or termination of this Agreement except as provided in Paragraph 14.
5. PREMIUMS
Licensed Products shall not be used as a Premium without the prior
written approval of NBAP in each instance and unless specifically
authorized pursuant to a separate agreement with NBAP. Nothing in this
Agreement shall prohibit LICENSEE from marketing Licensed Products
using creative techniques consistent with industry practice,
including, but not limited to, periodic "specials," "sales," or volume
discount prices, so long as all receipts are accounted for in Net
Sales and in accordance with this Agreement.
6. GOODWILL
LICENSEE recognizes that (i) a portion of the value of the NBA Marks
is attributable to goodwill, (ii) the goodwill attached to the NBA
Marks belongs exclusively to NBAP, the NBA and its Member Teams and
(iii) that such NBA Marks have secondary meanings in the minds of the
public. LICENSEE shall not, during the Term or thereafter, challenge
(y) the property rights of the Member Teams, whether severally owned
or held in association as the NBA, or NBAP's property rights, in and
to NBA Marks, or (z) the validity, legality or enforceability of this
Agreement.
7. PROTECTION OF RIGHTS
(a) Unauthorized Activities: LICENSEE shall promptly notify NBAP
in writing of any infringements of the Licensed Marks or the
Licensed Products or the sale of any Licensed Products
outside the Territory (e.g., unauthorized
importation/exportation of goods) which may come to
LICENSEE's attention. NBAP shall have the sole right to
determine whether or not any action shall be taken on account
of any such infringement or unauthorized
importation/exportation. LICENSEE agrees not to contact any
third party engaging in the aforementioned activities, not to
make any demands for claims
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and not to institute any suit or action on account of such
infringement or unauthorized importation/exportation without
obtaining the express prior written permission of NBAP in
each instance. In the event NBAP grants such permission and
LICENSEE institutes such a suit or takes other action,
LICENSEE shall bear all direct out-of-pocket costs and
expenses of such action and NBAP shall reasonably cooperate
with LICENSEE at LICENSEE's expense.
(b) Assistance in Protecting Marks: LICENSEE shall cooperate to
the fullest extent reasonably necessary to assist NBAP in the
protection of the rights of NBAP, the NBA and the Member
Teams in and to the Licensed Marks. NBAP shall reimburse
LICENSEE for any reasonable out-of-pocket costs actually
incurred by LICENSEE in providing such cooperation and
assistance. LICENSEE shall reasonably cooperate with NBAP in
its enforcement efforts, including being named by NBAP as a
complainant in any action against an infringer and NBAP shall
bear all LICENSEE's direct out-of-pocket costs and expenses
of being named a complainant and otherwise cooperating with
NBAP in any such action. LICENSEE shall pay to NBAP, and
waives all claims to, all damages or other monetary relief
recovered in any such NBAP-initiated action by reason of a
judgment or settlement (other than for reasonable attorneys'
fees and expenses incurred at NBAP's request) whether or not
such damages or any part of such damages represent or are
intended to represent injury sustained by LICENSEE.
(c) Ownership of Marks: LICENSEE acknowledges that NBAP and/or
the Member Teams are the exclusive owners of the Licensed
Marks. Any intellectual property rights in the Licensed Marks
that may accrue to LICENSEE shall inure to the benefit of
NBAP and shall be assigned to NBAP upon its request. Any
copyright, trademark or service mark used or procured by
LICENSEE with respect to or involving the Licensed Marks,
derivations or adaptations of the Licensed Marks, or any
word, symbol or design which is similar to the Licensed Marks
so as to suggest association with or sponsorship by the NBA,
one of its Member Teams or any of their affiliates, shall be
procured for the benefit of and in NBAP's name, at NBAP's
expense, notwithstanding their creation by LICENSEE. LICENSEE
shall take all necessary steps to secure an assignment to
NBAP of the copyright from a creator of work that is not
work-for-hire. Any copyright, trademark or service mark
affecting or relating to the Licensed Marks already procured
or applied for shall be assigned to NBAP. LICENSEE shall
supply NBAP with any necessary supporting materials required
to obtain copyright or trademark registrations of any
copyrights or trademarks required to be assigned to NBAP
under this Agreement at NBAP's expense.
(d) Notices, Labeling and Records: In every instance in which any
Licensed Mark is used free-standing in any Licensed Product
or promotional materials design (i.e., not appearing as
embodied in or on a uniform, equipment, etc.), LICENSEE shall
include the notice "TM," "(R)," or "(C)" or such other
copyright, trademark or service mark notices (including the
form, location and content of such notices) as
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NBAP may from time-to-time designate. In addition, the
following general notice (in the English language, and in the
language of any foreign country where the Licensed Products
will be sold subject to space limitations and the
requirements of local law) must be included on the packaging
of the Licensed Product:
"The NBA and individual NBA member team
identifications reproduced on this product are
trademarks and copyrighted designs, and/or other
forms of intellectual property, that are the
exclusive property of NBA Properties, Inc. and the
respective NBA member teams and may not be used, in
whole or in part, without the written consent of NBA
Properties, Inc."
LICENSEE shall: (i) cause all Licensed Products to bear the
NBA Logo together with the NBAP (C) notice in such place, and
in such prominence, as NBAP may designate from time-to-time,
(ii) include on the product box and wrapper the "Official
Licensed Product" logo and the NBAP (C) notice in such place,
and in prominence, as NBAP may designate from time-to-time,
(iii) faithfully comply with and adhere to NBAP's mandatory
hologram "Official Licensed Product" identification system or
such system(s) as NBAP may from time-to-time require
including, but not limited to, identification devices on
individual cards, shipment tracking, identification and
anti-counterfeiting systems, stickers, and labels that NBAP
may establish from time-to-time, (iv) unless approved in
writing by NBAP, not cross-license or otherwise use other
licensed properties or other Marks with the Licensed Products
or Licensed Marks, and (v) keep appropriate records, and
advise NBAP upon its request, of the date when each of the
Licensed Products is first placed on sale or sold in each
country of the Territory and the date of first use in each
country of each different Licensed Mark on the Licensed
Products and any promotional or packaging materials.
(e) Recordation and Registered User Applications: With respect to
these countries in which one or more LICENSEE's may
distribute and which require applications to register the
distributing LICENSEE as a permitted or registered user of
the Licensed Marks, or which require the recordation of this
Agreement, such LICENSEE shall execute and deliver to NBAP
such applications, agreements or other documents as may be
necessary. In such event, this Agreement rather than such
agreements will govern any disputes between LICENSEE and
NBAP, and when this Agreement expires or is terminated, any
such other agreement shall also be deemed expired or
terminated.
