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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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
For the transition period from to
Commission File No. 1-13638
TOY BIZ, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3711775
(State of incorporation) (I.R.S. employer identification number)
685 Third Avenue
New York, New York 10017
(Address of principal executive offices, including zip code)
(212) 588-5100
(Registrant's telephone number, including area code)
------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
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
--- ---
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. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 25, 1998 was $138,689,704, based on
a price of $9 7/8 per share, the closing sales price for the Registrant's Class
A Common Stock as reported in the New York Stock Exchange Composite Transaction
Tape on that date.
As of March 25, 1998, there were 27,746,127 outstanding shares of the
Registrant's Class A Common Stock, par value $.01 per share (the "Class A Common
Stock").
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
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PART I.......................................................................1
ITEM 1. BUSINESS...................................................1
ITEM 2. PROPERTIES................................................12
ITEM 3. LEGAL PROCEEDINGS.........................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......13
PART II.....................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................13
ITEM 6. SELECTED FINANCIAL DATA...................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................15
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...............................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................20
PART III....................................................................20
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........20
ITEM 11. EXECUTIVE COMPENSATION....................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............27
PART IV.....................................................................32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...............................................32
SIGNATURES..................................................................37
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CAUTIONARY STATEMENT FOR PURPOSES OF
THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed herein
concerning the Company's business and operations could cause actual results to
differ materially from those contained in forward-looking statements made in
this Form 10-K Annual Report. When used in this Form 10-K, the words "intend",
"estimate", "believe", "expect" and similar expressions are intended to identify
forward-looking statements. In addition, the following factors, among others,
could cause the Company's financial performance to differ materially from that
expressed in any forward-looking statements made by, or on behalf of, the
Company: (i) developments in the Marvel bankruptcy proceedings (including the
Company's proposal with respect thereto); (ii) a decrease in the level of media
exposure or popularity of Marvel characters resulting in declining revenues of
toys based on such characters; (iii) the lack of commercial success of
properties owned by major entertainment companies that have granted the Company
toy licenses; (iv) consumer acceptance of new toy product introductions; (v) the
imposition of quotas or tariffs on toys manufactured in China as a result of a
deterioration in trade relations between the U.S. and China; (vi) changing
consumer preferences; (vii) production delays or shortfalls; and (viii) general
economic conditions.
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PART I
ITEM 1. BUSINESS
General
Toy Biz, Inc. (the "Company") was incorporated in Delaware on March 18,
1993. The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool,
activity and electronic toy categories, based on popular entertainment
properties, consumer brand names and proprietary designs. The Company's products
are distributed to a number of general and specialty merchandisers and
distributors, principally in the United States and around the world.
For purposes of this Form 10-K Annual Report, the "Company" includes,
unless the context otherwise requires, the Company, its subsidiaries and their
respective predecessors. The "Predecessor Company" means Toy Biz, Inc., a
Delaware corporation incorporated in 1990 and subsequently renamed Zib Inc., and
its foreign sales affiliate, Toy Biz International Ltd., a Hong Kong
corporation. The Company's principal executive offices are located at 685 Third
Avenue, New York, New York 10017 and its telephone number is (212) 588-5100.
In connection with the Company's formation, the Company obtained an
exclusive, perpetual and paid up license (the "Marvel License") from Marvel
Entertainment Group, Inc. ("Marvel") in exchange for approximately 46% of the
common stock of the Company. The Marvel License permits the Company to produce a
broad range of toys based on Marvel's more than 3,500 characters (the "Marvel
Characters"). The Company also has licenses to manufacture certain toy products
based on non-Marvel Characters depicted in television programs such as Xena:
Warrior Princess(TM) and Men in Black(TM), both of which are or are planned to
be, broadcast on network, syndicated or cable television. A number of motion
pictures as to which the Company has obtained licenses to manufacture certain
products have been, or are about to be, released. These include feature films
such as Godzilla, The Lost World: Jurassic Park, Batman and Robin and Blues
Brothers 2000. The Company has also begun marketing collector figures based upon
the characters appearing in popular video games such as Tomb Raider(TM) and
Resident Evil.(TM)
The Company believes that media events associated with the characters
on which it bases certain of its toy products increase overall consumer
awareness and popularity of these characters and the Company has in part
followed a strategy intended to capitalize on the popularity generated by such
media exposure. The Company also has used its success in marketing the Marvel
line as a means of attracting licenses for use of recognized trademarks and
brand names such as Gerber(R) and NASCAR(R).
Change of Control
At the time of the Company's initial public offering in 1995 (the
"IPO"), Marvel received shares of class B common stock, par value $.01 per share
("Class B Common Stock") of the Company which had ten votes per share. All of
the other stockholders of the Company received shares of class A common stock,
par value $.01 per share ("Class A Common Stock" and together with the Class B
Common Stock, the "Common Stock") of the Company which had one vote per share.
Two voting trusts were created under voting trust agreements ("Voting Trust
Agreements"), each of which held one share of Class B Common Stock, for the
purpose of providing the Company's other principal stockholders, Isaac
Perlmutter ("Mr. Perlmutter") and Avi Arad ("Mr. Arad"), with the ability to
veto certain significant corporate actions. Also at the time of the Company's
IPO, the Company, Marvel, Mr. Perlmutter (including two affiliates of Mr.
Perlmutter through which Mr. Perlmutter held his shares of Class A Common Stock)
and Mr. Arad entered into a Stockholders' Agreement (the "Stockholders'
Agreement") which addressed the composition of the Company's board of directors.
The Stockholders' Agreement provided that the Class B Common Stock would be
converted into Class A Common Stock if Ronald O. Perelman ("Mr. Perelman"), who
was then the indirect beneficial owner of a majority of Marvel's common stock,
ceased to control Marvel. Subsequently, Marvel transferred its shares of Class B
Common Stock to Marvel Characters, Inc., a wholly-owned subsidiary of Marvel
("Characters"), and Characters became a party to the Stockholders' Agreement,
with the result
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that Characters owned approximately 26.6% of the outstanding Common Stock but
held approximately 78.4% of the voting power of the Common Stock. See "Item 13.
Certain Relationships and Related Transactions -- Stockholders' Agreement and
Class B Common Stock".
On December 27, 1996, Marvel and virtually all of its subsidiaries,
including Characters (the "Marvel Debtors"), filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). In separate cases, Marvel Holdings Inc. ("Marvel
Holdings"), Marvel (Parent) Holdings Inc. ("Marvel (Parent)") and Marvel III
Holdings Inc. ("Marvel III" and together with Marvel Holdings and Marvel
(Parent), the "Marvel Holding Companies") filed voluntary petitions for
reorganization under Chapter 11. The Marvel Holding Companies were the owners of
a majority of Marvel's common stock and were the entities through which Mr.
Perelman held his majority ownership position in Marvel.
During the period between December 27, 1996 and June, 1997, as a result
of proceedings in those bankruptcy cases, creditors of the Marvel Holding
Companies (the "Marvel Holding Companies Creditors") obtained the right to vote
the shares of the common stock of the Marvel Holding Companies and elected new
boards of directors for those entities. On June 20, 1997 Marvel Holdings voted
its pledged shares of Marvel common stock to elect a new board of directors of
Marvel.
The Company contends that, under the Stockholders' Agreement, the loss
of control of Marvel by Mr. Perelman in those bankruptcy proceedings triggered
the conversion of the shares of Class B Common Stock held by Characters into an
equal number of shares of Class A Common Stock and that the effect of that
conversion was to reduce the voting power of Characters as a stockholder of the
Company from approximately 78.4% to approximately 26.6% and to terminate the
Stockholders' Agreement.
The enforceability of the conversion provisions of the Stockholders'
Agreement has been disputed by the bankruptcy trustee appointed in the
bankruptcy cases of the Marvel Debtors (the "Chapter 11 Trustee"), by the equity
committee appointed in those cases and by High River Limited Partnership and
Westgate International L.P., which are affiliates of Carl C. Icahn and Vincent
Intrieri, both of whom are members of Marvel's board of directors. Those parties
maintain that Characters continues to own shares of Class B Common Stock. On
June 20, 1997, Characters purported to exercise the 78.4% voting power
associated with those shares to remove a majority of the Company's directors and
to replace them with Marvel nominees. On June 23, 1997, the Company, Mr.
Perlmutter, the two affiliates of Mr. Perlmutter who were parties to the
Stockholders' Agreement and Avi Arad commenced adversary proceedings in the
Marvel bankruptcy cases against Marvel, Characters and Marvel Holdings for a
declaration that the Class B Common Stock owned of record by Characters
converted to Class A Common Stock on or before June 20, 1997, and that the
incumbent board of the Company is the Company's duly constituted board and for
an injunction enjoining those defendants from interfering with the proper and
orderly functioning of the Company's incumbent board of directors.
On October 7, 1997, the Company and various senior secured creditors of
the Marvel Debtors agreed to pursue a combination of the Company with Marvel.
See "Item 1. Business -- Proposed Combination with Marvel."
On October 30, 1997, Marvel and certain of its subsidiaries filed suit
against the Company, its directors and a number of other defendants in the
United States District Court for the District of Delaware (the "District Court")
claiming, among other things, that the Company's board of directors properly
consists of Character's nominees and that the actions of the Company's incumbent
board were unauthorized.
On December 8, 1997, the Company, Mr. Perlmutter, the two affiliates
of Mr. Perlmutter who were parties to the Stockholders' Agreement and Avi Arad
asked the District Court for a summary judgment ruling in favor of their claims
in the adversary proceeding.
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On March 30, 1998, the District Court granted the Company's motion for summary
judgment and directed the entry of a judgment declaring that as a result of the
June 20, 1997 change of control of Marvel, the Class B Common Stock owned by
Characters converted, as of that date, into Class A Common Stock. See "Item 1.
Business -- Proposed Combination with Marvel" and "Item 3. Legal Proceedings."
The change in control of the Company described above constituted an
event of default under the Company's credit facility. Subsequently, the Company
and The Chase Manhattan Bank amended the credit facility and as a consequence of
this amendment, the Company is no longer in default under the credit facility.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Developments With Respect to the Company's Business During Fiscal Year 1997
During the past fiscal year, the Company continued to launch products
based on the various Marvel Character groups mentioned above. These included,
among other things, new products and product line extensions in the Company's
X-Men(R) and Spider-Man(R) ranges.
During 1997, the Company also continued its efforts to develop toys
under licenses for recognized consumer brand names and other popular characters
such as The Lost World: Jurassic Park and Xena: Warrior Princess(TM). The
Company continued to build on its line of dolls and infant and toddler learning
toys marketed under the Gerber(R) trademark. The Company also continued to
develop products under its license from NASCAR(R) and several well-known stock
car drivers.
During 1997, the Company also continued to manufacture and distribute
additional proprietary products in various categories including: Casey
Cartwheel(TM), Baby Headstand Surprise(TM), Magic Stroller Baby(TM), Take Care
of Me Triplets(TM) and multi-activity game tables.
Since completing the acquisitions of the assets of Spectra Star, Inc.
("Spectra Star(R)") and Quest Aerospace Education, Inc. ("Quest") in 1995, the
Company's specialized activity toy business has continued to grow, with Spectra
Star(R) brand kites comprising a substantial share of United States domestic
kite business, and Quest(TM) brand rockets entering the growing mass merchandise
market and specialty store distribution channels.
Industry Background
The toy industry's highly competitive environment continues to place
cost pressures on manufacturers and distributors. Discretionary spending among
potential toy consumers is limited and the toy industry competes for such
dollars along with the makers of computers and video games. The Company believes
that its products are well made, attractively priced, and benefit from
television exposure arising from scheduled programming, media events,
advertising and the strength of recognized trademarks or brand names.
Large mass market toy retailers dominate the toy industry and feature a
large selection of toys. Continued consolidation among discount-oriented
retailers can be expected to require toy companies to keep prices low and to
implement and maintain production and inventory control methods permitting them
to respond quickly to changes in demand.
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Products
The Company has historically marketed a variety of toy products
designed for children of different age groups. The Company's current product
strategy seeks broad expansion and diversification of its product lines.
Boys' Products
The Marvel License includes more than 3,500 Marvel Characters, all of
which are available to the Company for toy development. The segment of the
Marvel universe which has been most successfully developed by the Company is the
X-Men(R), consisting of over 300 characters. The popularity of the X-Men(R)
primarily resulted from that character group's long-standing success as a comic
book title, as well as the past success of the Fox Kids Network's animated
X-Men(R) television show. The Company's sales of the X-Men(R) product line have
decreased in 1996 and 1997 as that product line has matured although the Company
believes that the Company can continue to take advantage of the popularity of
the X-Men group of characters by introducing new assortments of action figures,
play sets and vehicles.
The Spider-Man(R) product line also capitalizes on an animated
television series which is broadcast on the Fox Kids Network. The Spider-Man(R)
toy line includes action figures, vehicles, play sets and accessories such as
the popular Spiderman Web Blaster(TM). The Company has recently launched Silver
Surfer(TM) products based upon the Silver Surfer animated television program
which began broadcasting on the Fox Kids Network in February 1998.
The Company's boys' business is also comprised of non-Marvel Character
genres supported by television advertising and broadcasts as well as popular
video game characters. The Company continues to market a line of action figures
and play sets based on characters portrayed in the Xena: Warrior Princess(TM)
syndicated television program. The Company also markets play sets and vehicles
using well-known stock car drivers and NASCAR(R) licenses. The Company has
recently launched action figure lines based upon two popular video game titles;
Tomb Raider(TM) and Resident Evil(TM).
