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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS
13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 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)
Registrant's telephone number, including area code: 212-696-0808
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
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 .
Based upon a review of Schedule 13Ds filed with the Securities and Exchange
Commission, the aggregate market value of the issued and outstanding shares of
Common Stock of the registrant held by non-affiliates was $12,081,812 based on
the closing price of the Company's Common Stock on March 27, 1998. As of March
27, 1998, there were 101,809,657 shares of the registrant's Common Stock, par
value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement for its 1998 annual
meeting of stockholders is incorporated by reference into Part III of this
Form 10-K. If such proxy is not so filed, such information will be filed as an
amendment to this Form 10-K.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
GENERAL
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"). The filing by the Debtor Companies of their voluntary
petitions for reorganization operated as an automatic stay against the
commencement or continuation of any judicial, administrative or other
proceedings against the Debtor Companies, any act to obtain possession of
property of or from the Debtor Companies, or any act to create, perfect or
enforce any lien against property of the Debtor Companies, with certain
exceptions under the Bankruptcy Code. Consequently, the Debtor Companies'
creditors are prohibited from attempting to collect pre-petition debts without
the consent of the Bankruptcy Court. Any creditor may seek relief from the
automatic stay and, if applicable, enforce a lien against any security, if
authorized to do so by the Bankruptcy Court. Pursuant to the provisions of the
Bankruptcy Code, liabilities arising prior to the filing of the petition under
chapter 11 of the Bankruptcy Code may not be paid without prior approval of
the 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. Accordingly, the Marvel Cases are
being heard in the District Court.
On December 22, 1997, a chapter 11 trustee (the "Chapter 11 Trustee")
was appointed by the District Court to oversee the operations of the Debtor
Companies.
The Company is a leading creator, publisher and distributor of youth
entertainment products for domestic and international markets which are
primarily based on fictional action adventure characters owned by the Company
(the "Marvel Characters"), 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 operations consist of (i) the publication and sale of
comic books and other children's publications, (ii) consumer products, media
advertising, promotions and licensing of Marvel Characters, (iii) the
marketing and distribution of sports and entertainment trading cards and
activity sticker collections, and (iv) the manufacture and distribution of
adhesives and confectionery products.
REORGANIZATION
Operating Companies
Marvel Parent Holdings, Inc. ("Marvel Parent") was an indirect wholly
owned subsidiary of Andrews Group Incorporated ("Andrews Group"), a wholly
owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"),
a corporation wholly owned through Mafco Holdings Inc. ("Mafco", and together
with MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman. As of
December 31, 1996, Mafco beneficially owned approximately 81.2% of the Common
Stock of the Company. As more fully discussed below, bankruptcy proceedings
commenced under chapter 11 by Marvel Parent and its affiliates have resulted
in the loss of control of Marvel by such entities. See "Reorganization-Holding
Companies."
The Company experienced significant operating losses during 1995 and
1996, and failed to satisfy certain financial covenants contained in the
Credit Agreements (as defined below and see Note 5 of Notes to the
Consolidated Financial Statements) beginning in the fall of 1996. The Company
commenced discussions in the fall of 1996 with Andrews Group, its then
indirect parent, regarding an equity infusion in order to provide for the
Company's cash requirements and with The Chase Manhattan Bank, agent bank for
the Credit Agreements, regarding a restructuring of the Credit Agreements.
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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. 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, Inc. ("Toy Biz"), an affiliate of Marvel,
as well as certain other inactive subsidiaries, did not file petitions under
the Bankruptcy Code.
As part of the first day order in the Marvel Cases, the Debtor
Companies received approval from the Bankruptcy Court to pay on time and in
full undisputed pre-petition obligations including salaries, wages and
benefits to all of its employees, debts due to its trade creditors and
independent contractors and to continue funding its strategic initiatives. As
discussed below, the unsecured creditors committee has applied for an order
vacating the first day order. In January 1998, the Debtor Companies ceased
making payments on pre-petition obligations.
On January 24, 1997 the Bankruptcy Court approved a $100 million
debtor-in-possession financing facility (the "DIP Loan"), which was provided
by a syndicate of lenders, including The Chase Manhattan Bank, as agent bank
(the "DIP Lenders"). As of December 31, 1997, the current outstanding debt
under this facility was $91.2 million. The DIP Loan matured on June 30, 1997
and no repayment has occurred except for $3.0 million, the cash resulting from
the sale of a portion of the Company's confectionery business in August 1997,
and the current payment of interest and related administrative fees. The DIP
Lenders have agreed to forbear from taking any action. Such forbearance is
continuing on a daily basis. In connection with the appointment of the Chapter
11 Trustee for the Company as more fully discussed herein, The Chase Manhattan
Bank has advised the Company that it is willing to lead a syndicate to make
loans to Marvel subject to execution of definitive documentation and agreement
on key terms. The Chapter 11 Trustee has not determined that such additional
financing is necessary. In any event, District Court approval is required for
such additional loans to the Debtor Companies and there can be no assurance
such approval would be granted by the court.
On February 12, 1997, the Office of the United States Trustee
appointed a committee of equity security holders of the Debtor Companies under
Section 1102(a)(1) of the Bankruptcy Code (the "Equity Committee"). As of the
date hereof, the Equity Committee consists of: Karen Nagel, Esq., Marty
Solomon, Peter E. Kelly, Jr., Gladys V. Veidemanis and Ronald Cantor.
On October 22, 1997, the Office of the United States Trustee
appointed a committee of unsecured creditors of the Debtor Companies. As of
the date hereof, such committee is comprised of: James E. Ladd, Jr., Standard
Folding Cartons, Inc., Frank J. O'Connell, Scott M. Rosenberg and Snyder
Ventures, Inc. The unsecured creditors committee has 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. As of the date hereof, no
hearing has occurred as of yet on this motion and none is scheduled by the
District Court. Nevertheless, the Debtor Companies have 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.
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 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.
The Chapter 11 Trustee has all of the powers of management and the
Board of Directors 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.
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Plans of Reorganization
On December 27, 1996, Marvel filed a Plan of Reorganization (as
amended, the "Initial Plan") which contemplated that pursuant to a stock
purchase agreement dated December 26, 1996, between Andrews Group and Marvel,
Andrews Group, or an affiliate thereof, would acquire from Marvel a number of
shares of common stock (or its equivalent) that would represent 80.1% of the
shares of a reorganized Marvel after giving effect to such acquisition, in
consideration for $365 million in cash or, at the option of Andrews Group,
shares of Class A Common Stock of Toy Biz, or a combination of the foregoing
(the "Andrews Investment"). The Initial Plan contemplated that in connection
with the Andrews Investment, the Company would acquire the Class A Common
Stock of Toy Biz not owned by Marvel, Andrews Group or their affiliates
pursuant to various agreements with the principal stockholders of Toy Biz.
On March 7, 1997, Andrews Group exercised its right to terminate the
stock purchase agreement with the Company. On the same date, Andrews Group
informed Toy Biz and the two principal stockholders of Toy Biz (other than the
Company) that, as a result of the termination of the Andrews Investment, a
condition to closing under the agreements that provided for the purchase of
the Class A Common Stock of Toy Biz would not be satisfied, that Andrews Group
did not intend to waive the satisfaction of such condition and therefore the
transaction contemplated by such agreements would not be consummated. As a
consequence of the termination of the stock purchase agreement and the Andrews
Investment, the Initial Plan was withdrawn.
On July 10, 1997 it was announced that Marvel, High River Limited
Partnership ("High River"), Westgate International, L.P. ("Westgate"), Toy
Biz, Isaac Perlmutter, Avi Arad and The Chase Manhattan Bank had reached
agreement in principle on certain key economic terms relating to the Marvel
Cases. The agreement in principle provided that, pursuant to a plan of
reorganization (the "July Proposal") to be proposed by the Company, Marvel and
Toy Biz would be combined in a transaction in which the stockholders of Toy
Biz (other than the Company) would have received, in exchange for their Toy
Biz shares, 49% of the outstanding shares of common stock of the Company, as
reorganized.
Additionally, pursuant to the July Proposal, the currently
outstanding shares of Marvel common stock, par value $.01 per share (the
"Common Stock"), would have been canceled and Marvel's equity holders
(including the holders of certain notes issued by the Holding Companies) would
have been offered rights to purchase on a pro rata basis: (1) new shares equal
to 51% of outstanding common stock of the reorganized company for an aggregate
price of $170.0 million and (2) $225.0 million of new debt securities of the
reorganized company. High River and Westgate would have appointed a majority
of the board of directors of the reorganized company. High River and Westgate
were to have purchased all of the pre-petition and post-petition claims and
liens of the secured lenders of the Company, except for certain debt of Panini
and Fleer/Sky Box, and the proceeds of the rights offering would have been
used to retire all of the bank claims so acquired by High River and Westgate.
Consummation of the July Proposal was subject to: (1) negotiation and
execution of definitive documentation regarding the agreement; (2) approvals
of the Boards of Directors of Marvel and Toy Biz; (3) approval by holders of
at least 67% in principal amount and 51% in number of secured lender claims
(other than secured lender claims against Panini); and (4) approval of the
Bankruptcy Court. The parties, however, could not reach agreement on
definitive documentation and as a result, the July Proposal was terminated.
On September 29, 1997, it was announced that Marvel had reached an
agreement with its primary lenders, led by The Chase Manhattan Bank, that
would allow it to emerge from bankruptcy protection. High River and Westgate
had agreed to purchase pre-petition and post-petition bank claims from lenders
in exchange for $385.0 million in cash and the transfer by Marvel of the
common stock of Panini owned by Marvel. High River and Westgate funded an
escrow account in the amount of $385.0 million in order to consummate the
agreement. The agreement however, was subject to approvals from at least 67%
in principal amount and a majority in number of members of the bank syndicate,
as well as the Bankruptcy Court. On October 8, 1997, The Chase Manhattan Bank
advised Marvel that although a majority in number of the bank lenders had
approved the agreement, less than the required 67% in principal amount of the
bank debt had approved the agreement and, accordingly, the $385.0 million
deposit was returned to High River and Westgate and the agreement in principle
was terminated.
In September 1997, prior to the appointment of the Chapter 11
Trustee, the Company, as debtor-in-possession, filed a plan of reorganization
with the Bankruptcy Court. The Court has not set a date for a confirmation
hearing on this plan and the Company has indicated that it will not proceed
with this plan given the appointment of the Chapter 11 Trustee.
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On October 7, 1997, Toy Biz announced an unsolicited merger proposal
for Marvel (the "Toy Biz Plan"). Under the Toy Biz Plan, shares of Toy Biz
common stock would convert into equal number of shares of common stock in the
combined company, giving Toy Biz stockholders (other than Marvel) an ownership
interest of approximately 41% in the combined company. Marvel's senior secured
creditors and DIP Lenders would receive approximately $230.0 million in cash
from new borrowings and Marvel's senior secured creditors would also receive
common and convertible preferred stock, giving them a 40% ownership interest
in the combined company. The Toy Biz Plan also provides for new investors to
purchase $90.0 million in convertible preferred stock, giving them an
ownership interest of approximately 19% in the combined company.
Under the Toy Biz Plan, unsecured creditors of the Company will
receive, on a pro rata basis, a cash distribution of 15% of the amount of the
allowed unsecured claims plus $2.0 million, up to a maximum of $8.0 million.
In addition, unsecured creditors of the Company would receive warrants to
purchase up to 1.75 million shares of common stock in the combined Toy
Biz/Marvel company. The warrants would have a four-year term and would be
exercisable at a price of $17.25 per share. Furthermore, shareholders in the
Company would receive warrants to purchase up to 4 million shares of common
stock in the combined company for 6 months following consummation of the Toy
Biz Plan at an exercise price of $15.00 per share. Finally, holders of allowed
unsecured claims would be entitled to receive distributions from any recovery
on certain litigation. The Toy Biz Plan is subject to confirmation by the
District Court and the approval of the senior secured creditors of the
Company, who have agreed to support this plan. There can be no assurance that
the Toy Biz Plan will be confirmed.
On March 13, 1998, the District Court approved the disclosure
statement for the Toy Biz Plan. The District Court had set May 4th and 5th,
1998, as the dates for a confirmation hearing for the proposed Toy Biz Plan.
On April 13, 1998, the United States Court of Appeals for the Third Circuit
issued an order granting a motion to expedite the appeal of a March 30, 1998
decision by the District Court regarding the Company's voting control over Toy
Biz. Pending the expedited determination of this appeal, the order also stayed
the effectiveness of the District Court's decision and the hearing scheduled
for May 4, 1998 for confirmation of the Toy Biz Plan. The Chapter 11 Trustee,
management of Toy Biz and the secured lenders of the Company are currently in
negotiations attempting to settle the claims that are the subject of the
appeal as well as other matters. There can be no assurance that such
negotiations will be successful and that such claims will be settled.
In addition to the Toy Biz Plan, the Company has received preliminary
indications of interest from third parties to purchase the Company or all or
part of the Company's assets. As of this date, the Company cannot predict
whether any of these indications of interest will result in a more formal
offer to purchase any or all of the Company or its assets, nor can the Company
determine whether any such indications of interest will result in offers
superior to the Toy Biz Plan. Several third parties have conducted due
diligence reviews with respect to the Company. The Chapter 11 Trustee has
retained the services of an investment banking firm to assist him in this
process.
There can be no assurance that any plan of reorganization, including
the Toy Biz Plan, will be confirmed under the Bankruptcy Code.
If the Company is unable to obtain confirmation of a 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.
Holding Companies
Based upon Schedule 13Ds and amendments thereto filed with the
Securities and Exchange Commission (the "SEC"), as of June 25, 1997, Marvel
Holdings, Inc. ("Holdings"), was the beneficial owner of 50,932,167 shares of
Marvel Common Stock of Marvel, or 50.03%. Holdings is a wholly owned
subsidiary of Marvel Parent which, in turn is a wholly owned subsidiary of
Marvel III Holdings, Inc. ("Marvel III", and collectively with Holdings and
Marvel Parent, the "Holding Companies"). Based upon Schedule 13Ds and
amendments thereto filed with the SEC, as of April 28, 1997, Marvel Parent was
the beneficial owner of 29,302,326 shares of Common Stock of Marvel, or 28.8%.
Each of the Holding Companies has issued debt obligations
(collectively, the "Notes") pursuant to certain indentures (collectively, the
"Indentures"), which debt is secured, in part, by shares of Common Stock of
Marvel owned by such Holding Company. Approximately 77.3 million shares of
Common Stock of Marvel are pledged to secure the Notes. The debt issued by
Marvel Parent was additionally secured by 100% of the issued and outstanding
shares of common stock of Holdings ("Holding Stock").
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On December 27, 1996, the Holding Companies filed voluntary petitions
for relief under the Bankruptcy Code with the Bankruptcy Court. The chapter 11
cases commenced by the Holding Companies (the "Holding Cases") have not been
procedurally consolidated with the Marvel Cases and are not jointly
administered with the Marvel Cases. The filing by the Holding Companies of
voluntary petitions for reorganization operated as an automatic stay against
the commencement or continuation of any judicial, administrative or other
proceedings against the Holding Companies, any act to obtain possession of
property of or from the Holding Companies, or any act to create, perfect or
enforce any lien against property of the Holding Companies, with certain
exceptions under the Bankruptcy Code.
On January 9, 1997, the United States Trustee appointed an Official
Bondholder Committee (the "Bondholder Committee") to represent the interest of
all holders (collectively, the "Noteholders") of the Notes. The Bondholder
Committee is currently comprised of High River, Westgate, Schultz Investments,
WHERCO, Inc., M3, LLC and United Equities Commodities Company.
The commencement of the Holding Cases was an event of default under
each of the Indentures. On January 13, 1997, the Bondholder Committee filed a
motion (the "Lift Stay Motion") with the Bankruptcy Court seeking an order
lifting the automatic stay in the Holding Cases and thus permitting the
trustee under the Indentures (the "Indentures Trustee") to vote the shares of
stock pledged to secure repayment of the Notes, including (i) 100% of the
Holding Stock (ii) 100% of the stock of Marvel Parent and (iii) approximately
78.8% of the Marvel Common Stock (collectively, the "Pledged Stock"). On
January 13, 1997, The Bank of New York, then trustee under the Indentures,
joined in the Lift Stay Motion, and on January 30, 1997, LaSalle National Bank
(after its appointment as the successor trustee under the Indentures) also
joined in the Lift Stay Motion. On February 26, 1997, the Bankruptcy Court
entered an order granting the Lift Stay Motion and permitting the Bondholder
Committee and the Indentures Trustee, on behalf of the Noteholders, to vote
the Pledged Stock (the "Lift Stay Order"). On February 27, 1997, the Company
and the Holding Companies filed a notice of appeal with respect to such Lift
Stay Order.
On March 19, 1997, the Bondholders Committee notified the Company
that on March 25, 1997 it would cause the Indentures Trustee to vote the
Pledged Stock to replace the Board of Directors of Marvel. On March 24, 1997,
at the request of Marvel and its pre-petition bank lenders (the "Bank
Lenders"), the Bankruptcy Court issued a restraining order (the "Stay Order")
enjoining the Bondholder Committee and the Indentures Trustee from voting the
Pledged Stock or otherwise replacing the Board of Marvel without first seeking
and obtaining relief from the automatic stay imposed under the Bankruptcy Code
in the Marvel Cases. The Stay Order, however, did not prevent the holders of
the Notes issued by Marvel Parent from exercising voting power over the
Holding Stock for the purpose of removing and replacing the Board of Directors
of Holdings.
On April 24, 1997, the Indentures Trustee, at the direction of the
holder of a majority of the Notes issued by Marvel Parent, removed the members
of the Board of Directors of Holdings and appointed Carl C. Icahn, Vincent J.
Intrieri and Robert J. Mitchell to the Holdings Board. As a result, Marvel was
no longer consolidated for federal income tax purpose with Mafco. As a result
of such tax deconsolidation, the Company will retain an allocated portion, if
any, of net operating loss carryforwards of the Mafco affiliated group. Such
allocation is not yet determinable. See Note 7 to the Notes to the
Consolidated Financial Statements.
Between March 24, 1997 and June 20, 1997, Marvel and the Bank Lenders
requested action by the Bankruptcy Court and the District Court seeking, among
other things, to prevent the Noteholders and Holdings from exercising voting
authority with respect to the shares of Common Stock of Marvel owned by
Holdings for the purpose of removing the existing Board of Directors of Marvel
and replacing it with the New Board (as defined below). At the same time, the
Bondholder Committee and Indentures Trustee also requested action by the
Bankruptcy Court and the District Court seeking to permit the Noteholders
and/or Holdings to exercise voting authority over such shares for such
purpose. Such litigation culminated in the issuance of an order by the
District Court vacating the Bankruptcy Court's Stay Lift Order effective as of
5:00 p.m. (New York time) on June 20, 1997. The effect of such order was to
permit Holdings, as a majority stockholder of Marvel, to vote such stock to
remove the existing Board of Directors of Marvel and replace it with a new
board of directors (the "New Board") which was comprised of the following
directors: Carl C. Icahn, Harold First, Charles K. MacDonald, Glen Adams, J.
Winston Fowlkes, III, Robert J. Mitchell, Jouko T. Tamminen, Vincent J.
Intrieri, and Michael J. Koblitz. Jouko T. Tamminen resigned from the Board of
Directors effective August 3, 1997. Additionally, the New Board by written
consent amended and modified Marvel's By-laws to provide that Marvel's Board
of Directors shall be composed of nine persons or such other number of persons
as may thereafter be fixed by Marvel's Board of Directors. As a result of the
replacement of the existing board with the New Board, Toy Biz has taken the
position that a change in control of Marvel occurred and that pursuant to the
provisions of the stockholder agreement between the Company, Toy Biz and
certain other stockholders of Toy Biz, the Company's shares of Toy Biz Class B
common stock
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automatically converted to Class A common stock of Toy Biz, reducing the
Company's voting control of Toy Biz from 78.4% to 26.6%. The Company disputes
Toy Biz's position and maintains that it continues to own Class B common stock
of Toy Biz. On March 30, 1998, the District Court issued an order in favor of
Toy Biz on this issue. The Company and other interested parties have filed an
appeal of this determination to the United States Court of Appeals for the
Third Circuit. The Chapter 11 Trustee, management of Toy Biz and the secured
lenders of the Company are currently in negotiations attempting to settle the
claims that are the subject of the appeal as well as other matters. There can
be no assurance that such negotiations will be successful and that such claims
will be settled.
On March 3, 1998, the District Court entered an order permitting the
distribution to the Noteholders of up to 12.5 million outstanding shares of
Common Stock of Marvel which were pledged to secure the Notes. Further, the
order authorized the sale by 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 of Marvel 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 of Marvel and the sale of approximately 400,000 additional shares of
Common Stock of Marvel currently held by Holdings to pay certain
administrative expenses.
PUBLISHING
COMICS
The Company is a leading creator and publisher of comic books in
North America and, through Panini, the Company publishes comic books in Italy,
the United Kingdom, France and Germany. The Company, through its licensing
agents, including Panini, also licenses the rights to publish its comic books
throughout the world.
The Company has been publishing comic books since 1939 and has
developed a roster of more than 3,500 Marvel Characters, including the
following popular Marvel Characters: SPIDER-MAN; X-MEN (including WOLVERINE,
NIGHTCRAWLER, COLOSSUS, STORM, CYCLOPS, ROGUE, BISHOP and GAMBIT); CAPTAIN
AMERICA; FANTASTIC FOUR (including MR. FANTASTIC, HUMAN TORCH, INVISIBLE WOMAN
and THING); INCREDIBLE HULK; THOR; SILVER SURFER; DAREDEVIL; IRON MAN; DR.
STRANGE and GHOST RIDER. The Company's Marvel SUPER HEROES exist in the
"MARVEL UNIVERSE," a fictitious universe which provides a unifying historical
and contextual background for the storylines. The Company's titles feature
classic Marvel SUPER HEROES and X-MEN, newly developed Marvel Characters, and
characters created by other entities and licensed to the Company.
In developing comic books, the Company targets particular age groups
or types of readers. The Marvel Characters such as X-MEN are aimed at the teen
market and currently the Company will begin targeting a new product for the 9
to 13 year-old demographic age group to be distributed in the mass market.
Established readership of the Company's comic books also extends to the 18 to
35 year-old age group.
The Company's approach to super heroes is a contemporary drama based
on real people with real problems. This enables the characters to evolve,
remain fresh, and, therefore, attract and retain new readers in each
succeeding generation. The "Marvel Universe" concept permits the Company to
use the popularity of its Marvel Characters to introduce a new character in an
existing Marvel SUPER HEROES or X-MEN comic or to develop more fully an
existing but lesser known character. In this manner, formerly lesser known
Marvel Characters such as THUNDERBOLTS and WOLVERINE have been developed and
are now popular characters in their own right and are featured in their own
monthly comic books. The "Marvel Universe" concept also allows the Company to
use its more popular characters to make "guest appearances" in the comic books
of lesser-known or newer characters to attempt to increase the circulation of
a particular issue or issues.
Market
The Company's primary target market for its comic books has been
teenagers and young adults in the 13 to 23 year old age group. In 1998 the
Company will introduce a new line of comic books that will be targeted to the
9 to 13 year-old group. There are two primary types of purchasers of the
Company's comic books. One is the traditional purchaser who buys comic books
like any other magazine. The other audience is the reader-saver who purchases
comic books, typically from a comic book specialty store, and maintains them
as part of a collection.
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Creative and Production Process
The Company's full-time editorial staff consists of an
editor-in-chief, creative director, art director and approximately 21 editors,
associate editors and assistant editors who oversee the quality and
consistency of the artwork and editorial copy and manage the production
schedule of each issue. The production of each issue requires the editors to
coordinate over a six to nine month period, the activities of a writer, a
pencil artist, an inker, a colorist and a printer. The majority of this work
is performed by third parties outside of the Company's premises.
The artists and writers include freelancers who generally are paid on
a per-page basis. They are eligible to receive incentives or royalties based
on the number of copies sold (net of returns) of the comics books in which
their work appears. The Company has entered into agreements with certain
artists and writers under which such persons have agreed to provide their
services to the Company on an exclusive basis, generally for a period of one
to three years. The financial terms of these agreements are competitive within
the industry and are consistent with current and expected levels of comic book
sales.
The creative process begins with the development of a story line.
From the established story line, the writer develops a character's actions and
motivations into a plot. After a writer has developed the plot, the pencil
artist translates it into an action-filled pictorial sequence of events. The
penciled story is returned to the writer who adds dialogue, indicating where
the balloons and captions should be placed. The completed dialogue and artwork
are forwarded to a letterer who letters the dialogue and captions in the
balloons. Next, an inker enhances the pencil artist's work in order to make
the drawing appear three-dimensional.
The artwork is then sent to a coloring artist. Typically using only
four colors in varying shades, the coloring artist uses overlays to create
over 100 different tones. This artwork is subcontracted to a color separator
who produces separations and sends the finished material to the printer.
Unaffiliated entities produce color separations and print all of the Company's
comic books. The Company currently uses several color separators and two
printers to produce its comic books.
Distribution
The Company's publications are distributed through three channels:
(i) to comic book specialty stores on a nonreturnable basis (the "direct
market"), (ii) to traditional retail outlets on a returnable basis (the
"retail returnable market") and (iii) on a subscription sales basis.
Net publishing revenues were $88.1 million, $103.1 million and $147.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Overall industry comic book sales declined in the past several years
primarily as a result of reduced readership, lower speculative purchases and
lower selling prices, which in turn caused a contraction in the number of
comic book specialty stores. The decrease in the overall comic book business
has resulted in a decrease in the number of, and has negatively affected the
financial condition of, the comic book specialty stores, which has further
negatively impacted the Company's net publishing revenues. The Company
believes that the contraction in the comic book industry has begun to show
some signs of stabilization. However, there can be no assurance that the
contraction will continue to stabilize.
For the year ended December 31, 1997, approximately 58% of net
publishing revenues were derived from sales to the direct market. In 1995 and
1996, the Company exclusively distributed its publications through Heroes
World, its wholly-owned subsidiary. In this time period, however, the comic
book direct market and the Company's sales in such market continued to
decline. In light of such declines and related inefficiencies at Heroes World,
in late 1996 the Company decided to close Heroes World and in April 1997, the
Company commenced distribution of its publications through an unaffiliated
entity to service specialty market retailers and direct market comic book
shops. The distribution agreement is for a term of 3 1/2 years and
automatically renews for succeeding one year periods unless terminated by
either party. Either party has the right to terminate upon the happening of
certain events.
The Company considers its relationship with its direct market
distributor to be good. However, this distributor is the sole-source provider
for the direct comic book market, and as a result, a termination of this
agreement would significantly disrupt the Company's publishing operations in
the short-term. In the event of a termination of this distribution agreement,
the Company would seek other means of distribution, including, but not limited
to, direct sales to dealers. The Company believes that the termination of the
current distribution agreement would not have a long-
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term material adverse effect on the Company. However, there can be no
assurance that such termination would not materially adversely affect the
Company or its consolidated financial condition or results of operations. The
Company has received a Civil Investigative Demand from the Antitrust Division
of the U.S. Department of Justice regarding an investigation into unreasonable
trade restraints and monopolization in comic book distribution and sales. See
"Legal Proceedings - Potential Litigation."
For the year ended December 31, 1997, approximately 34% of the
Company's net publishing revenues were derived from sales to the retail
returnable market. 24% of net publishing revenues were through three
unaffiliated distributors to the retail returnable market. The retail
returnable market consists of approximately 50,000 traditional periodical
retailers such as newsstands, convenience stores, drug stores, supermarkets,
mass merchandise and national bookstore chains. The distributors sell the
Company's publications to wholesalers, who in turn sell to the retail outlets.