(f) Licensee Trade Names and Trademarks: Fleer and SkyBox shall
each permanently affix labeling on its respective Licensed
Product or its packaging, indicating its name, trade name and
address so that the public can identify the supplier of the
Licensed Product. Prior to any distribution or sale of any
Licensed Product, each company shall advise NBAP in writing
of its trade names or
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<PAGE>
trademarks used on Licensed Products and the proposed
placement of such trade names and trademarks on the Licensed
Products. Each company shall only sell Licensed Products
under mutually agreed upon trade names or trademarks and with
approved copyrighted designs, shall not incorporate the
Licensed Marks into its corporate or business name or
trademark in any manner whatsoever and shall place its trade
names and trademarks on Licensed Products only as approved by
NBAP. NBAP acknowledges that it shall acquire no rights in
any LICENSEE trade names or trademarks used hereunder. If
requested by NBAP, each company shall supply NBAP, in advance
of shipping any Licensed Products, with at least twelve (12)
copies of each type of its stickers, products labels and
other markings of origin for use in identifying and
authenticating Licensed Products in the marketplace. LICENSEE
shall not use, whether during or after the Term, any Marks:
(i) in connection with the Licensed Marks without NBAP's
authorization, (ii) confusingly-similar to the Licensed
Marks, or (iii) intended to relate or refer to the Licensed
Marks, the Member Teams or events involving Member Teams.
8. INDEMNIFICATIONS
(a) LICENSEE shall be solely responsible for, and shall defend,
hold harmless and indemnify NBAP, NBA Entertainment, Inc.
("NBAE"), the NBA and its Member Teams and the NBPA and their
respective affiliates, owners, directors, governors,
officers, employees and agents (collectively "NBA Parties")
against any claims, demands, causes of action or damages,
including attorneys' fees (collectively, "Claims"), arising
out of: (i) any act or omission of LICENSEE, any Third Party
Contributor (as defined in Paragraph 11(b) below) or any
other entity acting on LICENSEE's behalf (whether or not
approved by NBAP pursuant to this Agreement), (ii) any breach
of this Agreement by LICENSEE, any Third Party Contributor or
any other entity acting on LICENSEE's behalf (whether or not
approved by NBAP pursuant to this Agreement), (iii) the
manufacture, distribution, advertisement, promotion, sale,
possession or use of any Licensed Product (including, but not
limited to, claims relating to (w) any defect (whether
obvious or hidden and whether or not present in any sample
approved by NBAP) in a Licensed Product or in any packaging
or other materials (including advertising materials), (x) any
alleged injuries to persons or property, (y) any infringement
of any rights of any other person or entity or (z) the
alleged failure by LICENSEE to comply with applicable laws,
regulations and standards or the terms of the NBAP Code of
Conduct, as amended from time to time by NBAP (the "Code of
Conduct"), attached hereto as Exhibit A) or (iv) any claim
that any Licensed Product or element thereof (other than the
Licensed Marks, Licensed Attributes, NBA Photos or other
material supplied to LICENSEE by NBAP) violates or infringes
upon the trademark, copyright or other intellectual property
rights (including trade dress and rights of publicity and
privacy) of a third party, provided LICENSEE is given prompt
written notice of and shall have the option to undertake and
conduct the defense of any such Claim. In any instance to
which the foregoing indemnities pertain, NBAP shall cooperate
fully with and assist
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LICENSEE in all respects in connection with any such defense.
LICENSEE shall reimburse NBAP for all reasonable
out-of-pocket costs actually incurred by NBAP in connection
with such cooperation and assistance. In any instance to
which indemnities pertain, LICENSEE shall not enter into a
settlement of such Claim or admit liability or fault without
NBAP's prior written approval. LICENSEE shall obtain and
maintain product liability insurance providing protection for
the NBA Parties against any Claims arising out of any alleged
defects in the Licensed Products or any use of the Licensed
Products, in the amount of one million dollars ($1,000,000)
(including the amount of the deductible). Such insurance
shall be carried by an insurer with a rating by A.M. Best &
Co. of A-7 or other rating satisfactory to NBAP. Such
insurance policy shall also provide that NBAP receive written
notice within thirty (30) days prior to the effective date of
the cancellation, non-renewal or any material change in
coverage. In the event that LICENSEE fails to deliver to NBAP
a certificate of such insurance evidencing satisfactory
coverage prior to NBAP's execution of this Agreement, NBAP
shall have the right to terminate this Agreement at any time.
Such insurance obligations shall not limit LICENSEE's
indemnity obligations, except to the extent that LICENSEE's
insurance company actually pays NBAP amounts which LICENSEE
would otherwise be obligated to pay NBAP.
(b) NBAP shall be solely responsible for, and shall defend, hold
harmless and indemnify LICENSEE, its directors, officers,
employees and agents against any Claims arising out of (i) a
claim that the use, as specifically approved by NBAP in
accordance with the terms of this Agreement, of the Licensed
Marks, Licensed Attributes, NBA Photos or other material
supplied to LICENSEE by NBAP (collectively, "Licensed
Materials") violates or infringes upon the trademark,
copyright or other intellectual property rights (including
trade dress) of a third party in or to the Licensed Marks,
(ii) a claim that the use, as specifically approved by NBAP
in accordance with the terms of this Agreement, of the
Licensed Attributes, NBA Photos or other material supplied to
LICENSEE by NBAP on Licensed Products, or in advertising or
promotional materials, as specifically approved by NBAP
violates or infringes upon the right of privacy or right of
publicity of, or libels or defames, any NBA player or (iii)
any breach of this Agreement by NBAP, provided NBAP is given
prompt written notice of and shall have the option to
undertake and conduct the defense of any such Claim. In any
instance to which the foregoing indemnities pertain, LICENSEE
shall cooperate fully with and assist NBAP in all respects in
connection with any such defense. NBAP shall reimburse
LICENSEE for all reasonable out-of-pocket expenses actually
incurred by LICENSEE in connection with such cooperation and
assistance. In any instance to which such indemnities
pertain, NBAP shall not enter into a settlement of such Claim
or admit liability or fault without LICENSEE's prior written
approval. NBAP shall have the right, within seventy (70) days
of LICENSEE's commencement of production of Licensed Products
bearing such marks, to advise LICENSEE that one or more Marks
of a Member Team (other than the team's name or logo) are not
covered by this Paragraph 8(b),
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whereupon any continued use of said Mark by LICENSEE shall be
at LICENSEE's sole risk. If as a consequence of NBAP's breach
of this Agreement or a Claim (for which it is entitled to
indemnification by NBAP under this Paragraph) LICENSEE is
restrained from use of any Licensed Materials and such
restraint has had a material adverse effect on LICENSEE's
Licensed Product sales, NBAP and LICENSEE shall in good faith
confer with respect to an equitable adjustment to LICENSEE's
obligations under this Agreement. If NBAP and LICENSEE are
unable to agree on the equitable adjustment, then the parties
shall proceed in accordance with the process set forth in
subparagraph 22(a) below.