Many of the action figure properties have proven to be highly popular
with the Company's international customers, especially those in Europe.
Girls' Products
The Company's girls' business has continued to be well received by
consumers with new introductions and product line extensions. Casey
Cartwheel(TM) and Magic Stroller Baby(TM) were top-selling unit volume dolls
during 1997. The Company also continued to market Baby Tumbles Surprise(TM) and
Baby Headstand Surprise(TM) and extended another line with the introduction of
the Take Care of Me Triplets(TM) dolls. The Company believes that it will
continue to be an important source of new girls' products for the retail toy
market.
Preschool Products
The Company continues to take advantage of the name recognition and the
goodwill associated with the Gerber(R) name with the production of its line of
dolls, as well as infant and toddler learning toys with the Gerber(R) trademark
and/or the famous trademarked Gerber(R) baby face.
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Activity Toys
The Spectra Star(R) brand name accounts for a substantial share of the
United States domestic kite business, and also utilizes license-driven products
to expand consumer appeal. The Company's kite licenses have been granted by
well-known licensors such as Disney, Sony, Universal and Warner Bros. The
Company's activity toy products also include the model rocketry products
associated with the business acquired from Quest and the Company's proprietary
multi-activity game tables.
Factors Which May Affect the Company's Product Strategy
The success of the Company's product strategy depends in part upon
consumer acceptance of its new toy products for which there can be no assurance.
Consumer acceptance of many of the Company's products is dependent on the
popularity generated by television programs and other media events, the strength
of recognized consumer trademarks and brand names, and consumer interest in the
Company's core product categories. There can be no assurance that any scheduled
or anticipated television program or other media event will occur at all or will
continue to be broadcast or will otherwise result in substantial marketing value
to, or sales of, the Company's toy products. Further, there can be no assurance
that the goodwill associated with recognized consumer trademarks or brand names
will add marketing value to the Company's toy products or that the Company's
core products will maintain the buying interest of consumers. The Company's new
and existing products are also subject to changing consumer preferences. Some
products in the toy industry are successfully marketed for a limited period,
sometimes only one or two years. There can be no assurance that any existing
product lines will retain their current popularity or that new products
developed by the Company will meet with the same success as the Company's
current products. While it is impossible to predict future trends in a business
as fad-oriented as the toy industry, the Company believes its product line is
sufficiently diverse to benefit from such trends. No assurance can be given that
the Company will accurately anticipate future trends or will be able to
successfully develop, produce and market products to take advantage of market
opportunities presented by such trends.
The Company believes its sales and business have been adversely
affected by concerns among retailers as to the impact of the Marvel bankruptcy.
While the Company is attempting to address these concerns, to the extent they
are not alleviated, it can be expected that they will continue to adversely
affect demand for the Company's products.
Licensing and Related Rights
In carrying out its business strategy, the Company continuously
monitors existing licensed properties and pursues new licenses, where it
believes such licenses fit with the Company's core product lines, or where they
may add to the Company's core product mix.
In 1997, the Company produced a majority of its products under licenses
which it has obtained from third parties. Some of these licenses confer rights
to exploit original concepts developed by toy inventors and designers. Character
licenses, such as the Marvel License, permit the Company to manufacture and
market toys based on characters owned by others which have or develop their own
popular identity, often through exposure in various media such as television
programs, movies, cartoons and books. Other licenses, referred to as trademark
or brand name licenses, permit the Company to produce toys bearing the
recognized consumer trademark or brand name owned by the licensor. In return for
these rights (other than those under the Marvel License), the Company pays
royalties to its licensors.
A determination to acquire a character license must frequently be made
before the commercial introduction of the property in which a licensed character
appears, and such license arrangements often require thinimum royalties.
Accordingly, the success of a character licensing program is dependent upon the
ability of the Company to accurately assess the future success and popularity of
the character
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properties which it is evaluating, to bid for such properties on a selective
basis in accordance with such evaluation and to capitalize on the properties for
which it has obtained licenses in an expeditious manner. The success of the
trademark licensing program depends in part on whether the strength of the
licensed trademark will produce marketing value for the toy products. There can
be no assurance that products produced under the licenses acquired by the
Company will obtain significant market acceptance.
Royalties paid by the Company to licensors and inventors are typically
based on a percentage of net sales. Most licenses have terms of one to three
years and some are renewable at the option of the Company upon payment
of minimum guaranteed payments or the attainment of certain sales levels during
the term of the license. In the future, royalty rates and minimum guaranteed
royalty payments may increase or decrease depending upon various competitive
forces in the toy industry.
Marvel License Agreement
In connection with the formation of the Company, Marvel granted the
Company the Marvel License, an exclusive, perpetual and paid up license, subject
to certain limitations, to manufacture and distribute a broad range of toys and
toy-related products based upon the Marvel Characters and properties in which it
owns copyrights, trademarks or trade names. The Marvel License covers all
characters (including the associated copyrights and trademarks) owned by Marvel
and disseminated under the Marvel Comics(R) trademark during the perpetual term
of the Marvel License. The Marvel License currently covers more than 3,500
different Marvel Characters, including: Marvel Super Heroes(TM), X-Men(R) and
X-Force(TM) (including Wolverine(R), Nightcrawler(TM), Colossus(TM), Storm(TM),
Cyclops(TM), Bishop(R) and Gambit(TM)); Spider-Man(R); Captain America(R);
Fantastic Four(TM) (including Mr. Fantastic(TM), The Human Torch(TM), Invisible
Woman(TM) and The Thing(TM)); Hulk(R); Thor(TM); The Silver Surfer(TM);
Daredevil(TM); Iron Man(R); The Punisher(R); Dr. Strange(TM); Ghost Rider(TM);
Cable(TM) and the other Marvel Characters. The Marvel License covers specified
categories of toys and toy-related products. In connection with the Marvel
bankruptcy proceedings, representatives of various Marvel Holding Companies
Creditors have publicly stated that they could seek to reject the Marvel License
as an executory contract. The Company would vigorously oppose any such action to
reject the Marvel License and would seek any and all damages resulting from any
such action.
The Marvel License restricts Marvel, subject to the Company's prior
consent, from manufacturing, using, distributing or advertising the licensed
products and from granting other licenses to use the Marvel Characters in
connection with any licensed toy products. If the Company fails to substantially
attain performance goals for sales of any category of licensed products, Marvel
has the right to require the Company to enter into one or more sublicenses with
respect to that category of licensed products on terms and conditions that
Marvel and the Company reasonably determine. While Marvel has never required the
Company to enter into any such sublicenses, the Company maintains an active
sublicensing program, as to which it retains all revenues, and has granted
sublicenses under the Marvel License to a variety of companies in the United
States and around the world.
Master License Agreement
Mr. Arad and the Company are parties to a license agreement which
amended the licenses between Mr. Arad and the Predecessor Company outstanding at
the time of the Company's formation and which governs the licensing of new
material to the Company by Mr. Arad thereafter. The license agreement provides
that Mr. Arad is entitled to receive royalty payments on net sales of Marvel
Character-based toys and on net sales of non-Marvel based toys of which Mr. Arad
is the inventor of record. In no event, however, may the total royalties payable
to Mr. Arad during any calendar year exceed $7.5 million.
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Gerber License Agreement
The Company is a party to a license agreement with the Gerber Products
Company (the "Gerber License") which grants the Company an exclusive license to
use the Gerber(R) trademark in connection with the manufacture and distribution
of dolls as well as infant and toddler learning toys. The Gerber License, which
continues until December 31, 1999, provides for a royalty on net sales of the
licensed products and contains certain minimum sales guarantees and customary
quality control and indemnification provisions. The Gerber License is terminable
immediately by Gerber if Avi Arad & Associates ceases to be involved in the
product development and marketing of the licensed products or upon a change of
ownership, control or management of the Company without Gerber's prior approval.
Gerber could claim that the change in control of Marvel and the conversion of
Marvel's shares of Class B Common Stock resulted in a change in control of the
Company within the meaning of the Gerber Agreement. In such event, the Company
will seek any necessary approval from Gerber for which there can be no
assurance.
Intellectual Property Rights
The Company believes that intellectual property rights, including
trademarks, patented devices and designs, and copyrighted material, owned or
licensed by it represent valuable assets in the operation of its business. The
Company generally seeks trademark, patent and copyright protection in the United
States and certain other countries for intellectual property rights used in its
business to the extent that such protection is available and meaningful. The
Company believes that all material intellectual property rights necessary for
the operation of its business are adequately protected and available to it.
Design and Development; Manufacturing
The Company maintains a product development staff and also obtains new
product ideas from third-party inventors. The time from concept to production of
a new toy can range from six to twenty-four months, depending on product
complexity.
The Company relies on independent parties in the People's Republic of
China ("China") to manufacture a substantial portion of its products. The
remainder of its products are manufactured in Mexico or the United States. As a
matter of policy, the Company uses several different manufacturers. By
concentrating its manufacturing among certain manufacturers, the Company thereby
pursues a strategy of selecting manufacturers at which the Company's product
volume qualifies the Company as a significant customer. The Company is not a
party to any long-term agreement with any manufacturer.
The principal raw materials used in the production and sale of the
Company's products are plastics and paper products. Raw materials are generally
purchased by the manufacturers who deliver completed products to the Company.
The Company believes that an adequate supply of raw materials used in the
manufacture of its products is readily available from existing and alternative
sources at reasonable prices. However, there can be no assurance that, in the
event of a disruption in raw material supplies, alternative sources of supply
could be obtained in a timely manner.
While the Company is not dependent on any single manufacturer in China
to supply it with products, the Company is subject to the risks of foreign
manufacturing, including currency exchange fluctuations, transportation delays
and interruptions, and political or economic disruptions affecting international
businesses generally. The Company's ability to obtain products from its Chinese
manufacturers is dependent upon the United States' trade relationship with
China. The "Most Favored Nation" status of China, which is reviewed annually by
the United States government, is a regular topic of political controversy. The
loss of China's "Most Favored Nation Status" would increase the cost of
importing products from China significantly, which could have a material adverse
effect on the Company. The imposition of further trade sanctions on China could
result in significant supply disruptions or higher
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merchandise costs to the Company. The Company believes that alternate sources of
manufacturing are available outside China, although there can be no assurance
that these alternate sources will be available on acceptable terms.
Transactions in which the Company purchases goods from manufacturers
are mostly effected in Hong Kong dollars and, accordingly, fluctuations in Hong
Kong monetary rates may have an impact on the cost of goods.
However, in recent years, the value of the Hong Kong dollar has been
tied to the value of the United States dollar, eliminating fluctuations between
the two currencies. There can be no assurance that the Hong Kong dollar will
continue to be tied to the United States dollar. Furthermore, appreciation of
Chinese currency values relative to the Hong Kong dollar could increase the cost
to the Company of products manufactured in China and thereby have a negative
impact on the Company.
The Company's Spectra Star(R) products are manufactured mainly in
Mexico. The Company recently completed the construction of a new manufacturing
facility in Mexico in order to expand manufacturing capacity for the Spectra
Star(R) and possibly other product lines. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
The Company maintains a Hong Kong office from which it regularly
monitors the progress and performance of its manufacturers and subcontractors.
The Company also uses Acts Testing Labs (H.K.) Ltd., a leading independent
quality-inspection firm, to maintain close contact with its manufacturers and
subcontractors in China and to monitor quality control of the Company's
products. The Company uses an affiliate of Acts Testing Labs (H.K.) Ltd. to
provide testing services for a limited amount of product currently produced in
the United States.
Customers, Marketing and Distribution
The Company markets and distributes its products throughout the world,
with sales to customers in the United States accounting for approximately 78% of
the Company's net sales in 1997.
The following table sets forth information concerning the Company's net
sales in the United States and internationally:
Year ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
(In Millions)
Domestic Sales......... $175.8 $176.6 $117.6
International Sales.... 20.6 45.0 33.2
---- ---- ----
Total............. $196.4 $221.6 $150.8
====== ====== ======
Outlets for the Company's products in the United States include
specialty toy retailers, mass merchandisers, mail order companies and variety
stores, as well as independent distributors who purchase products directly from
the Company and ship them to retail outlets. The Company's five largest
customers include Toys 'R' US, Inc., Wal- Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., a division of Dayton-Hudson Corp. and Kay-Bee Toys, a
division of Consolidated Stores, Inc. which customers accounted in the aggregate
for approximately 77.2% of the Company's domestic gross sales and 60.2% of the
Company's total sales in 1997.
The Company maintains a sales and marketing staff and retains various
independent manufacturers' sales representative organizations in the United
States. The Company's senior management coordinates and supervises the efforts
of its salesmen and its other sales representatives. The Company also directly
introduces and markets to
8
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customers new products and extensions to previously marketed product lines by
participating in the major toy trade shows in New York, Hong Kong and Europe and
through a showroom maintained by the Company in New York.
The Company's products are sold outside the United States through
independent distributors by its Hong Kong subsidiary, under supervision of the
Company's management. The Company's international product line generally
includes products currently or previously offered in the United States, packaged
to meet local regulatory and marketing requirements.
The Company utilizes an independent public warehouse in the Seattle,
Washington area, for storage of its products. The Company believes that adequate
alternative storage facilities are available. Disruptions in shipments from
China or from this facility could have a material adverse effect on the Company.