However, as a result of the continued consolidation and bankruptcies of the
independent wholesalers, management anticipates costs may rise and has taken
certain actions to mitigate any negative effects of such increases on the
Company's publishing operations. The Company issues credit to these
distributors for unsold and returned copies. Distribution to national
bookstore chains is accomplished through a separate distributor. The Company
believes it could obtain comparable services from other distributors in the
retail returnable market should such replacement become necessary or
desirable.
For the year ended December 31, 1997, approximately 3% of the
Company's net publishing revenues were derived from subscription sales.
Subscription copies of the Company's publications are mailed for the Company
by an unaffiliated subscription fulfillment service.
For the year ended December 31, 1997, approximately 5% of the
Company's net publishing revenues were derived from advertising sales. In most
of the Company's comic publications, ten pages (three glossy cover pages and
seven inside pages) are allocated for advertising. The products advertised
include sports and entertainment trading cards, video games, role playing
games, movies, candy, cereals, toys, models and other consumer packaged goods.
The Company permits advertisers to advertise in a broad range of the Company's
comic publications which target specific groups of titles that have a younger
or older readership.
CONSUMER PRODUCTS, MEDIA AND ADVERTISING, PROMOTION AND LICENSING
The Company's consumer products, media and advertising-promotion
licensing operations relate to the licensing of or joint ventures involving
the Marvel Characters for use with (i) merchandise, (ii) promotions, (iii)
publishing, (iv) television and film, (v) on-line and interactive software and
(vi) restaurants, theme parks and site-based entertainment. The Company's
licensees sell the Company's character-based products through their normal
distribution channels and occasionally in specialty comic book stores. Marvel
Characters appear on hundreds of items, including shirts, shoes and a myriad
of other types of apparel, gifts, toys and games, software, housewares and
domestic items and consumer packaged goods. The Company generally receives a
percentage of wholesale sales as a royalty including a guarantee of minimum
royalties, and an advance against royalties upon execution of a license
agreement. In addition, the Company licenses the Marvel Characters for the
production of television programs and feature films and for use in theme
parks.
The Company, through its foreign agents, including Panini, also
enters into publishing license agreements with international publishers for
the publication of comic and non-comic books employing the Company's titles
and the Marvel Characters and third party titles and characters in
approximately 50 countries and 19 languages. The Company receives a percentage
of the publishers' revenues as a royalty. The Company also acts as an agent
for third party owners of characters seeking to obtain licensing opportunities
for their characters outside of the United States.
For the year ended December 31, 1997, the revenue from consumer
products, media and advertising-promotions licensing comprised 2.2% of the
Company's consolidated net revenues. The Company's licensing revenues have
been adversely affected by the bankruptcy proceedings of the Debtor Companies,
and the concern potential licensees have as to the future ownership of the
Company and the ability of Marvel to support its programs.
MARVEL STUDIOS
To enhance further the media exposure of the Marvel Characters, the
Company formed Marvel Studios, which is operated as a division of the Company.
The objective of Marvel Studios is to facilitate the release of live action
and animated feature films and television programming, and other media based
on the Marvel Characters in order to create greater consumer interest in the
Marvel Characters and related merchandise. The Company believes that any
feature
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film or television programming, theatrical productions or other media
and any advertising and promotion associated with such media will create
consumer interest in the Marvel Characters and revenue opportunities for the
Company's licensing businesses. The Company believes that Marvel Studios will
facilitate the release of feature films, television programming and other
media by giving the Company greater control over such projects. The original
concept of Marvel Studios was for the Company to form a joint venture with Toy
Biz, in which both parties would share equally in all costs. No formal
agreement relating to this joint venture was prepared and as a result, Toy Biz
has not reimbursed the Company for any costs of Marvel Studios incurred by the
Company to date. The Company continues these activities to insure its
long-term success irrespective of its relationship with Toy Biz.
SPORTS AND ENTERTAINMENT TRADING CARDS; CHILDREN'S ACTIVITY STICKERS
In April 1995, the Company acquired SkyBox and merged its operations
with the existing trading card operations of Fleer (collectively,
"Fleer/SkyBox"). Fleer/SkyBox is a leading marketer of sports and
entertainment trading cards. Fleer/SkyBox is best known for its sports trading
cards depicting professional athletes and sports teams, including professional
baseball, basketball and football players competing in Major League Baseball,
the National Basketball Association and the National Football League. Sports
trading cards feature pictures of professional athletes and generally include
statistical and biographical information about the pictured athletes. The
Company's ability to produce, market, and sell its sports trading cards is
dependent upon the continual renewal of license agreements at reasonable terms
with the organizations representing the players and owners of the baseball,
basketball and football teams and leagues. These licenses are non-exclusive
and generally are granted for a two to four year period. In addition,
Fleer/SkyBox manufactures and distributes entertainment trading cards using
the Company's classic SUPER HEROES characters as well as characters based on
other licensed properties, such as Paramount's Star Trek properties. The
Company's trading card operations have been and continue to be negatively
affected by the general contraction in the sports and entertainment trading
card markets. The Company is required to make minimum royalty and advertising
payments under the license agreements related to sports and entertainment
trading cards. Generally, these licenses were executed when the trading card
market was larger and the Company's trading card net revenues was a
significantly higher percentage of net revenues. Hence, minimum royalty and
advertising commitments, declines in the Company's trading card revenues and
increased returns have significantly and adversely affected the profitability
of the overall trading card business. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Panini is the largest manufacturer and distributor of sports and
entertainment sticker collections in the world, with a substantial portion of
its business conducted in Western Europe. Panini produces and distributes
stickers, which are pictures on self-adhesive paper designed primarily to be
collected and placed in albums. Panini maintains a broad portfolio of licenses
for characters or themes on which the stickers are based. Panini's prominent
position in the sticker industry has enabled it to secure many desirable
licenses, including exclusive and non-exclusive agreements with many sporting
federations and with major entertainment licensors such as Disney, Time Warner
and Mattel. Collections produced by Panini feature professional athletes and
teams in sports such as soccer (primarily athletes and teams competing in the
major European and Brazilian soccer leagues, including those competing in the
World Cup and European Cup competitions), Disney characters such as 101
Dalmatians; variety characters and themes, such as Mattel's Barbie, D.C.
Comic's Batman and the Company's X-MEN; and other characters popular in local
European markets. Panini's business is significantly dependent upon the
continued commercial success of new entertainment properties as well as sports
licenses. In 1996 and 1997, a number of Panini's licenses did not perform
which contributed to Panini's operating losses. In the 1998 business plan, a
significant portion of Panini's projections is dependent upon the World Cup
Soccer tournament. In the event the World Cup Soccer tournament does not
generate the public interest anticipated by the management of Panini, Panini's
results of operations may be materially adversely affected. Licenses generally
are for a term of one to three years and provide for minimum guaranteed
royalty payments to be made by Panini.
Although there can be no assurance that, in the future, new licenses
for the Company's sports and entertainment trading card and sticker businesses
will be granted to the Company upon the expiration of the current licenses,
the Company anticipates that it will be able to obtain new licenses on terms
generally acceptable to the Company. The Company is currently negotiating with
certain of its licensors to lower royalty guarantees and advertising
commitments relating to its existing trading card and sticker licenses.
However, there can be no assurance that any such negotiations will be
successful. The Company believes that its working relationships with its key
licensors are good. For additional information relating to these matters, see
subsection entitled "Licenses and Trademarks."
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Market
A significant portion of Fleer/SkyBox sales are made to a market
consisting of serious collectors. Panini sells its sticker collections
primarily to children between the ages of 4 and 14 in Western European
markets. During the year ended December 31, 1997, sales in Italy, France,
Germany, Spain and Brazil accounted for a substantial majority of Panini's
children's activity sticker collection net revenues.
Since 1994, the Company believes that, based upon industry
statistics, the overall trading card market has declined by more than 50%,
which has resulted in a substantive decrease in the Company's trading card
revenues. The decrease in the overall trading card market has decreased the
number of, or has negatively affected the financial condition of, the trading
card specialty stores, thereby negatively impacting that portion of the
Company's business. In addition, the mass market channel of distributing the
Company's trading cards has also significantly contracted, thereby reducing
trading card revenues. The Company believes that the contraction in the
trading card market has begun to show signs of stabilizing. However, there can
be no assurance that such stabilization will continue.
The Company believes that since 1996 the overall sticker market has
begun to decline primarily as a result of the varying fan interest in soccer
throughout Europe and the rest of the world. Additionally, the sticker market
declined due to a lack of commercial success of entertainment properties. As a
result, the Company's children's activity sticker revenues have been
materially adversely affected.
Production Process
Photographs used for the Company's sports trading cards are usually
taken by independent photographers under contract with the Company or by the
organizations representing the respective leagues and their member teams.
Artwork used for Company's entertainment trading cards is developed from
actual medium (i.e. movies and comic books) or created by in-house and
freelance artists, some of whom create artwork for the Company's comic books.
Design and coordination of the artwork is handled by the Company's staff of
production/design personnel. Independent contractors print, cut, collate and
wrap the trading cards. Quality enhancements include dual-sided gloss coating
and color corrected photography. Additional enhancements of Fleer/SkyBox
premium brand cards utilize high-gloss ultraviolet coatings and foil stamping
and super premium brand cards utilize additional high-gloss clear plastic
laminates and foil stampings, heavier card stock and improved colorization.
Most of the manufacturing processes required in the production of
Panini's sticker collections, including self-adhesive paper production, film
layout, printing and packaging of the finished product are conducted in
Panini's own facilities, in Modena, Italy and Sao Paolo, Brazil. These
manufacturing activities are supported by the Company's editorial, art, studio
and photo lithography staff. Panini has separate production facilities for
stickers and self-adhesive paper in Modena, Italy and Sao Paolo, Brazil. In
the event Panini no longer owns its own adhesive facility, the cost of
obtaining such material will likely increase.
Distribution
The Company's sports and entertainment trading cards are distributed
through two channels: (i) to trading card specialty stores and (ii) through
mass merchandisers (the "mass market"). As a result of market conditions, the
Company has revamped its trading card business such that distribution of its
trading card products is concentrated in trading card specialty stores and
selected mass market accounts. The Company's sports and entertainment trading
cards are distributed primarily in the United States and Canada. The Company
distributes its trading cards internationally primarily through third-party
distributors.
Panini sells sticker packs and collection albums through newsstands,
confectioners and other retail locations. Panini sells primarily to national
and local third-party distributors in other countries where it markets its
products.
For the year ended December 31, 1997, approximately 60% of the
Company's net sports and entertainment trading card revenues were derived from
sales through numerous unaffiliated distributors to trading card specialty
stores. None of the unaffiliated distributors individually represented a
significant percentage of the Company's net sports and entertainment trading
card revenues for 1997. The Company estimates that there are approximately
2,500 to 3,000 trading card specialty stores which are primarily located in
the United States and Canada. The Company believes that one or more of its
existing distributors or others could replace any of the Company's other
distributors on acceptable terms should such replacement become necessary or
desirable.
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For the year ended December 31, 1997, approximately 30% of the
Company's net sports and entertainment trading card revenues were derived from
sales to mass market accounts. The remaining 10% of the Company's net sports
and entertainment trading card revenues were derived from international sales.
For the year ended December 31, 1997, substantially all of the
Company's children's activity sticker collection net revenues were derived
from sales to the retail returnable market, of which approximately 41% were
through three unaffiliated distributors.
Total net sports and entertainment trading card and children's
activity sticker revenues were $210.5 million, $301.1 million and $357.9
million in 1997, 1996 and 1995, respectively.
TOYS
The Company presently owns a 26.6% equity interest in Toy Biz, an
affiliate of the Company. Toy Biz is a toy entertainment company that designs,
markets and distributes a diverse product line comprised of boys' and girls',
infant/pre-school and activity toys in the United States and internationally,
based on popular entertainment properties, consumer brand names and
proprietary designs. The Company licenses to Toy Biz its universe of Marvel
Characters on an exclusive, perpetual, and royalty-fre basis, subject to
certain limitations, for use in a broad range of toys. Effective July 1, 1997
the Company deconsolidated Toy Biz. The results of operations of Toy Biz from
the date of the Toy Biz initial public offering through June 30, 1997 have
been included in the Company's Consolidated Statements of Operations. See
"Legal Proceedings" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OTHER PRODUCTS
Other products consist of confectionery products and self-adhesive
paper. Net revenues from other products were $94.1 million, $101.7 million and
$90.0 million in 1997, 1996 and 1995 respectively.
CONFECTIONERY
Fleer manufactures and markets an array of confectionery products.
Fleer's confectionery operation is best known for its DUBBLE BUBBLE and
RAZZLES gum products. The Company believes that DUBBLE BUBBLE, with origins
dating back to 1928, was the first branded bubble gum sold in the United
States. The Company distributes its confectionery products utilizing
substantially the same distribution channels as those used for sports and
entertainment trading cards. During 1997, the Company sold a portion of this
business at a loss. In March 1998 the Company determined that it will sell the
remaining portion of this business. The Chapter 11 Trustee has retained the
services of an investment banking firm to assist him in this process. Several
third parties have indicated an interest in purchasing this business, however,
there can be no assurance that the Company will not realize a loss on the sale
of the remaining portion of the confectionery business. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ADHESIVES
Panini distributes self-adhesive paper throughout the world. Through
its Adespan Paper Division, Panini manufactures sheet and reel self-adhesive
paper which is sold to third parties primarily for production of stickers used
in labeling and packaging.
RESTAURANTS
The Company, through Marvel Restaurants, a wholly owned subsidiary of
Marvel, formed a joint venture with Universal Studios and Planet Hollywood,
Inc. for the operation of a Marvel theme restaurant based on the Marvel
Characters ("Marvel Mania"). The restaurant opened in December 1997 and is
located in Los Angeles, California. The Company maintains a 30% interest in
the operations of this restaurant. During 1997, the Company wrote-down the
value of its Marvel Mania restaurant by $5.5 million. Planet Hollywood, Inc.
left the joint venture in February 1998. The Company may seek to license the
concept of theme restaurants in the future.
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LICENSES AND TRADEMARKS
The Company believes that its roster of Marvel Characters as well as
its MARVEL trade name represent its most valuable assets and that such roster
could not be easily replicated. In addition, the Company considers its FLEER,
FLEER ULTRA, FLAIR SHOWCASE, NBA HOOPS, E-X 2001 and SKYBOX trademarks to be
of material importance to its sports trading card business, its PANINI
trademark to be of material importance to its children's activity sticker
business and DUBBLE BUBBLE and RAZZLES trademarks to be of material importance
to its confectionery business. The Company currently conducts an active
program of maintaining and protecting its principal trademarks, including the
MARVEL trade name, and its copyrights on the Marvel Characters and
publications in the United States and in approximately 55 foreign countries
where such protection is available. The Company's principal trademarks have
been registered in the United States, certain of the countries in Western
Europe and South America, Japan, Israel and South Africa and, in the case of
Panini, in Western Europe and Brazil.
The Company's ability to market its sports trading cards is based on
rights under primarily non-exclusive license agreements with the baseball,
basketball and football players' associations, and with the organizations
which represent the respective leagues and their member teams. Generally, the
Company's sports trading card licenses provide for minimum guaranteed royalty
and advertising payments. The Company's agreements with the various players'
associations enable the Company to use a player' name, picture, facsimile
signature and biographical description. The Company's agreements with the
organizations representing the various leagues and their member teams enable
the Company to use the logos and trademarks of the various sports, the leagues
and logos, names and uniforms of the member teams. As a result of these
licenses, the Company is permitted to produce and sell sports trading cards
and stickers in the United States and Canada, and most of the rest of the
world. All of these licenses are primarily non-exclusive and, accordingly, the
various players' associations, leagues and team representatives are free to
grant similar licenses to other companies. For additional information relating
to this matter, see "Competition."
The Company's sports trading card license agreements generally
provide the licensor with the right to assure the quality of the manufactured
products and the suitability of the manufacturers used by the Company, allow
the licensor to inspect the records relating to licensed products, and set
forth labeling requirements for the licensed merchandise. Such license
agreements generally require annual guaranteed minimum royalty payments and
monthly or other periodic payments of royalty guarantees for royalties in
excess of the guaranteed minimum amounts. The Company also has required
minimum advertising expenditures under its various sports licenses. Although
the Company has accrued royalty commitments it owes through December 31, 1997,
payments of such royalties have been withheld pending renegotiations or
renewals of certain sports and entertainment trading card licenses. In the
event the Company cannot successfully negotiate such licenses, there may be a
material adverse impact on the future operations of the trading card business.
Previously, the Company's sports trading card licenses provided for two to
four year terms. Given the bankruptcy proceedings of the Company, it has been
difficult for the Company to obtain long-term agreements. The sports and
entertainment trading card license agreements of Fleer/SkyBox generally
contain anti-assignment provisions which provide that a change of control of
Fleer/SkyBox or of Marvel is an event of default or termination event under
such license agreements. No parties to the license agreements have declared an
event of default under such agreements relating to the appointment of the New
Board of Marvel or the appointment of the Chapter 11 Trustee.
Panini's ability to market its sports sticker products is based on
rights, some of which are exclusive, and some of which are non-exclusive, with
the sports federations and, depending upon the country, the players. Panini's
sticker licenses have various terms and require minimum guaranteed royalties.
Panini's agreements with the various federations and, where applicable, the
players, allow Panini to use the logos and trademarks of the various leagues,
member teams and the player's name, picture, biographical and other
information.
The Company also has various entertainment licenses related to the
trading cards and sticker businesses that require minimum guaranteed royalties
and are otherwise similar to the Company's sports trading card licenses.
Although the Company considers its relationships with its trading
card and sticker licensors to be generally satisfactory, there can be no
assurance that such licensors will grant new licenses to the Company upon
expiration of the current licenses or that the Company will be able to
renegotiate the terms of certain license agreements. In the past, renewals of
the Company's sports card licenses have required, among other things,
increases in royalty rates and minimum guaranteed royalty amounts and
advertising commitments.
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COMPETITION
The comic book and sports and entertainment trading card industries
are highly competitive. The Company competes with over one hundred publishers
in the United States. There are four major companies and several smaller
companies licensed to produce sports and entertainment trading cards, other
than entertainment trading cards based on the Marvel Characters, some of which
sell their products only in regional or niche markets. In addition, licenses
may be granted to other companies to produce sports and entertainment trading
cards in the future, thus generating greater competition.
Panini, as a leader in the development of the sticker industry,
generally enjoys a pre-eminent position in each of the countries in which it
operates. The major competitors of Panini are generally regional companies.
The Company believes that Panini's competitive advantages are its reputation
for quality stickers, its long standing relationship with licensors and its
strong distribution capabilities.
Some of the Company's competitors such as D.C. Comics are part of
integrated entertainment companies and may have greater resources than the
Company. The Company also faces competition from other entertainment media,
such as movies and video games, but believes that it benefits from the low
price of comic books, sports and entertainment trading cards and children's
activity sticker collections in relation to such other products.
SEASONALITY
The Company sells sports trading cards in baseball, basketball and
football throughout the year. Sales of the Company's sports trading cards peak
at or near the beginning and mid-point of the sports season to which a
specific product relates. Sales of entertainment related products tend to be
less seasonal, although sales of products related to a motion picture or
animated series are generally planned to begin at the time of first release or
subsequent video release in the case of a major motion picture.
Licensing revenues of the Company may vary from period to period
depending on the volume and extent of licensing agreements entered into during
any particular period of time, as well as the level and commercial success of
the media exposure of the Marvel Characters.
Sales of the Company's sports and entertainment stickers in Europe
are generally concentrated in the first and fourth quarters, coinciding with
the related buying habits of children during the school year.
The timing of events as discussed above as well as the continued
introduction of new events and related products can and will cause
fluctuations in quarterly revenues and earnings.
INFLATION
In general, the Company's business is affected by inflation and the
effects of inflation may be experienced by the Company in future periods. Such
effect has not been significant to the Company during the past three years.
EMPLOYEES
As of March 15, 1998, the Company employed approximately 1,100
persons. The Company also contracts for creative work on an as-needed basis
with approximately 550 freelance writers and artists.
The Company has been in bankruptcy since December 27, 1996. There is
a general uncertainty amongst the Company's employees regarding the outlook of
the Company. The Company believes its relationship with its employees is
satisfactory, however, it is not known if a merger or sale of the Company
under a plan of reorganization would negatively affect employee retention.
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ITEM 2. PROPERTIES
The Company has the following principal properties:
<TABLE>
<CAPTION>
Facility Location Square Feet Owned/Leased
-------- -------- ----------- ------------
<S> <C> <C> <C>
Manufacturing/Warehouse/Office Waldorf, Germany 22,825 Owned
Warehouse/Office Gerona, Spain 20,450 Owned
Warehouse/Office SaintLaurent Du Var, France 35,327 Owned
Manufacturing/Warehouse/Office Bomporto, Italy 217,345 Owned
Office Modena, Italy 131,132 Owned
Office Modena, Italy 11,388 Owned
Manufacturing Modena, Italy 45,144 Owned
Warehouse Modena, Italy 21,953 Owned
Manufacturing/Office Modena, Italy 48,086 Owned
Warehouse Modena, Italy 14,817 Owned
Warehouse Modena, Italy 23,605 Owned
Manufacturing/Warehouse/Office Sao Paolo, Brazil 35,801 Leased
Office New York, NY 69,000 Leased
Office New York, NY 15,000 Leased
Office Mt. Laurel, NJ 30,836 Leased
Warehouse/Office Leeds, England 13,390 Leased
Warehouse/Office Wakefield, England 18,385 Leased
Manufacturing/Warehouse/Office Byhalia, MS 72,300 Leased
</TABLE>
In addition, the Company leases or subleases other office and
warehouse space located in several locations in the United States and in
Europe. The Company's leases expire through 2005 and provide for aggregate
monthly rentals of approximately $0.5 million, subject to escalation clauses.
ITEM 3. LEGAL PROCEEDINGS
REORGANIZATION LEGAL PROCEEDINGS
On December 27, 1996, the Debtor Companies filed petitions under
chapter 11 of the Bankruptcy Code and in connection with such filing have been
parties to various legal proceedings. The filing by the Debtor Companies of
the voluntary petitions for reorganization operated as an automatic stay
against the commencement or continuation of any judicial, administrative or
other proceeding against the Debtor Companies, any act to obtain possession of
property of or from the Debtor Companies, or any act to create, perfect or
enforce any lien against property of the Debtor Companies, with certain
exceptions under the Bankruptcy Code.
The Indentures Trustee has alleged that events of defaults under each
of the Indentures have occurred by reason of the commencement of the Marvel
Cases under the Bankruptcy Code. The Indentures Trustee has also alleged that
the majority ownership and the anti-injunction provisions of each of the
Indentures have been violated. The Company is not a party to any of the
Indentures governing the Notes issued by the Holding Companies. In addition,
the Company believes the allegations of the Indentures Trustee are either
without merit or will be resolved in connection with the prosecution of the
reorganization cases of the Holding Companies. The Indentures Trustee has also
filed claims with the District Court alleging, among other things, "tortious
interference" occasioned by the filing of the Initial Plan. The Company
believes that any such claims are without merit. The Chapter 11 Trustee has
indicated that he will support a motion to expunge such claims in the
bankruptcy proceedings of the Debtor Companies.
There are twenty-seven purported class and derivative actions brought
by stockholders of the Company and the Noteholders and one action brought by a
purported class of Toy Biz shareholders presently pending in the Delaware
Court of Chancery (collectively, the "Delaware Actions") that challenge, among
other things, the Andrews Investment.
Twenty-one of the twenty-seven Delaware Actions assert either claims
on behalf of a purported class of all Marvel shareholders or shareholder
derivative claims on behalf of Marvel, or both. The complaints allege, among
other things, that the Andrews Investment represents a breach of defendants'
fiduciary duties because the proposed purchase price per share is unfair and
such purchase would dilute the minority shareholders' interest in Marvel.
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Plaintiffs in these actions seek to enjoin the Andrews Investment, to rescind
the Andrews Investment if it is in fact consummated prior to the entry of the
court's judgment, to recover damages for defendants' alleged conduct and to
recover costs and disbursements in pursuing these actions, including
reasonable attorneys' fees. These actions have been consolidated for all
purposes by order of the Delaware Court of Chancery. A consolidated complaint
has not yet been filed.
Six of the Delaware Actions assert claims on behalf of a purported
class consisting of the holders of Notes issued by the Holding Companies.
These complaints allege, among other things, that the Andrews Investment, if
consummated, would be a breach of defendants' duty of fair dealing and good
faith owed to the Noteholders because the Andrews Investment would result in
the substantial dilution of Marvel's outstanding stock, which is security for
the Notes, and will thus diminish the value of the Notes. These actions have
been separately consolidated by order of the Delaware Court of Chancery. The
consolidated complaint in these six actions does not name any of the Debtor
Companies as defendant. The parties to the consolidated complaint have agreed
to defer the filing of an answer.
All of the foregoing Delaware Actions name varying defendants
consisting in the aggregate of Marvel, Andrews Group, MacAndrews Holdings,
Marvel Parent, Marvel III, Holdings, Ronald O. Perelman, William C. Bevins,
Donald G. Drapkin, Michael Fuchs, Frank Gifford, E. Gregory Hookstratten,
Morton L. Janklow, Quincy Jones, Stan Lee, Scott C. Marden, Terry C. Stewart
and Kenneth Ziffren.
One of the pending Delaware Actions asserts claims on behalf of a
purported class of all Toy Biz shareholders. Holl v. Toy Biz, Inc., Marvel
Entertainment Group, Inc., Andrews Group, Inc., Ronald O. Perelman, Joseph M.
Ahearn, Avi Arad and Issac Perlmutter, was filed on November 15, 1996. The
complaint alleges, among other things, that defendants Perelman, Ahearn, Arad
and Perlmutter have breached their fiduciary duties in pursuing the proposed
offers of Marvel and Andrews Group to purchase Toy Biz stock. In addition, the
complaint alleges that defendant Marvel aided and abetted the individual
defendants in their unlawful conduct. Damages in an unspecified amount are
sought for the alleged breach of fiduciary duties by defendants. Plaintiffs
also seek to enjoin the consummation of the transaction, to rescind the
transaction in the event it is consummated and to recover costs and
disbursements and reasonable allowances for plaintiff's counsel. This case has
been stayed by stipulation of the parties.
No classes have been certified in any of the Delaware Actions. On
December 27, 1996, Marvel filed a petition for protection under chapter 11 of
the Bankruptcy Code. As a result of Marvel's filing, all of the Delaware
Actions with respect to Marvel are automatically stayed pursuant to 11 U.S.C.
Section 362. On March 7, 1997, Andrews Group terminated the Stock Purchase
Agreement with Marvel and withdrew the proposal for the Andrews Investment. On
the same date, Andrews Group informed Toy Biz and the two other principal
stockholders of Toy Biz that the transactions contemplated by the Merger
Agreement and the Stock Purchase Agreements with Toy Biz and each of such
principal stockholders, respectively, would not be consummated.
Piels v. Marvel Entertainment Group, Inc., Ronald O. Perelman,
Andrews Group, Inc. and MacAndrews & Forbes Holdings Inc., was commenced on
November 14, 1996. This action, filed in New York Supreme Court, County of New
York, asserts claims on behalf of a purported class of all Marvel
shareholders. Named as defendants are Marvel, Ronald O. Perelman, Andrews
Group and MacAndrews Holdings. The complaint alleges, among other things, that
the defendants have breached their fiduciary duties in connection with the
Andrews Investment. Specifically, plaintiff alleges that Marvel's minority
shareholders are being directly damaged by defendants' actions with respect to
the Andrews Investment. Plaintiff seeks injunctive relief, damages in an
unspecified amount and costs and disbursements, including reasonable
attorneys' fees. By orders dated February 25, 1997, the New York Supreme Court
denied plaintiff's motion for a preliminary injunction and granted defendants'
motion to dismiss the action based on forum non conveniens.