9. QUALITY; APPROVALS; SAMPLES
LICENSEE shall cause the Licensed Products to meet and conform to high
standards of style, quality and appearance, consistent with their
price point. In order to assure NBAP that it is meeting such standards
and other provisions of this Agreement, LICENSEE shall comply with the
following:
(a) Pre-Production: Before commercial production and distribution
of any Licensed Product, each LICENSEE shall submit to NBAP
all its proposed set/subset themes, composition, package
configurations, card designs, card copy, statistical
information, photographs, composite matchprints, packaging
and displays. LICENSEE acknowledges that NBA Photos not
obtained directly through NBAP's photo services shall not be
approved for use on Licensed Product or in NBA-identified
promotional materials. All submissions under this Paragraph
shall be accompanied by forms supplied by NBAP, using one (1)
form for each submission and filling in all necessary
information, and all NBA Photos submitted for approval must
include the photograph identification number (e.g., 95 NSBB
12345) assigned to each photograph by NBAP's photo services.
NBAP shall approve or disapprove in writing all submissions,
in its good faith exercise of sole discretion, before the
LICENSEE shall be entitled to distribute, advertise, use,
produce commercial quantities of or sell any item relating to
any such submission. Any article actually submitted and not
disapproved in writing within thirty (30) days after receipt
by NBAP shall be deemed approved. In the event of a
disapproval, NBAP shall set forth its reasons with enough
specificity that LICENSEE shall be able to remedy the defect
if curable. Approval of an article by one company which uses
particular artwork does not imply approval of such artwork
with a different article, by another company or of such
article with different artwork. LICENSEE acknowledges that
NBAP's approval of an article does not imply approval of any
non-NBA controlled elements contained in any article. After a
sample of an article has been approved, it shall not be
materially changed without resubmission of the modified
article for NBAP's written approval.
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<PAGE>
(b) Production Samples: Before selling or distributing any
Licensed Product, each company shall furnish NBAP with, at no
charge, for its files two (2) sample complete sets from the
first production run of each product line. If such samples do
not conform in all material respects to the Licensed Product
as approved or if the quality of such sample does not meet
the requirements of this Paragraph 9, NBAP shall notify the
LICENSEE and such article shall not be considered a Licensed
Product, be deemed unapproved and all such articles shall be
promptly destroyed unless such articles may be remedied to
NBAP's satisfaction. Each card LICENSEE shall also furnish
NBAP, free of charge and with no right of resale, with: (i)
five (5) "base cases" (i.e., a 20-box case with 36 packs of
cards per box and 12 cards per pack) of each product line
within thirty (30) days of production; (ii) twenty (20)
complete sets in binders; and (iii) any additional pieces of
Licensed Product as may reasonably be required by NBAP to
promote the sale of Official Licensed Products (e.g., for
NBAP's display room, advertisements, catalogs, mailers,
product placement and trade shows) or for comparison with
earlier samples. In addition, each LICENSEE shall provide
NBAP with any additional pieces of Licensed Product as may be
required for the permanent use of the Member Teams; for each
card LICENSEE not to exceed two (2) base cases per product
line per Member Team. If NBAP wishes to purchase further
quantities of any Licensed Products for resale, LICENSEE
shall sell such Licensed Products to NBAP at the lowest price
LICENSEE charges for similar quantities sold to its preferred
customers and LICENSEE shall pay royalties on such sales. If
NBAP wishes to purchase mutually acceptable quantities of
Licensed Products for giveaway purposes and not for resale,
LICENSEE shall sell the Licensed Products to NBAP at
LICENSEE's direct manufacturing costs for such Licensed
Products and LICENSEE shall not be required to pay royalties
on such sales to NBAP.
(c) Rejections and Non-Compliance: All submissions or samples not
approved by NBAP shall promptly be destroyed by the LICENSEE
except as otherwise provided by NBAP. The LICENSEE shall
advise NBAP regarding the time and place of such destruction
(in sufficient time to arrange for an NBAP representative to
witness such destruction, if NBAP so desires) and such
destruction shall be attested to a certificate signed by one
of LICENSEE's officers and submitted to NBAP within fifteen
(15) days of the date on which the sample was not approved.
In the event of a LICENSEE's unapproved or unauthorized
manufacture, distribution, use or sale of any products or
materials bearing the Licensed Marks, including promotional
materials, or the failure of a LICENSEE to comply with the
material provisions of Paragraphs 7(d), 7(f), 9 (after
receiving notice and opportunity to cure, if curable, as
provided under Paragraph 13(d) below), or 11(c), NBAP shall
have the right to: (i) immediately revoke that LICENSEE's
right with respect to any Licensed Product licensed under
this Agreement, and/or (ii) at the LICENSEE's expense,
confiscate or order the destruction of such unapproved,
unauthorized or non-complying products. In the event NBAP
exercises its rights under (i) above, LICENSEE shall pay all
royalties and
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Minimum Guarantees due NBAP with respect to the Licensed
Product for which right have been revoked. Such rights(s)
shall be without prejudice to any other rights NBAP may have
under this Agreement or otherwise.
(d) Testing: Both before and after Licensed Products are put on
the market, each LICENSEE shall follow reasonable and proper
procedures for testing the Licensed Products for compliance
with laws, regulations, standards and procedures, and shall
permit NBAP (upon reasonable notice during reasonable
business hours and no more than once a year) to inspect its
and its authorized manufacturer's testing, manufacturing and
quality control records, procedures and facilities and to
test or sample Licensed Products for compliance with this
Paragraph and the other terms and conditions of this
Agreement. Licensed Products found by NBAP at any time not to
comply with applicable laws, regulations, standards and
procedures shall be deemed unapproved, even if previously
approved by NBAP, and shall not be shipped unless and until
the LICENSEE can demonstrate to NBAP's satisfaction that such
Licensed Products have been brought into full compliance.