Advertising
Although a portion of the Company's advertising budget is expended for
newspaper advertising, magazine advertising, catalogs and other promotional
materials, the Company allocates a majority of its advertising budget to
television promotion. The Company advertises on national television and
purchases advertising spots on a local basis. The Company believes that
television programs underlying various Company product lines increase exposure
and awareness. The Company currently engages Tangible Media, Inc. ("Tangible
Media"), an affiliate of Mr. Perlmutter, to purchase all advertising for the
Company. The Company believes that its transactions with Tangible Media are on
terms which are no less favorable to the Company than those that it could obtain
from independent third parties, and the Company may engage other companies to
perform similar services at any time. The Company retains the services of a
media consulting agency for advice on matters of advertising creativity.
Competition
The toy industry is highly competitive and the Company competes with
many larger toy companies in the design and development of new toys, the
procurement of licenses and for adequate retail shelf space for its products.
The larger toy companies include Hasbro, Inc., Mattel Inc., Playmates, Inc. and
Bandai, Co., Ltd., and the Company considers Just Toys, Inc., Lewis Galoob Toys,
Inc., Empire of Carolina, Inc. and Ohio Art Co. to be among its competitors as
well. The Company believes that the Marvel License, other strong character and
product licenses, the industry reputation and ability of its senior management,
the quality of its products and its overhead and operational controls have
enabled the Company to compete successfully.
Seasonality
The Company, like the toy industry in general, experiences a
significant seasonal pattern in sales and net income due to the heavy demand for
toys during the Christmas season. During 1995, 1996 and 1997, 69%, 64% and 67%,
respectively, of the Company's domestic net sales were realized during the
months of July through December. This seasonal pattern requires significant use
of working capital mainly to build inventory during the year, prior to the
Christmas selling season. The Company expects that its business will continue to
experience a significant seasonal pattern for the foreseeable future.
Government Regulations; Insurance
The Company is subject to the provisions of, among other laws, the
Federal Hazardous Substances Act and the Federal Consumer Product Safety Act.
Those laws empower the Consumer Product Safety Commission (the "CPSC") to
protect children from hazardous toys and other articles. The CPSC has the
authority to exclude from the market articles which are found to be hazardous.
Similar laws exist in some states and cities in the United States, in Canada and
Europe. The Company maintains a quality control program (including the
inspection of goods at factories and the retention of an independent
quality-inspection firm) to ensure compliance with applicable laws. The
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Company's business exposes it to potential product liability risks which are
inherent in the design, marketing and sale of children's products. The Company
currently maintains product liability insurance and an umbrella liability
policy. In the event of a successful claim against the Company, a lack of
sufficient insurance coverage could have a material adverse effect on the
Company's business and operations. Moreover, though the Company maintains what
it considers to be adequate insurance, any successful claim could materially and
adversely affect the reputation and prospects of the Company.
Employees
As of March 25, 1998, the Company had 640 employees, of whom 68 were
based at the Company's New York office, 48 were based at the Company's Arizona
offices, 500 were based at the Company's facility in Mexico, 4 were based in the
California office and 20 were based at the Company's Hong Kong office.
Proposed Combination With Marvel
On October 8, 1997, the Company, certain senior secured creditors of
the Marvel Debtors (the "Consenting Lenders") and certain creditors of Panini
(the "Consenting Panini Lenders") filed, with the Bankruptcy Court, a Joint Plan
of Reorganization proposing the combination of the Company and Marvel (as since
amended, the "Plan").
In connection with the Plan, stockholders of the Company, other than
Characters, currently would receive approximately 41% of the common stock of the
Company and Marvel ("the Combined Company") (assuming the conversion of all
preferred stock but not assuming any exercise of warrants) and the senior
secured creditors of Marvel would receive a combination of cash and common and
preferred securities issued by the Combined Company which (under the same
assumptions) would represent approximately 40% of the common stock of the
Combined Company. An investor group, in which Mr. Perlmutter is expected to be a
participant, would purchase securities that (under the same assumptions) would
represent approximately 19% of the common stock of the Combined Company. The
Plan is being proposed by in excess of two-thirds in amount of Marvel's senior
secured lenders and is supported by the Official Committee of the Unsecured
Creditors of Marvel. Consummation of the Plan is subject to a number of
conditions including approval of the Company's stockholders and the District
Court. A hearing has been ordered by the District Court for May 4, 1998, to
consider a motion by the Company to confirm the Plan. The Company currently
anticipates that a meeting of the stockholders of the Company will be held in
the second quarter of 1998 for the purpose of considering and voting upon
approval of the Plan. In connection with that meeting, the Company will
distribute separate proxy materials describing the transactions contemplated by
the Plan and the other circumstances in connection therewith. As part of the
agreements setting forth the terms of the Plan, Messrs. Perlmutter and Arad have
agreed to vote all shares of Common Stock owned by them in favor of the Plan.
The Plan contemplates that for a period of 30 days after the
confirmation of the Plan, the Company will cooperate in efforts to sell Marvel
and the Company on a combined basis and that if a transaction can be arranged
which would result in stockholders of the Company (other than Characters)
receiving approximately $13.75 in exchange for each share of Common Stock held
by them, the Company will be sold in that transaction. The Plan provides that
any excess proceeds payable by the buyer in that transaction will not increase
the amount to be received by holders of Common Stock, but instead will inure to
the benefit of claimants in the Marvel bankruptcy.
The Plan was filed pursuant to a master agreement, dated October 7,
1997 (as since amended, the "Master Agreement"), by and among the Company, the
Consenting Leaders and the Consenting Panini Lenders. The Master Agreement
recites the intention of the Consenting Lenders and the Company to jointly
propose the Plan as creditors and parties in interest in the bankruptcy cases of
the Marvel Debtors. The Master Agreement provides, in general, that its parties
will use their reasonable best efforts to effectuate the Plan and to maintain
the status quo in various respects until the Plan is consummated.
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The Company agrees, in the Master Agreement, not to take various
actions without the permission of the Consenting Lenders unless those actions
are expressly contemplated by the Master Agreement, the Plan, or agreements
contemplated by the Plan (the "Plan Documents"). In particular, the Company
agrees that it will not, unless permitted by the Consenting Lenders or by the
terms of the Plan Documents: (i) issue or encumber any stock of the Company;
(ii) amend its certificate of incorporation or its by-laws; (iii) authorize a
stock split, combination, or reclassification; (iv) declare or pay dividends;
(v) redeem shares of the Company; (vi) combine with any other company; (vii)
mortgage a material portion of its assets unless in the usual course of business
(including in connection with the Company's current credit agreement); (viii)
incur or guarantee indebtedness outside the usual course of business; or (ix)
enter into any agreements with Company insiders other than consistent with past
practice.
The Company is obliged, under the Master Agreement, to arrange, on or
before the consummation date of the Plan (the "Consummation Date"), three forms
of financing for the company to survive the merger of the Company and Marvel
(the"Merger"): (i) ninety million dollars ($90,000,000) in cash from purchasers
of a new class of 8% cumulative convertible preferred stock to be issued by the
Combined Company (the "8% Preferred Stock"); (ii) a term loan facility in the
amount of one hundred and forty million dollars ($140,000,000), secured by all
the assets of the Combined Company; and (iii) a revolving credit (working
capital) facility in the amount of seventy-five million dollars ($75,000,000).
The Company's failure to obtain the financing required by the Master Agreement
would be a breach of the Master Agreement by the Company.
The Master Agreement sets forth various conditions to each party's
performance. Among the conditions to certain obligations of the Consenting
Lenders is that there be no "Stockholder Breach Event" as defined in the proxy
and stock option agreements of Mr. Perlmutter and Mr. Arad. See "Item 13.
Certain Relationships and Related Transactions -- Proxy and Stock Option
Agreements." Another condition to the Consenting Lenders' performance is that
the Company, Mr. Perlmutter (and certain of his affiliates), and Mr. Arad enter
into a stockholders' agreement pursuant to which the Perlmutter affiliates and
Mr. Arad agree to vote their shares of stock of the Combined Company in favor of
the election to the Combined Company's eleven-member board of directors of five
nominees designated by the Consenting Lenders and certain of the Consenting
Lenders' transferees for as long as the Consenting Lenders and those transferees
hold more than a specified percentage of the outstanding stock of the Combined
Company.
The Master Agreement provides that if it or the Merger Agreement is
terminated by the Consenting Lenders because of a breach by the Company, then,
upon request by the Consenting Lenders, the Company will reconvert the shares of
the Company's Common Stock that were converted from Class B Common Stock to
Class A Common Stock upon the change of control at Marvel ("Converted Class B
Shares") back into duly authorized, fully paid and nonassessable shares of Class
B Common Stock. As a condition to any obligation of the Company to reconvert the
Converted Class B Shares, the holders of the Converted Class B Shares must
execute and deliver a new stockholders' agreement and new voting trust
agreements. The terms of the new stockholders' agreement and the new voting
trust agreements are substantially the same as those of the Stockholders'
Agreement and Voting Trust Agreements.
The Master Agreement specifies certain dates by which events are
contemplated to occur. If the events do not occur by the stated dates, various
parties may terminate or withdraw from the Master Agreement. For example, the
Company may terminate the Master Agreement if, through no fault of the
Company's, the Consummation Date has not occurred on or before November 20,
1998. Unless a missed deadline has been caused by a Consenting Lender or a
Consenting Panini Lender, each Consenting Lender may withdraw from the Master
Agreement (a) before June 10, 1998, if the Plan has not been confirmed by the
court on or before June 1, 1998; (b) before July 25, 1998, if the Consummation
Date has not occurred on or before July 14, 1998; and (c) at any time during the
sixty-day period following various judicial determinations, adverse to the
Company's board of directors that approved the Master Agreement, based on a
contention that that board of directors was not the duly authorized board of the
Company.
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ITEM 2. PROPERTIES
The Company's principal executive offices and showroom are located in
New York City where the Company occupies approximately 30,000 square feet of
office space pursuant to a sublease that expires in June 2000. Under a lease
that expires in 2004, the Company also maintains a showroom at the Toy Center
Building in New York City, where the Company leases approximately 5,200 square
feet of display and office space. The Company owns a warehouse facility
consisting of approximately 80,000 square feet in Yuma, Arizona, and leases
additional property in Arizona pursuant to a lease that expires in 2006, where
it manufactures the Quest product line. The Company owns a manufacturing
facility consisting of approximately 210,000 square feet located in San Luis,
Mexico primarily for the production of its Spectra Star kites. The Company also
leases office space in Santa Monica, California for the Spectra Star division.
The Company believes that additional office and warehouse space is readily
available and that such new space, together with the Company's existing
facilities, will be adequate and suitable for the operation of its business for
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On December 28, 1995 G.D.L. Management Incorporated ("GDL") commenced
an action against the Company, Mr. Perlmutter and the Predecessor Company in the
Supreme Court of the State of New York, County of New York. The amended
complaint alleged that GDL was entitled to receive ten percent of the capital
stock of the Predecessor Company pursuant to a 1990 agreement between GDL and
Mr. Perlmutter and sought money damages based on the value of ten percent of the
Company's Class A Common Stock beneficially owned by Mr. Perlmutter and a
variety of equitable remedies. The action was settled by Mr. Perlmutter and GDL
without liability to the Company in December 1997.
On June 23, 1997, the Company, Zib Inc., Isaac Perlmutter T.A., Isaac
Perlmutter and Avi Arad commenced adversary proceedings in the United States
Bankruptcy Court for the District of Delaware in the Marvel bankruptcy cases
against Marvel, Characters and Marvel Holdings for a declaration that the Class
B Common Stock owned of record by Characters converted to Class A Common Stock
on or before June 20, 1997, and that the incumbent board of the Company is the
Company's duly constituted board and for an injunction enjoining the Marvel
defendants from interfering with the proper and orderly functioning of the
Company's incumbent board of directors. The District Court held a hearing on the
Company's request for summary judgment in its favor on these claims on March 12,
1998. On March 30, 1998, the District Court granted the Company's motion for
summary judgment and directed the entry of a judgment declaring that as a result
of the June 20, 1997 change of control of Marvel, the Class B Common Stock owned
by Characters converted, as of that date, into Class A Common Stock.
On October 30, 1997, Marvel and its subsidiaries filed an action
against the Company, its directors and a number of other defendants in the
District Court. The complaint against the Company and its directors alleges that
the Company and its directors have breached their fiduciary duty to Marvel, as a
minority stockholder in Toy Biz, and have otherwise wrongfully acted, in putting
forward the reorganization proposal to combine the Company and Marvel and
thereby conclude Marvel's bankruptcy proceedings and by refusing to recognize
Marvel's designees to the Company's board of directors. The complaint also
alleges that the Company's proposed reorganization plan violates certain
provisions of the Bankruptcy Code and is therefore invalid. The complaint
further alleges that the Company has breached an agreement with Marvel by
failing to contribute any amounts to the operations of Marvel Studios. Finally,
the complaint alleges that the Company has wrongfully interfered with Marvel's
efforts to negotiate with the Marvel secured lenders for the resolution of the
bankruptcy proceedings. On December 8, 1997 the Company and its directors filed
a motion to dismiss various claims asserted against them in this action. That
motion has not yet been scheduled for a hearing. The Company believes that the
action was not properly commenced and that the claims against it and the
Company's directors are without merit and the Company intends to defend this
action vigorously.