OTHER LEGAL PROCEEDINGS
On March 9, 1995, a complaint purporting to be a class action was
filed against SkyBox, certain of SkyBox's officers and directors and the
Company in the Delaware Court of Chancery, New Castle County, entitled Strougo
v. Lorber, et al., ("Strougo"). The complaint generally alleged that SkyBox
and certain of its officers and directors breached their fiduciary duties by
agreeing to be acquired by the Company at an allegedly unfair and inadequate
price, failing to consider other potential purchasers in a manner designed to
obtain the highest possible price for SkyBox's stockholders and not acting in
the best interest of stockholders. The complaint also alleged that the Company
aided and abetted the breaches of fiduciary duty committed by the other
defendants named in the complaint. The complaint
16
<PAGE>
sought preliminary and permanent injunctions against consummation of the
merger, damages, costs and experts' fees and expenses. This case was dismissed
without prejudice.
On March 16, 1995, a complaint purporting to be a class action was
filed against SkyBox and certain of SkyBox's officers and directors in the
Delaware Court of Chancery, New Castle County, entitled Krim and Gerber v.
SkyBox International Inc., et al. The complaint generally made allegations
similar to those contained in the Strougo complaint and sought similar
injunctive and other relief. This case was dismissed without prejudice.
The Company is a defendant in a purported class action filed on July
26, 1996 in the United States District Court for the Eastern District of New
York entitled Fishman, et al v. Marvel Entertainment Group, Inc., by four
persons who allegedly purchased sports and entertainment cards manufactured by
Fleer/SkyBox. The action is directed against standard business practices in
the trading card industry, including the practice of randomly placing insert
cards in packages of sports and entertainment trading cards, and alleges that
these practices constitute illegal gambling activity in violation of state and
Federal law. Plaintiffs seek certification of a class of persons who within
four years prior to the filing of the complaint purchased packages of trading
cards that might contain randomly inserted cards, and recovery of treble
damages. On September 30, 1996, 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. This motion is still pending.
The Company and two of its former officers, William C. Bevins and
Terry C. Stewart, were named as defendants in a purported class action
entitled Brian Barry SEP IRA v. Marvel Entertainment Group, Inc., commenced in
the United States District Court for the Southern District of New York. The
complaint sought unspecified damages on behalf of a proposed class of
purchasers of the Common Stock from April 11, 1994 to December 31, 1994 for
alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, as amended, as well as Rule 10b-5 promulgated thereunder. Plaintiff
alleged that the defendants, through their own statements and those of
analysts, artificially inflated the price of the Common Stock by creating
earnings expectations which the Company did not meet. Plaintiff also contended
that the defendants failed to timely disclose softness in the publishing and
sports trading card markets which led to the Company's not attaining its
purported earnings target. Plaintiff claims that the individual defendants,
because of their corporate positions, were liable under the securities laws as
control persons of the Company. The defendants moved to dismiss the complaint
in its entirety on February 23, 1996. On April 8, 1997, the District Court
granted the defendants' motion to dismiss without prejudice.
Marvel is named as a defendant in two actions which have been
consolidated for all purposes with certain related actions in proceedings now
pending in the Los Angeles County Superior Court in California. The
consolidated cases center around the ownership of certain rights in the
production and distribution of a live action motion picture based on the
"SPIDER-MAN" character owned by Marvel.
In the lead case, a dispute between 21st Century Film Corporation
("21st Film"), Carolco Pictures, Inc. ("Carolco") and related entities, 21st
Film claims that it still possesses rights under an agreement with Marvel to
produce and distribute a live action film based on the "SPIDER-MAN" character,
although it had assigned all of its rights to Carolco. Metro Goldwyn Mayer,
Inc. ("MGM") has succeeded to the litigation position of both 21st Film and
Carolco in the respective bankruptcy proceeding of those two companies. In
addition to its purchase of 21st Film and Carolco litigation positions, MGM is
a plaintiff in a separate case that has been deemed related to the lead and
consolidated cases. Marvel has answered the complaint denying MGM's
allegations.
An additional lawsuit, between Carolco and Columbia Tristar Home
Video ("Columbia"), concerns the videocassette rights to any such film, and a
third lawsuit, between Carolco and Viacom International, Inc. ("Viacom"),
involves television rights to any such film. Both Columbia and Viacom claim
that, before 21st Film assigned its rights under its agreement with Marvel to
Carolco, 21st Film had licensed ancillary rights to each company. Each seeks
to enforce its respective rights. Viacom, however, brought a separate suit
naming Marvel, and Marvel has answered that complaint, denying Viacom's
allegations.
In its answer and other pleadings, Marvel contends that it is the
sole and exclusive holder of the unencumbered right to produce and distribute
a live action film based on the "SPIDER-MAN" character. Marvel contends that
all rights to produce or distribute a "SPIDER-MAN" film under its agreement
with Carolco and 21st Film have reverted to Marvel.
Marvel has notified the court in the consolidated action that Marvel
has filed for bankruptcy protection, and that the bankruptcy court filing
stays all further proceedings in the consolidated lawsuit as to Marvel. On
March 24, 1998, the Chapter 11 Trustee filed a separate action in the District
Court asserting that Marvel has the full
17
<PAGE>
unencumbered right to produce and distribute any "SPIDER-MAN" films. There can
be no assurance that the Chapter 11 Trustee will be successful in this
litigation.
The National Basketball Association, through NBA Properties, Inc.
("NBAP"), filed a complaint against Panini, NBA Properties, Inc. v. Panini, in
Federal Court in the Southern District of New York on October 14, 1997. The
complaint seeks approximately $57 million for accrued and unaccrued royalty
and other payments under a license agreement with Marvel. The license concerns
the manufacture and distribution of basketball trading cards and stickers.
Panini is not in bankruptcy. Panini has moved to dismiss for lack of personal
jurisdiction and NBAP intends to cross-move for summary judgment. The Chapter
11 Trustee is moving to intervene in this action. Marvel has accrued unpaid
minimum royalties due to NBAP through December 31, 1997 on its consolidated
financial statements, but has not accrued for any future royalty payments that
may be owed to NBAP from Fleer/SkyBox. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
As debtor-in-possession and prior to the appointment of the Chapter
11 Trustee, Marvel filed an adversary proceeding in the District Court,
Marvel v. NBA Properties, Inc., on December 9, 1997, seeking an injunction
extending the automatic stay and enjoining further proceedings in the action
against Panini in NBA Properties, Inc. v. Panini. Marvel's motion for a
preliminary injunction is scheduled to be heard by the District Court on April
24, 1998.
The Company is currently negotiating with the NBAP to, among other
things, reduce the minimum royalties due to NBAP pursuant to its license
agreement with Marvel. There can be no assurance that such negotiations will
be successful.
As successor Indentures Trustee for the Notes issued by Holding
Companies, La Salle National Bank brought an action against Mafco, MacAndrews
Holdings, Andrews Group and certain of their directors, La Salle National Bank
v. Ronald O. Perelman, et. al., in the District Court in December 1997 to
enforce the provisions of the Notes and the Indentures. The defendants are
alleged to have materially adversely affected the Holding Companies by
executing the Indentures and issuing the Notes, thus ultimately depriving the
Noteholders of any viable expectation of recovery. The directors are also
alleged to have undermined Marvel through an initial public offering, the
acquisition of Fleer, the purchase of stock in Toy Biz, the transfer of
Marvel's toy license to Toy Biz and misuse of the proceeds of the Notes.
Plaintiff further alleges that the defendants caused Marvel to acquire Panini
and Skybox and used the financial statements of these entities to disguise
Marvel's financial condition. On January 16, 1998, the defendants moved to
dismiss the complaint on various grounds. This motion is still pending.
Toy Biz initiated an action in the District Court in June 1997
against the Company 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. In July 1997 the Bondholders Committee and the
Indentures Trustee moved to dismiss this action. Toy Biz cross-moved for
summary judgment, which motion was opposed by the Bondholders Committee, the
Indentures Trustee and the Chapter 11 Trustee. On March 30, 1998, the District
Court granted Toy Biz's motion for summary judgment. The Company and other
interested parties have filed an appeal of this determination to the United
States Court of Appeals for the Third Circuit. The Chapter 11 Trustee,
management of Toy Biz and the secured lenders of the Company are currently in
negotiations attempting to settle the claims that are the subject of the
appeal as well as other matters. There can be no assurance that such
negotiations will be successful and that such claims will be settled.
In October 1997, an action was brought in the District Court in the
name of the Company against, among others, Ronald O. Perelman, The Chase
Manhattan Bank and other lenders who are holders of pre-petition debt of
Marvel and Toy Biz. The complaint seeks declaratory and injunctive relief and
alleges improper, manipulative and collusive conduct by the defendants. Among
the violations charged are breach of fiduciary duties, fraudulent conveyances,
preferential transfers, breach of contract, violation of the automatic stay
under the Bankruptcy Code and interference with contractual relations. This
litigation is the subject of various motions to dismiss. The Chapter 11
Trustee is in the process of evaluating the claims in this litigation,
interviewing parties and witnesses and investigating the defendants' conduct
under the applicable rules and laws.
The Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding, the Company believes
that other than the litigation involving 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
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<PAGE>
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 which are
not Debtor Companies (principally, Panini), have been automatically stayed.
POTENTIAL LITIGATION
On October 27, 1997, the Company received a Civil Investigative
Demand ("CID") from the Antitrust Division of the U.S. Department of Justice
(the "Justice Department") as part of the Justice Department's investigation
into unreasonable trade restraints and monopolization in comic-book
distribution and sales. A CID is a formal request for information and a
customary initial step of any Justice Department investigation. The Justice
Department is permitted to issue a CID to anyone whom the Justice Department
believes may have information relevant to an investigation. Therefore, the
receipt of a CID does not mean that the recipient is the target of an
investigation, nor does it presuppose that there is a probable cause to
believe that a violation of the antitrust laws has occurred or that a formal
complaint ultimately will be filed. The Company believes that the primary
focus of the CID relates to the distribution and sale of comic books. The
Company intends to cooperate fully with the Justice Department inquiry, and
submitted a response to the CID on January 28, 1998.
There can be no assurance that the Justice Department's investigation
will not result in litigation against the Company or that the Company will
prevail in any such litigation, if commenced. Any material restructuring of
the distribution arrangements by the Company for its comic books could have a
material negative effect on the Company's business, financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's Common Stock is listed and traded on the New York Stock
Exchange ("NYSE") under the symbol "MRV". The following table sets forth the
range of high and low closing sale prices for Common Stock as reported by the
NYSE.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
1997
- - ----
<S> <C> <C>
First Quarter Ended March 31, 1997............................ 3 3/8 1 3/4
Second Quarter Ended June 30, 1997............................ 2 3/4 2
Third Quarter Ended September 30, 1997 2 13/16 1 5/8
Fourth Quarter Ended December 31, 1997 2 5/8 1/2
1996 HIGH LOW
- - ---- ---- ---
First Quarter Ended March 31, 1996............................ 13 1/4 10 1/4
Second Quarter Ended June 30, 1996............................ 12 9 3/8
Third Quarter Ended September 30, 1996 9 3/4 7 3/4
Fourth Quarter Ended December 31, 1996 8 1/8 1 5/8
</TABLE>
As of the close of business on March 15, 1998, there were 14,645
holders of record of shares of Common Stock of the Company.
The Company has not declared a cash dividend on shares of Common
Stock subsequent to its initial public offering, consummated on July 22, 1991
and the Company has no intentions of paying dividends. The declaration and
payment of dividends are subject to the discretion of the Board of Directors
of the Company or the Chapter 11 Trustee, as appropriate, and to certain
limitations under the General Corporation Law of the State of Delaware.
The timing, amount and form of dividends, if any, will depend on, among
other things, the Company's results of operations, financial condition, cash
requirements, restrictions under the Company's Credit Agreements and DIP Loan,
restrictions on an entity operating under chapter 11 of the Bankruptcy Code
and other factors deemed relevant by the Board of Directors of Marvel or
the Chapter 11 Trustee, as appropriate.
All potential plans of reorganization of the Company to date have
involved the recapitalization of the Company, which would result in the
issuance of new equity of the corporation resulting from the reorganization.
No proposed plan of reorganization has provided for an additional distribution
of Common Stock to the shareholders of the Company, although the Toy Biz Plan
does contemplate the issuance to shareholders of Marvel of warrants to
purchase common stock in the reorganized company.
Marvel has been advised by the NYSE that they are reviewing the
status of the listing of its Common Stock. In the event the Common Stock were
to be delisted by the NYSE, Marvel may seek to list its Common Stock on
another major exchange or the NASDAQ National Market System or the SmallCap
Market. However, due to the cost and timing involved in such process and the
uncertainty of its bankruptcy proceedings, Marvel may not be successful in
listing its Common Stock. There can be no assurance that Marvel will be
successful in any attempt to list its Common Stock on an exchange or NASDAQ
in the event the Common Stock is delisted by the NYSE. Marvel understands
that its Common Stock will be traded on the electronic bulletin board of
NASDAQ in the event it is delisted from the NYSE and not accepted for listing
on any other exchange or NASDAQ. There can be no assurance that the delisting
of the Common Stock from the NYSE will not have a material adverse effect on
the Common Stock's value, liquidity or marketability.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
On December 27, 1996, the Debtor Companies filed a voluntary petition
for reorganization under chapter 11 of the Bankruptcy Code and were operating
their businesses as debtors-in-possession under control of the Bankruptcy Court
until December 22, 1997, when the District Court appointed the Chapter 11
Trustee to replace the debtors-in-possession.
The following selected financial data have been derived from the
Consolidated Financial Statements of the Company for each of the five years in
the period ended December 31, 1997. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Annual Report.
The historical financial data for each of the periods presented are
not comparable due to several factors, including, but not limited to, (i) the
effects of the acquisition of Panini on September 1, 1994, (ii) the
consolidation of Toy Biz from the Toy Biz initial public offering on March 2,
1995 (the "Toy Biz IPO") through June 30, 1997 (see Note 10 to the Notes to
Consolidated Financial Statements), (iii) the effects of the acquisition of
SkyBox on April 27, 1995, (iv) the Company's commencement of bankruptcy
proceedings on December 27, 1996, and (v) the Company's ability to operate as
a going concern.
<TABLE>
<CAPTION>
For the years ended December 31,
1997 (a), (c) 1996 (b), (c) 1995 (c) 1994 (e) 1993
------------- ------------- -------- -------- ----
CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
DATA:
Net revenues--------------------------- $471.7 $745.5 $828.9 $514.8 $415.2
Cost of sales-------------------------- 366.5 536.4 533.3 273.4 214.2
Selling, general and administrative
expenses-------------------------- 155.0 244.5 226.7 117.6 84.2
Restructuring charges------------------ - 15.8 25.0 - -
Depreciation and
amortization-------------------- 17.8 31.8 21.2 4.0 2.2
Amortization and write-off of
goodwill, intangibles and
deferred charges------------------ 123.8 303.3 17.9 10.9 10.1
Interest expense, net ----------------- 46.3 58.9 43.2 17.1 14.6
Foreign exchange loss/(gain), net------ (1.6) 1.1 (0.4) (0.6) -
Loss on sale of portion of
confectionery business------------ 4.7 - - - -
Gain on sale of Toy Biz common stock--- - 22.0 14.3 - -
Equity in net (loss) income of
unconsolidated
subsidiaries and other,
net-------------------- (5.0) (1.2) 1.7 11.9 4.5
-------------- ------------- ------------ ----------- ------------
(Loss) income before reorganization
items, provision for income
taxes, minority interest and (245.8) (425.5) (22.0) 104.3 94.4
extraordinary item----------------
Reorganization 11.3 5.5 - - -
items--------------------------------
-------------- ------------- ------------ ----------- ------------
(Loss) income before provision for
income taxes, minority interest
and extraordinary item------------ (257.1) (431.0) (22.0) 104.3 94.4
Provision for income taxes------------- 0.6 21.7 5.7 42.5 38.4
-------------- ------------- ------------ ----------- ------------
(Loss) income before minority interest
and extraordinary item------------ (257.7) (452.7) (27.7) 61.8 56.0
Minority interest in (loss) earnings (3.4) 11.7 17.4 - -
of Toy Biz------------------------
-------------- ------------- ------------ ----------- ------------
(Loss) income before extraordinary item (254.3) (464.4) (45.1) 61.8 56.0
Extraordinary item, net of taxes------- - - (3.3) (d) - -
-------------- ------------- ------------ ----------- ------------
Net (loss) income---------------------- $ (254.3) $ (464.4) $ (48.4) $ 61.8 $ 56.0
============== ============= ============ =========== ============
(Loss) earnings per common share: (f)
Basic:
(Loss) income before extraordinary item $ (2.50) $ (4.56) $ (0.45) $ 0.63 $ 0.58
Extraordinary charge-------------------- - - (0.03)(d) - -
-------------- ------------- ------------- ----------- ------------
Net (Loss) income per share------------- $ (2.50) $ (4.56) $ (0.48) $ 0.63 $ 0.58
============== ============= ============ =========== ============
Diluted:
(Loss) income before extraordinary
item----------------------------------- $ (2.50) $ (4.56) $ (0.45) $ 0.60 $ 0.55
Extraordinary charge------------------- - - (0.03) - -
------------- ----------- ----------- ---------- ------------
Net (loss) income per share------------ $ (2.50) $ (4.56) $ (0.48) $ 0.60 $ 0.55
============= =========== =========== ========== ============
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET DATA: (Dollars in millions)
DECEMBER 31,
---------------------------------------------------------------------------------
1997 (a), (c) 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Goodwill and other intangibles, net----- $ 174.7 $ 317.6 $ 604.0 $ 433.6 $ 299.0
Total assets---------------------------- $ 476.5 $ 844.0 $ 1,226.3 $ 828.7 $ 472.0
Long-term debt (including current
portion)-------------------------------- $ 130.4 $ 155.6 $ 586.5 $ 384.3 $ 250.2
Liabilities subject to settlement under
reorganization (g)---------------------- $ 502.2 $ 503.2 - - -
Total stockholders' (deficit) equity---- $ (512.0) $(256.3) $ 207.8 $ 243.0 $ 147.3
</TABLE>
- - -----------------------------
(a) Includes fourth quarter write-downs of trading card and children's
activity sticker goodwill of approximately $106.7 million. This
charge was reflected in "Amortization and write-off of goodwill,
intangibles and deferred charges". The charge was of a non-cash
nature.
(b) Includes fourth quarter charges comprised of: a write-down of
goodwill and other intangibles of approximately $278.5 million and a
valuation allowance of approximately $32.2 million provided to offset
deferred tax assets of certain subsidiaries that were previously
recorded. These charges were reflected in "Amortization and write-off
of goodwill, intangibles and deferred charges", and "Provision for
income taxes", respectively. These charges were of a non-cash nature.
(c) The Company's consolidated statements of operations and financial
position include the operations and financial position of Toy Biz
since the Toy Biz IPO on March 2, 1995 through June 30, 1997 and the
operations and financial position of SkyBox since its acquisition on
April 27, 1995.
(d) During 1995, the Company recorded a $3.3 million extraordinary loss,
net of taxes of $2.1 million, which represents a write-off of the
related deferred financing costs associated with the termination of
the term loan portion of its Amended and Restated Credit Agreement
(as defined herein).
(e) The Company's consolidated statements of operations and financial
position include the operations of Panini since its acquisition on
September 1, 1994.
(f) The (loss) earnings per share amounts prior to 1997 have been
restated as required to comply with Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). For further
discussion of (loss) earnings per share and the impact of FAS 128,
see Note 3 of Notes to Consolidated Financial Statements.
(g) Certain liabilities have been classified to "Liabilities subject to
settlement under reorganization" in accordance with bankruptcy
reporting as prescribed in Statement of Position 90-7 ("SOP 90-7").
ITEM 7. 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, adhesives and confectionery products.
RECENT DEVELOPMENTS - REORGANIZATION
On December 27, 1996, the Debtor Companies filed a voluntary petition
for reorganization under chapter 11 of the Bankruptcy Code and were operating
their businesses as debtors-in-possession under the control of the Bankruptcy
Court until December 22, 1997, when the District Court appointed the Chapter
11 Trustee to replace the debtors-in-possession. 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.
As more fully described in "Description of Business", on October 7,
1997, Toy Biz announced an unsolicited merger proposal for the Company. On
March 13, 1998, the District Court approved the disclosure statement for the
Toy Biz Plan. The District Court had set May 4th and 5th, 1998 as the dates
for a confirmation hearing for the
22
<PAGE>
proposed Toy Biz Plan. On April 13, 1998, the United States Court of Appeals
for the Third Circuit issued an order granting a motion to expedite the appeal
of a March 30, 1998 decision by the District Court regarding the Company's
voting control over Toy Biz. Pending the expedited determination of this
appeal, the order also stayed the effectiveness of the District Court's
decision and the hearing scheduled for May 4, 1998 for confirmation of the Toy
Biz Plan. The Chapter 11 Trustee, management of Toy Biz and the secured
lenders of the Company are currently in negotiations attempting to settle the
claims that are the subject of the appeal as well as other matters. There can
be no assurance that such negotiations will be successful and that such claims
will be settled. The Toy Biz Plan is subject to approval of the senior
creditors of Marvel, who have agreed to support this plan, confirmation of the
District Court and other conditions. There can be no assurance that the Toy
Biz Plan will be confirmed.
The Company has also received preliminary indications of interest
from third parties to purchase the Company or all or part of the Company's
assets. As of this date, the Company cannot predict whether any of these
indications of interest will result in a more formal offer to purchase any or
all of the Company or its assets, nor can the Company determine whether any
such indications of interest will result in offers superior to the Toy Biz
Plan. In the event that the Toy Biz Plan is not confirmed or that indications
of interest do not result in offers, the Company's creditors or equity holders
may seek other alternatives for the Company, including bids for the Company or
parts thereof through an auction process or possible liquidation. Several
third parties have conducted due diligence reviews with respect to the
Company. The Chapter 11 Trustee has retained the services of an investment
banking firm to assist him in this process.
RESULTS OF OPERATIONS
In recent years there has been an overall decline in the comic book
market, and more specifically, a significant reduction in speculative
purchases of comic books and reduced readership, 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.
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 level of fan interest, although
continuing to show some signs of improvement during 1997, has not returned to
the levels experienced prior to the 1994-1995 labor situations in professional
sports. 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. In 1997, the Company
discontinued unprofitable sports product lines and continued to focus on
trading card specialty stores and select mass market accounts in an effort to
reduce returns and inventory obsolescence.
In 1994 and 1995, the sale of entertainment cards based on the Marvel
Characters and third party licensed characters substantially offset the
decline in sports trading cards. However, in 1996, the Company's sales of
entertainment trading cards was adversely affected by lack of commercial
success of properties licensed from third parties as well as the lower demand
for trading cards based on comic book characters. In 1997, as a result of this
significant contraction in the entertainment card market, the Company
discontinued various unprofitable entertainment product lines. 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 and the Company anticipates a continued significant adverse effect on
profit margins unless the current contractual commitments are successfully
re-negotiated. The Company is attempting to re-negotiate such licenses but
there can be no assurance these negotiations will be successfully concluded by
the Company in light of its bankruptcy proceedings.
Primarily in the second half of 1997, the Company further reduced its
operating costs through the realignment of management functions which resulted
in the termination of a number of highly compensated employees, the
restructuring and consolidation of administrative staff and editorial staff,
the improvement of the distribution of the Company's trading card products and
other items to conserve cash within the Company. In the fourth quarter of
1996, the Company instituted a series of actions to reduce its operating
costs. These actions include, the termination of certain employees and the
closure of certain facilities and given the underlying weaknesses in certain
of the Company's markets and the negative impact associated with the
uncertainty surrounding its chapter 11 proceeding, the Company made additional
provisions for returns and inventory obsolescence and provided additional
reserves for other assets which it believed would not be realized. The
aggregate amount of the foregoing charges was approximately $69.3 million,
which includes restructuring charges
23
<PAGE>
of $15.8 million. These charges were reflected in various line items in the
Company's Consolidated Statements of Operations.
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.
Currently there is no Company sponsored plan of reorganization. There
can be no assurance that any plan of reorganization, including the Toy Biz
Plan, will be confirmed under the Bankruptcy Code. If the Company is unable to
obtain confirmation of a plan of reorganization, its creditors or equity
security holders may seek other alternatives for the Company, which includes
continuing to solicit bids for the Company or parts thereof through an auction
process or possible liquidation. There can be no assurance that upon
consummation of a plan of reorganization that there will be improvement in the
Company's financial conditions or results of operations. The Company has, and
will continue to incur professional fees and other cash demands typically
incurred in bankruptcy.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
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
Consolidated Financial Statements do not include any adjustments to its
investment in Toy Biz since July 1, 1997. 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 Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996, respectively are listed below
<TABLE>
<CAPTION>
TOY BIZ:
Six months ended June 30, 1997 Year ended December 31, 1996
------------------------------ ---------------------------
<S> <C> <C>
Revenue $68.9 $221.6
Cost of sales 42.2 116.5
Selling, general & administrative expenses 27.8 61.9
Depreciation and amortization 6.5 15.7
Amortization of goodwill and intangibles .3 .4
Interest expense, net .1 (.6)
Provision (benefit) for income taxes (3.2) 11.1
------------------------------ ---------------------------
Income before minority interest (4.8) 16.6
Minority interest in (loss) earnings (3.5) 11.6
------------------------------ ---------------------------
Net (loss) income (1.3) 5.0
============================== ===========================
</TABLE>
The Company's net revenues were $402.8 million and $523.9 million in
1997 and 1996, respectively, a decrease of $121.0 million or 23.1%. This
reflects a decrease of $90.7 million in net trading card and children's
activity sticker revenues, a decrease of $15.0 million in publishing revenues,
a decrease of $8.2 million in licensing revenues, and a $7.1 million decrease
in other revenues. The decrease in net trading card revenues of $48.6 million
was primarily due to the continuing general decline in the demand for trading
cards, the discontinuance of unprofitable product lines and the Company's
continued focus on trading card specialty stores and select mass market
accounts which generally resulted in lower net revenues in 1997. In addition,
net entertainment card revenues decreased due to lower sales of cards based on
Marvel's comic book characters due in part to market conditions in the comic
book specialty store market and, to a lesser extent, lower sales of cards in
1997 as compared to 1996 based on properties licensed from third parties.
However, as compared to 1996, provisions for trading card sales returns were
significantly lower, reflecting the Company's continued focus on its
distribution strategy. The decrease in net children's activity sticker
revenues of $42.1 million was due to market declines in Western Europe and
lower net revenues in certain European markets principally due to lower net
revenues from entertainment stickers based on properties licensed from third
parties that had reduced commercial success in 1997 as compared to 1996. In
addition, in 1996, there were increased levels of net sticker revenues
resulting from the European Cup soccer tournament. The decrease in net
publishing revenues was due to the impact on the Company of the continuing
decline in the overall comic book market and the discontinuation of
unprofitable children's magazines.
24
<PAGE>
The decrease in licensing revenue was primarily due to the Company's
bankruptcy and the lack of commercial success of the existing media exposure
for the Company's characters in spite of existing media exposure. Pursuant to
the agreement between Fox Kids Worldwide and the Company, the Company has a
new animation series based on the Silver Surfer which began to air on the Fox
Children's Network in February 1998. As a result of the Company's bankruptcy
proceedings, potential licensors appear to be less willing to deal with the
Company due to concern regarding the Company's future ownership and the
ability of Marvel to support its programs. In addition, the decrease in
licensing revenues was due to a lesser extent to the renegotiation of the
America Online agreement with the Company which required a partial write-down
in 1997 that had been previously recognized under the old agreement. The
decrease in other revenues in 1997 was due to the sale of a portion of the
confectionery business in 1997.