(e) Revocation of Approval: In the event that (i) the quality,
appearance or style of any Licensed Product previously
approved by NBAP ceases to be acceptable to NBAP, or (ii)
there is an event or occurrence relating to any player
depicted in a Licensed Product which, in the good faith
opinion of NBAP, defames or brings into disrepute, or
reflects unfavorably upon NBAP, the NBA or any of its Member
Teams, then, in any such event, NBAP shall have the right, in
its sole discretion, to withdraw its approval of such
Licensed Product. In the event of such a withdrawal pursuant
to (i), LICENSEE shall as soon as practicable cease the
printing of such Licensed Product and shall have a six (6)
month sell-off period an equitable adjustment to the minimum
guarantee for such Licensed Product. In the event of such a
withdrawal pursuant to (ii), LICENSEE shall cease the
advertising of the Licensed Product and, as soon as
practicable, shall cease the printing of such Licensed
Product and the parties shall negotiate in good faith for a
reasonable sell-off period for such Licensed Product. If, in
the good faith judgment of NBAP, the sell-off of such
Licensed Product is likely to defame, bring into disrepute,
or reflect unfavorably upon NBAP, the NBA, or any of its
Member Teams, then LICENSEE shall destroy its remaining
inventory of such Licensed Product. In either case, the
parties shall also negotiate an equitable adjustment to the
minimum guarantee for such Licensed Product. If there are
other Licensed Products for which approval has not been
withdrawn under this subparagraph, then this Agreement shall
remain in full force and effect as to such other Licensed
Products. LICENSEE shall notify NBAP in writing of any
Licensed Products deleted from its product lines.
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10. PROMOTIONAL MATERIAL; LIST GENERATION
LICENSEE shall not use the Licensed Marks or Licensed Attributes, or
any reproduction of the Licensed Marks or Licensed Attributes in any
advertising, promotion or display material or in any other manner
whatsoever without prior written approval from NBAP. Each LICENSEE
shall furnish to NBAP, free of charge, in a computer readable form or
such other format reasonably acceptable to NBAP, the names, addresses,
telephone numbers and any other consumer information furnished to, and
maintained by, it resulting from participation in any sweepstakes,
promotion or direct mail solicitation conducted by it and featuring
the Licensed Products or NBA Marks (and which information NBAP shall
have the right to use for its marketing and research efforts as it
deems appropriate). Under no circumstances will "lotteries," "games of
chance" or any other type of promotion which NBAP believes reflects
unfavorably upon the NBA or its Member Teams be approved. All copy and
material depicting or using the Licensed Marks or Licensed Attributes
(including display and promotional material, catalogs and press
releases) shall be submitted for approval well in advance of
production (but in no event less than ten (10) business days prior to
the start of commercial production) to allow adequate time for NBAP,
in its sole discretion, to approve, disapprove or comment upon such
materials and for any required changes to be made. By way of example,
no television or cinema advertising containing any Licensed Mark or
licensed Attribute may be used unless it has been approved in all
stages (i.e., creative concept, script, storyboard, production
"rough-cut" and final version). Unless otherwise approved by NBAP, any
NBA Photo or NBA game action footage that LICENSEE uses in connection
with the Licensed Products must be obtained from NBAE and shall be
subject to NBAE's prevailing search and edit charges for NBAE
licensees and NBAP's cost of providing such footage. Any promotional
material submitted that is not approved or disapproved in writing by
NBAP within ten (10) days of its receipt by NBAP shall be deemed
approved by NBAP. In the event of a disapproval, NBAP shall set forth
in writing the reasons therefore with reasonable specificity.
11. DISTRIBUTION; COMPLIANCE
(a) Distribution: LICENSEE shall use commercially reasonable
efforts to distribute and sell, within and throughout the
Territory, the Licensed Products in such manner as may be
required to meet competition by reputable manufacturers of
similar articles. LICENSEE shall make and maintain adequate
arrangements for the distribution and timely delivery of
Licensed Products to retailers within and throughout the
Territory. In the event NBAP advises a particular LICENSEE
that a special promotional effort is to take place in an
individual store or chain in a region in which it has
distribution rights, such LICENSEE shall use commercially
reasonable efforts to sell its Licensed Products to said
store or chain. In addition, each LICENSEE shall give the
Licensed Products wide distribution and
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shall not, in accordance with the selling practices set forth
in this Agreement, refrain for any reason from selling
Licensed Products to any retail outlet within its Territory
that may desire to purchase Licensed Products and whose
credit rating, marketing image and past experience with
LICENSEE, if any, warrants such sale.
(b) Third Party Contributors: If a LICENSEE desires to use a
third party manufacture or distributor (each, a "Third Party
Contributor") in connection with the manufacturing of all or
any part of, or the distribution of, any Licensed Product,
such LICENSEE must first notify NBAP of the name and address
of such proposed Third Party Contributor and of the Licensed
Product LICENSEE desires such Third Party Contributor to
manufacture or distribute. NBAP shall have the right, in its
sole discretion, to withhold approval of any proposed Third
Party Contributor and may predicate its approval on any terms
or conditions NBAP shall determine in its sole discretion.
LICENSEE may not use a Third Party Contributor in connection
with the manufacture of all or any part of, or the
distribution of, any Licensed Product prior to receiving such
approval from NBAP. If any of LICENSEE's Third Party
Contributors uses the Licensed Marks or Licensed Attributes
for any unauthorized purpose, LICENSEE shall cooperate fully
with NBAP in stopping, such unauthorized use. Attached as
Schedule A is a true and complete list of all Third Party
Contributors currently authorized by NBAP as of the date of
execution of this Agreement. Any change by a LICENSEE from a
Third Party Contributor previously approved by NBAP shall
require approval in accordance with this Paragraph.
(c) Counterfeit, Diverted and Parallel Goods: LICENSEE
understands and acknowledges the meanings of "Counterfeit
Goods," "Diverted Goods" and "Parallel Goods" as set forth in
Paragraph 1 above and LICENSEE shall not authorize or
knowingly permit the creation of any such goods by its
employees, agents, representatives or any others operating
under its direction, supervision or control and involving the
NBA Marks. LICENSEE shall stamp on all invoices, and shall
require its own affiliated distributor to stamp on its
invoices, a prominent legend that states that the Licensed
Products are allowed to be sold only within the Territory. In
the event NBAP has good cause to believe that any of
LICENSEE's authorized distributors, agents and customers are
not observing territorial limits, LICENSEE shall, at the
request of NBAP, inquire as to whether such party or parties
are observing territorial limits and shall report in writing
to NBAP the results of such inquiries. LICENSEE shall notify
NBAP of all orders from, or on behalf of, a customer who
LICENSEE knows is located outside the Territory or has good
cause to believe intends to resell the Licensed Products
outside the Territory. If LICENSEE sells Licensed Product
outside the Territory, or to a customer that it knows to
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<PAGE>
be reselling the Licensed Product outside the Territory,
LICENSEE shall pay all NBAP's costs and expenses, including
attorney's fees, required to remove such goods from the
marketplace. Such right of reimbursement shall be in addition
to, and not in lieu of, such other rights and relief
(including injunctive relief) as may be available to NBAP.