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During 1995, the Company licensed the Apple name to be used in
educational toys in exchange for $1,000,000 and future royalty payments. Shortly
after licensing the Apple name, Apple made public certain financial difficulties
Apple was experiencing. The Company has not made minimum royalty payments of
$1,000,000 for 1996 and 1997 and has commenced an arbitration proceeding against
Apple for return of the original 1995 payment. Apple is asserting the right to
receive the $2,000,000 in unpaid royalties.
The Company is involved in variong in the normal course of business.
The Company believes that the final outcome of these proceedings will not have a
material adverse effect on the Company's results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for each fiscal quarter indicated, the
high and low prices for the Company's Class A Common Stock as reported in the
New York Stock Exchange Composite Transaction Tape.
Fiscal Year High Low
----------- ---- ---
1996
First Quarter $ 24 3/4 $ 17 7/8
Second Quarter $ 22 3/8 $ 17 5/8
Third Quarter $ 20 1/4 $ 14
Fourth Quarter $ 19 7/8 $ 17
1997
First Quarter $ 20 $ 8 3/8
Second Quarter $ 11 $ 8 1/4
Third Quarter $ 11 $ 7 15/16
Fourth Quarter $ 9 11/16 $ 7 9/16
As of March 25, 1998, there were 85 holders of record of the Company's
Class A Common Stock.
The Company has not declared any dividends. For a description of
certain restrictions on payment of dividends, see Note 7 to the December 31,
1997 Consolidated Financial Statements included elsewhere in this Report.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected combined or consolidated
financial data for the business of the Company and the Predecessor Company for
the five year period ended December 31, 1997 which were derived from audited
financial statements of the Company's business.
The Company has not paid dividends on its capital stock during
any of the periods presented below.
<TABLE>
<CAPTION>
Predecessor
Company
Four Months Eight Months Year Ended
Ended Ended ----------------------------------------------
Apr. 30, Dec. 31, Dec. 31, Dec. 31, Dec.31, Dec.31,
1993 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data: (1) (2)
Net Sales................. $10,175 $79,569 $156,525 $196,395 $221,624 $150,812
Operating income (loss)... ( 1,611) 6,266 32,072 47,014 27,215 (49,288)
Net income (loss) (3)..... ( 1,110) 3,488 18,014 28,402 16,687 (29,465)
Net income (loss) per common
share (3)(4).............. ( 0.04) 0.13 0.67 1.05 0.61 (1.06)
At December 31:
Balance Sheet Data:
Working capital........... 24,780 39,839 85,174 102,192 74,047
Total assets.............. 56,877 104,723 152,218 171,732 150,366
Borrowings under credit facility 4,500 21,500 -- -- 12,000
Due to stockholders and affiliated
companies................. 15,746 16,845 -- -- --
Redeemable preferred stock -- -- 3,016 1,681 --
Stockholders' equity...... 16,283 38,416 111,332 137,455 107,981
</TABLE>
(1) The four month period ended April 30, 1993 represents the combined
results of the business of the Company, which was then wholly owned by
Mr. Perlmutter, and Toy Biz International Ltd., a Hong Kong company
indirectly controlled by the Predecessor Company. These operations are
referred to as the Predecessor Company results. The eight month period
ended December 31, 1993 and the years ended December 31, 1994, 1995,
1996 and 1997 represent the consolidated results of the Company. There
was no change in the carrying value of the Company's assets or
liabilities as a result of the April 30, 1993 transaction (see Note 1
of notes to audited financial statements).
(2) The four month period ended April 30, 1993 includes the five months of
results of Toy Biz International Ltd. as a result of changing Toy Biz
International Ltd's fiscal year end from November 30 to December 31.
The sales and operating loss of Toy Biz International Ltd. for the
month of December 1992 were not significant.
(3) For the taxable periods from January 1, 1993 until April 30, 1993, the
Predecessor Company was subject to taxation under Subchapter S of the
Internal Revenue code of 1986, as amended. As a result, the Predecessor
Company was not subject to Federal and certain state income taxes as
its sole stockholder included the results of its operations in his
personal income for tax purposes. Provision for income taxes for the
aforementioned periods reflects income tax benefit (at an assumed
effective combined tax rate of 40%) on a pro forma basis as if the
Predecessor Company had not been an S corporation.
(4) Assumes 27,000,000 common and common equivalent shares outstanding for
periods prior to 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company and its subsidiaries should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
included elsewhere in this Report.
Overview
The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool,
activity and electronic toy categories featuring major entertainment and
consumer brand name properties. The Company also designs, markets and
distributes its own line of proprietary toys. The Company believes that its
business in the boys' toys category domestically and internationally continues
to be negatively impacted as a result of the proceedings surrounding Marvel's
bankruptcy. This includes decreased retailer interest in Marvel brand products
and reduced consumer interest in these products due to reduced promotional
activity by Marvel. The Company believes that the Marvel bankruptcy has had and
will continue to have an adverse impact on the Company in various ways
including, but not limited to, the following: concerns among retailers about the
future of the Marvel brand, the status of the Company due to Marvel's ownership
of 26% of the Company's Common Stock and its claim that it continues to control
the Company through its ownership of Class B Common Stock, potential impact on
the Company's relationship with its distributors, difficulty in obtaining new
licenses and excess legal and administrative expenses.
Results of Operations
Years Ended December 31, 1997 and 1996
The Company's net sales decreased to approximately $150.8 million for
the year ended December 31, 1997 from approximately $221.6 million in the 1996
period. Net sales in the domestic boys' toys category, including sublicense
income, decreased approximately $33.4 million to approximately $43.1 million in
1997. The Company's sales of domestic boys' toys have decreased since the first
quarter of 1996 as compared to the respective prior periods, but the Company
believes that the decrease in this category has been accelerated as a result of
concerns among retailers as to the impact of the Marvel bankruptcy on the future
of the Marvel brand. Net sales in the domestic girls' toys category decreased
approximately $19.2 million to approximately $38.7 million in 1997 due primarily
to the Company's decision to reduce the number of promotional dolls offered for
sale by the Company during 1997 as compared to 1996. Domestic activity toy net
sales increased approximately $1.4 million to approximately $28.0 million in
1997 due primarily to the expansion of the Quest rocket division in the 1997
period. International net sales decreased approximately $17.6 million to
approximately $27.4 million in 1997 from approximately $45.0 million in 1996 due
primarily to the decreased interest in Marvel products in the international
markets. Sales by the Company's import division, which was established in late
1996, accounted for approximately $30.5 million in sales in the 1997 period. Net
sales of other products decreased approximately $10.7 million to approximately
$1.1 million due primarily to a reduction in sales in the preschool category
which was transferred to the import division in 1997. The Company recorded an
additional $18.0 million of sales allowances in the 1997 period that the Company
believes are attributable to the impact of the Marvel bankruptcy on the
Company's relationships with its distributors.
Gross profit decreased 58% to approximately $43.9 million for 1997 from
approximately $105.2 million in 1996. Gross profit as a percentage of net sales
("gross margin") decreased to approximately 29% in 1997 from approximately 47%
in 1996 due to changes in the Company's product mix, additional sales allowances
required due to the Marvel bankruptcy and concerns among retailers about the
future of the Marvel brand and the introduction of the import division which
generally has a lower gross margin than average domestic sales.
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<PAGE>
Selling, general and administrative expenses increased 16% to
approximately $72.1 million (approximately 48% of net sales) in 1997 from
approximately $61.9 million (approximately 28% of net sales) in 1996. The
increase in expenses consisted primarily of approximately $2.3 million of
additional professional fees, approximately $5.0 million of additional
advertising expenses and approximately $1.7 million of additional royalties
expensed in the 1997 period. The Company believes that these increases were
primarily attributable to the effects of the Marvel bankruptcy on the Company.
This increase was partially offset by a net reduction in selling expenses due to
a decrease in sales in the 1997 period, offset by additional salaries and
related expenses attributable to the Company's expanded product lines.
Depreciation and amortization expense increased to approximately $21.1
million in 1997 from approximately $16.1 million in 1996. The increase was
primarily attributable to increased amortization expense resulting from an
increased investment in product tooling and product design to support the
Company's expanded product line and approximately $2.5 million of additional
expense resulting from early write-offs of products.
Interest expense (income), net was $362,000 and ($596,000) for the
years ended December 31, 1997 and 1996, respectively. The net change was due
primarily to the Company's borrowing of funds in the 1997 period compared with
investing excess cash in the 1996 period.
As a result of the above, the Company reported a net loss of
approximately $29.5 million and a loss per share of $1.06 for the year ended
December 31, 1997.
Years Ended December 31, 1996 and 1995
The Company's net sales increased 12.8% to approximately $221.6 million
from approximately $196.4 million in 1995.
Domestic net sales of boys' toys decreased 27% from approximately
$105.5 million in 1995 to $76.5 million in 1996 due primarily to decreased sales
of the X-Men(R), Fantastic Four(TM) and Iron Man(R) product lines. International
net sales of boys' toys more than doubled from approximately $16.4 million in
1995 to approximately $39.6 million in 1996. Domestic net sales of girls' toys
increased 54% from approximately $37.7 million in 1995 to approximately $57.9
million in 1996 due mainly to the introduction and success of Take Care of Me
Twins(TM) doll, as well as the expansion of the Baby Tumbles Surprise(TM)
category in 1996. Sales in the activity toy category increased 72% from
approximately $15.5 million in domestic net sales in 1995 to approximately $26.6
million in 1996 due to the introduction of the multi-activity game tables and
the full-year effect of kite sales from the Spectra Star(R) acquisition, which
only had four months of sales included in the 1995 year. The preschool category
decreased 32% from approximately $13.5 million in domestic net sales in 1995 to
approximately $9.2 million in 1996. International net sales more than doubled
from approximately $20.6 million in 1995 to approximately $45.0 million in 1996,
due to the continued expansion of the Company's product offerings overseas.
Distribution agreement fees and sub-licensing revenues more than doubled from
approximately $5.7 million in 1995 to approximately $13.6 million in 1996.
Gross profit decreased 3% to approximately $105.2 million in 1996 from
approximately $108.0 million in 1995. Gross profit as percentage of net sales
decreased from approximately 55% in 1995 to approximately 47% in 1996 due
primarily to changes in the Company's product mix, additional sales allowances
and the effect of a higher percentage of international sales, which typically
have a lower gross margin than domestic sales.
Selling, general and administrative expenses increased 28% to
approximately $61.9 million (approximately 28% of net sales) in 1996 from
approximately $48.2 million (approximately 25% of net sales) in 1995. The
increase of approximately $13.7 million was due to increased advertising and
miscellaneous selling and administrative expenses, which increased as a result
of sales growth, and additional salaries attributable to the Company's expanded
product lines, as well as the effect of a full year of the Spectra Star(R)
operations in 1996.
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<PAGE>
Depreciation and amortization expense increased to approximately $16.1
million in 1996 from approximately $12.8 million in 1995. This increase was
primarily attributable to increased amortization of product tooling costs
resulting from increased investment in product and package design costs and
molds, tools and equipment to support the Company's expanded product line.
Depreciation and amortization expense as a percentage of net sales increased
from 6.5% in 1995 to 7.2% in 1996. This increase in depreciation expense as a
percentage of net sales was primarily attributable to a changing product mix and
decreased unit sales of boys' toys assortments.
Interest income, net of interest expense, increased 6.4% to $596,000 in
1996 from $560,000 in 1995.
As a result of the above, net income decreased 41% to approximately
$16.7 million in 1996 from approximately $28.4 million in 1995.
Backlog
Customer open orders were approximately $15.2 million on December 31,
1997 and $7.8 million on December 31, 1996. The Company believes that this
increase in open orders resulted from several causes, including the
diversification of the Company's product base.
Liquidity and Capital Resources
The Company's operating activities provided or (used) net cash of
approximately $35.5 million, ($1.2 million) and $11.7 million in 1995, 1996 and
1997, respectively.
Cash used in investing activities in 1995, 1996 and 1997 was
approximately $25.1 million, $23.6 million and $21.3 million, respectively and
consisted of capital expenditures for molds, tools and equipment for the
production of new products, as well as capitalized product and package design
expenditures. In 1997, approximately $3.3 million net cash was used for the
acquisition of Colorforms and approximately $1.3 million net cash was used for
the final payment of the purchase price of Spectra Star(R).
Cash provided by financing activities in 1995, 1996 and 1997 was
approximately $8.0 million, $8.3 million and $11.1 million, respectively. In
1995, cash provided by financing activities consisted principally of net
proceeds from the initial public offering of $44.1 million, offset by repayments
of notes to the stockholders, which totalled approximately $15.1 million, and by
repayments of funds previously borrowed under the Credit Facility with the
balance used for working capital and general corporate purposes. In 1996, cash
provided by financing activities consisted principally of approximately $9.3
million in net proceeds from an additional public offering of Class A Common
Stock completed in August 1996, offset by the redemption of preferred stock
issued in connection with the Spectra Star(R) acquisition, with the balance used
for working capital and general corporate purposes. In 1997, cash provided by
financing activities consisted principally of $12.0 million in borrowings under
the Credit Facility (defined below), offset by the redemption of Preferred Stock
issued in connection with the Spectra Star acquisition.