Gross profit was $78.5 million and $104.0 million in 1997 and 1996,
respectively, a decrease of $25.5 million. The decrease in gross profit was
principally due to a decrease in net revenues in 1997. As a percentage of net
revenues, gross profit was 19.5% in 1997 as compared to 19.9% in 1996. Gross
profit for trading cards and stickers was significantly affected in 1997, as
it was in 1996, as a result of relatively high minimum guarantee royalties
compared to sales levels for certain trading card and sticker licensors.
This was partially offset by the increase in gross profit for publishing that
resulted from the elimination of charges recorded in 1996 for unfavorable
artist contracts.
Selling, general & administrative ("SG&A") expenses were $127.2
million and $182.6 million in 1997 and 1996, respectively. The decrease of
$55.4 million was mainly attributable to overhead reductions associated with
the restructuring of the comic book publishing and distribution, trading card
and confectionery operations and a realignment of management functions, the
benefits of which will continue to accrue to the Company in the future.
Additionally, as a result of lower sales, the Company reduced spending on
advertising and promotional events. As a percentage of net revenues, SG&A was
31.6% in 1997 as compared to 34.9% in 1996.
During the fourth quarter of 1996, the Company recorded a $15.8
million restructuring charge, which primarily represents the costs related to
the closure of facilities, including severance related to terminated employees
and other costs associated with the restructuring of its comic book
distribution subsidiary and confectionery businesses.
Depreciation and amortization was $11.3 million and $16.1 million in
1997 and 1996, respectively. The decrease of $4.8 million was primarily due to
lower amortization of animation costs and the effects of certain write-downs
of fixed assets in 1996.
Amortization and write-off of goodwill, intangibles and deferred
charges was $123.5 million and $302.9 million in 1997 and 1996, respectively.
As described above, continuing operating losses in the trading card and
sticker businesses through the fourth-quarter of 1997, as well as significant
long-term changes in industry conditions which resulted in lower than expected
fourth quarter sales, including basketball trading card sales, indicated to
the Company, at that time, that there may be asset impairment. During the
fourth quarter of 1997, the Company also completed its 1998 business plan
which anticipates a continuation of the trend of lower revenues from the
trading card and children's activity stickers businesses. Accordingly, the
Company evaluated the recoverability of the carrying value of long-lived
assets, including goodwill and other intangibles, in accordance with its
stated accounting policies and recorded a non-cash charge of approximately
$106.7 million, of which $78.5 million related to trading cards and $28.2
million related to activity stickers. The Company had recorded a non-cash
charge of approximately $278.5 million during the fourth quarter of 1996
resulting from an asset impairment related substantially to its trading card
business, and to a lesser extent, its publishing business. See Note 13 of
Notes to Consolidated Financial Statements.
Interest expense, net was $46.2 million and $59.5 million in 1997 and
1996, respectively. The decrease in interest expense of $13.3 million
primarily reflects a Bankruptcy Court ruling permitting the suspension of
adequate protection payments by the Company on the Credit Agreements
(excluding the Panini Term Loan Agreement) and therefore, in accordance with
SOP 90-7, suspension of interest expense accruals. The unrecorded interest on
the above for the period was $29.4 million. The decrease in interest expense
was partially offset by the interest expense of $8.5 million on borrowings
under the DIP Loan in 1997 and on other increased short-term borrowings.
A loss of $4.7 million resulting from the sale of a portion of the
Company's confectionery business was incurred in the 1997 period. The proceeds
of $3.0 million were paid to the DIP lenders.
25
<PAGE>
In the third quarter of 1996, the Company sold 2.5 million shares of
Toy Biz common stock and realized a gain of $22.0 million. See Note 4 of Notes
to Consolidated Financial Statements.
Equity in net loss of unconsolidated subsidiaries was $5.0 million
and $1.2 million in 1997 and 1996, respectively. During 1997, the Company
wrote-down the value of its Marvel themed restaurant by $5.5 million. The
current plans for the Company are to operate one restaurant and to open a
second restaurant and find alternative financing or licensing arrangements for
a number of other restaurants in the future. As a result of these revised
plans, the Company revalued its investment in these assets.
Total bankruptcy reorganization items of $11.3 million for the 1997
period and $5.5 million for the 1996 period includes professional charges 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,
the District Court ordered the Company to pay $1.2 million on account of
certain professional fees which will be paid in three equal installments over
approximately a two month period. As of December 31, 1997, the unpaid
professional fees described above were $7.3 million, however, such fees have
not been approved by the District Court and may be reduced by such court.
Provision for income taxes was $3.8 and $10.6 million in 1997 and
1996, respectively. The net tax provision in 1997 primarily represents certain
current year foreign and state and local taxes and an adjustment to prior year
deferred foreign taxes partially offset by a benefit for income taxes related
to certain Panini entities. The Company has recorded no benefit in the 1997
consolidated statements of operations for any potential tax benefits from
operating losses. In 1996, the net tax provision primarily represented the
establishment of a valuation allowance against deferred tax assets partially
offset by a U.S. federal and foreign tax benefit relating to losses generated
from operations. Taxes paid with respect to the Company's income in the three
year carryback period have been fully recaptured by loss carrybacks in prior
years. Therefore, the 1997 loss cannot be carried back for a refund.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1995
Basis For Management's Discussion and Analysis
The Management's Discussion and Analysis of Financial Condition and
Results of Operations presented below compare only the Company's publishing,
licensing, trading card and sticker, confectionery and adhesive businesses.
The Company has eliminated the results of operations of Toy Biz from the
discussion comparing the years ended December 31, 1996 and 1995. The results of
operations for Toy Biz included in the Company's Consolidated Statements of
Operations for the years ended December 31, 1996 and 1995, respectively, are
listed below
TOY BIZ:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
---------------------- ---------------------
<S> <C> <C>
Revenue $221.6 $181.7
Cost of Sales 116.5 80.4
Selling, general & administrative expenses 61.9 44.0
Depreciation and amortization 15.7 11.6
Amortization of goodwill and intangibles .4 0.1
Interest income, net (.6) (.9)
Provision (benefit) for income taxes 11.1 18.7
---------------------- ---------------------
Income before minority interest 16.6 27.8
Minority interest in (loss) earnings 11.6 17.6
---------------------- ---------------------
Net (loss) income $5.0 $10.2
====================== =====================
</TABLE>
The Company's net revenues were $523.9 million and $647.2 million in
1996 and 1995, respectively, a decrease of $123.3 million or 19.1%. This
reflects a decrease of $44.7 million in net publishing revenues, a decrease of
$56.7 million in net trading card and sticker revenues, and a decrease of
$34.7 million in licensing revenues, partially offset by a $12.8 million
increase in other revenues. The decrease in net publishing revenues was due to
the
26
<PAGE>
impact on the Company of the continuing decline in the overall comic book
market, the reduction of marginally profitable titles resulting from the
implementation of the Company's business strategy, and beginning in July 1995
the discontinuance of distribution by Heroes World of comic book publications
other than the Company's titles. The decrease in net trading card revenues was
primarily due to the continuing general decline in the demand for trading
cards as well as the change in the Company's distribution of its trading cards
to concentrate on trading card specialty stores and select mass market
accounts which generally resulted in lower net revenues in 1996. In addition,
net entertainment card revenues decreased due to lower sales of cards based on
Marvel's comic book characters due in part to market conditions in the comic
book specialty store market, as well as lower sales of cards based on
properties licensed from third parties resulting from lower commercial success
of such properties in 1996 as compared to 1995. However, as compared to 1995,
provisions for trading card sales returns were significantly lower, reflecting
the change in distribution and the inclusion in 1995 of a significant increase
in sales returns allowances. Such lower sales return provisions, combined with
the inclusion of net revenues from SkyBox for a full year in 1996 versus only
eight months in 1995 (the acquisition of SkyBox was consummated on April 27,
1995), partially offset the lower sales discussed above. These decreases in
net trading card revenues were partially offset by an increase in net revenues
of stickers. This increase in net sticker revenues was due to the 1996
European Cup soccer tournament and expansion into new markets such as Brazil
and Russia, and was partially offset by higher provisions for returns for
stickers in 1996. In addition, the Company experienced lower net revenues in
certain European markets principally due to reduced commercial success of
entertainment stickers based on properties licensed from third parties in 1996
as compared to 1995. Licensing revenues decreased in 1996 as compared to 1995
primarily as a result of the lack of commercial success of the Company's
characters in spite of existing media exposure, as well as non-repeating 1995
licensing revenues, which included certain significant long term licenses for
particular licensing categories. Licensing revenues will vary from period to
period depending on the volume and extent of licensing agreements entered into
during any particular period, as well as the level and commercial success of
the media exposure of the Marvel Characters. The improvement in other revenues
was due to increased sales of adhesive paper by Panini.
Gross profit was $104.0 million and $194.3 million in 1996 and 1995,
respectively, a decrease of $90.3 million. As a percentage of net revenues,
gross profit was 19.8% in 1996 as compared to 30.0% in 1995. The decrease in
gross profit as a percentage of net revenues was due primarily to lower gross
sales as well as the effect of higher return provisions for stickers, the
effect of lower licensing revenues, an unfavorable product mix for trading
cards as compared to 1995 and the effect of lower net trading card revenues
without a corresponding decrease in royalty expense given minimum payment
obligations for trading cards in 1996.
SG&A expenses were $182.6 million and $182.7 million in 1996 and
1995, respectively. The decrease of $0.1 million was mainly attributable to a
general reduction in overhead expenses associated with the restructuring of
the trading card, publishing and confectionery operations offset by increased
advertising, promotion and selling expenses of Panini and the inclusion of the
operations of SkyBox for a full year in 1996 as compared to eight months in
1995. As a percentage of net revenues, SG&A was 34.9% in 1996 as compared to
28.2% in 1995.
During the fourth quarter of 1996, the Company recorded a $15.8
million restructuring charge, which primarily represents the costs related to
the closure of facilities, including severance related to terminated employees
and other costs associated with the restructuring of its comic book
distribution subsidiary and confectionery businesses. During the fourth
quarter of 1995, the Company recorded a $25.0 million restructuring charge,
which primarily represents the costs related to the consolidation and closure
of facilities, severance related to terminated employees and other costs
associated with its publishing, trading card and confectionery businesses.
Depreciation and amortization was $16.1 million and $9.6 million in
1996 and 1995, respectively. The increase of $6.5 million was primarily due to
the effect of certain write-downs of fixed assets and the amortization of
animated film costs.
Amortization and write-off of goodwill, intangibles and deferred
charges was $302.9 million and $17.8 million in 1996 and 1995, respectively
and write-off. The increase of $285.1 million mainly reflects the write-down
of goodwill and other intangibles which was primarily due to the significant
and long-term changes in industry conditions in trading cards and publishing.
See Note 13 of Notes to Consolidated Financial Statements.
Interest expense, net was $59.5 million and $44.1 million in 1996 and
1995, respectively. The increase in interest expense of $15.4 million
primarily reflects the interest expense from the increased borrowings in 1995
under the U.S. Term Loan Facility in connection with the acquisition of SkyBox
for a full year in 1996 versus only
27
<PAGE>
eight months in 1995, increased borrowings under the Credit Agreements and
Panini's short term lines of credit, borrowings for the expansion of Panini's
Adespan adhesives facility, and higher average borrowing rates.
The gain on sale of Toy Biz common stock was $22.0 million in 1996
and $14.3 million from the Toy Biz IPO in 1995. See Note 4 of Notes to
Consolidated Financial Statements.
Provision (benefit) for income taxes was $10.6 million and $(13.0)
million in 1996 and 1995, respectively. The net tax provision in 1996
primarily represents the establishment of a valuation allowance against
deferred tax assets partially offset by a U.S. federal and foreign tax benefit
relating to losses generated from operations. In 1995, the tax benefit
primarily was a result of a U.S. federal benefit from losses in its
publishing, licensing and trading card and confectionery operations, partially
offset by taxes on income from foreign operations. As a result of the losses
incurred during 1996, in 1997 the Company received an income tax refund of
approximately $10.4 million under the Company's tax sharing agreement with
certain Mafco affiliates.
Total bankruptcy reorganization items of $5.5 million for the 1996
period includes professional charges and other costs typical to those incurred
by entities in bankruptcy.
In 1995, the Company recorded a $3.3 million extraordinary loss, net
of taxes of $2.1 million, which represented a write-off of deferred financing
costs associated with the permanent reduction of the term loan portion of the
Amended and Restated Credit Agreement.
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 its strategic initiatives. See
"Description of Business". The unsecured creditors committee has 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 has
occurred as of yet on this motion and none is scheduled by the District Court.
Nevertheless, the Debtor Companies have 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 $3.0 million resulting
from the sale of a portion of the Company's confectionery business in August
1997, and the current payment of interest and related administrative fees
discussed below. 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. There can be no assurance that the DIP Lenders and the
pre-petition secured lenders will allow the Company to continue to use its
cash collateral.
The Company incurred significant cash operating losses during the
first six months of 1997. Management of the Company believes the Company has
adequate near-term working capital to fund normal operations until the third
quarter of 1998. In connection with the appointment of the Chapter 11 Trustee
for the Company, The Chase Manhattan Bank has advised the Company that it is
willing to lead a syndicate to make loans to Marvel subject to execution of
definitive documentation and agreement on key terms. The Chapter 11 Trustee
has not determined that such additional financing is necessary. In any event,
District Court approval is required for such additional loans to the Company
and there can be no assurance such approval will be granted by the court.
On June 5, 1997, the Bankruptcy Court approved an order suspending
adequate protection payments being made by the Company to the Bank Lenders. As
a result, the Company 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 (as such terms are defined herein). The amount of the
suspended adequate protection payment as of December 31, 1997 was $29.4
million and is not included in the liabilities of the Company reflected in the
Consolidated Balance Sheets. The Company has, however, continued paying
interest on the DIP Loan.
28
<PAGE>
The Company sold a portion of its confectionery business for a loss
in August 1997. It has decided to sell the remaining portion of the
confectionery business. In 1997, confectionery revenues represented
approximately 6% of consolidated net revenues and the operations of the
confectionery business incurred a loss of $5.3 million as compared to a loss
of $1.1 million in 1996 (excluding non-recurring charges). The Company does
not believe the confectionery business is essential to the operation of its
business. If a sale of the remaining portion of the confectionery business
were to occur, the net proceeds of such sale would be due to the Company's
lenders in accordance with the terms of the Credit Agreements. However, the
Company may seek to negotiate with its lenders to retain the net proceeds
rather than enter into a replacement financing agreement. There can be no
assurance that the Company will not incur a loss upon the sale of the
remaining portion of the confectionery business or that the Company's lenders
will permit it to retain the net proceeds of any such sale.
In connection with the Company's use of cash collateral and the
stipulation and order entered into on October 21, 1997, the Company received a
tax refund from Mafco in the amount of $10.4 million and such funds were
delivered to The Chase Manhattan Bank. Of this $10.4 million, The Chase
Manhattan Bank transferred $4.2 million to Marvel and retained $6.2 million
which was applied toward interest on the DIP Loan and related administrative
fees through March 1998.
Panini, a subsidiary of the Company that has not filed for protection
under chapter 11 and therefore is not one of the Debtor Companies, has
incurred operating losses over the last two years. In addition, in 1996,
Panini suffered a fire at its adhesives facility which caused approximately
$10.0 million in insured losses, of which the Company has not yet received a
significant amount of the insurance proceeds. In July 1997, Panini suspended
all payments of interest and principal under the Panini Term Loan Agreement.
This action constituted an event of default under the Panini Term Loan
Agreement and, consequently, the Company reclassified the Panini Term Loan to
current liabilities. Through June 1997, the Company borrowed approximately
$10.0 million under its DIP Loan to fund Panini's working capital needs.
In addition, 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 December 31, 1997) 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 December 31, 1997, 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
October 1998. 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 $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.
The Company has loan and financing arrangements with several
creditors. In April 1995, the Company entered into a $350.0 million term loan
agreement (as amended) with a syndicate of banks, the Co-Agents and The Chase
Manhattan Bank as administrative agent (the "U.S. Term Loan Agreement"). On
August 30, 1994, the Company entered into a $120.0 million revolving loan
agreement with a syndicate of banks, the Co-Agents and The Chase Manhattan
Bank, as administrative agent (the "Amended and Restated Credit Agreement").
During March 1996, the Company entered into a $25.0 million revolving line of
credit with The Chase Manhattan Bank (the "Chase Revolving Line of Credit").
On August 30, 1994, the Company, Panini and Insituto Bancario San Pado Di
Torino S.p.A. entered into a term loan and guarantee agreement providing for a
term loan credit facility of lire 244.5 billion (approximately $154.0 million
based on exchange rates in effect on date of acquisition) (the "Panini Term
Loan Agreement"). The U.S. Term Loan Agreement, the Amended and Restated
Credit Agreement, the Chase Revolving Line of Credit and the Panini Term Loan
Agreement are collectively referred to herein as the "Credit Agreements."
As of March 15, 1998, the Company's outstanding bank indebtedness was
approximately $749.6 million, of which $91.2 million related to borrowings
under the DIP Loan, $599.5 million related to borrowings under the Credit
Agreements, approximately lire 25 billion (approximately $14.0 million based
on exchange rates at March
29
<PAGE>
15, 1998) relates to borrowings for Panini's Adespan adhesives facility,
approximately lire 53.4 billion (approximately $29.8 million based on exchange
rates at March 15, 1998) relates to borrowings under Panini's short term lines
of credit and approximately lire 27 billion (approximately $15.1 million based
on exchange rates at March 15, 1998) relates to borrowings under Panini's loan
from The Chase Manhattan Bank.
As part of the chapter 11 process, the Company has received a
significant number of proofs of claims. The Company is currently in the
process of reviewing these claims and believes that a majority of these claims
may have been paid or are without merit. Although the Company believes that
amounts recorded as of December 31, 1997 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 Consolidated Financial Statements. The amounts reported in
the 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 confirmation of a 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
consolidated financial 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. In 1997 the Company recorded a non-cash write-down of
goodwill of $106.7 million related to its trading card and sticker businesses.
Net cash (used in) provided by operating activities was ($61.3)
million, ($102.9) million and $3.5 million for the years ended December 31,
1997, 1996 and 1995, respectively. The use of funds in 1997 and in 1996 was
principally due to the loss from operations and was partially offset by a
decrease in working capital. In 1997, the Company recorded a non-cash charge
of approximately $106.7 million related to the write-down of goodwill
associated with its trading card and sticker businesses. In 1996 the Company
recorded a non-cash charge of approximately $278.5 million related to the
write-down of goodwill and other intangibles and the establishment of a
valuation allowance of $32.2 million related to its deferred tax assets.
Cash used in investing activities was $25.7 million, $10.8 million
and $230.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The primary use of these funds 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. The primary use of cash in
1996 and 1995 was for capital expenditures for Panini's Adespan adhesives
facility, tooling and molds and capitalized development costs related to Toy
Biz. In 1996, these costs were partially offset by net proceeds from the
Company's sale of a portion of its investment in Toy Biz. Capital expenditures
for the Company are projected to approximate $5.0 million for the year ending
December 31, 1998. The Company expects to incur approximately $1.4 million in
net production costs and royalty advances for the SILVER SURFER animated
series produced for the 1998 broadcast year.
Since the Debtor Companies entered into bankruptcy on December 27,
1996 through the year ended December 31, 1997, they have incurred
approximately $16.8 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. As of December 31, 1997, unpaid professional
fees included in accounts payable and accrued expenses were approximately $7.3
million. However, on March 4, 1998, the District Court ordered the Debtor
Companies to pay $1.2 million of certain professional fees which will be paid
in three equal installments over a sixty day period. In addition, 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 has not
accrued any 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 previously discussed, NBAP has commenced litigation against Panini
seeking approximately $57 million for accrued and unaccrued royalty and other
payments under a license agreement with Marvel. Marvel has accrued unpaid
minimum royalties due to NBAP through December 31, 1997 on its consolidated
financial statements, but has not accrued for any future royalty payments that
may be due to NBAP from Fleer/SkyBox. In
30
<PAGE>
order to avoid requiring a replacement loan facility, the Company has
indicated to the District Court that it would prefer to pay royalties owed to
NBAP after confirmation of a plan of reorganization. The Company is currently
negotiating with NBAP to, among other things, reduce the minimum royalties due
to NBAP pursuant to its license agreement with Marvel. There can be no
assurance that such negotiations will be successful.
YEAR 2000
The Company is in the process of developing a plan to address its
Year 2000 needs. The Company has determined its current information systems
are currently not Year 2000 compatible. Given the uncertainty of the Company
due to the bankruptcy process, the Toy Biz Plan and indications of interest,
the Company has not begun to allocate funds towards this matter. The Company
intends to begin to allocate funds for Year 2000 compatibility on or about
June 30, 1998. This schedule may not permit the Company to make these systems
compatible on a timely basis. In addition, the cost to make these systems
compatible is not known at this time. There can be no assurance that the
Company will be successful in converting to Year 2000 capabilities, nor that
it will have the funds necessary to perform the conversion.
RECENT PRONOUNCEMENTS
In 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("FAS 130"). The Company is not required to disclose financial
statements in accordance with FAS 130 until the first quarter of 1998, at
which time it will reclassify interim financial statements for the prior year
for comparative purposes.
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 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 annual report on Form 10-K 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, (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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and supplementary data
listed in the accompanying Index to Consolidated Financial Statements and
Schedule on page F-1 herein. Information required by other schedules called
for under Regulation S-X is either not applicable or is included in the
financial statements or notes thereto.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
The information required by Part III, Items 10 through 13, of Form
10-K is incorporated by reference from the Registrant's definitive proxy
statement for its 1998 annual meeting of stockholders, and if such proxy is
not so filed, it will be filed as an amendment to the Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a)(1 and 2) Financial Statements. See Index to Consolidated
Financial Statements and Schedule which appears on page F-1 herein.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation of the
Registrant. Incorporated by reference to Exhibit
3.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 (the
"1991 10-K").
3.2 Amendment to Restated Certificate of Incorporation
of the Registrant. Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,
1993 (the "1993 10-K").
3.3 Amended and Restated By-laws of the Registrant.
Incorporated by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1996 (the "1996 Third
Quarter 10-Q").
9.1 Voting Trust Agreement dated as of March 2, 1995,
by and among the Registrant, Avi Arad and Toy Biz,
Inc. Incorporated by reference to Exhibit No. 9.1
to the Toy Biz, Inc. Registration Statement on Form
S-1 (No. 33-87268) filed February 21, 1995 (the
"Toy Biz 1995 Registration Statement").
9.2 Voting Trust Agreement dated as of March 2, 1995,
by and among the Registrant, Isaac Perlmutter,
Isaac Perlmutter T.A. and Toy Biz, Inc.
Incorporated by reference to Exhibit 9.2 to the Toy
Biz 1995 Registration Statement.
10.1 Formation and Contribution Agreement dated as of
March 19, 1993, among Toy Biz, Inc., Isaac
Perlmutter, Isaac Perlmutter T.A., the Registrant,
Avi Arad and Toy Biz Acquisition, Inc., as amended
as of March 31, 1993, and April 30, 1993.
Incorporated by reference to Exhibit 10.29 to the
Registrant's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1993.
10.2 Distribution Agreement dated as of September 1,
1993, between Curtis Circulation Company and the
Registrant. Incorporated by reference to Exhibit
10.3 to the 1993 10-K. Confidential treatment has
been granted for portions of this document.
10.3 Marketing and Distribution Agreement dated November
1, 1989, between Publishers Group West Incorporated
and the Registrant. Incorporated by reference to
Exhibit 10.5 to the 1991 Registrant's Statement on
Form S-1 (File No. 33-40574) (the "1991
Registration Statement").
10.4 Agreement dated November 9, 1994, between Time
Distribution Services and Fleer Corp. Incorporated
by reference to Exhibit 10.7 to the Registrant's
Annual Report on Form 10-K for the
32
<PAGE>
fiscal year ended December 31, 1994 (the "1994
10-K"). Confidential treatment has been granted for
portions of this document.
10.5 Lease dated as of July 1, 1986, between 387 P.A.S.
Enterprises and Cadence Industries Corporation (9th
Floor). Incorporated by reference to Exhibit 10.7
to the 1991 Registration Statement.
10.6 Lease Modification and Extension Agreement dated as
of July 1, 1991, between 387 P.A.S. Enterprises and
the Registrant (9th, 10th, 11th and 12th Floors).
Incorporated by reference to Exhibit 10.9 to the
1991 10-K.
10.7 Sublease dated September 13, 1991, between American
Banker Bond Buyer and the Registrant (12th Floor).
Incorporated by reference to Exhibit 10.10 to the
1991 10-K.
10.8 Marvel Entertainment Group, Inc. Amended and
Restated Stock Option Plan. Incorporated by
reference to Exhibit 10.18 to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 (the "1996 10-K").
10.9 Services Agreement dated as of July 22, 1991, among
the Registrant, MacAndrews & Forbes Holdings Inc.
and Andrews Group Incorporated. Incorporated by
reference to Exhibit 10.13 to the 1991 10-K.
10.10 Tax Indemnification Agreement dated as of July 22,
1991, between the Registrant and Mafco Holdings
Inc. Incorporated by reference to Exhibit 10.14 to
the 1991 10-K.
10.11 Tax Sharing Agreement dated as of May 18, 1993,
among the Registrant, certain of its subsidiaries
and Mafco Holdings Inc. Incorporated by reference
to Exhibit 10.32 to the Marvel (Parent) Holdings
Inc. Registration Statement on Form S-1 (File No.
33-65496).
10.12 Amended and Restated Tax Sharing Agreement dated as
of January 1, 1994, between Mafco Holdings Inc.,
Marvel III Holdings Inc., the Registrant and
certain subsidiaries of the Registrant.
Incorporated by reference to Exhibit 10.15 to the
1993 10-K.
10.13 Stock Purchase Agreement dated as of July 1, 1993,
between Marvel Holdings Inc. and the Registrant.
Incorporated by reference to Exhibit 10.16 to the
1993 10-K.
10.14 Term Sheet for License Agreement dated January 25,
1995, between Major League Baseball Properties,
Inc. and Fleer Corp. Incorporated by reference to
Exhibit 10.20 to the Registrant's 1994 10-K.
Confidential treatment has been granted for
portions of this document.
10.15 License Agreement dated December 22, 1994, between
Major League Baseball Players Association and Fleer
Corp. Incorporated by reference to Exhibit 10.21 to
the 1994 10-K. Confidential treatment has been
granted for portions of this document.
10.16 Amendment dated February 7, 1996, to License
Agreement dated December 22, 1994, between Major
League Baseball Players Association and Fleer Corp.
Incorporated by reference to Exhibit 10.22 to the
1995 10-K. Confidential treatment has been granted
for portions of this document.
10.17 Retail Product License Agreement dated July 21,
1995, between NBA Properties, Inc. and the
Registrant. Incorporated by reference to Exhibit
10.27 to the 1995 10-K. Confidential treatment has
been granted for portions of this document.
10.18 Employment Agreement dated as of August 1, 1995,
between the Registrant and Jeffrey L. Kaplan.
Incorporated by reference to Exhibit 10.44 to the
1995 10-K.
10.19 Employment Agreement dated as of January 26, 1996,
between the Registrant and Scott C. Marden.
Incorporated by reference to Exhibit 10.19 to the
1996 10-K.
<PAGE>
10.20 Employment Agreement dated as of August 13, 1996,
between the Registrant and David J. Schreff.
Incorporated by reference to Exhibit 10.2 to the
1996 Third Quarter 10-Q.
33
<PAGE>
10.21 Joint Venture Agreement dated December 9,1994,
between Marvel Restaurant Venture Corp. and EBCO
Management, Inc. Incorporated by reference to
Exhibit 10.45 to the 1994 10-K. Confidential
treatment has been granted for portions of this
document.