(d) Selling, Distributing and Reporting: In the event any
LICENSEE sells or distributes other sports-related licensed
merchandise of a similar grade or quality as the Licensed
Products, but which do not bear any of the Licensed Marks, it
will not discriminate, in a manner which adversely impacts
the Licensed Products, in the granting of commissions and
discounts to salesmen, dealers and distributors between the
Licensed Products and the licensed products of any third
party. A LICENSEE may not package its Licensed Products in
combination with other of its products, whether similar or
different, without the prior written approval of NBAP which
shall not be unreasonably withheld. In the event a LICENSEE
has employed selling or reporting methods which circumvent or
reduce the royalty or other payment or reporting obligations
contained in this Agreement, NBAP may, in addition to any
other rights and remedies it may have, at its option and upon
fifteen (15) days' prior written notice, adjust the minimum
royalty per unit so that LICENSEE's payment or reporting
obligations are the same as if such practice had not been
employed.
(e) Shipping and Anti-Counterfeiting Compliance: Each LICENSEE
shall at all times conduct all aspects of its business in a
fair and reasonable manner and in compliance with all
shipment tracking, identification and anti-counterfeiting
systems and labels that NBAP may establish from time-to-time
and all applicable laws, government rules and regulations,
court and administrative decrees and the highest standard of
business ethics then prevailing in the industry.
(f) Conduct Requirements: LICENSEE represents and warrants to
NBAP that LICENSEE shall faithfully comply with and adhere
to, and LICENSEE shall take all steps necessary to ensure
that all Third Party Contributors shall faithfully comply
with and adhere to, all of the terms, provisions and policies
contained in this Agreement, the Code of Conduct and all
applicable United States and foreign laws, government rules
and regulations, court and administrative decrees and the
highest standard of business ethics then prevailing in the
industry with regard to the conduct of all aspects of
LICENSEE's (or any Third Party Contributor's) business and
the manufacture, distribution, sale, testing and use of all
Licensed Products (collectively, "Conduct Requirements").
NBAP and its authorized representatives shall have the right,
upon reasonable prior notice, to examine and audit LICENSEE
to ensure compliance with the
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<PAGE>
Conduct Requirements. LICENSEE shall allow NBAP access to any
of its premises and personnel at all reasonable times for the
purposes of such auditing. LICENSEE shall take all necessary
steps in negotiating contracts with Third Party Contributors
to provide NBAP and its authorized representatives with a
contractual right to audit such Third Party Contributors to
ensure compliance with the Conduct Requirements, including
the right of NBAP to have access to the premises and
personnel of any Third Party Contributor at all reasonable
times for the purposes of such auditing.
(g) Governmental Approvals: It shall be the sole responsibility
of each LICENSEE, at its sole expense, to obtain all
approvals (including, but not limited to, approvals of
advertising materials) of all governmental authorities which
may be necessary in connection with such LICENSEE's
performance under this Agreement.
(h) NBA Store: LICENSEE acknowledges that NBAP intends to offer
various NBA and/or Member Team-identified products for sale
in an NBAP-owned "showcase" retail store ("NBA Store").
LICENSEE further acknowledges that it will receive a variety
of tangible and intangible benefits as a result of having
merchandise manufactured by LICENSEE displayed, sold and
promoted at the NBA Store. Therefore, LICENSEE shall, in
addition to and in consideration for the license granted
under this Agreement and in consideration of the benefits it
will receive from having merchandise displayed, sold and
promoted at the NBA Store, (i) upon the request of NBAP,
perform contract manufacturing services for NBAP in
connection with the manufacture of products for sale in the
NBA Store on terms as mutually agreed upon by NBAP and
LICENSEE and (ii) offer Licensed Products to the NBA Store on
terms at least as favorable as those offered to LICENSEE's
most preferred high-volume customers, including price,
priority of delivery, discounts, cooperative or other
advertising and promotional allowances and other benefits
(regardless of volume).
12. RECORDS; AUDITS
LICENSEE shall keep accurate books of account and records covering all
transactions relating to the license granted in this Agreement
(including, but not limited to, sales of Licensed Products, purchases
and uses of NBA hologram stickers and compliance with shipment
tracking, identification and anti-counterfeiting systems and labels
that NBAP may establish from time to time). NBAP and its authorized
representatives shall have the right no more than once per year
without good cause, at all reasonable hours of the business day and
upon ten (10) days' notice, to examine and audit such books of account
and records and all other documents and materials in LICENSEE's
possession or under its control (including records of LICENSEE's
parents, subsidiaries, affiliates and third
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<PAGE>
parties if they are directly involved in activities which relate to
this Agreement) relating to this Agreement. NBAP shall have free and
full access for such purposes and for the purpose of making extracts
and copies. All such information shall be kept confidential in
accordance with Paragraph 22(f) hereof. Should an audit by NBAP
establish a deficiency between the amount found to be due NBAP and the
amount LICENSEE actually paid or reported, the LICENSEE shall pay the
amount of such deficiency, plus interest at the then current prime
rate (as announced by Chase Bank, New York branch) from the date such
amount should have been paid until the date of payment. Should such
audit establish a deficiency of more than five percent (5%) and
greater than five thousand dollars ($5,000) LICENSEE shall also pay
for the reasonable cost of the audit. LICENSEE shall pay such amount
within thirty (30) days. All such books of account and records shall
be kept available for at least two (2) years after the expiration or
termination of this Agreement, or three (3) years after the end of the
Contract Year to which they relate, whichever is earlier. In order to
facilitate inspection of its books and records, LICENSEE shall
designate a symbol or number which will be used exclusively in
connection with the Licensed Products on which royalty payments are
payable and shall maintain for inspection as provided in this
Agreement duplicates of all billings to customers with respect to
Licensed Products. LICENSEE shall, within ten (10) business days of
NBAP's request (which shall not be made more than four (4) times per
Contract Year), furnish NBAP with a list of LICENSEE's top twenty-five
(25) retail accounts for Licensed Products (on a country by country
basis) and their monthly purchases of Licensed Products (broken down
by unit sales and in dollar volume by retailer). LICENSEE shall,
promptly upon execution thereof, supply NBAP with true and complete
copies of any agreement it enters into with any Member Team or any NBA
player. In addition, LICENSEE shall, on a quarterly basis during the
Term, provide NBAP with copies of either (i) financial information
furnished to the United States Securities and Exchange Commission or
(ii) with all financial statements and other financial information
prepared by LICENSEE for distribution to its banks or other financial
lending institutions to whom it reports regularly. Such information,
to the extent not publicly available, shall be kept confidential in
accordance with Paragraph 22(f) hereof. At NBAP's request, LICENSEE
shall reasonably cooperate with NBAP in developing an electronic data
interchange, or developing such other system, that will facilitate
NBAP's review of LICENSEE's graphic designs for Licensed Products.