Since 1995 the Company has had a revolving line of credit (the "Credit
Facility") with a syndicate of banks for which The Chase Manhattan Bank
(formerly named Chemical Bank) serves as administrative agent. The change in
control of the Company resulting from the conversion of Marvel's Class B Common
Stock during 1997, could have allowed the banks to terminate the Credit
Facility. In addition the Company did not reduce its borrowings to zero for a
period of 45 consecutive days commencing during the first six months of 1997, as
required by the Credit Facility, and did not satisfy certain of the financial
covenants under the Credit Facility during 1997. As a result of these
circumstances, on October 21, 1997, the Company and The Chase Manhattan Bank
agreed that the Company would not seek to borrow any additional funds under the
Credit Facility and the banksayment of the amounts outstanding.
17
<PAGE>
In March 1998, the Company and the Chase Manhattan Bank entered into an
amendment to the Credit Facility extending the duration of the Credit Facility
and modifying its terms. The Credit Facility, as amended (the "Amended Credit
Facility") provides the Company can borrow an aggregate amount of up to $20.0
million (increasing during October through mid-November 1998 to up to $29
million), subject to certain borrowing base limitations based upon the level of
the Company's receivables and inventory. Substantially all of the assets of the
Company continue to be pledged to secure borrowings under the Amended Credit
Facility. Borrowings under the Amended Credit Facility bear interest at either
The Chase Manhattan Bank's alternate base rate or at the Eurodollar rate plus
the applicable margin. The applicable margin is 1% with respect to base rate
loans and 2% with respect to Eurodollar loans. The Amended Credit Facility
requires the Company to pay a commitment fee of 3/8 of 1% per annum on the
average daily unused portion of the Amended Credit Facility. The Company had
$9.0 million in outstanding borrowings under the line of credit as of March 25,
1998. The Amended Credit Facility is scheduled to expire in February 1999.
The Amended Credit Facility contains various financial covenants, as
well as restrictions, on new indebtedness, prepaying or amending subordinated
debt, acquisitions and similar investments, the sale or transfer of assets,
capital expenditures, limitations on restricted payments, dividends, issuing
guarantees and creating liens. In addition, the Amended Credit Facility also
requires that (a) the current board of directors or successors designated by
them remain in office, (b) the Marvel License remains in effect and (c) Messrs.
Perlmutter and Arad continue to own at least 50% of the Common Stock held by
them as of February 21, 1998. The Credit facility is not guaranteed by Marvel.
For a description of the Spectra Star(R) acquisition in September 1995,
see Note 12 to the December 31, 1997 Consolidated Financial Statements included
elsewhere in this Report.
The approximately $9.1 million net proceeds to the Company from the
August 1996 public offering was intended to fund the working capital of the
Company and a portion of the Company's capital commitment to Marvel Studios, the
Company's proposed he Company has no plans to invest a material amount of funds
in Marvel Studios in the foreseeable future. The Marvel Studios joint venture
will become mooted if the Plan proposed by the Company to combine with Marvel is
consummated. See Note 8 to the December 31, 1997 Consolidated Financial
Statements included elsewhere in this report.
In 1997, the Company concluded the construction of a new manufacturing
facility in Mexico in order to expand manufacturing capacity for the Spectra
Star(R) product line. The expenditures needed in 1996 and 1997 to complete that
facility were approximately $3.3 million.
In March 1996, the Company acquired, pursuant to a put right, 53,030
shares of Series A Preferred Stock of the Company for approximately $1.4
million. In October 1997, the Company acquired, pursuant to a put right, 31,818
shares of Series A Preferred Stock of the Company for $939,000. The balance of
the shares of Series A Preferred Stock were retired in October 1997 in
conjunction with the final settlement of the acquisition of Spectra Star.
In March 1997, the Company acquired all of the assets of Colorforms
Inc. The purchase price was approximately $5.0 million, excluding fees and
expenses, consisting of approximately $2.9 million in cash paid at the closing
and the assumption of approximately $2.1 million of accounts payable and accrued
liabilities at the closing date. The Company utilized cash available under its
credit facility to finance the acquisition. The transaction was accounted for as
a purchase. The results of Colorforms are included in the Company's consolidated
financial statements from the date of acquisition.
During 1997 the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash with a promissory note
representing the remainder of $1.35
18
<PAGE>
million due from August 1998 through May 1999. The sales price is subject to
adjustment based upon inventory levels.
The Company has determined that it will need to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company also has
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
remediate properly their computer systems.
The Company's Year 2000 initiative is being managed by a team of
internal staff and outside consultants. These activities are designed to ensure
that there is no adverse effect on the Company's core business operations and
that transactions with customers, suppliers, and financial institutions are
fully supported. The Company is well under way with these efforts, which are
scheduled to be completed in early 1999. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Year 2000 initiatives is not expected to
be material to the Company's results of operation or financial position.
The Company believes that it has sufficient funds available from cash
and cash equivalents, operating activities and borrowings under the Amended
Credit Facility to meet peak working capital needs and capital expenditure
requirements. During 1997, the maximum amount outstanding under the Credit
Facility was $12,000,000.
Proposed Combination with Marvel
Due to the significance of the Marvel license on the Company's overall
boys' toys business and the negative impact that Marvel's bankruptchad
participated in discussions concerning a number of proposed plans of
reorganization that would have resulted in a combination of the Company and
various segments of Marvel's business and that would have facilitated a
resolution of Marvel's bankruptcy proceedings. In connection with these
proposals, the Company participated in discussions with various parties
interested in the bankruptcy proceedings including Marvel, the largest holders
of the Marvel Holding Companies bonds and Marvel's senior secured creditors.
None of these discussions resulted in definitive agreements not subject to due
diligence, board approval or other contingencies which failed to occur.
The Company has proposed a plan of reorganization for Marvel which
provides for the combination of the Company and Marvel. See "Item 1. Business --
Proposed Combination with Marvel."
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item, the report of the
independent auditors thereon and the related financial statement schedule
required by Item 14(a)(2) appear on pages F-2 to F-22. See the accompanying
Index to Financial Statements and Financial Statement Schedule on page F-1. The
supplementary financial data required by Item 302 of Regulation S-K appears in
Note 11 to the December 31, 1997 Consolidated Financial Statements.
19
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The executive officers and Directors of the Company, their ages as of
March 25, 1998 and their positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Joseph M. Ahearn................... 43 President, Chief Executive Officer and Director
David J. Fremed.................... 37 Chief Financial Officer and Treasurer
Alan Fine.......................... 47 Chief Operating Officer and Director
William H. Hardie, III............. 35 Executive Vice President-Business Affairs and Secretary
Avi Arad........................... 50 Director
James S. Carluccio................. 44 Director
James F. Halpin.................... 47 Director
Morton E. Handel................... 62 Director
Isaac Perlmutter................... 55 Director
Alfred A. Piergallini.............. 50 Director
Lt. Gen. Donald E. Rosenblum, Ret.. 68 Director
Paul R. Verkuil.................... 57 Director
</TABLE>
Directors
The name, principal occupation for the last five years, selected
biographical information and period of service as a director of the Company of
each director are set forth below.
Joseph M. Ahearn has served as Chief Executive Officer and a Director
of the Company since April 1993 and as President of the Company since November
1994. From January 1990 to April 1993, Mr. Ahearn served initially as a
consultant to, and after April 1990, as an executive officer and director of the
Company's predecessor company. During such period, he served as a consultant to
other businesses affiliated with Mr. Perlmutter. From 1987 to August 1991, Mr.
Ahearn was a principal of GDL, a corporation that provides management advice and
assistance to financially distressed companies. From August 1988 to August 1991,
Mr. Ahearn, in his capacity as a principal of GDL, served as Chief Operating
Officer of Coleco Industries, Inc. and as a director or officer of various other
businesses that were the subject of bankruptcy proceedings. From 1981 to 1987,
Mr. Ahearn was employed by Touche Ross & Co., attaining the position of senior
manager. From 1976 to 1980, Mr. Ahearn served in both the audit and consulting
departments of Arthur Andersen & Co.
Avi Arad has served as a Director of and consultant to the Company
since April 1993. Mr. Arad was the President and Chief Executive Officer of New
World Animation, a media production company under common control with Marvel,
from April 1993 until February 1997 and held the same position at the Marvel
Studios division of Marvel from February 1997 until November 1997. At New World
Animation and Marvel Studios, Mr. Arad served as the Executive Producer of the
X-Men(R) and the Spider-Man(R) animated TV series. Mr. Arad has been a toy
inventor and designer for more than 20 years for major toy companies including
Mattel Inc., Hasbro, Inc. and Tyco Toys, Inc.
20
<PAGE>
During his career, Mr. Arad has designed or co-designed more than 160 toys.
Mr. Arad is also the owner of Avi Arad & Associates, a firm engaged in the
design and development of toys and the production and distribution of television
programs and is a beneficial owner in Classic Heroes, Inc.
Alan Fine was appointed as a Director in June 1997 and has served as
the Chief Operating Officer of the Company since September 1996. From June 1996
to September 1996, Mr. Fine was the President and Chief Operating Officer of Toy
Biz International Ltd. From May 1995 to May 1996, Mr. Fine was the President and
Chief Operating Officer of Kay-Bee Toys, a national toy retailer, and from
December 1989 to May 1995, he was the Senior Vice President General Merchandise
Manager of Kay-Bee Toys.
James F. Halpin has served as a Director of the Company since March
1995. Mr. Halpin has been President, Chief Operating Officer and a director of
CompUSA Inc., a retailer of computer hardware, software, accessories and related
products, since May 1993 and Chief Executive Officer of CompUSA, Inc. since
December 1993. From 1990 to November 1992, Mr. Halpin was President of Homebase,
a home center warehouse retailer. From 1988 to 1990, Mr. Halpin was President of
BJ's Wholesale Club, a chain of club retail stores. Mr. Halpin also served as
Executive Vice President of Waban Inc., the parent of Homebase and BJ's
Wholesale Club, from 1988 to May 1993. Mr. Halpin is also a director of both
Interphase Corporation, a manufacturer of high-performance networking equipment
for computers, and Lowe's Companies, Inc., a chain of home improvement stores.
Isaac Perlmutter has served as a Director of the Company since April
1993 and he served as Chairman of the Board of Directors until March 1995. Mr.
Perlmutter purchased the Company's predecessor company from Charan Industries,
Inc. in January 1990. Mr. Perlmutter is actively involved in the management of
the affairs of the Company and has been an independent financial investor for
more than the past five years. Mr. Perlmutter is also a director of Ranger
Industries, Inc. ("Ranger"). As an independent investor Mr. Perlmutter currently
has, or has had within the past five years, controlling ownership interests in
Ranger, Remington Products Company, Westwood Industries, Inc., a manufacturer
and distributor of table and floor lamps, Job Lot Incorporated (and its
predecessor Job Lot Associates L.P.), a discount oriented retail chain, and
Tangible Media, Inc. ("Tangible Media"), a media buying and barter advertising
agency.
Alfred A. Piergallini has served as a Director of the Company since
March 1995. Mr. Piergallini has been a director of Gerber since 1989, Chairman
of the Board and Chief Executive Officer of Gerber since January 1990 and
President of Gerber since January 1993. Mr. Piergallini also served as President
of Gerber from January 1990 to May 1992. Mr. Piergallini is also a director of
Comerica, Incorporated, a financial services holding company. From February 1986
to April 1989, Mr. Piergallini was a Senior Vice President of The Carnation
Company.
Paul R. Verkuil is an attorney-at-law and Dean of the Cardozo Law
School, Yeshiva University. Mr. Verkuil served as President of the College of
William and Mary from 1985 to 1992. He has been on the faculty of the Columbia
Law School as an Adjunct Professor and on the faculty of the University of
Pennsylvania as a Visiting Professor from January 1995 to December 1995. Mr.
Verkuil served as Dean of Tulane Law School from 1978 to 1985. Mr. Verkuil also
served as the President and Chief Executive officer of the American Automobile
Association from January 1992 to December 1994. Mr. Verkuil was appointed as a
Director of the Company in July 1996. Mr. Verkuil is a director of Universal
Health Services, Inc. and previously served as a director of NationsBank of
Florida from 1992 to 1995 and of Florida Progress Corporation from 1993 to 1995.
James S. Carluccio is the Executive Vice President of Technology
Solutions Company, a systems integration consulting group, and has held that
position since January 1992. Prior to that time, Mr. Carluccio was a partner
with Andersen Consulting. Mr. Carluccio was appointed as a Director in June
1997.
Morton E. Handel is the President of S&H Consulting Ltd., a financial
consulting group. Mr. Handel has held that position since 1990. Mr. Handel has
also held the position of Director and President of Ranger Industries since July
1997. Mr. Handel also serves as a director of CompUSA, Inc., Ithaca Industries,
Inc. and Concurrent
21
<PAGE>
Computer Corp., and was previously Chairman of the Board of Directors and
Chief Executive Officer of Coleco Industries, Inc. Mr. Handel was appointed
as a director in June 1997.
Lt. Gen. Donald E. Rosenblum, Ret. General Rosenblum was appointed as a
Director in June 1997. General Rosenblum is the President of Rosenblum &
Associates, a marketing and management consulting firm, and has held that
position since 1985. Prior to that time, General Rosenblum held various ranks
with the U.S. Army during a distinguished 33-year military career.
Executive Officers
The following sets forth the positions held with the Company and
selected biographical information for the executive officers of the Company who
are not Directors.
David J. Fremed has served as the Chief Financial Officer and Treasurer
of the Company since October 1996 and Vice President/Controller of the Company
since 1990. From 1986 to 1990, Mr. Fremed served as Controller of Admerex
International, Inc. From 1984 to 1986, Mr. Fremed served as Assistant Controller
of Albert Frank-Guenther Law, Inc., a subsidiary of Foote, Cone & Belding. From
1981 to 1984, Mr. Fremed served in the audit department of Arthur Andersen & Co.