10.22 Amended and Restated Credit and Guarantee Agreement
dated as of August 30, 1994, among the Registrant,
Fleer Corp., the banks from time-to-time parties
thereto, the Co-Agents and Chemical Bank, as
Administrative Agent. Incorporated by reference to
Exhibit 10.49 to the Form 8-K filed September 15,
1994 (the "1994 August 8-K").
10.23 Term Loan and Guarantee Agreement dated as of
August 30, 1994, among Marvel Comics Italia S.r.l.,
the Registrant and Instituto Bancario San Paolo Di
Torino, S.p.A. Incorporated by reference to Exhibit
10.50 to the 1994 August 8-K.
10.24 Participation Agreement dated as of August 30,
1994, among Instituto Bancario San Paolo Di Torino,
S.p.A., New York Limited Branch, as Italian Lender,
Chemical Bank, as Administrative Agent, and the
financial institutions signatory thereto, as
Participants. Incorporated by reference to Exhibit
10.51 to the 1994 August 8-K.
10.25 Credit and Guarantee Agreement dated as of April
24, 1995, by and among the Registrant, Fleer Corp.,
Chemical Bank, as Administrative Agent, and the
financial institutions parties thereto.
Incorporated by reference to Exhibit (b)(3) to the
Registrant's Schedule 14D-1 dated March 15, 1995.
10.26 First Amendment dated as of November 22, 1994, to
the Amended and Restated Credit and Guarantee
Agreement by and among the Registrant, Fleer Corp.,
Chemical Bank, as Administrative Agent, and the
financial institutions parties thereto.
Incorporated by reference to Exhibit 10.4 to the
Form 8-K of the Registrant filed May 11, 1995.
10.27 Second Amendment dated as of April 24, 1995, to the
Amended and Restated Credit and Guarantee Agreement
by and among the Registrant, Fleer Corp., Chemical
Bank, as Administrative Agent, and the financial
institutions parties thereto. Incorporated by
reference to Exhibit 10.5 to the Form 8-K of the
Registrant filed May 11, 1995.
10.28 Consent Number 1 dated as of February 9, 1996, to
the Registrant's Credit Agreements with Chemical
Bank, as Administrative Agent, and the financial
institutions from time to time parties thereto.
Incorporated by reference to Exhibit 10.55 to the
1995 10-K.
10.29 Third Amendment dated as of March 1, 1996, to the
Amended and Restated Credit and Guarantee Agreement
by and among the Registrant, Fleer Corp., Chemical
Bank, as Administrative Agent, and the financial
institutions from time to time parties thereto.
Incorporated by reference to Exhibit 10.56 to the
1995 10-K.
10.30 Consent Number Two and First Amendment dated as of
March 1, 1996, to the Credit and Guarantee
Agreement among the Registrant, Fleer Corp., the
financial institutions from time to time parties
thereto, the Co-Agents and Chemical Bank, as
Administrative Agent. Incorporated by reference to
Exhibit 10.56 to the 1995 10-K
10.31 Consent Number Three dated as of June 30, 1996 to
the Credit and Guarantee Agreement among the
Registrant, Fleer Corp., the financial institutions
from time to time parties thereto, and The Chase
Manhattan Bank (formerly Chemical Bank) as
administrative agent. Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the period ended June 30, 1996
(the "1996 Second Quarter 10-Q").
10.32 Consent Number Two and Fourth Amendment, dated as
of June 30, 1996, to the Amended and Restated
Credit and Guarantee Agreement, by and among the
Registrant, Fleer Corp., the financial institutions
from time to time parties thereto, and The Chase
Manhattan Bank (formerly named Chemical Bank).
Incorporated by reference to Exhibit 10.2 to the
1996 Second Quarter 10-Q.
34
<PAGE>
10.33 Line of Credit, dated as of March 27, 1996 between
Fleer Corp. and The Chase Manhattan Bank (formerly
named Chemical Bank). Incorporated by reference to
Exhibit 10.3 to the 1996 Second Quarter 10-Q.
10.34 Consent, dated as of September 24, 1996 to the (a)
Participation Agreement, dated as of August
30,1994, among Instituto Bancario San Paolo Di
Torino, S. p. A., New York Limited Branch ("San
Paolo"), the financial institutions party thereto
and The Chase Manhattan Bank (formerly named
Chemical Bank), as administrative agent and (b) the
Term Loan and Guarantee Agreement among Panini S.
p. A. (formerly named Marvel Comics Italia S. r.
L.), the Registrant and San Paolo. Incorporated by
reference to Exhibit 10.1 to the 1996 Third Quarter
10-Q.
10.35 Standstill Agreement and Amendment dated as of
December 20, 1996 among the signatories thereto.
Incorporated by reference to Exhibit 10.35 to the
1996 10-K.
10.36 Consent Number Four and Second Amendment dated as
of November 25, 1996, to the Credit and Guarantee
Agreement among the Registrant, Fleer Corp., the
banks and other financial institutions, from time
to time as parties thereto and The Chase Manhattan
Bank (formerly Chemical Bank) as administrative
agent. Incorporated by reference to Exhibit 10.36
to the 1996 10-K.
10.37 Waiver Number One or Fifth Amendment, dated as of
November 25, 1996, to the Amended and Restated
Credit and Guarantee Agreement among the
Registrant, Fleer Corp., the banks and other
financial institutions from time to time as parties
thereto and The Chase Manhattan Bank (formerly
Chemical Bank) as administrative agent.
Incorporated by reference to Exhibit 10.37 to the
1996 10-K.
10.38 Revolving Credit and Guaranty Agreement, dated as
of December 27, 1996, among the Registrant, certain
subsidiaries of the Registrant, the banks party
thereto and The Chase Manhattan Bank, as agent.
Incorporated by reference to Exhibit 10.38 to the
1996 10-K.
10.39 First Amendment to Revolving Credit and Guaranty
Agreement, dated as of January 24, 1997 among the
Registrant, certain subsidiaries of the Registrant,
the banks party thereto and The Chase Manhattan
Bank, as agent. Incorporated by reference to
Exhibit 10.39 to the 1996 10-K.
10.40 Second Amendment to Revolving Credit and Guaranty
Agreement, dated as of February 11, 1997, among the
Registrant, certain subsidiaries of the Registrant,
the banks party thereto and The Chase Manhattan
Bank, as agent. Incorporated by reference to
Exhibit 10.40 to the 1996 10-K.
10.41 Stockholders Agreement dated as of March 2, 1995,
by and among the Registrant, Isaac Perlmutter,
Isaac Perlmutter T.A., Toy Biz, Inc., Avi Arad and
Zib, Inc. Incorporated by reference to Exhibit 10.1
to the Toy Biz 1995 Registration Statement.
10.42 Registration Rights Agreement dated as of March 2,
1995, by and among Toy Biz, Inc., the Registrant,
Isaac Perlmutter and Avi Arad. Incorporated by
reference to Exhibit 10.2 to the Toy Biz 1995
Registration Statement.
10.43 Services Agreement dated as of January 1, 1995,
between Toy Biz, Inc. and the Registrant.
Incorporated by reference to Exhibit 10.18 to the
Toy Biz 1995 Registration Statement.
10.44 License Agreement dated April 30, 1993, by and
between Toy Biz, Inc. and the Registrant, as
amended December 1, 1994. Incorporated by reference
to Exhibit 10.9 to the Toy Biz 1995 Registration
Statement.
10.45 Amendment dated November 22, 1995, to the License
Agreement dated April 30, 1993, as amended, between
Toy Biz, Inc. and the Registrant. Incorporated by
reference to Exhibit 10.45 to the 1996 10-K.
<PAGE>
10.46 Amendment dated February, 1995, to the License
Agreement dated April 30, 1993, as amended, between
Toy Biz, Inc. and the Registrant. Incorporated by
reference to Exhibit 10.9(b) to the Toy Biz 1995
Registration Statement.
35
<PAGE>
10.47 License Agreement dated July 1, 1994, between Toy
Biz, Inc. and the Registrant. Incorporated by
reference to Exhibit 10.12 to the Toy Biz 1995
Registration Statement.
21 Subsidiaries of the Registrant. Incorporated by
reference to Exhibit 10.35 to the 1996 10-K.
*23.1 Consent of Ernst & Young LLP
*27.1 Financial Data Schedule for year ended December 31,
1997
*27.2 Financial Data Schedule for year ended December 31,
1996
------------------------------------------
* Filed herewith.
(b) Reports on Form 8-K filed during the last quarter of the year
ended December 31, 1997.
Form 8-K was filed with the SEC on December 29, 1997 reporting
with respect to Item 5, Other Events.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Dated: April 15, 1998 By: /s/ Joseph Calamari
-------------------------------------
Joseph Calamari
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: April 15, 1998 By: /s/ Joseph Calamari
-------------------------------------
Joseph Calamari
President and
Chief Executive Officer
Dated: April 15, 1998 By: /s/ August J. Liguori
-------------------------------------
August J. Liguori
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: April 15, 1998 By: /s/ John J. Gibbons
-------------------------------------
John J. Gibbons
Trustee(*)
(*) Pursuant to an order of the Bankruptcy Court, the Trustee exercises
the powers of the Board of Directors.
37
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors................................................................................F - 2
Consolidated Balance Sheets as of December 31, 1997 and 1996..................................................F - 3
Consolidated Statements of Operations for the years ended December 31, 1997, 1996, and 1995...................F - 4
Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the years ended
December 31, 1997, 1996, and 1995....................................................................F - 5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995....................F - 6
Notes to Consolidated Financial Statements....................................................................F - 7
Schedule II - Valuation and Qualifying Accounts *............................................................
</TABLE>
* - All other schedules prescribed by the accounting regulations of the
Commission are not required or are inapplicable and therefore have been
omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Chapter 11 Trustee
Marvel Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of
Marvel Entertainment Group, Inc. (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' (deficit) equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Marvel Entertainment Group, Inc. at December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, on December 27, 1996, the Company,
together with eight of its subsidiaries, filed a voluntary petition for relief
under chapter 11 of the United States Bankruptcy Code. The Company is
currently operating its business under the jurisdiction of the Chapter 11
Trustee appointed by the United States District Court for the District of
Delaware (the "District Court"), and continuation of the Company as a going
concern is contingent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of requisite parties under the
United States Bankruptcy Code and confirmation of the District Court, the
ability to comply with its debtor-in-possession financing agreement,
resolution of various litigations against the Company, the Company's ability
to make its information systems Year 2000 compliant, and the Company's ability
to generate sufficient cash from operations and obtain financing sources to
meet its future obligations. 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. These matters raise substantial doubt about the Company's ability
to continue as a going concern. In the event a plan of reorganization is
accepted, continuation of the business thereafter is dependent on the
Company's ability to achieve sufficient cash flow to meet its restructured
debt obligations. The accompanying financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might
result from the outcome of these uncertainties.
Ernst & Young LLP
New York, New York
April 14, 1998
F-2
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash ..........................................................................................$ 21.7 $ 25.1
Accounts receivable, net ...................................................................... 86.8 229.1
Inventories, net .............................................................................. 43.9 78.1
Deferred income taxes ......................................................................... 2.0 6.2
Prepaid expenses and other .................................................................... 34.1 61.0
-------- --------
Total current assets .......................................................................... 188.5 399.5
Property, plant and equipment, net ............................................................ 55.5 79.5
Goodwill and other intangibles, net ........................................................... 174.7 317.6
Investment in Toy Biz ......................................................................... 33.0 -
Deferred charges and other .................................................................... 24.8 47.4
-------- --------
Total Assets .................................................................................$ 476.5 $ 844.0
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Debtor-in-Possession Loan .....................................................................$ 91.2 $ 10.0
Accounts payable .............................................................................. 78.3 98.5
Accrued expenses and other .................................................................... 127.3 174.7
Panini Credit Arrangements .................................................................... 39.5 37.3
Panini debt ................................................................................... 121.9 10.6
-------- --------
Total current liabilities ..................................................................... 458.2 331.1
Long-term debt ................................................................................ 8.5 145.0
Other long-term liabilities ................................................................... 19.6 20.4
Liabilities subject to settlement under reorganization ........................................ 502.2 503.2
-------- --------
Total Liabilities ............................................................................. 988.5 999.7
Minority interest in Toy Biz .................................................................. -- 100.6
Stockholders' deficit:
Preferred stock, $.01 par value; 50,000,000 shares authorized, none issued .................... -- --
Common Stock, $.01 par value; 250,000,000 shares authorized,
101,809,657 shares issued and outstanding at December 31, 1997 and 1996, respectively ......... 1.0 1.0
Additional paid-in capital .................................................................... 93.1 93.1
Accumulated deficit ........................................................................... (604.6) (350.3)
Cumulative translation adjustment ............................................................. (1.5) (0.1)
-------- --------
Total Stockholders' Deficit ..................................................... (512.0) (256.3)
-------- --------
Total Liabilities and Stockholders' Deficit .....................................$ 476.5 $ 844.0
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-3
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------------
1997 1996 1995
------------------ ------------ ------------
<S> <C> <C> <C>
Net revenues...................................................... $471.7 $745.5 $828.9
Cost of sales..................................................... 366.5 536.4 533.3
Selling, general & administrative expenses........................ 155.0 244.5 226.7
Restructuring charges............................................. -- 15.8 25.0
Depreciation and amortization..................................... 17.8 31.8 21.2
Amortization and write-off of goodwill, intangibles and deferred
charges......................................................... 123.8 303.3 17.9
Interest expense, net (contractual interest for the year ended
December 31, 1997 was $77.1).................................... 46.3 58.9 43.2
Foreign exchange loss/(gain), net................................. (1.6) 1.1 (0.4)
Loss on sale of portion of confectionery business................. 4.7 -- --
Gain on sale of Toy Biz common stock.............................. -- 22.0 14.3
Equity in net (loss) income of unconsolidated subsidiaries
and other, net.................................................... (5.0) (1.2) 1.7
--------- --------- ----------
Loss before reorganization items, provision for income taxes,
minority interest and extraordinary item......................... (245.8) (425.5) (22.0)
Reorganization items.............................................. 11.3 5.5 --
--------- --------- ----------
Loss before provision for income taxes, minority interest and
extraordinary item.............................................. (257.1) (431.0) (22.0)
Provision for income taxes........................................ 0.6 21.7 5.7
--------- --------- ----------
Loss before minority interest and extraordinary item.............. (257.7) (452.7) (27.7)
Minority interest in (loss) earnings of Toy Biz................... (3.4) 11.7 17.4
--------- --------- ----------
Loss before extraordinary item.................................... (254.3) (464.4) (45.1)
Extraordinary item, net of taxes.................................. -- -- (3.3)
--------- --------- ----------
Net loss.......................................................... ($254.3) ($464.4) ($48.4)
========= ========= ==========
Loss Per Common Share-Basic and Diluted:..........................
Loss before extraordinary item........................... ($2.50) ($4.56) ($0.45)
Extraordinary item....................................... -- -- ($0.03)
--------- --------- ----------
Net loss per share....................................... ($2.50) ($4.56) ($0.48)
========= ========= ==========
Common shares outstanding - Basic and Diluted (in millions) 101.8 101.8 101.3
========= ========= ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-4
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT) / CUMULATIVE
PAID-IN RETAINED TRANSLATION
COMMON STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------------- -------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $1.0 $81.2 $162.5 ($1.7) $243.0
Exercise of stock options.... - 8.1 - - 8.1
Tax benefit from exercise of
stock options................ - 3.1 - - 3.1
Currency translation
adjustment................... - - - 2.0 2.0
Net loss..................... - - (48.4) - (48.4)
------------- -------------- ---------------- -------------- -----------
Balance at December 31, 1995.
1.0 92.4 114.1 0.3 207.8
Exercise of stock options.... - 0.5 - - 0.5
Tax benefit from exercise of
stock options................ - 0.2 - - 0.2
Currency translation
adjustment................... - - - (0.4) (0.4)
Net loss..................... - - (464.4) - (464.4)
------------- -------------- ---------------- -------------- -----------
Balance at December 31, 1996.
1.0 93.1 (350.3) (0.1) (256.3)
Currency translation
adjustment................... - - - (1.4) (1.4)
Net loss..................... - - (254.3) - (254.3)
------------- -------------- ---------------- -------------- -----------
Balance at December 31, 1997.
$1.0 $93.1 ($604.6) ($1.5) ($512.0)
============= ============== ================ ============== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are in
integral part of these statements.
F-5
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................................... ($ 254.3) ($ 464.4) ($ 48.4)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ......................................... 34.9 56.6 39.2
Writedown of goodwill and other intangibles ........................... 106.7 278.5 --
Provision (benefit) for deferred income taxes ......................... -- 24.2 (5.2)
Extraordinary item, net ............................................... -- -- 3.3
Undistributed earnings of unconsolidated subsidiaries ................. 5.0 (0.8) (1.7)
Distributions from unconsolidated subsidiary .......................... -- -- 3.0
Gain from sale of Toy Biz common stock ................................ -- (22.0) (14.3)
Minority interest in earnings (loss) of Toy Biz ....................... (3.4) 11.7 17.4
Loss on sale of a portion of confectionery business ................... 4.7 -- --
Other ................................................................. -- -- (0.5)
Changes in assets and liabilities, net of effect of
acquisitions and a previously unconsolidated
subsidiary:
Decrease (increase) in accounts receivable, net ..................... 56.9 8.1 (7.5)
Decrease (increase) in inventories .................................. 3.4 2.1 (9.1)
Decrease (increase) in other assets ................................. (0.8) 6.7 (19.3)
(Decrease) increase in accounts payable ............................. (1.1) (8.3) 14.9
(Decrease) increase in accrued expenses and other ............... (13.3) 4.7 31.7
-------- -------- --------
Total adjustments: .................................................. 193.0 361.5 51.9
-------- -------- --------
Net cash (used in) provided by operating activities ............... (61.3) (102.9) 3.5
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .................................................. (17.4) (43.2) (42.5)
Net proceeds from sale of investment in Toy Biz ....................... -- 35.7 --
Cash proceeds from sale of a portion of confectionery business ........ 3.0 -- --
Acquisition of SkyBox, net of cash and cash equivalents acquired ...... -- -- (162.5)
Other acquisitions, net of cash and cash equivalents acquired ......... (3.9) -- (27.5)
Other investing activities ............................................ (7.4) (3.3) 2.0
-------- -------- --------
Net cash used in investing activities ............................. (25.7) (10.8) (230.5)
-------- -------- --------
Cash flows from financing activities:
Net (repayments) borrowings under term portion of credit
agreements ........................................................ (5.1) (5.3) 184.8
Net borrowings under revolving portion of credit agreement ............ -- 47.5 5.0
Net borrowings under Debtor-in-Possession Loan ........................ 81.2 10.0 --
Net borrowings under credit agreement and other debt .................. 13.1 27.0 20.2
Net proceeds to Toy Biz from common stock offerings ................... -- 9.3 44.1
Proceeds from exercise of stock options ............................... -- 0.5 8.1
Debt issuance costs ................................................... -- (3.2) (9.6)
Other financing activities ............................................ -- (1.0) 0.4
-------- -------- --------
Net cash provided by financing activities ......................... 89.2 84.8 253.0
-------- -------- --------
Effect of exchange rate changes on cash ........................... (1.0) 0.4 2.0
-------- -------- --------
Cash balance from previously
(consolidated)/unconsolidated subsidiary ........................ (4.6) -- 7.5
-------- -------- --------
Net (decrease) increase in cash ................................... (3.4) (28.5) 35.5
Cash, at beginning of period ...................................... 25.1 53.6 18.1
-------- -------- --------
Cash, at end of period ............................................ $ 21.7 $ 25.1 $ 53.6
======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-6
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
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"). The filing by the Debtor Companies of their voluntary
petitions for reorganization operated as an automatic stay against the
commencement or continuation of any judicial, administrative or other
proceedings against the Debtor Companies, any act to obtain possession of
property of or from the Debtor Companies, or any act to create, perfect or
enforce any lien against property of the Debtor Companies, with certain
exceptions under the Bankruptcy Code. Consequently, the Debtor Companies'
creditors are prohibited from attempting to collect pre-petition
debts without the consent of the Bankruptcy Court. Any creditor may seek
relief from the automatic stay and, if applicable, enforce a lien against any
security, if authorized to do so by the 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.
Accordingly, the Marvel Cases are being heard in the District Court.
The accompanying consolidated financial statements include the
accounts of Marvel Entertainment Group, Inc. and its subsidiaries. The
consolidated financial statements of the Company include the operations of
SkyBox International Inc. and its subsidiaries (collectively, "SkyBox") from
the date of its acquisition on April 27, 1995, and 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 4).
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 adhesives and confectionery products. All significant
intercompany transactions and accounts have been eliminated in consolidation.
The Debtor Companies have been in bankruptcy since December 27, 1996.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. Continuation of the
Company as a going concern is contingent upon, among other things, the ability
to formulate a plan of reorganization which will gain approval of requisite
parties under the United States Bankruptcy Code and confirmation of the
District Court, the ability to comply with its debtor-in-possession financing
agreement, resolution of various litigations against the Company, the Company's
ability to make its information systems Year 2000 compliant, and the Company's
ability to generate sufficient cash from operations and obtain financing
sources to meet its future obligations. 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. These matters raise substantial doubt about the Company's
ability to continue as a going concern.
Since July 1, 1997, Toy Biz ceased reporting its financial information
to the Company and as a result, the Company deconsolidated Toy Biz and its
investment has been reflected in the Company's Consolidated Financial
Statements under the equity method of accounting. The Consolidated Financial
Statements do not include any adjustments to its investment in Toy Biz for the
results of operations of Toy Biz since that date.
If a plan of reorganization regarding the Debtor Companies is
confirmed, the consolidated results of operations and the financial condition
of the Company may be materially affected.
2. CHAPTER 11 REORGANIZATION
Operating Companies
Marvel Parent Holdings, Inc. ("Marvel Parent") was an indirect wholly
owned subsidiary of Andrews Group Incorporated ("Andrews Group"), a wholly
owned subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"),
a corporation wholly owned through Mafco Holdings Inc. ("Mafco", and together
with MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman. As of
December 31, 1996, Mafco beneficially owned
F-7
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
approximately 81.2% of the Common Stock of the Company. As more fully
discussed below, bankruptcy proceedings commenced under chapter 11 by Marvel
Parent and its affiliates have resulted in the loss of control of Marvel by
such entities.
The Company experienced significant operating losses during 1995 and
1996, and failed to satisfy certain financial covenants contained in the
Credit Agreements (see Note 5) beginning in the fall of 1996. The Company
commenced discussions in the fall of 1996 with Andrews Group, its then
indirect parent, regarding an equity infusion in order to provide for the
Company's cash requirements and with The Chase Manhattan Bank, agent bank for
the Credit Agreements, regarding a restructuring of the Credit Agreements.
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, Inc. ("Toy Biz"), an affiliate of Marvel, as well as certain other
inactive subsidiaries, did not file petitions under the Bankruptcy Code.
As part of the first day order in the Marvel Cases, the Debtor
Companies received approval from the Bankruptcy Court to pay on time and in
full undisputed pre-petition obligations including salaries, wages and
benefits to all of its employees, debts due to its trade creditors and
independent contractors and to continue funding its strategic initiatives. As
discussed below, the unsecured creditors committee has applied for an order
vacating the first day order. In January 1998, the Debtor Companies ceased
making payments on pre-petition obligations.
On January 24, 1997 the Bankruptcy Court approved a $100
debtor-in-possession financing facility (the "DIP Loan"), which was provided
by a syndicate of lenders, including The Chase Manhattan Bank, as agent bank
(the "DIP Lenders"). As of December 31, 1997, the current outstanding debt
under this facility was $91.2. The DIP Loan matured on June 30, 1997 and no
repayment has occurred except for $3.0, the cash resulting from the sale of a
portion of the Company's confectionery business in August 1997, and the
current payment of interest and related administrative fees. The DIP Lenders
have agreed to forbear from taking any action. Such forbearance is continuing
on a daily basis. In connection with the appointment of the Chapter 11 Trustee
for the Company as more fully discussed herein, The Chase Manhattan Bank has
advised the Company that it is willing to lead a syndicate to make loans to
Marvel subject to execution of definitive documentation and agreement on key
terms. The Chapter 11 Trustee has not determined that such additional
financing is necessary. In any event, District Court approval is required for
such additional loans to the Debtor Companies and there can be no assurance
such approval would be granted by the court.
On February 12, 1997, the Office of the United States Trustee
appointed a committee of equity security holders of the Debtor Companies under
Section 1102(a)(1) of the Bankruptcy Code (the "Equity Committee"). As of
April 14, 1998, the Equity Committee consists of: Karen Nagel, Esq., Marty
Solomon, Peter E. Kelly, Jr., Gladys V. Veidemanis and Ronald Cantor.
On October 22, 1997, the Office of the United States Trustee
appointed a committee of unsecured creditors of the Debtor Companies. As of
April 14, 1998, such committee is comprised of: James E. Ladd, Jr.,
Standard Folding Cartons, Inc., Frank J. O'Connell, Scott M. Rosenberg and
Snyder Ventures, Inc. The unsecured creditors committee has 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. As of April 14, 1998,
no hearing has occurred as of yet on this motion and none is scheduled by the
District Court. Nevertheless, the Debtor Companies have discontinued the
payment of such pre-petition debt and do not intend to make any further
payments regarding such debt without first applying to the District Court for
approval.
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
F-8
<PAGE>
bankruptcy related costs incurred by the Company, on December 22, 1997, John
J. Gibbons was appointed as 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.
The Chapter 11 Trustee has all of the powers of management and the
Board of Directors 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.
Plans of Reorganization
On December 27, 1996, Marvel filed a Plan of Reorganization (as
amended, the "Initial Plan") which contemplated that pursuant to a stock
purchase agreement dated December 26, 1996, between Andrews Group and Marvel,
Andrews Group, or an affiliate thereof, would acquire from Marvel a number of
shares of common stock (or its equivalent) that would represent 80.1% of the
shares of a reorganized Marvel after giving effect to such acquisition, in
consideration for $365 in cash or, at the option of Andrews Group, shares of
Class A Common Stock of Toy Biz, or a combination of the foregoing (the
"Andrews Investment"). The Initial Plan contemplated that in connection with
the Andrews Investment, the Company would acquire the Class A Common Stock of
Toy Biz not owned by Marvel, Andrews Group or their affiliates pursuant to
various agreements with the principal stockholders of Toy Biz.
On March 7, 1997, Andrews Group exercised its right to terminate the
stock purchase agreement with the Company. On the same date, Andrews Group
informed Toy Biz and the two principal stockholders of Toy Biz (other than the
Company) that, as a result of the termination of the Andrews Investment, a
condition to closing under the agreements that provided for the purchase of
the Class A Common Stock of Toy Biz would not be satisfied, that Andrews Group
did not intend to waive the satisfaction of such condition and therefore the
transaction contemplated by such agreements would not be consummated. As a
consequence of the termination of the stock purchase agreement and the Andrews
Investment, the Initial Plan was withdrawn.
On July 10, 1997 it was announced that Marvel, High River Limited
Partnership ("High River"), Westgate International, L.P. ("Westgate"), Toy
Biz, Isaac Perlmutter, Avi Arad and The Chase Manhattan Bank had reached
agreement in principle on certain key economic terms relating to the Marvel
Cases. The agreement in principle provided that, pursuant to a plan of
reorganization (the "July Proposal") to be proposed by the Company, Marvel and
Toy Biz would be combined in a transaction in which the stockholders of Toy
Biz (other than the Company) would have received, in exchange for their Toy
Biz shares, 49% of the outstanding shares of common stock of the Company, as
reorganized.