13. EARLY TERMINATION
Without prejudice to any other rights NBAP may have pursuant to this
Agreement or otherwise, NBAP shall have the right to terminate this
Agreement, or rights with respect to a particular LICENSEE where
appropriate, at any time if:
(a) LICENSEE shall fail to timely remit a royalty report or any
payment of any nature due to NBAP or any of its affiliates
when due and shall fail to
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<PAGE>
cure such delinquency and non-payment within thirty (30) days
(ten (10) days for other non-payment defaults) of its receipt
of written notice from NBAP; provided, however, that LICENSEE
shall not have the right to cure more than three (3)
delinquent submissions or payment defaults.
(b) LICENSEE or any guarantor under this Agreement shall be
unable to pay its liabilities when due, or shall. make any
assignment for the benefit of creditors, or under any
applicable law admits in writing its inability to meet the
obligations when due or commit any other act of bankruptcy,
institute voluntary proceedings in bankruptcy or insolvency
or permit institution of such proceedings against it.
(c) LICENSEE shall exhibit a pattern of failure to timely return
original NBA Photos to NBAP in accordance with the terms of
its Photo Use Form Agreement.
(d) LICENSEE shall fail to perform or shall be in breach of any
other term or condition of this Agreement; provided, however,
that if such breach can be cured, termination shall take
effect thirty (30) days after written notice of such breach
is sent by NBAP if such breach has not been cured during such
thirty (30) day period.
(e) LICENSEE now or in the future holds a license from NBAP
covering any other products or geographic area other than the
Territory and such license is terminated by NBAP.
(f) LICENSEE (i) delivers Licensed Products outside the territory
covered by any retail product license agreement in effect
during the Term between NBAP and LICENSEE; (ii) sells
Licensed Products to a third party who LICENSEE knows,
intends to deliver the Licensed Products outside the
Territory; or (iii) LICENSEE is in breach of Paragraph 11(c).
(g) LICENSEE sells to any third party that LICENSEE knows is
altering or modifying the Licensed Products prior to sale to
the ultimate consumer.
(h) LICENSEE is in breach of Paragraphs 11(b) or 11(f).
In addition to NBAP's other rights and remedies, upon termination of
this Agreement under this Paragraph LICENSEE shall pay NBAP (within
thirty (30) days of such termination) the Minimum Guarantees for each
Licensed Product through the end of the Agreement, less the royalties
paid to NBAP through the date of termination.
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<PAGE>
14. DISPOSAL OF STOCK; EFFECT OF TERMINATION
Within seven (7) months following the initial release of each series
of Licensed Product, except as otherwise approved by NBAP in writing,
LICENSEE shall destroy printing plates and any such Licensed Product
on hand. In the alternative, LICENSEE may sell or resell such Licensed
Product with NBAP's permission, not to be unreasonably withheld.
LICENSEE shall be entitled to retain for its purposes up to one
hundred (100) cases of each Licensed Product each Contract Year. Any
Licensed Product returned after seven (7) months of its initial ship
date shall be destroyed within ninety (90) days of receipt by
LICENSEE. In the alternative, LICENSEE may sell or resell such
Licensed Product with NBAP's permission, not to be unreasonably
withheld. Upon request, LICENSEE shall provide NBAP with evidence of
the destruction of such product or components. Upon expiration (but
not termination except with the prior approval of NBAP which shall not
be unreasonably withheld if such termination is unrelated to
LICENSEE's breach of Paragraphs 3,7,9 or 11(c) above), any Licensed
Product on hand at the end of the sell-off period or subsequently
returned to LICENSEE (or unfinished components of Licensed Products)
shall be destroyed by LICENSEE at its cost, no later than thirty (30)
days thereafter.
15. EQUITABLE RELIEF
LICENSEE acknowledges that NBAP is entering into this Agreement not
only in consideration of the royalties to be paid, but also for the
promotional value and intrinsic benefit resulting from the
manufacture, advertisement, distribution, sale and promotion of the
Licensed Products by LICENSEE in the Territory. LICENSEE acknowledges
that the Licensed Marks and Player Attributes possess a special,
unique and extraordinary character which makes difficult the
assessment of the monetary damage which NBAP would sustain as a result
of the unauthorized use thereof. LICENSEE further acknowledges that
the unauthorized use of the Licensed Marks or Licensed Attributes
having a material adverse effect on the NBA Marks or Player
Attributes, will, in either case, cause immediate and irreparable
damage to NBAP for which NBAP would not have an adequate remedy at
law. Therefore, LICENSEE agrees that, in the event of a breach of this
Agreement by LICENSEE, in addition to such other legal and equitable
rights and remedies as shall be available to NBAP, NBAP shall be
entitled to seek injunctive and other equitable relief, without the
necessity of proving special damages or furnishing a bond or other
security unless so ordered by the Court.
16. NOTICES
All notices and statements to be given and all payments to be made
under this Agreement shall be given or made at the respective address
of the parties as set forth above, unless notification of a change of
address is given in writing. Any notice of breach or default must be
in writing and sent by facsimile or express
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<PAGE>
delivery properly addressed. Any written notice shall be deemed to
have been given at the time it is confirmed received, if sent by
facsimile, or next business day if sent by express delivery.
17. NO JOINT VENTURE
Nothing in this Agreement shall be construed to place the parties in
the relationship of partners or joint venturers. Neither party shall
have the power to obligate or bind the other to a third party in any
manner whatsoever.
18. ARBITRATION OF CERTAIN MATTERS
Any dispute or disagreement between the parties relating solely to the
amount of royalty payments owing under this Agreement shall be settled
by arbitration in New York City under the rules then in effect of the
American Arbitration Association. Judgment upon the award may be
entered in any court having jurisdiction. No other dispute or
disagreement between the parties (including any claim by NBAP that
LICENSEE is using the Licensed Marks in a manner not authorized by
this Agreement or is otherwise in breach of this Agreement) shall be
settled by arbitration. All decisions by NBAP relating to disapproval
of any Licensed Product or advertising, promotion or display material
shall be final and binding on LICENSEE and shall not be subject to
review in any proceeding except in the event LICENSEE claims that NBAP
has used the approval process to frustrate the purpose of this
Agreement.