William H. Hardie, III was the Executive Vice President, Business
Affairs and Secretary of Fleer/SkyBox International, a subsidiary of Marvel,
from May 1995 through September 1997. From January 1991 to May 1995, Mr. Hardie
was an associate at Jones, Walker, Waechter, Poitevant, Carrere & Denegre in New
Orleans, Louisiana.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities ("10% stockholders"), to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission and the NYSE. Officers, directors and 10% stockholders are required
to furnish the Company with copies of all Forms 3, 4 and 5 they file.
Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file Form 5's for a specified fiscal year, the Company
believes that all of its officers, directors and 10% Stockholders complied with
all filing requirements applicable to them with respect to transactions during
1997, other than the following:
(i) a Form 3 was filed by William H. Hardie, III in February
1998 that reported his status, as of September 1, 1997, as Executive
Vice President of the Company. Mr. Hardie's Form 3 should have been
filed in September 1997. Mr. Hardie owned no stock in the Company on
September 1, 1997, and the number of transactions that he has not
reported on a timely basis is zero;
(ii) a Form 4 was filed by Isaac Perlmutter in February 1998
that reported, among other things, three purchases (totaling 12,500
shares) of Class A Common Stock of the Company made by an affiliate of
Mr. Perlmutter's in the last two days of December 1997. A Form 4
reporting those three transactions should have been filed in January
1998.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the Chief Executive
Officer of the Company and the four most highly paid executive officers earning
over $100,000, other than the Chief Executive Officer, who served as executive
officers of the Company as of December 31, 1997 (the "Named Executive
Officers"), for services rendered in all capacities to the Company and its
subsidiaries during such period.
Summary Compensation Table
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
- ----------------------------------------------------------------------------------------------------------------------------
Securities Underlying
Name and Principal Position Year Salary($) Bonus($) Options(#)
- --------------------------- ---- -------- -------- ----------
<S> <C> <C> <C> <C>
Joseph M. Ahearn 1997 $500,000 $150,000 --
President and Chief Executive 1996 350,000 150,000 --
Officer 1995 350,000 -- 280,000(1)
Daniel J. Werther(2) 1997 $132,364 -- --
Executive Vice President and 1996 300,000 25,000 --
Senior Legal Officer 1995 252,000 25,000 75,000
Andrew R. Gatto(3) 1997 $212,562 -- --
Executive Vice President - 1996 275,000 50,000 --
Marketing 1995 126,923 30,000 30,000
Alan Fine(4) 1997 $400,000 $302,816 --
Chief Operating Officer 1996 253,846 117,858 30,000
-- -- -- --
David J. Fremed 1997 $165,000 $40,000 --
Chief Financial Officer 1996 140,000 25,000 --
-- -- -- --
- -----------------------------
</TABLE>
(1) Includes options for 250,000 shares granted in March 1995 after
consummation of the Company's IPO and options for 30,000 shares granted
in December 1995 in lieu of $150,000 non-discretionary cash bonus
payable pursuant to the terms of Mr. Ahearn's employment agreement with
the Company.
(2) Mr. Werther terminated his employment with the Company in May 1997.
(3) Mr. Gatto commenced employment with the Company in July 1995 and terminated
his employment with the Company in October 1997.
(4) Mr. Fine commenced employment with the Company in May 1996.
23
<PAGE>
Stock Option Plan
The Company did not grant any stock options during 1997 to the
Company's Chief Executive Officer or to the Named Executive Officers.
The following chart shows the number of exercisable and unexercisable
stock options held by the Chief Executive Officer and by the other Named
Executive Officers. None of the Named Executive Officers exercised stock options
during 1997. Based upon the December 31, 1997, New York Stock Exchange (the
"NYSE") closing price per share of Class A Common Stock of $7.75, none of the
Options held by the Named Executive Officers were considered in-the-money.
Year End 1997 Options
Number of Securities
Underlying Unexercised
Options/SARs at Year
End #(1)
----------------------
Name Exercisable Unexercisable
- ---- ----------- -------------
Joseph M. Ahearn 280,000 --
Alan Fine 20,000 10,000
David J. Fremed 30,000 --
- ----------
(1) Represents shares underlying stock options; none of the executive officers
hold SARs.
Employment Agreements
During 1997 the Company was a party to an employment agreement with
each of Joseph M. Ahearn, Andrew R. Gatto and Alan Fine which governed,
respectively, Mr. Ahearn's employment as President and Chief Executive Officer,
Mr. Gatto's employment as Executive Vice President - Marketing and Mr. Fine's
employment as Chief Operating Officer. Mr. Gatto terminated his employment with
the Company in October 1997. Mr. Ahearn's employment agreement expired on
December 31, 1997, in accordance with its terms and Mr. Ahearn and the
Compensation Committee of the Board have elected to defer discussions regarding
the renewal of his contract until a resolution of the Marvel bankruptcy has been
reached.
Employment Agreement with Mr. Ahearn: Under his employment agreement,
Mr. Ahearn received a base salary, subject to discretionary increases, of
$350,000. Mr. Ahearn was entitled to an annual non-discretionary bonus of
$150,000. The employment agreement further provided for the payment of
discretionary bonuses and participation in the Company's Stock Option Plan as
determined by the Board of Directors. Mr. Ahearn also received a $1,000 monthly
automobile allowance and was entitled to participate in employee benefit plans
generally available to the Company's employees.
Employment Agreement with Mr. Gatto: Under his employment agreement,
Mr. Gatto received a base salary, subject to discretionary increases, of
$275,000. Mr. Gatto was entitled to an annual non-discretionary bonus of
$50,000. The employment agreement further provided for the payment of
discretionary bonuses and participation in the Company's Stock Option Plan as
determined by the Board of Directors. Mr. Gatto also received a $1,000
24
<PAGE>
monthly automobile allowance and was entitled to participate in employee benefit
plans generally available to the Company's employees.
Employment Agreement with Mr. Fine: Pursuant to his employment
agreement, Mr. Fine has agreed to render his exclusive and full time services to
the Company for a term of employment expiring on December 31, 1999. Under his
employment agreement, Mr. Fine receives a base salary, subject to discretionary
increases, of $400,000. Mr. Fine is entitled to an annual non-discretionary
bonus based on a formula for FOB sales. The employment agreement further
provides for the payment of discretionary bonuses and participation in the
Company's Stock Option Plan as determined by the Board of Directors. Mr. Fine
also receives a $1,000 monthly automobile allowances and is entitled to
participate in employee benefit plans generally available to the Company's
employees.
Mr. Fine's employment agreement provides that, in the event of
termination other than for cause, Mr. Fine is entitled to his salary and car
allowance earned through the date of termination and thereafter for a period up
to twelve months. Mr. Fine is also entitled to the pro rata portion of his
annual bonus earned through the date of termination.
Each of the employment agreements with Messrs. Ahearn, Gatto and Fine
prohibits disclosure of proprietary and confidential information regarding the
Company and its business to anyone outside the Company both during and
subsequent to employment and otherwise provides that all inventions made by the
employees during their employment belong to the Company. In addition, the
employees agreed during their employment, and for one year thereafter, not to
engage in any competitive business activity.
25
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 25,
1998, with respect to the shares of Common Stock beneficially owned by (a) each
person known by the Company to be the beneficial owner of 5% or more of the
outstanding Common Stock, (b) each Director of the Company and (c) all Directors
and executive officers of the Company as a group.
Class A Common Stock(1)
----------------------------------
Number of Shares
Beneficially Owned
----------------------------------
Five Percent Stockholders, Percent of
Directors and Executive Officers Number Class
- --------------------------------------- --------------- ---------------
Marvel Characters, Inc................ 7,394,000 26.6%
c/o Marvel Entertainment
Group, Inc.
387 Park Avenue South
New York, New York 10016
Avi Arad (2).......................... 4,150,000 15.0%
1698 Post Road East
Westport, Connecticut 06880
Isaac Perlmutter (3).................. 9,539,500 34.4%
P.O. Box 1028
Lake Worth, Florida 33460-1028
Joseph M. Ahearn (4).................. 280,100 *
David J. Fremed (5)................... 30,000 *
James F. Halpin....................... 5,000 *
Alfred A. Piergallini................. 4,000 *
Paul R. Verkuil....................... 2,000 *
James S. Carluccio.................... 0 *
Morton E. Handel...................... 1,000 *
Donald E. Rosenblum................... 0 *
William H. Hardie, III................ 0 *
Alan Fine (5)......................... 20,000 *
All executive officers and Directors
as a group (12 persons)(6).......... 14,031,600 50.6%
- --------------------------
* Less than 1%.
(1) There are no longer any shares of Class B Common Stock outstanding. In
accordance with the Stockholders' Agreement, each share of Class B
Common Stock held by Marvel, was converted into a share of Class A
Common Stock as a result of the change of control at Marvel no later
than June 20, 1997. The enforceability of the conversion provisions of
the Stockholders' Agreement has been disputed by the Chapter 11
Trustee. See "Item 1. Business Change in Control." and "Item 3. - Legal
Proceedings."
(2) Mr. Arad is also a Director of the Company.
(3) Mr. Perlmutter is also a Director of the Company. Represents shares of
Class A Common Stock owned by (i) Zib, Inc., formerly Toy Biz, Inc., a
Delaware corporation incorporated in 1990, which is owned entirely by
the Isaac Perlmutter T.A. trust, a revocable trust established by Mr.
Perlmutter, (ii) The Laura and Isaac Perlmutter Foundation Inc. and
(iii) Object Trading Corp. Mr. Perlmutter is the sole beneficiary of
the trust during his lifetime and may revoke the trust at any time and
he and his wife serve as trustees of the trust. Mr. Perlmutter is the
sole stockholder of the Foundation and Object Trading Corp.
(4) Includes 280,000 shares of Class A Common Stock subject to employee
options granted pursuant to the Stock Option Plan which are immediately
exercisable or exercisable within 60 days.
26
<PAGE>
(5) Represents shares of Class A Common Stock subject to employee options
granted pursuant to the Stock Option Plan which are immediately
exercisable or exercisable within 60 days.
(6) Includes 330,000 shares of Class A Common Stock subject to employee
options granted pursuant to the Stock Option Plan which are immediately
exercisable or exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Because Marvel and various of its affiliates are the subject of
petitions for reorganization under Chapter 11, agreements described below to
which Marvel or those affiliates are parties which are determined by the
District Court to be executory contracts may be subject to rejection in the
Marvel bankruptcy cases.
Marvel License Agreements
In connection with the formation of the Company, Marvel granted the
Company the Marvel License, an exclusive, perpetual and paid up license to
manufacture and distribute a broad range of toys based upon characters owned by
Marvel and properties in which it owns copyrights, trademarks or tradenames. The
Marvel License covers all characters (including the associated copyrights and
trademarks) owned by Marvel and disseminated under the Marvel Comics trademark.
The Marvel License restricts Marvel, subject to the Company's prior
consent, from manufacturing, using, distributing or advertising the licensed
products and from granting other licenses to use the Marvel Characters in
connection with the licensed products.
The Company and Marvel have entered into an exclusive license agreement
pursuant to which Marvel may use the Toy Biz trademark on online services and
electronic networks, including the Internet. The license is limited to
Marvel-related products of the Company. Marvel paid the Company $500,000 for
such license.
The Company also distributed certain products through a wholly owned
subsidiary of Marvel engaged in the distribution of products to certain comic
book retailers. During the years ended December 31, 1995, 1996 and 1997, the
Company's sales to that subsidiary totaled $1,616,000, $324,000 and $0,
respectively.
License With Avi Arad
Avi Arad & Associates ("Associates"), of which Mr. Arad is the sole
proprietor, and the Company are parties to a license agreement which amended the
licenses between Associates and the Predecessor Company outstanding at the time
of the Company's formation and which governs the licensing of new material to
the Company by Associates thereafter. The license agreement provides that
Associates is entitled to receive royalty payments on net sales of Marvel
character-based toys and on net sales of non-Marvel based toys of which Arad is
the inventor of record. In no event, however, may the total royalties payable to
Associates during any calendar year exceed $7.5 million. Mr. Arad has agreed
that he was not entitled to receive royalties based on sales in 1996 of certain
Marvel character-based toys which were developed independently of Arad in 1996.
The Company accrued royalties to Mr. Arad for toys he invented or designed of
$1,848,000 and $3,624,000 during the years ended December 31, 1996 and 1997,
respectively. At December 31, 1996 the Company had a receivable from Mr. Arad
for $505,000 related to reimbursement of expenses which was subsequently
collected.
Marvel Services Arrangement
In connection with the IPO, the Company and Marvel entered into a
services agreement (the "Services Agreement") governing the provision by Marvel
of services to the Company. Under the Services Agreement, upon
27
<PAGE>
request by the Company and acceptance by Marvel, Marvel provides certain
management, consulting and administrative services and certain services
purchased from third party providers, including legal and accounting services.
The Company is obligated to reimburse Marvel for the costs of such services. The
Services Agreement automatically renews for successive one-year terms unless
terminated upon 120 days' notice. Marvel is under no obligation to provide
services under the Services Agreement. The Company accrued for the account of,
or reimbursed Marvel for, approximately $262,000 and $141,000 for 1996 and 1997,
respectively. The Company has not requested services under the Services
Agreement since June 1997.