Additionally, pursuant to the July Proposal, the currently
outstanding shares of Marvel common stock, par value $.01 per share (the
"Common Stock"), would have been canceled and Marvel's equity holders
(including the holders of certain notes issued by the Holding Companies) would
have been offered rights to purchase on a pro rata basis: (1) new shares equal
to 51% of outstanding common stock of the reorganized company for an aggregate
price of $170.0 and (2) $225.0 of new debt securities of the reorganized
company. High River and Westgate would have appointed a majority of the board
of directors of the reorganized company. High River and Westgate were to have
purchased all of the pre-petition and post-petition claims and liens of the
secured lenders of the Company, except for certain debt of Panini and
Fleer/Sky Box, and the proceeds of the rights offering would have been used to
retire all of the bank claims so acquired by High River and Westgate.
Consummation of the July Proposal was subject to: (1) negotiation and
execution of definitive documentation regarding the agreement; (2) approvals
of the Boards of Directors of Marvel and Toy Biz; (3) approval by holders of
at least 67% in principal amount and 51% in number of secured lender claims
(other than secured lender claims against Panini); and (4) approval of the
Bankruptcy Court. The parties, however, could not reach agreement on
definitive documentation and as a result, the July Proposal was terminated.
F-9
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
On September 29, 1997, it was announced that Marvel had reached an
agreement with its primary lenders, led by The Chase Manhattan Bank, that
would allow it to emerge from bankruptcy protection. High River and Westgate
had agreed to purchase pre-petition and post-petition bank claims from lenders
in exchange for $385.0 in cash and the transfer by Marvel of the common stock
of Panini owned by Marvel. High River and Westgate funded an escrow account in
the amount of $385.0 in order to consummate the agreement. The agreement
however, was subject to approvals from at least 67% in principal amount and a
majority in number of members of the bank syndicate, as well as the Bankruptcy
Court. On October 8, 1997, The Chase Manhattan Bank advised Marvel that
although a majority in number of the bank lenders had approved the agreement,
less than the required 67% in principal amount of the bank debt had approved
the agreement and, accordingly, the $385.0 deposit was returned to High River
and Westgate and the agreement in principle was terminated.
In September 1997, prior to the appointment of the Chapter 11
Trustee, the Company, as debtor-in-possession, filed a plan of reorganization
with the Bankruptcy Court. The Court has not set a date for a confirmation
hearing on this plan and the Company has indicated that it will not proceed
with this plan given the appointment of the Chapter 11 Trustee.
On October 7, 1997, Toy Biz announced an unsolicited merger proposal
for Marvel (the "Toy Biz Plan"). Under the Toy Biz Plan, shares of Toy Biz
common stock would convert into equal number of shares of common stock in the
combined company, giving Toy Biz stockholders (other than Marvel) an ownership
interest of approximately 41% in the combined company. Marvel's senior secured
creditors and DIP Lenders would receive approximately $230.0 in cash from new
borrowings and Marvel's senior secured creditors would also receive common and
convertible preferred stock, giving them a 40% ownership interest in the
combined company. The Toy Biz Plan also provides for new investors to purchase
$90.0 in convertible preferred stock, giving them an ownership interest of
approximately 19% in the combined company.
Under the Toy Biz Plan, unsecured creditors of the Company will
receive, on a pro rata basis, a cash distribution of 15% of the amount of the
allowed unsecured claims plus $2.0, up to a maximum of $8.0. In addition,
unsecured creditors of the Company would receive warrants to purchase up to
1.75 million shares of common stock in the combined Toy Biz/Marvel company.
The warrants would have a four-year term and would be exercisable at a price
of $17.25 per share. Furthermore, shareholders in the Company would receive
warrants to purchase up to 4 million shares of common stock in the combined
company for 6 months following consummation of the Toy Biz Plan at an exercise
price of $15.00 per share. Finally, holders of allowed unsecured claims would
be entitled to receive distributions from any recovery on certain litigation.
The Toy Biz Plan is subject to confirmation by the District Court and the
approval of the senior secured creditors of the Company, who have agreed to
support this plan. There can be no assurance that the Toy Biz Plan will be
confirmed.
On March 13, 1998, the District Court approved the disclosure
statement for the Toy Biz Plan. The District Court has set May 4th and 5th,
1998, as the dates for a confirmation hearing for the proposed Toy Biz Plan.
On April 13, 1998, the United States Court of Appeals for the Third Circuit
issued an order granting a motion to expedite the appeal of a March 30, 1998
decision by the District Court regarding the Company's voting control over Toy
Biz. Pending the expedited determination of this appeal, the order also stayed
the effectiveness of the District Court's decision and the hearing scheduled
for May 4, 1998 for confirmation of the Toy Biz Plan. The Chapter 11 Trustee,
management of Toy Biz and the secured lenders of the Company are currently in
negotiations attempting to settle the claims that are the subject of the
appeal as well as other matters. There can be no assurance that such
negotiations will be successful and that such claims will be settled.
In addition to the Toy Biz Plan, the Company has received preliminary
indications of interest from third parties to purchase the Company or all or
part of the Company's assets. As of this date, the Company cannot predict
whether any of these indications of interest will result in a more formal
offer to purchase any or all of the Company or its assets, nor can the Company
determine whether any such indications of interest will result in offers
superior to the Toy Biz Plan. Several third parties have conducted due
diligence reviews with respect to the Company. The Chapter 11 Trustee has
retained the services of an investment banking firm to assist him in this
process.
F-10
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
There can be no assurance that any plan of reorganization, including
the Toy Biz Plan, will be confirmed under the Bankruptcy Code.
If the Company is unable to obtain confirmation of a 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.
Holding Companies
Marvel Holdings, Inc. ("Holdings"), Marvel Parent, Marvel III
Holdings, Inc. ("Marvel III", and collectively with Holdings and Marvel
Parent, the "Holding Companies") own approximately 78% of common stock
of Marvel.
Each of the Holding Companies has issued debt obligations
(collectively, the "Notes") pursuant to certain indentures (collectively, the
"Indentures"), which debt is secured, in part, by shares of Common Stock of
Marvel owned by such Holding Company. Approximately 77.3 million shares of
Common Stock of Marvel are pledged to secure the Notes. The debt issued by
Marvel Parent was additionally secured by 100% of the issued and outstanding
shares of common stock of Holdings ("Holding Stock").
On December 27, 1996, the Holding Companies filed voluntary petitions
for relief under the Bankruptcy Code with the Bankruptcy Court. The chapter 11
cases commenced by the Holding Companies (the "Holding Cases") have not been
procedurally consolidated with the Marvel Cases and are not jointly
administered with the Marvel Cases. The filing by the Holding Companies of
voluntary petitions for reorganization operated as an automatic stay against
the commencement or continuation of any judicial, administrative or other
proceedings against the Holding Companies, any act to obtain possession of
property of or from the Holding Companies, or any act to create, perfect or
enforce any lien against property of the Holding Companies, with certain
exceptions under the Bankruptcy Code.
On January 9, 1997, the United States Trustee appointed an Official
Bondholder Committee (the "Bondholder Committee") to represent the interest of
all holders (collectively, the "Noteholders") of the Notes. The Bondholder
Committee is currently comprised of High River, Westgate, Schultz Investments,
WHERCO, Inc., M3, LLC and United Equities Commodities Company.
The commencement of the Holding Cases was an event of default under
each of the Indentures. On January 13, 1997, the Bondholder Committee filed a
motion (the "Lift Stay Motion") with the Bankruptcy Court seeking an order
lifting the automatic stay in the Holding Cases and thus permitting the
trustee under the Indentures (the "Indentures Trustee") to vote the shares of
stock pledged to secure repayment of the Notes, including (i) 100% of the
Holding Stock (ii) 100% of the stock of Marvel Parent and (iii) approximately
78.8% of the Marvel Common Stock (collectively, the "Pledged Stock"). On
January 13, 1997, The Bank of New York, then trustee under the Indentures,
joined in the Lift Stay Motion, and on January 30, 1997, LaSalle National Bank
(after its appointment as the successor trustee under the Indentures) also
joined in the Lift Stay Motion. On February 26, 1997, the Bankruptcy Court
entered an order granting the Lift Stay Motion and permitting the Bondholder
Committee and the Indentures Trustee, on behalf of the Noteholders, to vote
the Pledged Stock (the "Lift Stay Order"). On February 27, 1997, the Company
and the Holding Companies filed a notice of appeal with respect to such Lift
Stay Order.
On March 19, 1997, the Bondholders Committee notified the Company
that on March 25, 1997 it would cause the Indentures Trustee to vote the
Pledged Stock to replace the Board of Directors of Marvel. On March 24, 1997,
at the request of Marvel and its pre-petition bank lenders (the "Bank
Lenders"), the Bankruptcy Court issued a
F-11
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
restraining order (the "Stay Order") enjoining the Bondholder Committee and
the Indentures Trustee from voting the Pledged Stock or otherwise replacing
the Board of Marvel without first seeking and obtaining relief from the
automatic stay imposed under the Bankruptcy Code in the Marvel Cases. The Stay
Order, however, did not prevent the holders of the Notes issued by Marvel
Parent from exercising voting power over the Holding Stock for the purpose of
removing and replacing the Board of Directors of Holdings.
On April 24, 1997, the Indentures Trustee, at the direction of the
holder of a majority of the Notes issued by Marvel Parent, removed the members
of the Board of Directors of Holdings and appointed Carl C. Icahn, Vincent J.
Intrieri and Robert J. Mitchell to the Holdings Board. As a result, Marvel was
no longer consolidated for federal income tax purpose with Mafco. As a result
of such tax deconsolidation, the Company will retain an allocated portion, if
any, of net operating loss carryforwards of the Mafco affiliated group. Such
allocation is not yet determinable (See Note 7).
Between March 24, 1997 and June 20, 1997, Marvel and the Bank Lenders
requested action by the Bankruptcy Court and the District Court seeking, among
other things, to prevent the Noteholders and Holdings from exercising voting
authority with respect to the shares of Common Stock of Marvel owned by
Holdings for the purpose of removing the existing Board of Directors of Marvel
and replacing it with the New Board (as defined below). At the same time, the
Bondholder Committee and Indentures Trustee also requested action by the
Bankruptcy Court and the District Court seeking to permit the Noteholders
and/or Holdings to exercise voting authority over such shares for such
purpose. Such litigation culminated in the issuance of an order by the
District Court vacating the Bankruptcy Court's Stay Lift Order effective as of
5:00 p.m. (New York time) on June 20, 1997. The effect of such order was to
permit Holdings, as a majority stockholder of Marvel, to vote such stock to
remove the existing Board of Directors of Marvel and replace it with a new
board of directors (the "New Board") which was comprised of the following
directors: Carl C. Icahn, Harold First, Charles K. MacDonald, Glen Adams, J.
Winston Fowlkes, III, Robert J. Mitchell, Jouko T. Tamminen, Vincent J.
Intrieri, and Michael J. Koblitz. Jouko T. Tamminen resigned from the Board of
Directors effective August 3, 1997. Additionally, the New Board by written
consent amended and modified Marvel's By-laws to provide that Marvel's Board
of Directors shall be composed of nine persons or such other number of persons
as may thereafter be fixed by Marvel's Board of Directors. As a result of the
replacement of the existing board with the New Board, Toy Biz has taken the
position that a change in control of Marvel occurred and that pursuant to the
provisions of the stockholder agreement between the Company, Toy Biz and
certain other stockholders of Toy Biz, the Company's shares of Toy Biz Class B
common stock automatically converted to Class A common stock of Toy Biz,
reducing the Company's voting control of Toy Biz from 78.4% to 26.6%. The
Company disputes Toy Biz's position and maintains that it continues to own
Class B common stock of Toy Biz. On March 30, 1998, the District Court issued
an order in favor of Toy Biz on this issue. The Company and other interested
parties have filed an appeal of this determination to the United States Court
of Appeals for the Third Circuit. The Chapter 11 Trustee, management of Toy
Biz and the secured lenders of the Company are currently in negotiations
attempting to settle the claims that are the subject of the appeal as well as
other matters. There can be no assurance that such negotiations will be
successful and that such claims will be settled.
On March 3, 1998, the District Court entered an order permitting the
distribution to the Noteholders of up to 12.5 million outstanding shares of
Common Stock of Marvel which were pledged to secure the Notes. Further, the
order authorized the sale by 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.
Other:
F-12
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
As part of the chapter 11 process, the Debtor Companies have received
a significant number of proofs of claims. The Company is currently in the
process of reviewing these claims and believes that a majority of these claims
may have been paid or are without merit. Although the Company believes that
amounts recorded as of December 31, 1997 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.
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:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------- ----------------------
<S> <C> <C>
Total accrued expenses $ 13.7 $ 14.7
Debt:
U.S. Term Loan Agreement 350.0 350.0
Amended and Restated Credit Agreement 120.0 120.0
Chase Revolving Line of Credit 15.0 15.0
----------------------- ----------------------
Total debt 485.0 485.0
----------------------- ----------------------
Other long-term liabilities 3.5 3.5
----------------------- ----------------------
Total liabilities subject to settlement under reorganization $ 502.2 $ 503.2
======================= ======================
</TABLE>
Total bankruptcy reorganization items of $11.3 and $5.5 for the years
ended December 31, 1997 and 1996, respectively, include professional charges
and other costs typical to those incurred by entities in bankruptcy.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales are recorded upon shipment of products. Sales made on a
returnable basis are recorded net of provisions for estimated returns. These
estimates are revised, as necessary, to reflect actual experience and market
conditions. Subscription revenues generally are collected in advance for a one
year subscription and are recognized as income on a pro-rata basis over the
subscription period. Income from licensing of characters owned by the Company
is recorded at the time characters are available to the licensee and
collection is reasonably assured. Receivables due more than one year beyond
the balance sheet date are discounted to their present value.
ADVERTISING EXPENSE
Advertising production costs are expensed when the advertisement is
first run. Advertising expense was $31.0, $69.0, and $69.2 in 1997, 1996, and
1995, respectively. The amount of advertising costs included in prepaid
expenses and other as of December 31, 1997 and 1996 was $0.6 and $2.2,
respectively.
ROYALTIES
Minimum guaranteed royalties, as well as royalties in excess of
minimum guarantees, are generally expensed as incurred based on sales of
related products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure
F-13
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
principal areas of judgment relate to provision for returns and other sales
allowances, doubtful accounts, the realizability of inventories, goodwill and
other intangible asset impairment, reserve for royalty guarantees and
advances, income taxes, proofs of claims, resolution of litigation and pro
forma information related to stock options.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out
(FIFO)) or market.
PROPERTY, PLANT AND EQUIPMENT
All expenditures for additions and improvements to property, plant
and equipment are capitalized and normal repairs and maintenance are charged
to expense as incurred. Construction-in-progress principally includes
machinery and equipment being constructed for the Company by outside vendors
under contract.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on the straight-line
basis over 15 to 40 years. The Company's accounting policy regarding the
assessment of the recoverability of the carrying value of goodwill and other
intangibles is to review the carrying value of goodwill and other intangibles
if the facts and circumstances suggest that they may be impaired. If this
review indicates that goodwill and other intangibles will not be recoverable,
as determined based on the undiscounted future cash flows of the Company
relating to such assets, the carrying value of goodwill and other intangibles
will be reduced to its estimated fair value.
As described above, continuing operating losses in the trading card
business and losses in the sticker business through the fourth quarter of
1997, as well as significant long-term changes in industry conditions which
resulted in lower than expected fourth-quarter sales, including basketball
trading card sales, indicated to the Company, at that time, that there may be
asset impairment. During the fourth quarter of 1997, the Company also
completed its 1998 business plan which anticipates a continuation of the trend
of lower revenues from the trading card and children's activity stickers
businesses. Accordingly, the Company evaluated the recoverability of the
carrying value of long-lived assets, including goodwill and other intangibles,
in accordance with its previously stated accounting policies and recorded a
non-cash charge of approximately $106.7, of which $78.5 related to trading
cards and $28.2 related to activity stickers. The Company had recorded a
non-cash charge of approximately $278.5 during the fourth-quarter of 1996 to
write-off impaired goodwill related substantially to its trading card
business, and to a lesser extent, its publishing business. Remaining goodwill
associated with the Company's trading cards operations is approximately $24.0,
which will be amortized on the straight-line basis over 10 years and remaining
goodwill associated with its sticker operations is $70.0, which will be
amortized on the straight line basis over the next 20 years (see Note 13).
DEFERRED CHARGES
Deferred charges and other includes deferred debt issue costs, which
are mainly costs associated with the Company's credit facilities that are
amortized over the term of the related agreements (see Note 5).
TRANSLATION OF FOREIGN CURRENCIES
The financial position and results of operations of the Company's
foreign subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities of subsidiaries are translated at the
exchange rate in effect at year-end. Income statement accounts and cash flows
are translated at the average rate of exchange prevailing during the period.
Translation adjustments arising from the use of differing exchange rates are
included in the cumulative translation adjustment account in stockholders'
equity. Transaction adjustments arising from the use of differing exchange
rates, including intercompany account balances, are included in net income.
F-14
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share ("FAS 128"). This statement replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented and restated as necessary to conform to FAS 128's
requirements.
The following table sets forth the components for the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Loss before extraordinary item $ (254.3) $ (464.4) $ (45.1)
Denominator:
Weighted average shares outstanding 101,809,657 101,796,100 101,287,467
</TABLE>
RECENT PRONOUNCEMENTS
In 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("FAS 130"). The Company is not required to disclose financial
statements in accordance with FAS 130 until the first quarter of 1998, at
which time it will reclassify interim financial statements for the prior year
for comparative purposes.
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 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.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
4. TOY BIZ
On March 2, 1995, Toy Biz completed the Toy Biz IPO in which it
issued and sold 2,750,000 shares of Class A Common Stock at $18 per share. As
part of the Toy Biz IPO, a stockholder sold 700,000 shares of Class A Common
Stock at $18 per share. The net proceeds to Toy Biz, after deducting
commissions and offering expenses, of $44.1 were used to pay outstanding
amounts due under subordinated notes held by the Company and the sole
stockholder of the predecessor to Toy Biz and for working capital and general
corporate purposes. In 1995, the Company recorded a gain of $14.3 on the Toy
Biz IPO in recognition of the net increase of the Company's equity investment
in Toy Biz based on fair value. In August 1996, Toy Biz sold in an offering
700,000 shares of its Class A Common Stock at a price to the public of $15 per
share. As part of the Toy Biz offering, the Company sold 2.5 million shares of
its Toy Biz Class A Common Stock. In the third quarter of 1996, the Company
recorded a gain on the sale of this common stock of approximately $22.0. The
net proceeds to Toy Biz and the Company were approximately $9.3 and $35.7,
respectively, after deducting amounts for fees and expenses.
In conjunction with the Toy Biz IPO, the Company's equity ownership
percentage of Toy Biz decreased to 36.6% and its voting control increased to
85.3% and, as a result of the increase in voting control, the consolidated
financial statements of the Company from March 1, 1995 through June 30, 1997
include the results of operations,
F-15
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
financial position and cash flows of Toy Biz. For the period prior to the Toy
Biz IPO, Toy Biz was accounted for under the equity method. As a result of the
Company's sale of Class A Common Stock of Toy Biz in August 1996, the
Company's ownership percentage of Toy Biz decreased to 26.6% and its voting
control decreased to 78.4%.
In connection with the Toy Biz IPO, Marvel, certain principal
shareholders of Toy Biz and their affiliates and Toy Biz entered into a
stockholders' agreement (the "Stockholders' Agreement"). The Stockholders'
Agreement provides that upon a change of control of Marvel, Marvel is obligated
to convert its shares of Class B Common Stock of Toy Biz into Class A Common
Stock of Toy Biz, unless such shareholders consent to such shares remaining as
Class B Common Stock. Due to the replacement of Marvel's existing board with a
new Board of Directors, Toy Biz had taken the position that a change in control
occurred under the Stockholders' Agreement and that the Company's shares of
Toy Biz Class B Common Stock automatically converted to Class A Common Stock,
reducing the Company's voting control of Toy Biz from 78.4% to 26.6%. The
Company had disputed Toy Biz's position and maintained that it owned Class B
Common Stock of Toy Biz. On March 30, 1998, the District Court issued an order
that resulted in the Company's voting power over Toy Biz being reduced from
78.4% to 26.6%. The Chapter 11 Trustee and other interested parties have
appealed this order. On April 13, 1998, the United States Court of Appeals for
the Third Circuit issued an order granting a motion to expedite the appeal of a
March 30, 1998 decision by the District Court regarding the Company's voting
control over Toy Biz. Pending the expedited determination of this appeal, the
order also stayed the effectiveness of the District Court's decision and the
hearing scheduled for May 4, 1998 for confirmation of the Toy Biz Plan. 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 Company's Consolidated
Financial Statements do not include any adjustments to its investment in
Toy Biz in the Consolidated Financial Statements since July 1, 1997. The
Consolidated Balance Sheet, as of December 31, 1997, 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 December 31, 1997 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 $26.4 at December 31,
1997 based on Toy Biz's published results.
5. AMOUNTS PAYABLE TO BANKS
Debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
<S> <C> <C>
U.S. Term Loan Agreement $ 350.0 $ 350.0
Amended and Restated Credit Agreement 120.0 120.0
Chase Revolving Line of Credit 15.0 15.0
Panini Term Loan Agreement 116.2 139.3
Other Long Term Panini Debt 14.2 16.3
------------------------ ------------------------
Subtotal 615.4 640.6
Included in liabilities subject to settlement (485.0) (485.0)
Less Panini debt in default (116.2) (10.6)
Less current maturities of other Panini debt (5.7) -
------------------------ ------------------------
$ 8.5 $ 145.0
======================== ========================
</TABLE>
On December 20, 1996, the banks and financial institutions that were
parties to the U.S. Term Loan Agreement (as defined below), the Amended and
Restated Credit Agreements (as defined below), the Chase Revolving Line of
Credit (as defined below) and the Panini Term Loan Agreement (as defined
below), (collectively, the "Credit Agreements") entered into a Standstill
Agreement and Amendment (the "Standstill Agreement") which granted the Company
the right to maintain any outstanding loans under the Credit Agreements as
either Eurodollar in Eurocurrency Loans during the Standstill Period (as
defined below). The Standstill Agreement also provided that the commitments
under the Credit Agreements would not automatically terminate or be
accelerated upon the commencement of the reorganization cases but rather would
be suspended and reinstated upon confirmation of the Initial Plan. Unless a
payment default was continuing or certain other termination events were
triggered, each lender under the Credit
F-16
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Agreements agreed not to exercise any remedies against any subsidiary of
Marvel which is not one of the Debtor Companies during the Standstill Period.
The Standstill Period commenced on December 27, 1996 and ended on June 30,
1997. As a result of the lapse of the Standstill Period (as defined in the
Standstill Agreement), all principal and interest incurred under the Company's
Credit Agreements is now due and owing. The Company currently operates its
business using cash collateral as authorized by the pre-petition banks from
time to time. However, there can be no assurance that such authorization will
continue in the future.
On June 5, 1997, the Bankruptcy court approved an order suspending
the adequate protection payments being made by the Company to the Bank
Lenders. As a result, the Company 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 payments as of December 31, 1997 was $29.4 and is not included in
the liabilities of the Company.
In July 1997, Panini, a subsidiary of the Company that has not filed
for protection under chapter 11 and, therefore, is not one of the Debtor
Companies, suspended all payments of interest and principal under the Panini
Term Loan Agreement. As of December 31, 1997, suspended payments of interest
and principal under the Panini Term Loan are lire 22.0 billion (approximately
$12.4 based on the exchange rates at December 31, 1997), and is included in
the Consolidated Balance Sheet at December 31, 1997 in accrued expenses. This
suspension constituted an event of default under the Panini Term Loan
Agreement, and, consequently, the Company has reclassified the Panini Term
Loan to current liabilities. On August 11, 1997, Panini entered into an
agreement with The Chase Manhattan Bank for a loan of lire 27 billion
(approximately $15.3 based on the exchange rate at December 31, 1997) to
provide short term liquidity. On August 5, 1997, the Company received approval
from Bankruptcy Court to guarantee this loan. The guarantee is junior to all
liens of the 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 December 31, 1997, the credit line was fully used. The 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
losses in 1997 and continued liquidity crisis, the Company was able to further
extend the payment date of this loan to October 1998.
On June 30, 1997, the DIP Loan matured and no repayment has occurred,
except $3.0 from the net proceeds resulting from the sale of a portion of the
Company's confectionery business, and the current payment of interest and
related administrative fees. The DIP Lenders have agreed to forbear from
taking any actions. 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's continued use of the 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. In connection with the appointment of the Chapter 11 Trustee,
The Chase Manhattan Bank has advised the Company that it is willing to lead a
syndicate to make loans to the Company subject to the execution of definitive
documentation and agreement on key terms. The District Court's approval is
required for such additional loans to the Company. There can be no assurance
that such approval will be granted by the court or that the DIP Lenders and
the pre-petition secured lenders will allow for the Company to continue to use
their cash collateral.
The liens securing the DIP Loan take first position (prime) over the
liens securing the Credit Agreements and are secured by a lien on the
Company's 26.6% equity interest in Toy Biz. Borrowings under the DIP Loan bear
interest at a rate per annum equal to the one month Eurodollar Rate (as
defined in the DIP Loan) rounded upwards to the next 1/16 of 1%, or Alternate
Base Rate (as defined in the DIP Loan) plus the Applicable Margin (as defined
in the DIP Loan) of 2-1/2% with respect to Eurodollar Loans and 1-1/2% with
respect with Alternate Base Rate loans. Interest on Alternate Base Rate Loans
is payable monthly in arrears, and interest on Eurodollar Rate Loans is
payable at the end of the applicable interest period. Pursuant to the terms of
the DIP Loan, the outstanding balances under the current DIP Loan after June
30, 1997 bear interest at the penalty rate of Alternate Base Rate plus a
margin of 3-1/2%, which, at December 31, 1997 was approximately 12%.
The DIP Loan includes various restrictive covenants prohibiting the
Company from, among other things, incurring additional indebtedness (with
certain limited exceptions), making investments, including for the Company's
strategic initiatives (with certain limited exceptions), and making dividend,
redemption and certain other payments on
F-17
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
its capital stock. The DIP Loan also contains certain financial covenants and
events of default if the royalty free license from Marvel to Toy Biz is
rejected in the Marvel Cases.
Under separate credit arrangements for short term borrowings arranged
with the various European financial institutions, Panini may borrow up to lire
42.7 billion as of December 31, 1997 (approximately $24.2 based on the
exchange rate at December 31, 1997) on such terms as Panini and the banks may
mutually agree upon. These arrangements generally do not have termination
dates but are reviewed periodically for renewal. At December 31, 1997, the
credit lines were fully used. The weighted average interest rate on short-term
borrowings as of December 31, 1997 was 6.7%.
In April 1995, the Company entered into a $350.0 term loan agreement
(as amended) with a syndicate of banks, the Co-Agents and The Chase Manhattan
Bank, as administrative agent (the "U.S. Term Loan Agreement"). Loans under
the U.S. Term Loan Agreement bear interest at a rate per annum equal to the
Eurodollar Rate (as defined in the U.S. Term Loan Agreement), or the Alternate
Base Rate (as defined in the U.S. Term Loan Agreement) plus, in each case, the
Applicable Margin (as defined in this paragraph). Applicable Margin means (a)
with respect to Eurodollar Rate Loans, 3% and (b) with respect to Alternate
Base Rate loans, 2%. If adequate protection payments were not suspended,
Alternate Base Rate borrowings would have a rate of 10.5% as of December 31,
1997.
On August 30, 1994, the Company entered into a $120.0 revolving loan
agreement with a syndicate of banks, the Co-Agents and The Chase Manhattan
Bank, as administrative agent (the "Amended and Restated Credit Agreement").