19. USE OF PLAYERS
(a) LICENSEE acknowledges that this Agreement does not grant to
LICENSEE any licenses or rights with respect to the use of
Player Attributes except on Licensed Product as expressly
provided herein and in advertising and promotional materials
specifically approved by NBAP. The license granted under this
Agreement does not include, and shall not be used to imply, a
testimonial or endorsement of any Licensed Products by any
NBA player. LICENSEE shall not use Player Attributes in any
manner that is a testimonial or endorsement without first
obtaining written authorization from the subject player(s)
("Endorsement Rights"). LICENSEE shall not enter into any
agreement with any NBA player or any other person which would
require that player or other person to wear any
LICENSEE-identified item in or at any NBA game, competition
or event (either courtside or in any locker room) or at
practice.
(b) LICENSEE may enter into an "exclusive" Endorsement Rights
agreement with a current NBA player but acknowledges that,
notwithstanding any such exclusivity, under the group license
agreement between NBAP and the National Basketball Players
Association (the "Group License"), such player has no right
to "opt-out" with respect to the trading card category.
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<PAGE>
Accordingly, LICENSEE further acknowledges that NBAP shall
continue to license to other trading card manufacturers the
right to use the Licensed Attributes of such player.
Notwithstanding the foregoing, NBAP shall not permit any
other trading card manufacturer to use the Licensed
Attributes of any player for whom LICENSEE has secured
Endorsement Rights in any manner that is a testimonial or
endorsement of such other manufacturer's product (e.g., use
with greater prominence than other players depicted in the
materials submitted to NBAP for approval).
(c) In the event any current NBA player retires or becomes
inactive, or enters into an exclusive license agreement with
respect to an "opt-out" category of products that conflicts
with the rights granted hereunder, upon receipt of written
notice from NBAP that such a player has become inactive, or
entered into a conflicting exclusive license agreement,
LICENSEE shall cease and/or cause to cease the use of such
player's Licensed Attributes in the manufacture,
distribution, advertisement, promotion and sale of any
applicable Licensed Product within seventy (70) days of
receipt of NBAP's notice, said seventy (70) day period being
commensurate with the sell-off period provided in the Group
License. In the event that a new Group License is entered
into during the Term and the sell-off period therein is
extended beyond seventy (70) days with respect to any product
category covered by this Agreement, NBA) agrees that the
sell-off period in this Paragraph 19(c) shall be similarly
extended.
20. WARRANTIES
Each party represents and warrants that it has the right and
authority to enter into and perform this Agreement and NBAP
represents and warrants that it has the right to grant the
rights to use the Licensed Marks and Licensed Attributes.
LICENSEE represents and warrants that all advertising and
promotional materials shall comply with all applicable laws,
regulations and standards. NBAP's approval of such materials
will not imply a representation or belief that NBAP believes
such materials are sufficient to meet applicable laws,
regulations and standards, nor shall it imply that NBAP
agrees with or supports any claims made by LICENSEE in any
advertising materials relating to the Licensed Products.
LICENSEE further represents and warrants that all advertising
and promotional materials and all graphics used on Licensed
Products (other than materials or properties supplied by
NBAP) will not violate the intellectual property rights of
any third party.
21. SEVERABILITY
In the event any provision of this Agreement is found to be
void, invalid or unenforceable as a result of any judicial or
administrative proceeding or decree,
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<PAGE>
this Agreement shall be construed and enforced as if such
provision were not contained in this Agreement.
22. MISCELLANEOUS
(a) Force Majeure: If in any country or region outside of North
America, either LICENSEE or NBAP shall have been prevented in
whole, or in part, from performing its obligations under this
Agreement as a result of war, insurrection, national
emergency, restrictions imposed by law, or "acts of God" (a
"Force Majeure"), then the performance of such party disabled
by said Force Majeure shall be suspended for the duration of
the Force Majeure or resultant period of disability (the
"Disability Period"); and provided that the disabled party
shall resume its affected performance as soon as possible
after the disability has been removed. However, if such Force
Majeure prevents performance for a period in excess of ninety
(90) days, either party may terminate this Agreement with
respect to the country or region affected by the Force
Majeure upon thirty (30) days' written notice served upon the
other party not later than ten (10) days after the elapse of
the 90-day Disability Period. In the event of a termination
pursuant to this Paragraph 23(a), NBAP and LICENSEE shall in
good faith confer with each other to negotiate with respect
to an equitable adjustment to LICENSEE's obligations
hereunder, including an appropriate adjustment in Minimum
Guarantees, or other appropriate adjustments to the
Agreement. If, after conferring in good faith for a
reasonable period of time, NBAP and LICENSEE are unable to
agree on the equitable adjustment, they shall jointly
designate a mutually acceptable person to determine the
equitable adjustment, and such person's determination shall
be final and binding on NBAP and LICENSEE and shall not be
subject to review in any proceeding. If NBAP and LICENSEE are
unable to designate such mutually acceptable person after a
reasonable period following their failure to agree on the
equitable adjustment, either party may request the President
of the Association of the Bar of the City of New York to make
such designation.
(b) Assignment: This Agreement and any rights granted under this
Agreement are personal to LICENSEE and shall not be assigned,
sublicensed, subcontracted or encumbered, directly or
indirectly, by law or by contract, without NBAP's prior
written consent (which shall not be unreasonably withheld
with respect to an affiliate or related company of LICENSEE
which is in the youth entertainment business), which consent
may, in NBAP's sole discretion (i) be contingent upon a fee
payable by LICENSEE or the transferee (except with respect to
an
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affiliated or related company of LICENSEE), the amount of
which shall be determined by NBAP in its sole discretion,
and/or (ii) impose other terms and conditions upon the
assignment, sublicense or transfer (except with respect to an
affiliated or related company directly or indirectly
wholly-owned by LICENSEE). Any transfer of a controlling
interest in LICENSEE or in any party which currently controls
LICENSEE, directly or indirectly, shall be deemed an
assignment prohibited by the preceding sentence. Any
nonconsensual assignment, sublicense, subcontract or
encumbrance of this Agreement by LICENSEE shall be invalid
and of no force or effect. Upon any such nonconsensual
assignment, sublicense or encumbrance, this Agreement shall
terminate, all payment obligations of LICENSEE hereunder
shall be accelerated and immediately due and payable, and all
rights granted under this Agreement shall immediately revert
to NBAP.
(c) Waiver: None of the provisions of this Agreement can be
waived or modified except expressly by a writing signed by
both parties. There are no representations, promises,
agreements, warranties, covenants or undertakings by either
party other than those contained in this Agreement. No
failure on the part of NBAP to exercise any right under this
Agreement shall operate as a waiver of such right, nor shall
any single or partial exercise of any right preclude any
other or further exercise or the exercise of any other
rights.