Stockholders' Agreement and Class B Common Stock
In connection with the IPO, Marvel, Mr. Perlmutter, two affiliates of
Mr. Perlmutter through which Mr. Perlmutter held his shares of Class A Common
Stock, Mr. Arad and the Company entered into the Stockholders' Agreement which
provided, among other things, that Marvel and its permitted transferees (in this
case, Characters) ("Permitted Transferees"), if any, Perlmutter and Arad would
vote their respective shares of common stock of the Company to elect as
directors of the Company (i) eight persons designated by Characters, (ii) two
persons designated by Perlmutter and (iii) one person designated by Arad. The
Stockholders' Agreement also permitted certain pledges of Class B Common Stock
owned by Marvel and its Permitted Transferees.
The Stockholders' Agreement provided that, if Marvel ceased to be
controlled by Mr. Perelman, Characters would be obligated to convert its shares
of Class B Common Stock into Class A Common Stock, unless Mr. Perlmutter and Mr.
Arad consented to those shares remaining Class B Common Stock. The Stockholders'
Agreement provided that it would terminate upon, among other events, the
conversion into Class A Common Stock of the Class B Common Stock held by
Characters pursuant to a change in control of Marvel. The Company contends that,
under the Stockholders' Agreement, the loss of control of Marvel by Mr. Perelman
in the Marvel bankruptcy proceedings triggered the conversion of the shares of
Class B Common Stock held by Characters into an equal number of shares of Class
A Common Stock and that the effect of that conversion was to reduce the voting
power of Characters as a stockholder of the Company from approximately 78.4% to
approximately 26.6% and to terminate the Stockholders' Agreement. See "Item 1.
Business -- Change of Control".
Company Registration Rights Agreement
The Company is a party to a registration rights agreement (the "Company
Registration Rights Agreement") with Marvel, Arad and Perlmutter, pursuant to
which they and certain of their transferees each have the right, subject to
certain conditions, to require the Company to register under the Securities Act,
all or any portion of the shares of Class A Common Stock held by them on two
occasions. In addition, Marvel, Arad, Perlmutter and certain of their
transferees have certain rights to participate in such registrations and in
other registrations by the Company of its Class A Common Stock. The Company is
obligated to pay any expenses incurred in connection with such registrations,
except for underwriting discounts and commissions attributable to the shares of
Class A Common Stock sold by stockholders pursuant to such registrations.
Tangible Media Advertising Services
Tangible Media, a corporation which is wholly owned by Perlmutter, acts
as the Company's media consultant in placing the Company's advertising and, in
connection therewith, receives certain fees and commission based on the cost of
the placement of such advertising. Tangible Media is compensated solely as a
consultant on an event-by-event basis with no written arrangements in place. It
is expected that Tangible Media, upon request, will continue to arrange for the
placement for the Company's advertising. The Company retains the services of a
non-affiliated media consulting agency on matters of advertising creativity.
Tangible Media received payments of fees and commissions totaling approximately
$965,000 and $1,274,000 in 1996 and 1997, respectively.
28
<PAGE>
Employee, Office Space and Overhead Cost Sharing Arrangements
Under expense sharing arrangements with Tangible Media, Classic Heroes,
REC Sound and Marvel Software, affiliated companies owned by Perlmutter in the
case of Tangible Media, Classic Heroes and REC Sound, or owned equally by Marvel
and the Company in the case of Marvel Software (collectively, the "Affiliates"),
the Company and the Affiliates have shared certain space at the Company's
principal executive offices and related overhead expenses. Since 1994, Tangible
Media and the Company have been, and until the end of 1995 Classic Heroes and
REC Sound were, parties to an employee, office space and overhead cost sharing
agreement governing the Company's sharing of employees, office space and
overhead expenses (the "Cost Sharing Agreement"). Under the Cost Sharing
Agreement, any party thereto may through its employees provide services to
another party, upon request, whereupon the party receiving services shall be
obligated to reimburse the providing party for the cost of such employees'
salaries and benefits accrued for the time devoted by such employees to
providing services. Under this agreement, Tangible Media is currently obligated
to reimburse the Company for 18% of the rent paid under the sublease for the
space, which obligations reflect the approximate percentage of floor space
occupied by Tangible Media. The agreement also requires Tangible Media to
reimburse the Company for any related overhead expenses comprised of commercial
rent tax, repair and maintenance costs and telephone and facsimile services, in
proportion to its percentage occupancy. The Cost Sharing Agreement is
coterminous with the term of the Company's sublease for its executive offices.
The Company received net reimbursements from one of the Affiliates of
approximately $245,000 for 1996 and paid approximately $38,000 to this Affiliate
in 1997 under this Agreement.
Showroom Sharing Arrangement
Under an expense sharing arrangement with Marvel, Classic Heroes and
REC Sound (the "Showroom Affiliates"), the Company and the Showroom Affiliates
have shared showroom space and related overhead expenses. Since 1995, Marvel and
the Company have been, and until the end of 1995 Classic Heroes and REC Sound
were, parties to a showroom space sharing agreement (the "Showroom Sharing
Agreement"). Under the Showroom Sharing Agreement, Marvel is currently obligated
to reimburse the Company for 30% of the rent paid under the lease for the
showroom space, which obligations reflect the percentage of floor space occupied
by Marvel. The agreement also requires Marvel to reimburse the Company for any
related overhead expenses comprised of commercial rent tax, repair and
maintenance costs and telephone and facsimile service, in proportion to their
percentage occupancy, except that overhead expenses which inure to the benefit
of a single party shall be reimbursed entirely by such party. The agreement has
a term which is coterminous with the term of the Company's lease for the
showroom space. The Company was reimbursed approximately $47,000 in 1996 under
the Showroom Sharing Agreement and accrued approximately $26,000 as being due
from Marvel for 1997.
Marvel Studios
The Company and Marvel formed Marvel Studios with the objective of
facilitating the release of live action and animated motion pictures and
television programming and other media based on the Marvel Characters in order
to create greater consumer interests in these characters and related
merchandise. The Company believes that any feature 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 and toy
businesses. The rights to produce certain feature films based on certain of the
Marvel Characters are currently licensed to third parties. The approximately
$9.1 million net proceeds to the Company from its 1996 public offering was
intendedal commitment to Marvel Studios. At this time, the Company has no plans
to invest a material amount of funds in Marvel Studios until the resolution of
Marvel's bankruptcy proceeding. The Marvel Studios joint venture will become
mooted if the Plan proposed by the Company to combine with Marvel is
consummated. Marvel has asserted that the Company has breached its obligation to
fund Marvel Studios. See "Item 3. Legal Proceedings."
29
<PAGE>
Other Agreements with Affiliates
The Company was a party to a license agreement entered into in
September 1994 with Coleman, an affiliate of the Company, pursuant to which the
Company licensed certain Coleman trademarks. The license terminated during 1997.
The Company was a party to a license agreement entered into in July
1995 with Revlon Consumer Products Corporation, an affiliate of the Company,
pursuant to which the Company licenses certain Revlon Consumer Products
Trademarks. The license terminated during 1997.
The Company believes that the terms of the foregoing transactions are
no less favorable than could be obtained by the Company from unrelated parties
on an arm's-length basis.
Proxy and Stock Option Agreements
Mr. Perlmutter and certain of his affiliates (the "Perlmutter Group")
and Mr. Arad have entered into proxy and stock option agreements with the
Consenting Lenders (the "Proxy and Stock Option Agreements"). In the following
discussion of the Proxy and Stock Option Agreements, the term "Stockholder"
means the Perlmutter Group or Mr. Arad, pursuant to the respective Proxy and
Stock Option Agreement of each.
In each Proxy and Stock Option Agreement, the Stockholders have agreed
to vote all shares of Class A Common Stock held beneficially or of record by
them (i) in favor of the Merger and of any other action necessary or appropriate
to effect the Merger; (ii) in favor of the other transactions contemplated by
the Master Agreement and the Plan or of any other action necessary or
appropriate to effect the Master Agreement and the Plan; (iii) against any
action or agreement that would result in a material breach or default by the
Company of the Master Agreement or the Plan; or (iv) against any action or
agreement that would, directly or indirectly, interfere with the Merger or with
the confirmation of the Plan. See "Item 1. Business -- Proposed Combination with
Marvel."
The Proxy and Stock Option Agreements require each Stockholder not to
(i) dispose of any of the Stockholder's shares of Class A Common Stock; (ii)
grant any additional proxies; (iii) support any plan of reorganization other
than the Plan; (iv) take any action inconsistent with the Stockholder's
obligations under the Proxy and Stock Option Agreement; (v) acquire any claim
against or interest in the Marvel Debtors; or (vi) take any action that would
cause the Company to materially breach the Master Agreement.
Under each Proxy and Stock Option Agreement, the Consenting Lenders
have the option (the "Option") to purchase all (but not less than all) of the
Stockholders' shares of Class A Common Stock if (i) the Master Agreement is
terminated because of a material breach by the Company or (ii) the Stockholder
materially breaches the Proxy and Stock Option Agreement. The purchase and sale
price of the Class A Common Stock pursuant to the Option is $4.00 per share.
Agreements Relating to the Purchase of Preferred Shares
On November 19, 1997, Zib Inc. (an entity wholly-owned by Mr.
Perlmutter), Dickstein Partners, Inc. ("Dickstein") and the Company entered into
an agreement in the form of a commitment letter (the "Commitment Letter")
relating to the purchase of 8% Preferred Stock of the Company by Zib Inc. and
Dickstein as investors ("New Preferred Stock Investors"). On that same day, Mr.
Perlmutter, Mr. Arad, and Joseph M. Ahearn executed a related letter agreement
(the "Letter Agreement") addressed to Dickstein.
The Commitment Letter provides that Zib Inc. has committed to purchase
600,000 shares, and Dickstein has committed to purchase 300,000 shares, of the
8% Preferred Stock of the Combined Company to be issued in connection with the
proposed combination of the Company and Marvel pursuant to the Plan (the
"Merger") and the
30
<PAGE>
Company has agreed to sell those shares to the New Investors. The purchase price
is $90,000,000, or $100 per share. Zib Inc. is permitted to assign its rights
under the Commitment Letter without the Company's consent. In consideration of
the New Preferred Stock Investors' commitment, the Company has agreed that if
the Company and Marvel consummate any of certain transactions (generally
consisting of mergers other than the Merger contemplated by the Plan; each is
referred to as an "Alternative Transaction") where the holders of the
outstanding Class A Common Stock of the Company receive consideration in excess
of $9.625 per share of Class A Common Stock, then Dickstein shall be entitled to
be paid an alternative transaction fee (the "Alternative Transaction Fee") by
the Company. The Alternative Transaction Fee is to be equal to the product of
(a) the lesser of (x) $3.00 (appropriately adjusted for any recapitalization of
the Company) and (y) the amount by which the consideration per share of Class A
Common Stock received by Company stockholders in that Alternative Transaction
exceeds $9.625, (b) 10.39 (appropriately adjusted for any recapitalization of
the Company) and (c) the number of shares of 8% Preferred Stock to be pAny
Alternative Transaction Fee that becomes payable in respect of an Alternative
Transaction announced or consummated prior to the later of September 21, 1998
and the termination of the Master Agreement will not be in excess of $8,000,000
and any Alternative Transaction Fee which becomes payable in respect of an
Alternative Transaction which is announced and consummated after the later of
September 21, 1998 and the termination of the Master Agreement will not be in
excess of $4,000,000 (with certain exceptions). No Alternative Transaction Fee
is payable by the Company in respect of an Alternative Transaction which occurs
after a final and non-appealable determination of any court that the board of
directors of the Company which approved the Master Agreement was not at such
time the duly authorized board of the Company, or which results in a change in
the identity of the majority of directors of the Company (a "Final Change in
Control").
The Commitment Letter provides that the Company will not at any time
prior to the termination of the Master Agreement, with certain exceptions,
consent to any material change in the Plan or withdraw or otherwise terminate
the Plan for the purpose of submitting an alternative plan of reorganization or
consummating an Alternative Transaction without the prior written consent of the
New Preferred Stock Investors having committed to purchase 80% of the shares of
8% Preferred Stock to be purchased by the New Preferred Stock Investors.
Additionally, the Company will not at any time prior to the termination of the
Master Agreement implement the transactions contemplated by the Master Agreement
or any similar transactions without permitting the New Preferred Stock Investors
to purchase the 8% Preferred Stock on the terms provided in the Commitment
Letter.
The Letter Agreement provides that Mr. Perlmutter and Mr. Arad are
severally obligated to pay a cash fee (the "Substitute Fee") to Dickstein if (a)
a Final Change in Control (as defined above) shall occur and, but for the Final
Change of Control, Dickstein would be entitled under the terms of the Commitment
Letter to receive an Alternative Transaction Fee, (b) a court order, preventing
the Company from consummating the Plan and based on a contention that the board
of directors of the Company which approved the Master Agreement was not duly
authorized, shall prevent the payment of the Alternative Transaction Fee in
accordance with the terms of the Commitment Letter where Dickstein is otherwise
entitled under the terms of the Commitment Letter to receive an Alternative
Transaction Fee or (c) a Marvel Board Change (defined generally as a time where
persons designated by Marvel and not approved by Dickstein or Zib Inc. become a
majority of the directors of the Company) occurs and the Alternative Transaction
Fee is not paid when due. The Substitute Fee is equal to ten percent (10%) of
the product of (a) the number of Company Shares owned, directly or indirectly,
by each of Messrs. Perlmutter and Arad as of the date of the Letter Agreement
and (b) the amount by which (i) the consideration per share received by holders
of Common Stock in the Alternative Transaction exceeds (ii) $9.00. No Substitute
Fee, however, shall be payable by Mr. Perlmutter or Mr. Arad in respect of any
shares sold upon exercise of the Option granted by him in the Proxy and Stock
Option Agreements. The Letter Agreement also provides that each of Mr.