Loans under the Amended and Restated Credit Agreement bear interest at a rate
per annum equal to the Eurodollar Rate (as defined in the Amended and Restated
Credit Agreement) plus, in each case, the Applicable Margin (as defined in
this paragraph). Applicable Margin means (a) with respect to Eurodollar Rate
loans, 3% and (b) with respect to Alternate Base Rate loans, 2%. If adequate
protection payments were not suspended, Alternate Base Rate borrowings would
have a rate of 10.5% as of December 31, 1997.
During March 1996, the Company entered into a $25.0 revolving line of
credit (as amended) with The Chase Manhattan Bank (the "Chase Revolving Line
of Credit"). Through November 20, 1996 the Company borrowed $15.0, at which
time the line of credit was reduced to the amount outstanding. The Chase
Revolving Line of Credit is pari passu with the U.S. Term Loan Agreement, the
Amended and Restated Credit Agreement, and the Panini Term Loan Agreement. The
Chase Revolving Line of Credit bears interest at a rate per annum equal to the
Eurodollar Rate (as defined in the Amended and Restated Credit Agreement),
plus 3%, or the Alternate Base Rate Loan (as defined in the Amended and
Restated Credit Agreement) plus 2%. If adequate protection payments were not
suspended, ABR borrowings would have a rate of 10.5% as of December 31, 1997.
On August 30, 1994, the Company, Marvel Italia Srl (now Panini
S.p.A.) and Insituto Bancario San Paolo Di Torino S.p.A. (the "Lenders"),
entered into a term loan and guarantee agreement (the "Panini Term Loan
Agreement") providing for a term loan credit facility of lire 244.5 billion
(approximately $154.0 based on exchange rates in effect on the date of
acquisition).
The Panini Term Loan Agreement requires interest at a rate per annum
equal to the Eurocurrency Rate (as defined in the Panini Term Loan Agreement)
or, in certain limited circumstances, the Negotiated Rate (as defined in the
Panini Term Loan Agreement), in each case plus the Applicable Margin (as
defined in this paragraph). Eurocurrency Rate Loans have, at the option of
Panini, interest periods of one, two, three or six months. Applicable Margin
means (a) with respect to Eurocurrency Loans 3% and (b) with respect to
Negotiated Rate Loans, 2%. Panini suspended all payments of interest and
principal for the Panini Term Loan Agreement in July 1997.
The U.S. Term Loan Agreement (through incorporation by reference to
the Amended and Restated Credit Agreement), the Amended and Restated Credit
Agreement, Chase Revolving Line of Credit Agreement (through incorporation by
reference to the Panini Term Loan Agreement), and the Panini Term Loan
Agreement include various restrictive covenants prohibiting the Company from,
among other things, incurring additional indebtedness, with certain limited
exceptions, and making dividend, redemption and certain other payments on its
capital stock. The U.S. Term Loan Agreement, the Amended and Restated Credit
Agreement and the Panini Term Loan Agreement also contain
F-18
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
certain customary financial covenants and events of default for financing of
this type, including a change of control covenant. Mandatory prepayments are
required to be made out of net proceeds from sales of assets by the Company,
with certain exceptions, and from certain excess cash flow (as defined in the
Amended and Restated Credit Agreement).
Pursuant to the terms of the Credit Agreements, the respective
lenders (the "secured lenders") are secured by substantially all of the
Company's domestic assets, other than the Company's investment in common stock
of Toy Biz, and all of the capital stock of the Company's domestic
subsidiaries and 65% of the capital stock of the Company's first tier foreign
subsidiaries.
The filing of petitions for relief under chapter 11 of the Bankruptcy
Code in the Bankruptcy Court by the Debtor Companies is an event of default
under the Credit Agreements.
The average cost of borrowings for the U.S. Term Loan Agreement and
the Amended and Restated Credit Agreement was 8.65% for the period of January
1, 1997 through June 5, 1997, the date the Company stopped paying and accruing
interest. The average cost of borrowing for the Term Loan Agreement was
approximately 11.13% for the year ended December 31, 1997. The average cost of
borrowings for the U.S. Term Loan Agreement, the Amended and Restated Credit
Agreement and the Term Loan Agreement was approximately 8.83% and 8.88% for
the years ended December 31, 1996 and 1995, respectively. The average cost of
borrowings for the DIP Loan was 8.23% for the year ended December 31, 1997.
Interest expense was $47.7, $60.8, and $47.1 in 1997, 1996, and 1995,
respectively. Contractual interest was $77.1 for the year ended December 31,
1997. Interest paid was $43.3, $60.6, and $42.7 in 1997, 1996, and 1995,
respectively. The revolving credit portion of the Amended and Restated Credit
Agreement at December 31, 1997 was fully drawn. The Amended and Restated
Credit Agreement requires the Company to pay a commitment fee of 1/4 to 3/8 of
1% per annum on the unused portion.
Due to the extenuating circumstances involving the Credit Facilities
and other debt as a result of the chapter 11 filings, it is not practicable to
estimate the fair value of these obligations as of December 31, 1997.
Financing charges of $21.8 were incurred in connection with the
Company's credit facilities which were deferred and are being amortized over
the remaining term of the respective facilities.
The scheduled aggregate maturities of the Company's long term debt,
not subject to settlement under reorganization, per the underlying credit
agreements that support each debt facility are as follows:
<TABLE>
<CAPTION>
For the Years Ending December 31,
---------------------------------
<S> <C>
1998................................... $ 121.9
1999................................... 5.7
2000................................... 2.8
--------
$ 130.4
========
</TABLE>
F-19
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The scheduled aggregate maturities of the Company's long term debt
which is subject to settlement under reorganization per the underlying credit
agreements that support each debt facility are as follows:
<TABLE>
<CAPTION>
For the Years Ending December 31,
---------------------------------------
<C> <C>
1998...................................... $ 15.0
1999...................................... 57.5
2000...................................... 125.0
2001...................................... 187.5
2002...................................... 100.0
--------
$ 485.0
========
</TABLE>
6. EMPLOYEE BENEFIT PLANS
SAVINGS PLANS
The Marvel Entertainment Group, Inc. Savings and Investment Plan is a
defined contribution plan qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended, covering all full-time non-union salaried
and hourly employees who have at least one year of service and matches
contributions by employees in an amount equal to 100% of the first 3% of
eligible compensation contributed and 25% of the next 3% of eligible
compensation contributed, up to a maximum of 3.75% of the employees'
compensation. The provisions for contributions under this plan was $.5 in each
of 1997, 1996 and 1995 .
PENSION PLANS
Fleer and SkyBox have noncontributory defined benefit pension plans
for salaried employees. During prior years, these plans were amended to
prohibit participation by new employees. Effective as of September 1, 1996,
such pension plans were merged with Fleer becoming the plan sponsor. The
benefits were based on the employee's years of service and highest five years
of compensation. Contributions are intended to provide for benefits attributed
to service to date. The projected benefit obligation was $18.0 and $17.7 and
plan assets were approximately $17.1 and $14.5 at December 31, 1997 and 1996,
respectively. Pension expense for all periods was insignificant.
STOCK OPTION PLAN
Under the terms of the Marvel Entertainment Group, Inc. Amended and
Restated Stock Option Plan (the "Stock Option Plan"), incentive stock options
("ISOs"), non-qualified stock options ("NQSOs") and stock appreciation rights
("SARs") may be granted to key employees of, or consultants to, the Company
and any of its affiliates from time to time. In May 1995, the Company was
authorized to increase the aggregate number of shares of Common Stock as to
which options and rights may be granted under the Stock Option Plan from
11,000,000 to 16,000,000 shares, including options described below.
F-20
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Information with respect to options under the Stock Option Plan
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Option price per share Price
----------------- -------------------------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1995---------- 8,072,603 $ 2.0625 - $26.75
Exercised------------------------------- (1,046,940) $ 2.0625 - $14.50 $15.623
Canceled-------------------------------- (1,267,002) $ 2.0625 - $17.625 $16.296
Granted--------------------------------- 2,200,000 $ 14.25 - $15.50 $14.909
-----------------
Outstanding at December 31, 1995-------- 7,958,661 $ 2.0625 - $26.75
Exercised------------------------------- (106,993) $ 2.0625 - $7.75 $11.945
Canceled-------------------------------- (1,127,668) $ 2.0625 - $26.75 $15.658
Granted--------------------------------- 1,745,000 $ 5.00 - $12.625 $ 9.851
-----------------
Outstanding at December 31, 1996-------- 8,469,000 $ 2.0625 - $26.75
Canceled-------------------------------- (4,435,800) $ 2.0625 - $18.00 $10.266
Exercised------------------------------- --- --- ---
Granted--------------------------------- --- --- ---
-----------------
Outstanding at December 31, 1997-------- 4,033,200 $ 2.0625 - $26.75
=================
</TABLE>
At December 31, 1997, 3,523,200 shares (6,078,867 shares at December
31, 1996) were exercisable and 6,158,143 shares (1,722,343 shares at December
31, 1996) were available for future grants of options and rights. The current
Toy Biz Plan and all other previous plans of reorganization involve a
recapitalization of the Company. As a result, any outstanding grants would be
canceled as the Company's stock option plan will be terminated.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Average Number
Ranges of Exercise Outstanding at Remaining Weighted Average Exercisable at Weighted Average
Prices December 31, 1997 Contractual Life Exercise Price December 31, 1997 Exercise Price
------------------ ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 2.06 - $ 5.00 496,000 3.53 $ 2.06 496,000 $ 2.06
$ 5.01 - $10.00 2,296,500 5.20 $ 9.33 2,296,500 $ 9.33
$10.01 - $15.00 1,010,700 7.67 $12.82 550,700 $13.41
$15.01 - $26.75 230,000 7.28 $15.84 180,000 $15.93
</TABLE>
The Company accounts for its stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related Interpretations. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on date of grant, no compensation expense is recognized. In
1996, the Company elected to follow the disclosure-only provisions under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123"). For
the purposes of FAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Net loss, as reported ($254.3) ($464.4)
Pro forma net loss ($260.7) ($470.4)
Pro forma net loss per share - basic and diluted ($2.56) ($4.62)
================== ==================
</TABLE>
F-21
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The fair value for each option grant under the Stock Option Plan was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the various grants made during
1995 and 1996: risk free interest rates ranging from 5.40% to 6.53%; no
dividend yield; expected volatility ranging from .466 to .487; and expected
life of three years. The option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the option valuation model requires
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate in
management's opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its employee stock options.
7. INCOME TAXES
The domestic members of the Company, with the exception of Toy Biz
(Toy Biz files separate federal and state income tax returns), were included
in the consolidated federal income tax return, and in some cases the state
income tax returns, of Mafco and its subsidiaries from May 19, 1993 until
April 24, 1997.
Throughout the Mafco consolidated period, the Company has been
operating under a tax sharing agreement with Mafco or an affiliate of Mafco
which provides that federal income taxes be paid to Mafco or an
affiliate as if the Company were a separate taxpayer. The Company previously
filed separate federal income tax returns for the periods July 23, 1991 (the
date of its initial public offering) through May 18, 1993. By operation of net
operating loss carrybacks, Marvel has received refunds of substantially all
Federal tax previously paid to Mafco or its affiliates. An additional refund
of $0.4 related to these carrybacks is due from the Internal Revenue Service
(the "IRS"), but has not yet been received. Federal income taxes paid to Mafco
affiliates were $0.1 and $13.6 in 1996 and 1995, respectively. Refunds
received from Mafco affiliates were $10.4 and $17.1 in 1997 and 1996,
respectively, relating to prior years. Total income taxes paid (refunded),
including the payments to and from Mafco affiliates, were $(10.3), $(6.1) and
$16.5 in 1997, 1996 and 1995, respectively.
As more fully described in Note 2, the Board of Directors of Marvel
Holdings Inc. (a 50.08% shareholder of the Company) was replaced by the
Indentures Trustee on April 24, 1997. Stock ownership in Marvel by members of
the Mafco affiliated group declined below 80% (measured by vote or value), and
Marvel and its subsidiaries ceased to be members of the Mafco affiliated group
at such time for tax purposes (a "deconsolidation"). Accordingly, for the
period from January 1, 1997 through April 24, 1997, the Marvel group will be
included in the Federal consolidated return and the combined returns of a few
states of the Mafco group. The members of the Marvel group will additionally
file Federal returns separate from the Mafco group for the period April 25,
1997 through December 31, 1997.
The Tax Sharing Agreement with Mafco and its affiliates related to
the Mafco consolidated years has not yet been settled. Additionally, the IRS
has filed proof of claims during the bankruptcy process totaling approximately
$103 with respect to the 1995 and 1996 tax years. These years have not yet
been examined by the IRS, and the Company has not been able to learn from the
IRS how the claim amount was derived. The Company believes a majority of
these claims are without merit (See Note 2).
At December 31, 1997, the Company expects to have a Federal net
operating loss carry forward of approximately $102 related to the loss
generated in the period April 25, 1997 through December 31, 1997. This loss
carryforward will expire in 2012. Additionally, as a result of the
deconsolidation with Mafco, the Company believes that additional net operating
loss will be allocated to the Company. The amount to be allocated cannot be
determined until Mafco completes its Federal tax return for the 1997 year. The
Company also has state and foreign net operating loss carryforwards in various
state, local, and foreign tax jurisdictions at December 31, 1997.
At such time as the Company emerges from bankruptcy, it is likely
that there will be a 50% "change of ownership" pursuant to Section 382 of the
Internal Revenue Code of 1986, as amended, which may severely limit
F-22
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
future utilization of net operating losses. The Company does not believe that
there have been any changes in ownership through April 14, 1998 that would
have caused a Section 382 limitation. In addition to any possible limitation
on the utilization of net operating losses due to Section 382, there may be a
further limitation imposed by Treasury Regulations related to separate return
limitation years (commonly referred to as the "SRLY" limitation).
In addition to the probable Section 382 change of ownership at
emergence from bankruptcy, there could be one or more other Section 382
changes in ownership prior to such emergence. This could occur, for example,
were a sufficiently large enough number of shares transferred to certain
persons or entities prior to the Company's emergence from bankruptcy. Multiple
Section 382 changes in ownership have the potential to more greatly limit the
future utilization of net operating losses than would a single ownership
change.
Toy Biz has announced an unsolicited merger proposal for Marvel (see
Note 2). The Company is working with Toy Biz in an effort to structure the
reorganization to allow the maximum utilization of net operating losses and
minimum loss of tax attributes should such proposal be confirmed.
At the emergence from bankruptcy, there may be discharge of both bank
and trade debt. Such discharge should, due to the application of special rules
related to companies in bankruptcy, not be income recognized currently for tax
purposes. Rather, tax attributes should be reduced by the amount of debt
discharged. The Company believes that application of the attribute reduction
rules to the Company would primarily reduce or eliminate the amount of tax net
operating losses and asset tax bases in the legal entities in which
forgiveness occurs, primarily Fleer Corporation. Attribute reduction would
occur on the first day of the tax year following the year in which the Company
emerges from bankruptcy.
Due to the fact that a plan of reorganization has not yet been
approved by the District Court, the Company is not able at this time to
determine whether any net operating losses or the ability to utilize such
losses would survive a Section 382 limitation, multiple Section 382
limitations, or the attribute reduction that might occur from debt
forgiveness.
For financial statement purposes, the Company records income taxes in
accordance with Statement of Financial Accounting Standards No. 109 using a
liability approach for financial accounting and reporting which results in the
recognition and measurement of deferred tax assets based on the likelihood of
realization of tax benefits in future years.
F-23
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
For all periods presented, federal and state income taxes are
provided as if the Company filed its own income tax returns. Tax benefit for
federal and state purposes as well as for certain foreign jurisdictions was
generally not provided for in either 1996 or 1997. Components of the provision
for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ---------------
<S> <C> <C> <C>
Income (loss) before provision for taxes:
Domestic..................................................... $ (226.2) $ (421.2) $ (56.6)
Foreign...................................................... (30.9) (9.8) 34.6
---------------- --------------- ---------------
$ (257.1) $ (431.0) $ (22.0)
================ =============== ===============
Provision (Benefit) for income taxes:
Current:
Federal...................................................... $ (1.6) $ (5.0) $ (0.1)
State and local.............................................. (0.2) 2.9 2.9
Foreign...................................................... 0.6 (0.4) 8.1
---------------- --------------- ---------------
(1.2) (2.5) 10.9
---------------- --------------- ---------------
Deferred:
Federal...................................................... 0.0 22.8 (12.9)
State and local.............................................. 0.0 4.2 1.0
Foreign...................................................... 1.8 (2.8) 6.7
----------------
--------------- ---------------
1.8 (24.2) (5.2)
---------------- --------------- ---------------
$ 0.6 $ 21.7 $ 5.7
================ =============== ===============
</TABLE>
During 1997 and 1996, the Company recorded a valuation allowance
against its domestic and certain foreign deferred tax assets as management
determined that it was not more likely than not that such assets would be
realized in the future.
Deferred taxes result from temporary differences in the recognition
of income and expenses for financial and income tax reporting purposes and
differences between the fair value of assets acquired in business combinations
accounted for as purchases and their tax bases. The approximate effect of
temporary differences that gave rise to deferred tax balances at December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable............................................ $3.1 $3.5
Inventory...................................................... 4.3 13.6
Sales returns reserves......................................... 15.9 21.7
Restructuring reserves......................................... 10.7 22.4
Reserve related to foreign investments......................... 9.8 7.5
Net operating loss carryforwards............................... 101.6 61.4
Tax credit carry forwards...................................... 4.7 4.7
Other.......................................................... 7.9 11.2
-------------- --------------
Total gross deferred tax assets................................ 158.0 146.0
Less valuation allowance....................................... (144.5) (112.5)
-------------- --------------
Net deferred tax assets........................................ 13.5 33.5
-------------- --------------
Deferred tax liabilities:
Equity investments............................................. 3.2 3.4
Depreciation/ amortization..................................... 9.2 20.9
Licensing income............................................... 6.3 6.6
Other.......................................................... 0.5 2.5
-------------- --------------
Total gross deferred tax liabilities........................... 19.2 33.4
-------------- --------------
Net deferred tax asset (liability).............................. $ (5.7) $ 0.1
============== ==============
</TABLE>
F-24
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
As discussed more fully in Note 1, the results of operations of Toy
Biz are not included in the Company's consolidated financial statements for
the last six months ended December 31, 1997. Accordingly, the net deferred tax
assets at December 31, 1997 do not include the net deferred tax assets of
Toy Biz. At December 31, 1996, net deferred tax assets of $6.2 related to
Toy Biz are included in the Company's net deferred tax assets.
The total valuation allowance for 1997 and 1996 includes $12.8, which
if realized, will be accounted for as a reduction of goodwill.
The income tax on (loss) income before provision for income taxes,
minority interest and extraordinary item varies from the current statutory
federal income tax as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- -------------- -------------
<S> <C> <C> <C>
Statutory rate...................................................... (35.0)% (35.0)% (35.0)%
State and local taxes, net.......................................... (0.2) (2.2) 16.0
Non-deductible amortization expense................................. 1.2 21.5 17.5
Foreign taxes....................................................... 0.5 (0.8) 18.8
Increase in Valuation Allowance..................................... 32.6 21.6 -
Other............................................................... 0.6 (0.1) 8.6
--------------- -------------- ---------------
Total provision for income taxes.................................... (0.2)% 5.0 25.9
=============== ============== ===============
</TABLE>
8. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
ACCOUNTS RECEIVABLE, NET:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
Accounts receivable .......................................... $ 109.6 $ 275.3
Less: Allowances........................................... (22.8) (46.2)
------------------ ------------------
$ 86.8 $ 229.1
================== ==================
</TABLE>
Included in the Company's net accounts receivable balance as of
December 31, 1996 was $95.6 related to Toy Biz. The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral. Receivables generally are due within 30-90 days. At
December 31, 1997, the Company did not have any significant concentrations of
credit risk.
<TABLE>
<CAPTION>
INVENTORIES:
1997 1996
------------------ ------------------
<S> <C> <C>
Finished goods................................................ $ 26.0 $ 69.4
Work in process............................................... 12.7 16.3
Raw materials................................................. 13.9 22.0
Less: Reserve for obsolescence................................ (8.7) (29.6)
------------------ ------------------
$ 43.9 $ 78.1
================== ==================
</TABLE>
Included in the Company's net inventory as of December 31, 1996 was
$20.9 related to Toy Biz.
F-25
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
PROPERTY, PLANT AND EQUIPMENT (AT COST), NET:
Depreciation and amortization of property, plant and equipment are
provided on the straight-line basis over the estimated asset lives indicated
below.
<TABLE>
<CAPTION>
1997 1996
------------- -----------
<S> <C> <C>
Land and buildings (20 to 33 years for buildings)------------- $ 33.0 $ 35.5
Machinery and equipment (3 to 10 years)----------------------- 35.0 65.1
Furniture and fixtures (5 to 10 years)------------------------ 5.8 6.2
Leasehold improvements and other (3 to 10 years)-------------- 2.8 2.5
Construction-in-progress-------------------------------------- 1.0 1.8
------------- ------------
77.6 111.1
Less: Accumulated depreciation and amortization-------------- (22.1) (31.6)
-------------
============
$ 55.5 $ 79.5
============= ============
</TABLE>
Included in the Company's net property, plant and equipment as of
December 31,1996 was $19.9 related to Toy Biz. Depreciation and amortization
was $10.3 , $19.1 and $13.3 in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
GOODWILL AND OTHER INTANGIBLES, NET:
1997 1996
------------- -------------
<S> <C> <C>
Goodwill and other intangibles-------------------------------- $ 243.9 $ 376.1
Less: Accumulated amortization------------------------------- (69.2) (58.5)
------------- -------------
$ 174.7 $ 317.6
============= =============
</TABLE>
Amortization, excluding the write-off of goodwill, was $12.5 , $16.8
and $15.0 in 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
ACCRUED EXPENSES AND OTHER:
1997 1996
------------- ------------
<S> <C> <C>
Royalties and incentives-------------------------------------- $ 31.5 $ 23.0
Reserve for returns------------------------------------------- 44.6 51.2
Interest------------------------------------------------------ 15.0 9.0
Other--------------------------------------------------------- 49.9 106.2
Less amounts reclassified to liabilities subject to settlement
under reorganization (See Note 3)----------------------------- (13.7) (14.7)
------------- ------------
$ 127.3 $ 174.7
============= ============
</TABLE>
Included in the Company's accrued expenses and other as of December
31, 1996 was $22.4 related to Toy Biz.
9. RELATED PARTY TRANSACTIONS
The Company had been a subsidiary of MacAndrews & Forbes or an
affiliate thereof from 1989 through the middle of 1997.
The Company was charged for certain services provided by affiliates
of Mafco on behalf of the Company. These charges did not exceed 1/2 of 1% of
the Company's net revenues for the years ended December 31, 1997, 1996, and
1995.
During the years ended December 31, 1996 and 1995, Toy Biz accrued
royalties of $1.8 and $5.7, respectively, to Mr. Arad, a director and
stockholder of Toy Biz, for toys he invented or designed. Mr. Arad was later
F-26
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
employed by the Company where he was in charge of Marvel Studios until August
1997. For the year ended December 31, 1997, the Company paid Mr. Arad
approximately $.3 for his services.
In 1995, the Company terminated a contract with Classic Heroes, Inc.,
an affiliate of Toy Biz, and incurred $4.0 of costs, which has been charged to
operations.
During 1993, the Company entered into agreements to license certain
of the Company's characters to New World Communications Group Incorporated
("New World"), then a subsidiary of Mafco, for the production of animated
series for television. These agreements provide for New World to participate
in licensing and other revenues generated from the exhibition of certain
animated series. Results of operations for 1996 and 1995 includes an expense
for this participation that did not exceed 1/2 of 1% of the Company's net
revenues for the years ended December 31, 1996 and 1995, respectively. During
1996, the Company and New World entered into an agreement whereby New World
produced for the Company episodes 1-13 of THE INCREDIBLE HULK animated
television series at the cost of approximately $4.0.
During 1995, the Company extended two unsecured loans totaling $0.5
to one of its executive officers. The unpaid principal and accrued interest on
such loans was paid to the Company by Andrews Group during March, 1997.
The Company was party to a tax sharing agreement with certain of its
affiliates through April 24, 1997, the date the Company became deconsolidated
from the MacAndrews and Forbes tax group (see Note 7). During 1997 and 1996,
the Company received tax refunds from Mafco in the amounts of $10.4. and $17.1,
respectively.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Consolidated rent expense under operating leases covering production
facilities, office facilities, warehouse facilities and equipment was $5.9,
$7.9 and $7.0 for the years ended December 31, 1997, 1996 and 1995,
respectively. These leases expire through 2005 and are subject to price
escalation's for certain costs. Aggregate future minimum rental commitments,
excluding amounts included within restructuring charges, for these leases as
of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
For the Years Ending December 31,
-------------------------------------
<S> <C>
1998............................................... $ 3.7
1999............................................... 2.7
2000............................................... 1.9
2001............................................... 1.0
2002............................................... 0.3
2003 and thereafter................................ 0.3
</TABLE>
SPORTS AND ENTERTAINMENT LICENSING CONTRACTS
Minimum payments under the Company's sports and entertainment license
agreements are $57.3, $37.1, $9.0, $7.2 and $6.3 in 1998, 1999, 2000, 2001 and
2002 respectively.
LEGAL MATTERS
On December 27, 1996, the Debtor Companies filed petitions under
chapter 11 of the Bankruptcy Code and in connection with such filing have been
parties to various legal proceedings. The filing by the Debtor Companies of
the voluntary petitions for reorganization operated as an automatic stay
against the commencement or continuation of any judicial, administrative or
other proceeding against the Debtor Companies, any act to obtain possession of
property of
F-27
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
or from the Debtor Companies, or any act to create, perfect or enforce any
lien against property of the Debtor Companies, with certain exceptions under
the Bankruptcy Code.
The Indentures Trustee has alleged that events of defaults under each
of the Indentures have occurred by reason of the commencement of the Marvel
Cases under the Bankruptcy Code. The Indentures Trustee has also alleged that
the majority ownership and the anti-injunction provisions of each of the
Indentures have been violated. The Company is not a party to any of the
Indentures governing the Notes issued by the Holding Companies. In addition,
the Company believes the allegations of the Indentures Trustee are either
without merit or will be resolved in connection with the prosecution of the
reorganization cases of the Holding Companies. The Indentures Trustee has also
filed claims with the District Court alleging, among other things, "tortious
interference" occasioned by the filing of the Initial Plan. The Company
believes that any such claims are without merit. The Chapter 11 Trustee has
indicated that he will support a motion to expunge such claims in the
bankruptcy proceedings of the Debtor Companies.
There are twenty-seven purported class and derivative actions brought
by stockholders of the Company and the Noteholders and one action brought by a
purported class of Toy Biz shareholders presently pending in the Delaware
Court of Chancery (collectively, the "Delaware Actions") that challenge, among
other things, the Andrews Investment.
Twenty-one of the twenty-seven Delaware Actions assert either claims
on behalf of a purported class of all Marvel shareholders or shareholder
derivative claims on behalf of Marvel, or both. The complaints allege, among
other things, that the Andrews Investment represents a breach of defendants'
fiduciary duties because the proposed purchase price per share is unfair and
such purchase would dilute the minority shareholders' interest in Marvel.
Plaintiffs in these actions seek to enjoin the Andrews Investment, to rescind
the Andrews Investment if it is in fact consummated prior to the entry of the
court's judgment, to recover damages for defendants' alleged conduct and to
recover costs and disbursements in pursuing these actions, including
reasonable attorneys' fees. These actions have been consolidated for all
purposes by order of the Delaware Court of Chancery. A consolidated complaint
has not yet been filed.