(d) Survival: No expiration or termination of this Agreement
shall relieve LICENSEE of its obligation to pay NBAP any
amounts due to NBAP at the time of termination, regardless of
whether these amounts are then or thereafter payable. The
provisions of Paragraphs 12 and 23(f) shall survive the
expiration or termination of this Agreement.
(e) Governing Law and Jurisdiction: This Agreement shall be
construed in accordance with the laws of the State of New
York, USA, without regard to its principles of conflicts of
laws. Any claim arising under this Agreement (except as
provided under Paragraph 18) shall be prosecuted in a federal
or state court of competent jurisdiction located within the
City of New York, USA and LICENSEE consents to the
jurisdiction of such court and to the service of process by
mail.
(f) Confidentiality: Neither party shall (nor shall they permit
or cause their employees or agents to) divulge, disseminate
or publicize information relating to this Agreement or the
financial or other terms of this Agreement (including any
information on the specifications or methods of reproduction
of the Licensed Marks) or information exchanged between the
parties hereunder to any third party (other than their
respective attorneys or accountants or the NBA Board of
Governors), except as may be required by law or to fulfill
the terms of this Agreement.
(g) Construction: This Agreement has been executed in a text
using the English language, which text shall be controlling.
This Agreement
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<PAGE>
together with any exhibits or attachments, constitutes the
entire agreement and understanding between the parties and
cancels, terminates and supersedes any prior agreement or
understanding relating to the subject matter of this
Agreement between LICENSEE and the NBA, any Member Team, NBAP
or NBAE. The headings in the Agreement are for reference
purposes only and shall not affect the interpretation of this
Agreement. This Agreement shall not be binding on NBAP until
signed on its behalf by its President or Senior Vice
President, Business Affairs.
* * *
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<PAGE>
SCHEDULE A
Third Party Contributors:
[Information to be provided by LICENSEE]
<PAGE>
EXHIBIT A
NBA PROPERTIES, INC.
LICENSEE AND SUPPLIER CODE OF CONDUCT
The NBA's mission is to be the most respected and successful sports league and
sports marketing organization in the world. In keeping with this mission, NBA
Properties, Inc. ("NBAP") is committed to conducting its business in a socially
responsible and ethical manner. We expect all NBAP licensees, including their
contractors, engaged in the manufacture and sourcing of products bearing NBA,
WNBA, USA Basketball and NBC trademarks (collectively "Product Suppliers") to
share this commitment. At a minimum, all Product Suppliers must adhere to the
following Licensee and Supplier Code of Conduct:
1. ETHICAL STANDARDS
Product Suppliers shall conduct their businesses in accordance with
the highest standards of ethical behavior.
2. COMPLIANCE WITH APPLICABLE LAWS
Product suppliers shall comply with all applicable laws and
regulations of the countries, states and localities in which they
operate.
3. EMPLOYMENT PRACTICES
NBAP will only do business with Product Suppliers whose employees are
appropriately compensated, present at work voluntarily, not at undue
risk of physical harm and not exploited in any way. In addition,
Product Suppliers must comply with the following specific standards:
o WAGES AND BENEFITS: Product Suppliers shall provide wages,
overtime compensation and benefits at not less than the
minimum levels required by applicable laws and regulations or
the prevailing local industry levels, if higher.
o WORKING HOURS: Product Suppliers shall, at a minimum, comply
with all applicable working hours laws and regulations.
Except in unusual business circumstances, employees shall not
be required to work more than the lesser of (a) 48 hours per
week and 12 hours of overtime or (b) the limits on regular
and overtime hours allowed by local law or, where local law
does not limit the hours of work, the regular work week in
such locality plus 12 hours of overtime. In addition, except
in unusual business circumstances, employees shall be
entitled to at least one day off in every seven-day period.
o CHILD LABOR: Product Suppliers shall not employ any person
under the age of 15 (or 14 where allowed by local law) or
under the local age for completing compulsory education, if
higher.
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<PAGE>
o FORCED LABOR: Product Suppliers shall not use any forced
labor, whether in the form of prison labor, indentured labor,
bonded labor or otherwise.
o HARASSMENT OR ABUSE: Product Suppliers shall treat each
employee with dignity and respect, and shall not use corporal
punishment, threats of violence or other forms of physical,
sexual, psychological or verbal harassment or abuse.
o NONDISCRIMINATION: Product Suppliers shall not discriminate
in employment practices on the basis of race, religion, age,
nationality, social or ethnic origin, gender, sexual
orientation, political opinion or disability.
o FREEDOM OF ASSOCIATION: Product Suppliers shall recognize
and respect the right of employees to join organizations of
their own choosing and shall neither threaten nor penalize
employees for their efforts to organize or bargain
collectively.
o HEALTH AND SAFETY: Product Suppliers shall provide employees
with a safe and healthy working environment. Manufacturing
facilities shall, at a minimum, contain clean restrooms,
potable water, adequate lighting, adequate ventilation and
fire exits. Residential facilities, if provided, shall also
be kept sanitary and safe.
4. ENVIRONMENTAL REQUIREMENTS
Product Suppliers shall comply with all applicable environmental laws
and regulations.
5. COMMUNICATION
Product Suppliers shall take appropriate steps to ensure that the
provisions of this Code are communicated to employees, including the
prominent posting of the Code (in the local language) in their
manufacturing facilities.
6. MONITORING AND COMPLIANCE
Product Suppliers shall conduct periodic audits of manufacturing
facilities, on the basis of which they shall certify to NBAP on
request either that (a) all products bearing NBA, WNBA, USA Basketball
and NBC trademarks have been manufactured in compliance with this
Code, or (b) identified facilities have been found not to be in
compliance with this Code, in which event the Product Supplier shall
specify appropriate and effective steps to remedy the non-compliance.
NBAP or its representatives are authorized to engage in monitoring
activities to confirm compliance with this Code, including on-site
inspections of manufacturing facilities and residential facilities,
audits of records relating to employment matters and private
interviews with employees at all levels. Product Suppliers shall
retain and make available to NBAP or its representatives, either on
site or at agreed upon locations, all documentation that may be
required to assess whether or not the Product Supplier is in
compliance with this Code.
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<PAGE>
7. FAILURE TO COMPLY
NBAP reserves the right, in addition to all other legal and
contractual rights, to terminate its relationship with any Product
Supplier found to be in violation of this Code.
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Marvel Entertainment Group, Inc. Condensed Consolidated Balance Sheets
and Statements of Operations.
</LEGEND>
<CIK> 0000874808
<NAME> MARVEL ENTERTAINMENT GROUP, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 23
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0
0
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