Six of the Delaware Actions assert claims on behalf of a purported
class consisting of the holders of Notes issued by the Holding Companies.
These complaints allege, among other things, that the Andrews Investment, if
consummated, would be a breach of defendants' duty of fair dealing and good
faith owed to the Noteholders because the Andrews Investment would result in
the substantial dilution of Marvel's outstanding stock, which is security for
the Notes, and will thus diminish the value of the Notes. These actions have
been separately consolidated by order of the Delaware Court of Chancery. The
consolidated complaint in these six actions does not name any of the Debtor
Companies as defendant. The parties to the consolidated complaint have agreed
to defer the filing of an answer.
All of the foregoing Delaware Actions name varying defendants
consisting in the aggregate of Marvel, Andrews Group, MacAndrews Holdings,
Marvel Parent, Marvel III, Holdings, Ronald O. Perelman, William C. Bevins,
Donald G. Drapkin, Michael Fuchs, Frank Gifford, E. Gregory Hookstratten,
Morton L. Janklow, Quincy Jones, Stan Lee, Scott C. Marden, Terry C. Stewart
and Kenneth Ziffren.
One of the pending Delaware Actions asserts claims on behalf of a
purported class of all Toy Biz shareholders. Holl v. Toy Biz, Inc., Marvel
Entertainment Group, Inc., Andrews Group, Inc., Ronald O. Perelman, Joseph M.
Ahearn, Avi Arad and Issac Perlmutter, was filed on November 15, 1996. The
complaint alleges, among other things, that defendants Perelman, Ahearn, Arad
and Perlmutter have breached their fiduciary duties in pursuing the proposed
offers of Marvel and Andrews Group to purchase Toy Biz stock. In addition, the
complaint alleges that defendant Marvel aided and abetted the individual
defendants in their unlawful conduct. Damages in an unspecified amount are
sought for the alleged breach of fiduciary duties by defendants. Plaintiffs
also seek to enjoin the consummation of the transaction, to rescind the
transaction in the event it is consummated and to recover costs and
disbursements and reasonable allowances for plaintiff's counsel. This case has
been stayed by stipulation of the parties.
F-28
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
No classes have been certified in any of the Delaware Actions. On
December 27, 1996, Marvel filed a petition for protection under chapter 11 of
the Bankruptcy Code. As a result of Marvel's filing, all of the Delaware
Actions with respect to Marvel are automatically stayed pursuant to 11 U.S.C.
Section 362. On March 7, 1997, Andrews Group terminated the Stock Purchase
Agreement with Marvel and withdrew the proposal for the Andrews Investment. On
the same date, Andrews Group informed Toy Biz and the two other principal
stockholders of Toy Biz that the transactions contemplated by the Merger
Agreement and the Stock Purchase Agreements with Toy Biz and each of such
principal stockholders, respectively, would not be consummated.
OTHER LEGAL PROCEEDINGS
The Company is a defendant in a purported class action filed on July
26, 1996 in the United States District Court for the Eastern District of New
York entitled Fishman, et al v. Marvel Entertainment Group, Inc., by four
persons who allegedly purchased sports and entertainment cards manufactured by
Fleer/SkyBox. The action is directed against standard business practices in
the trading card industry, including the practice of randomly placing insert
cards in packages of sports and entertainment trading cards, and alleges that
these practices constitute illegal gambling activity in violation of state and
Federal law. Plaintiffs seek certification of a class of persons who within
four years prior to the filing of the complaint purchased packages of trading
cards that might contain randomly inserted cards, and recovery of treble
damages. On September 30, 1996, 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. This motion is still pending.
Marvel is named as a defendant in two actions which have been
consolidated for all purposes with certain related actions in proceedings now
pending in the Los Angeles County Superior Court in California. The
consolidated cases center around the ownership of certain rights in the
production and distribution of a live action motion picture based on the
"SPIDER-MAN" character owned by Marvel.
In the lead case, a dispute between 21st Century Film Corporation
("21st Film"), Carolco Pictures, Inc. ("Carolco") and related entities, 21st
Film claims that it still possesses rights under an agreement with Marvel to
produce and distribute a live action film based on the "SPIDER-MAN" character,
although it had assigned all of its rights to Carolco. Metro Goldwyn Mayer,
Inc. ("MGM") has succeeded to the litigation position of both 21st Film and
Carolco in the respective bankruptcy proceeding of those two companies. In
addition to its purchase of 21st Film and Carolco litigation positions, MGM is
a plaintiff in a separate case that has been deemed related to the lead and
consolidated cases. Marvel has answered the complaint denying MGM's
allegations.
An additional lawsuit, between Carolco and Columbia Tristar Home
Video ("Columbia"), concerns the videocassette rights to any such film, and a
third lawsuit, between Carolco and Viacom International, Inc. ("Viacom"),
involves television rights to any such film. Both Columbia and Viacom claim
that, before 21st Film assigned its rights under its agreement with Marvel to
Carolco, 21st Film had licensed ancillary rights to each company. Each seeks
to enforce its respective rights. Viacom, however, brought a separate suit
naming Marvel, and Marvel has answered that complaint, denying Viacom's
allegations.
In its answer and other pleadings, Marvel contends that it is the
sole and exclusive holder of the unencumbered right to produce and distribute
a live action film based on the "SPIDER-MAN" character. Marvel contends that
all rights to produce or distribute a "SPIDER-MAN" film under its agreement
with Carolco and 21st Film have reverted to Marvel.
Marvel has notified the court in the consolidated action that Marvel
has filed for bankruptcy protection, and that the bankruptcy court filing
stays all further proceedings in the consolidated lawsuit as to Marvel. On
March 24, 1998, the Chapter 11 Trustee filed a separate action in the District
Court asserting that Marvel has the full unencumbered right to produce and
distribute any "SPIDER-MAN" films. There can be no assurance that the Chapter
11 Trustee will be successful in this litigation.
The National Basketball Association, through NBA Properties, Inc.
("NBAP"), filed a complaint against Panini, NBA Properties, Inc. v. Panini, in
Federal Court in the Southern District of New York on October 14, 1997.
F-29
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The complaint seeks approximately $57 for accrued and unaccrued royalty and
other payments under a license agreement with Marvel, to which Panini is a
party. The license concerns the manufacture and distribution of basketball
trading cards and stickers. Panini is not in bankruptcy. Panini has moved to
dismiss for lack of personal jurisdiction and NBAP intends to cross-move for
summary judgment. The Chapter 11 Trustee is moving to intervene in this
action. The Company has accrued unpaid minimum royalties due to NBAP through
December 31, 1997 on its consolidated financial statements, but has not
accrued for any future royalty payments that may be owed to NBAP from the
Company.
As debtor-in-possession and prior to the appointment of the Chapter
11 Trustee, Marvel filed an adversary proceeding in the District Court with
regard to the Marvel v. NBA Properties, Inc. suit, on December 9, 1997,
seeking an injunction extending the automatic stay and enjoining further
proceedings in the action against Panini in NBA Properties, Inc. v. Panini.
Marvel's motion for a preliminary injunction is scheduled to be heard by the
District Court on April 24, 1998.
The Company is currently negotiating with the NBAP to, among other
things, reduce the minimum royalties due to NBAP pursuant to its license
agreement with Marvel. There can be no assurance that such negotiations will
be successful.
As successor Indentures Trustee for the Notes issued by Holding
Companies, La Salle National Bank brought an action against Mafco, MacAndrews
Holdings, Andrews Group and certain of their directors, La Salle National Bank
v. Ronald O. Perelman, et. al., in the District Court in December 1997 to
enforce the provisions of the Notes and the Indentures. The defendants are
alleged to have materially adversely affected the Holding Companies by
executing the Indentures and issuing the Notes, thus ultimately depriving the
Noteholders of any viable expectation of recovery. The directors are also
alleged to have undermined Marvel through an initial public offering, the
acquisition of Fleer, the purchase of stock in Toy Biz, the transfer of
Marvel's toy license to Toy Biz and misuse of the proceeds of the Notes.
Plaintiff further alleges that the defendants caused Marvel to acquire Panini
and Skybox and used the financial statements of these entities to disguise
Marvel's financial condition. On January 16, 1998, the defendants moved to
dismiss the complaint on various grounds. This motion is still pending.
Toy Biz initiated an action in the District Court in June 1997
against the Company 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. In July 1997 the Bondholders Committee and the
Indentures Trustee moved to dismiss this action. Toy Biz cross-moved for
summary judgment which motion was opposed by the Bondholders Committee, the
Indentures Trustee and the Chapter 11 Trustee. On March 30, 1998, the District
Court granted Toy Biz's motion for summary judgment. The Company and other
interested parties have filed an appeal of this determination to the United
States Court of Appeals for the Third Circuit. The Chapter 11 Trustee,
management of Toy Biz and the secured lenders of the Company are currently in
negotiations attempting to settle the claims that are the subject of the
appeal as well as other matters. There can be no assurance that such
negotiations will be successful and that such claims will be settled.
In October 1997, an action was brought in the District Court in the
name of the Company against, among others, Ronald O. Perelman, The Chase
Manhattan Bank and other lenders who are holders of pre-petition debt of
Marvel and Toy Biz. The complaint seeks declaratory and injunctive relief and
alleges improper, manipulative and collusive conduct by the defendants. Among
the violations charged are breach of fiduciary duties, fraudulent conveyances,
preferential transfers, breach of contract, violation of the automatic stay
under the Bankruptcy Code and interference with contractual relations. This
litigation is the subject of various motions to dismiss. The Chapter 11
Trustee is in the process of evaluating the claims in this litigation,
interviewing parties and witnesses and investigating the defendants' conduct
under the applicable rules and laws.
The Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding, the Company believes
that other than the litigation involving 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
F-30
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
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.
POTENTIAL LITIGATION
On October 27, 1997, the Company received a Civil Investigative
Demand ("CID") from the Antitrust Division of the U.S. Department of Justice
(the "Justice Department") as part of the Justice Department's investigation
into unreasonable trade restraints and monopolization in comic-book
distribution and sales. A CID is a formal request for information and a
customary initial step of any Justice Department investigation. The Justice
Department is permitted to issue a CID to anyone whom the Justice Department
believes may have information relevant to an investigation. Therefore, the
receipt of a CID does not mean that the recipient is the target of an
investigation, nor does it presuppose that there is a probable cause to
believe that a violation of the antitrust laws has occurred or that a formal
complaint ultimately will be filed. The Company believes that the primary
focus of the CID relates to the distribution and sale of comic books. The
Company intends to cooperate fully with the Justice Department inquiry, and
submitted a response to the CID on January 28, 1998.
There can be no assurance that the Justice Department's investigation
will not result in litigation against the Company or that the Company will
prevail in any such litigation, if commenced. Any material restructuring of
the distribution arrangements by the Company for its comic books could have a
material negative effect on the Company's business, financial condition and
results of operations.
11. GEOGRAPHIC SEGMENTS
The Company operates in a single business segment. Information
related to the Company's geographic segments for the years ended December 31,
1997, 1996 and 1995 is presented below. Substantially all of the Company's
foreign net revenues were derived from Europe. As discussed more fully in Note
4, the information for the year ended December 31, 1997 does not include the
results of operations for Toy Biz for the year ended December 31, 1997 due to
the unavailability of such information.
Operating profit, as presented below, is total sales less operating
expenses, amortization of goodwill and other intangibles, restructuring
charges, and identifiable miscellaneous income and expense. Unallocated income
and expenses represent interest expense, net interest and investment income,
foreign exchange loss (gain), loss on sale of a portion of confectionery
business, equity in net income of unconsolidated subsidiaries, reorganization
items and general corporate expenses incurred to manage all of the Company's
activities. Unallocated income for 1996 and 1995 includes a gain on the sale
of Toy Biz common stock.
Identifiable assets, as presented below, are those assets used in
each geographic area. Corporate assets are principally cash, certain property
and equipment and non-operating assets. Export sales, including those to
affiliates, are not significant.
The majority of the Company's foreign sales and thus the majority of
the risk of foreign currency fluctuations relate to Panini. As a hedge against
foreign currency fluctuation, the financing for the acquisition of Panini in
1994 has been denominated in Panini's functional currency. Additionally, from
time to time, Panini may enter into foreign currency forward exchange
contracts, swaps and options as hedges of various intercompany transactions.
At December 31, 1997 and 1996, outstanding forward exchange contracts were
insignificant. Additionally, the fluctuation in Panini's functional currency
for the years ended December 31, 1997, 1996 and 1995 was not significant.
F-31
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
GEOGRAPHIC AREAS:
<TABLE>
<CAPTION>
Year Ended December 31,
1997* 1996 1995
----------------------------------------
<S> <C> <C> <C>
Net sales:
Domestic---------------------- $196.5 $462.8 $ 579.9
Foreign----------------------- 214.3 309.9 278.6
Eliminations------------------ (8.0) (27.2) (29.6)
------- --------- ---------
$402.8 $745.5 $ 828.9
======= ========= =========
Operating profit:
Domestic---------------------- ($134.8) ($384.4) ($28.6)
Foreign----------------------- (37.8) 13.1 44.6
------- --------- ---------
(172.6) (371.3) 16.0
Unallocated expenses, net ------------- (76.5) (59.7) (38.0)
------- --------- ---------
Loss before provision for income taxes- ($249.1) ($431.0) ($22.0)
======= ========= =========
Identifiable assets:
Domestic---------------------- $169.7 $455.6 $ 786.7
Foreign----------------------- 237.1 342.3 324.0
Corporate--------------------- 69.7 46.1 115.6
------- --------- ---------
$476.5 $844.0 $ 1,226.3
======= ========= =========
</TABLE>
* Excludes the operations of Toy Biz.
12. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter*
--------- --------- --------- -----------
1997
<S> <C> <C> <C> <C>
Net revenues-------------------------------------------------- $ 156.7 $ 129.6 $ 91.9 $ 93.5
Gross profit-------------------------------------------------- 52.2 33.2 18.0 1.8
Net loss------------------------------------------------------ (27.8) (41.9) (30.6) (154.0)
Loss per share------------------------------------------- $ (0.27) $ (0.41) $ (0.30) $ (1.51)
1996
Net revenues-------------------------------------------------- $ 189.6 $ 182.2 $ 209.4 $ 164.3
Gross profit-------------------------------------------------- 75.7 66.8 66.3 0.3
Net loss------------------------------------------------------ (4.4) (11.0) (12.5) (436.5)
Loss per share------------------------------------------- $ (.04) $ (.11) $ (.12) $ (4.29)
</TABLE>
* 1997 - Includes the write down of trading card and children's activity
sticker goodwill of approximately $106.7.
* 1996 - Reflects fourth quarter charges, including: a write-down of goodwill
and other intangibles of approximately $278.5 and a valuation allowance of
approximately $32.2 provided to offset deferred tax assets of certain
subsidiaries that were previously recorded.
The loss per share amounts have been restated to comply with FAS 128.
F-32
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
13. UNUSUAL CHARGES
GOODWILL AND OTHER INTANGIBLES WRITE-DOWN:
Goodwill related to the trading card operations of Fleer and SkyBox
and the children's activity sticker operations of Panini was initially
recorded at the time of their respective acquisitions. This goodwill
represented the excess of the purchase price over the valuation of the net
assets acquired in each acquisition. Among other things, the purchase price
was based on the Company's expectations of future performance at the time of
acquisition, considering historical performance and industry trends. These
expectations assumed various growth rates in revenue and sufficient cash flow
from operations to repay acquisition indebtedness.
There has been a significant and continued contraction in the trading
card market since the Fleer and SkyBox acquisitions, related in part to lower
speculative purchases. In addition as a result of the labor unrest in
baseball, hockey and basketball in 1994 and 1995, fan interest declined which
adversely affected sports trading card sales and increased returns for those
periods. The level of fan interest, although showing recent signs of
improvement, has not returned to the levels experienced prior to such labor
unrest. The Company believes that all of these factors have negatively
affected the sports trading card business, causing the Company to experience
lower sales, higher returns and higher inventory obsolescence.
The level of demand for entertainment trading cards is dependent on,
among other factors, the commercial success and media exposure of the Marvel
Characters and third party licensed products, as well as the market conditions
in the comic book specialty stores. In 1994 and 1995, the sale of
entertainment cards based on the Marvel Characters and third party licensed
characters substantially offset the decline in sports trading cards. However,
in 1996 and 1997 the Company's sales of entertainment trading cards was
adversely affected by lack of commercial success of properties licensed from
third parties as well as the lower demand for trading cards based on comic
book characters.
As described above, continuing operating losses in the trading card
business, as well as significant long-term changes in industry conditions,
indicated to the Company that there may be asset impairment. During the fourth
quarter of 1996, the Company evaluated the recoverability of the carrying
value of long-lived assets, including goodwill and other intangibles, in
accordance with its previously stated accounting policies and recorded a
non-cash charge of approximately $252.9 related to Fleer and SkyBox that has
been classified as amortization and write-off of goodwill and other
intangibles. The Company recognized an impairment on a going concern basis
related to certain assets of the trading card business because the future
undiscounted cash flows of the assets were estimated to be insufficient to
recover their related carrying value. The write down was recorded based on the
difference between the carrying value of the asset and the fair value
estimated by independent valuations on a going concern basis. As part of the
bankruptcy proceedings and reorganization efforts involving the Company,
certain valuations of the Company's business units were prepared by investment
banking firms. Considerable judgment was used to estimate future cash flows
and fair value. During the fourth quarter of 1997, the continued operating
losses in the trading card business as well as continued significant long-term
changes in industry conditions which resulted in lower than expected
fourth-quarter sales, including basketball trading card sales, indicated to
the Company that a further impairment of its trading card goodwill occurred.
The Company also completed, in the fourth quarter of 1997, its 1998 business
plan which anticipates a continuation of the trend of lower revenues from
trading cards. The write-down of goodwill of $78.5 was recorded based on the
difference between the carrying value of the assets and the fair value of the
business based on several offers from willing buyers. Remaining goodwill
associated with the Company's trading cards operations is approximately $24.0,
which will be amortized over 10 years.
During 1997, the Company experienced a significant loss in its
sticker business due to a contraction in the sticker industry. In addition,
the Company had suffered a loss in 1996 for its sticker business. In the
fourth quarter of 1997, Panini also completed its 1998 business plan which
anticipates a continuation of the trend of lower revenues from children's
activity stickers. As a result, the Company recognized an impairment on a
going concern basis related to certain assets of the children's activity
sticker business because the future undiscounted cash flows of the assets were
F-33
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
estimated to be insufficient to recover their related carrying value. The
write-down of goodwill of $28.2 was recorded based on the difference between
the carrying value of the assets and the fair value of the business based on
several bids. Remaining goodwill associated with the Company's children's
activity sticker business is approximately $70.0, which will be amortized over
the next 20 years.
In addition, the Company recorded, in the fourth quarter of 1996, an
approximate $19.8 noncash write-down of goodwill and other intangibles related
to the write off of long-lived assets, including goodwill and other
intangibles, related to the closing of Heroes World and the discontinuance of
certain magazines for children. This charge was classified as amortization and
write-off of goodwill and other intangibles. No such adjustment was required
in 1997 and 1996 for the assets of the Company's ongoing publishing activity.
RESTRUCTURING:
In the fourth quarter of 1995, the Company recorded restructuring
charges of $25.0 related primarily to publishing and confections operations.
As part of the restructuring, the Company terminated approximately 275
employees, covering editorial, production, distribution and administrative
employee groups and, accordingly, provided for $10.7 of termination benefits,
of which $9.8 has been paid as of December 31, 1997. Additionally,
approximately $6.7 of the restructuring charges relates to facility closure,
of which $5.8 has been paid as of December 31, 1997, and $7.6 of the
restructuring charges relates to other costs, of which $7.1 has been paid as
of December 31, 1997. A substantial portion of the remaining restructuring
charge of $2.3 as of December 31, 1997, which is included in accrued expenses
and other, are "liabilities subject to settlement under reorganization".
In the fourth quarter of 1996, the Company recorded restructuring
charges of $15.8 related primarily to the publishing and trading card
operations; the closing of the comic book distribution subsidiary and the
closing of a confections facility. As part of the restructuring, the Company
terminated approximately 200 employees, covering editorial, production,
distribution and administrative employee groups and, accordingly, provided for
$6.6 of termination benefits of which $3.1 has been paid as of December 31,
1997 and the balance represents amounts due under employment contracts to
be paid over time. The remaining approximate $9.2 of the restructuring
charges relates to facility closure or sale of which $1.4 has been paid as of
December 31, 1997 and $6.5 was used to write-down certain fixed assets and
facility closure. A substantial portion of the remaining amount of $4.8 as of
December 31, 1997, which is included in accrued expenses and other, are
"liabilities subject to settlement under reorganization".
F-34
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
14. FINANCIAL STATEMENTS OF ENTITIES OPERATING UNDER CHAPTER 11
The combined balance sheet as of December 31, 1997 of the Debtor Companies is
as follows (See Note 2):
<TABLE>
<CAPTION>
ASSETS
Current Assets:
<S> <C>
Cash................................................................... $18.1
Accounts receivable, net............................................... 22.7
Inventories, net....................................................... 18.0
Deferred income taxes.................................................. 1.6
Prepaid expenses and other............................................. 4.4
-----------------
Total current assets............................................... 64.8
Property, plant and equipment, net..................................... 8.3
Goodwill and other intangibles, net.................................... 104.7
Deferred charges and other............................................. 19.9
Investment in Toy Biz.................................................. 33.0
Investments in and advances to subsidiaries, at cost (40.1)
-----------------
Total Assets....................................................... $190.6
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................................... $22.9
Accrued expenses and other............................................. 79.8
Debtor in Possession Loan (DIP)........................................ 91.2
-----------------
Total current liabilities.......................................... 193.9
Other long-term liabilities............................................ 6.5
Liabilities subject to settlement under reorganization ................ 502.2
-----------------
Total Liabilities.................................................. 702.6
-----------------
Stockholders' deficit:
Common Stock........................................................... 1.0
Additional paid-in capital............................................. 93.1
Accumulated Deficit.................................................... (604.6)
Cumulative translation adjustment...................................... (1.5)
-----------------
Total Stockholders' Deficit........................................ (512.0)
-----------------
Total Liabilities and Stockholders' Deficit $190.6
=================
</TABLE>
F-35
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
The combined statement of operations for the year ended December 31, 1997 of
the Debtor Companies is as follows:
<S> <C>
Net revenues............................................................................ $199.4
Cost of sales........................................................................... 154.6
Selling, general & administrative expenses.............................................. 81.1
Depreciation and amortization........................................................... 6.2
Amortization and write-off of goodwill, intangibles and deferred charges................ 91.6
Interest expense, net (Contractual interest for the year ended December 31, 1997
was $55.4)........................................................................... 26.0
Loss on sale of a portion of confectionery business..................................... 4.7
Equity in net loss of unconsolidated subsidiaries and other, net........................ (76.2)
-------------------
Loss before reorganization items and provision for income taxes......................... (241.0)
Reorganization items.................................................................... 11.3
-------------------
Loss before provision for income taxes.................................................. (252.3)
Provision for income taxes.............................................................. 2.0
-------------------
Net loss................................................................................ $(254.3)
===================
</TABLE>
F-36
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Balance at Charged to Changed to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts(c)/(d) Deductions Period
---------- ---------- ---------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for returns .................. $ 18.7 $ 32.6 $ (2.7) $ (40.4)(a) $ 8.2
Allowance for doubtful accounts and
other allowances................... 27.5 10.3 (10.4) (12.8)(b) 14.6
Reserve for inventory obsolescence........... 29.6 9.3 (4.3) (25.9) 8.7
Included in Accrued Expenses & Other:
Reserve for Returns .................... 51.2 92.2 (0.8) (98.0)(a) 44.6
-------- ------- --------- ------- --------
Totals $ 127.0 144.4 $ (18.2) $(177.1) $ 76.1
======== ======= ========= ======= ========
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for returns .................. $ 61.6 $ 41.0 $ - ($83.9)(a) $ 18.7
Allowance for doubtful accounts and
other allowances.................... 16.3 52.7 - (41.5)(b) 27.5
Reserve for inventory obsolescence........... 22.4 23.5 - (16.3) 29.6
Included in Accrued Expenses & Other:
Reserve for Returns .................... 59.0 129.1 - (136.9)(a) 51.2
-------- ------- --------- ------- --------
Totals $ 159.3 $ 246.3 $ - $(278.6) $ 127.0
======== ======= ========= ======= ========
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for returns.................. $ 21.0 $ 101.5 $ 3.8 ($64.7)(a) $ 61.6
Allowance for doubtful accounts and
other allowances.................. 2.5 24.1 4.0 (14.3)(b) 16.3
Reserve for inventory obsolescence........... 1.7 33.6 9.8 (22.7) 22.4
Included in Accrued Expenses & Other:
Reserve for Returns .................... 47.6 163.7 7.5 (159.8)(a) 59.0
-------- ------- --------- ------- --------
Totals $ 72.8 $ 322.9 $ 25.1 $(261.5) $ 159.3
======== ======= ========= ======= ========
</TABLE>
- - ------------------
(a) Actual returns processed.
(b) Write-Off uncollectible accounts.
(c) For the year ended December 31, 1995 represents amounts acquired,
including amounts from the consolidation of Toy Biz commencing in
1995.
(d) For the year ended December 31, 1997 represents amounts from the
deconsolidation of Toy Biz commencing July 1, 1997.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-90302) of Marvel Entertainment Group, Inc. and the related
Prospectus and the Registration Statement (Form S-8 No. 33-94448) pertaining
to the Marvel Entertainment Group, Inc. Amended and Restated Stock Option
Plan, of our report dated April 14, 1998 with respect to the consolidated
financial statements and schedule of Marvel Entertainment Group, Inc. included
in this Annual Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
New York, New York
April 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARVEL ENTERTAINMENT GROUP, INC. CONSOLIDATED BALANCE SHEETS AND
STATMENTS OF OPERATIONS
</LEGEND>
<MULTIPLIER> 1,000,000
<NAME> MARVEL ENTERTAINMENT GROUP, INC.
<CIK> 0000874808
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 110
<ALLOWANCES> 23
<INVENTORY> 44
<CURRENT-ASSETS> 189
<PP&E> 78
<DEPRECIATION> 22
<TOTAL-ASSETS> 477
<CURRENT-LIABILITIES> 458
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> (513)
<TOTAL-LIABILITY-AND-EQUITY> 477
<SALES> 472
<TOTAL-REVENUES> 472
<CGS> 367
<TOTAL-COSTS> 367
<OTHER-EXPENSES> 297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (257)
<INCOME-TAX> 1
<INCOME-CONTINUING> (254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (254)
<EPS-PRIMARY> (2.50)
<EPS-DILUTED> (2.50)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
MARVEL ENTERTAINMENT GROUP, INC. CONDOLIDATED BALANCE SHEETS AND
STATEMENTS OF OPERATIONS
</LEGEND>
<MULTIPLIER> 1,000,000
<NAME> MARVEL ENTERTAINMENT GROUP, INC.
<CIK> 0000874808
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 25
<SECURITIES> 0
<RECEIVABLES> 275
<ALLOWANCES> 46
<INVENTORY> 78
<CURRENT-ASSETS> 400
<PP&E> 111
<DEPRECIATION> 32
<TOTAL-ASSETS> 844
<CURRENT-LIABILITIES> 331
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> (257)
<TOTAL-LIABILITY-AND-EQUITY> 844
<SALES> 746
<TOTAL-REVENUES> 746
<CGS> 536
<TOTAL-COSTS> 536
<OTHER-EXPENSES> 595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61
<INCOME-PRETAX> (431)
<INCOME-TAX> 22
<INCOME-CONTINUING> (464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464)
<EPS-PRIMARY> (4.56)
<EPS-DILUTED> (4.56)
</TABLE>