Perlmutter, Mr. Arad, and Mr. Ahearn shall use his reasonable best efforts,
subject to his fiduciary duties as a director and/or officer of the Company, to
cause the Company to comply with the terms of the Commitment Letter irrespective
of any judicial determination as to the authorized composition of the Company's
board of directors.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed with this Report
1. Financial Statements
--------------------
See the accompanying Index to Financial Statements
and Financial Statement Schedule on page F-1.
2. Financial Statement Schedule
----------------------------
See the accompanying Index to Financial Statements
and Financial Statement Schedule on page F-1.
3. Exhibits
--------
See the accompanying Exhibit Index appearing on page
33.
(b) Reports on Form 8-K.
1. The Registrant filed a Current Report on Form 8-K,
dated as of October 16, 1997 and filed on October 16,
1997.
2. The Registrant filed a Current Report on Form 8-K,
dated as of November 24, 1997 and filed on November
24, 1997.
32
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
2.1 Amended and Restated Asset Purchase Agreement, dated
August 17, 1995, between the Company and Spectra Star,
Inc., as amended by the First, Second, Third, Fourth and
Fifth Amendments thereto. (Incorporated by reference to
Exhibits 2.1, 2.2, 2.3 2.4 and 2.5 to the Company's Current
Report on Form 8-K, filed with the Commission on September
26, 1995.)
Restated Certificate of Incorporation. (Incorporated
by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.)
3.2 Certificate of Designation of Series A Preferred Stock of
Toy Biz, Inc. (Incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K, filed with the
Commission on September 26, 1995.)
3.3 Bylaws (as restated and amended). (Incorporated by
reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995.)
4.1 Specimen Copy of Stock Certificate for shares of Class A
Common Stock. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1, File No.
33-87268.)
9.1 Voting Trust Agreement, dated as of March 2, 1995, by
and among Marvel Entertainment Group, Inc., Avi Arad
and the Company. (Incorporated by reference to
Exhibit 9.1 to the Company's Registration Statement
on Form S-1, File No. 33- 87268.)
9.2 Voting Trust Agreement, dated as of March 2, 1995, by
and among Marvel Entertainment Group, Inc., Isaac
Perlmutter and the Company. (Incorporated by
reference to Exhibit 9.2 to the Company's
Registration Statement on Form S-1, File No.
33-87268.)
10.1 Stockholders' Agreement, dated as of March 2, 1995,
by and among the Company, Isaac Perlmutter T.A.,
Marvel Entertainment Group, Inc., Avi Arad and Zib
Inc. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.)
10.2 Registration Rights Agreement, dated as of March 2,
1995, by and among the Company, Marvel Entertainment
Group, Inc., and Isaac Perlmutter and Avi Arad.
(Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.)
10.3 Assignment and Assumption of Sublease by and between
Job Lot of West 45th St., Inc. and the Company, as
amended by First Amendment of Sublease, dated May 26,
1994, by and between Kallir, Philips, Ross, Inc. and
the Company; Agreement of Sublease, dated May 6,
1991, by and between Kallir, Philips, Ross, Inc. and
Job Lot of West 45th St., Inc.; Agreement of
Sublease, dated January 1989, by and between 673
First Realty Company and Kallir, Philips, Ross, Inc.
(Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, File
No. 33- 87268.)
10.4 Lease, dated December 3, 1993, by and between 200
Fifth Avenue Associates and the Company.
(Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, File
No. 33-87268.)
33
<PAGE>
Exhibit No.
- -----------
10.5 Sublease, dated December 19, 1996, by and between
Gruner & Jahr USA Publishing and the Company. (Incorporated
by reference to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.)
10.6 Letter Agreement, effective March 1, 1994, by and between
Regal West Warehouse Trucking and the Company.
(Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1, File No. 33-87268.)
10.7 Credit Agreement, dated as of February 22, 1995 among the
Company, the Banks (as defined therein) and Chemical Bank
as administrative agent for the Banks, as amended by First
Amendment and Consent Number 1, dated as of August 29,
1995. (Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 and Exhibit 10.7 to the Company's
Current Report on Form 8-K filed on September 26, 1995.)
10.8 License Agreement, dated April 30, 1993, by and between the
Company and Marvel Entertainment Group, Inc., as amended by
Amendments thereto, dated December 1, 1994, and February
22, 1995. (Incorporated by reference to Exhibits 10.9 and
10-9(b) to the Company's Registration Statement on Form S-
1, File No. 33-87268 and to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1995.)
10.9 License Agreement, dated July 1, 1994, between Marvel
Entertainment Group, Inc. and the Company. (Incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-87268.)
10.10 License Agreement, dated March 1, 1993, by and between the
Company and Gerber Products Company as amended by Amendment
thereto, dated April 5, 1995. (Incorporated by reference to
Exhibit 10.13 to the Company's Registration Statement on
Form S-1, File No. 33-87268 and Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995.), (Confidential treatment has been
requested for a portion of this exhibit.)
10.11 Distribution Agreement, dated July 29, 1993, by and between
the Company and Tyco Industries, Inc. (Incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1, File No. 33-87268.)
10.12 Services Agreement, dated as of March 2, 1995, by and
between the Company and Marvel Entertainment Group, Inc.
(Incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)
10.13 Showroom Sharing Agreement, dated as of March 2, 1995, by
and among the Company, Marvel Entertainment Group, Inc.,
Classic Heroes, Inc. and REC Sound Incorporated.
(Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)
10.14 Master License Agreement, dated as of April 30, 1993,
between Avi Arad & Associates and the Company.
(Incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)
34
<PAGE>
Exhibit No.
- -----------
10.15 Amended and Restated Consulting Agreement by and between
the Company and Avi Arad, as amended and restated as of
March 2, 1995. (Incorporated by reference to Exhibit 10.22
to the Company's Registration Statement on Form S-1, File
No. 33-87268.)*
10.16 Amended and Restated Employment Agreement between New World
Animation, Ltd. and Avi Arad. (Incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on
Form S-1, File No. 33-87268.)
10.17 Stock Option Agreement, dated as of April 30, 1993, between
the Company and Avi Arad as amended. (Incorporated by
reference to Exhibits 10.25, 10.26 and 10.26(b) to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)
10.18 Employment Agreement, by and between Joseph M. Ahearn and
the Company. (Incorporated by reference to Exhibit 10.27 to
the Company's Registration Statement on Form S-1, File No.
33-87268.)*
10.19 Employment Agreement, by and between Andrew R. Gatto
and the Company. (Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form
10-K, filed on April 1, 1995.)*
10.20 Employment Agreement, by and between Alan Fine and
the Company. (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.)*
10.21 1995 Stock Option Plan. (Incorporated by reference to
Exhibit 10.30 to the Company's Registration Statement on
Form S-1, File No. 33-87268.)*
10.22 Registration Rights Agreement, dated September 11,
1995, by and between the Company and Spectra Star,
Inc. (Incorporated by reference to Exhibit 10.8 to
the Company's Current Report on Form 8-K, filed on
September 26, 1995.)
10.23 Option Agreement, dated September 11, 1995, by and
between the Company and Spectra Star, Inc.
(Incorporated by reference to Exhibit 10.9 to the
Company's Current Report on Form 8-K, filed on
September 26, 1995.)
10.24 Purchase and Option Agreement, dated September 11, 1995, by
and between the Company, Frank Alonso, Jr. and Estrella
Maquiladoras, S.A. DE C.V. (Incorporated by reference to
Exhibit 10.10 to the Company's Current Report on Form 8-K,
filed on September 26, 1995.)
10.25 Maquila and Technical Assistance Agreement, dated
September 11, 1995, by and between the Company and
Estrella Maquiladoras, S.A. DE C.V. (Incorporated by
reference to Exhibit 10.11 to the Company's Current
Report on Form 8-K, filed on September 26, 1995.)
10.26 Amended and Restated Master Agreement, dated as of November
19, 1997, by and among the Company, certain secured
creditors of Marvel and certain secured creditors of Panini
Spa and Amendments 1 and 2 thereto.
10.27 Amended and Restated Proxy and Stock Option Agreement,
dated as of November 19, 1997, between the Company and Avi
Arad (Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated November 24,
1997).
35
<PAGE>
Exhibit No.
- -----------
10.28 Amended and Restated Proxy of Stock Option Agreement, dated
as of November 19, 1997 among the Company, Isaac
Perlmutter, Isaac Perlmutter T.A. and Zib Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated November 24, 1997).
10.29 Commitment Letter, dated as of November 19, 1997, by and
between the Registrant, Dickstein Partners Inc., and Zib
Inc. (Incorporated by reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K dated November 24,
1997).
10.30 Agreement, dated as of November 19, 1997, by and among
Dickstein Partners, Inc., Isaac Perlmutter, Avi Arad and
Joseph M. Ahearn (Incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K dated November
24, 1997).
10.31 Second Amended Joint Plan of Reorganization filed with
the United States Bankruptcy Court for the District of
Delaware on March 12, 1998 by the secured lenders of Marvel
and the Registrant.
21.1 Subsidiaries of the Company.
23 Consent of Accountants.
27 Financial Data Schedule.
* Management contract or compensatory plan or arrangement.
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.
TOY BIZ, INC.
By: /s/ Joseph M. Ahearn
-------------------------------------
Joseph M. Ahearn
President and Chief Executive Officer
Date: March 31, 1998
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<C> <S> <C>
/s/ Isaac Perlmutter Director March 31, 1998
- ---------------------------
Isaac Perlmutter
/s/ Joseph Ahearn President, Chief Executive Officer and
- ---------------------------
Joseph M. Ahearn Director (principal executive officer) March 31, 1998
/s/ David J. Fremed Chief Financial Officer and Treasurer March 31, 1998
- ---------------------------
David J. Fremed (principal financial and accounting officer)
/s/ Avi Arad Director March 31, 1998
- ---------------------------
Avi Arad
/s/ Morton E. Handel Director March 31, 1998
- ---------------------------
Morton E. Handel
/s/ James S. Carluccio Director March 31, 1998
- ---------------------------
James S. Carluccio
/s/ Donald E. Rosenblum Director March 24, 1998
- ---------------------------
Donald E. Rosenblum
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<C> <S> <C>
/s/ James F. Halpin Director March 31, 1998
- ---------------------------
James F. Halpin
/s/ Alan Fine Chief Operating Officer and Director March 31, 1998
- ------------------------
Alan Fine
/s/ Alfred A. Piergallini Director March 23, 1998
- ------------------------
Alfred A. Piergallini
/s/ Paul R. Verkuil Director March 31, 1998
- ------------------------
Paul R. Verkuil
</TABLE>
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Independent Auditors.........................................F-2
Consolidated Balance Sheets as of December 31, 1996
and December 31, 1997.................................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997......................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997......................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997......................................F-6
Notes to Consolidated Financial Statements.............................F-7
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts......................F-22
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
The Stockholders of Toy Biz, Inc.
We have audited the accompanying consolidated balance sheets of Toy Biz, Inc.
and subsidiaries as of December 31, 1996 and 1997 and the related consolidated
statements of operations, stockholders' 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). The 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 audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Toy Biz, Inc. and
subsidiaries at December 31, 1996 and 1997 and the consolidated results of their
operations and their 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, based upon our audits, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
ERNST & YOUNG LLP
New York, New York
March 9, 1998, except as to Note 7
as to which the date is March 25, 1998
F-2
<PAGE>
TOY BIZ, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------------ ------------------
(In thousands, except per share data)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................................... $6,022 $7,596
Accounts receivable, net (Note 3)................................... 95,591 50,395
Inventories, net (Note 3)........................................... 20,935 22,685
Assets held for resale (Note 10).................................... - 4,136
Income tax receivable (Note 6)...................................... - 17,542
Deferred income taxes (Notes 1 and 6)............................... 6,173 7,494
Prepaid expenses and other.......................................... 6,067 6,584
-------- --------
Total current assets............................................. 134,788 116,432
Molds, tools and equipment, net (Note 3).............................. 17,680 17,013
Product and package design costs, net (Note 3)........................ 9,283 7,616
Goodwill and other intangibles, net (Note 3).......................... 9,981 9,305
-------- --------
Total assets..................................................... $171,732 $150,366
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $10,237 $ 5,354
Accrued expenses and other (Note 3)................................. 22,359 25,031
Borrowings under credit facility.................................... - 12,000
-------- --------
Total current liabilities........................................ 32,596 42,385
-------- --------
Redeemable preferred stock (Note 12).................................. 1,681 -
-------- --------
Stockholders' equity (Notes 8 and 9)
Preferred Stock, $.01 par value, 25,000,000 shares authorized,
none issued)..................................................... - -
Class A common stock, $.01 par value, 100,000,000 shares
authorized, 20,348,794 issued and outstanding at 12/31/96
and 27,746,127 issued and outstanding as of 12/31/97............. 203 277
Class B common stock, $.01 par value, 20,000,000 shares
authorized, 7,394,000 issued and outstanding at 12/31/96
and none issued and outstanding as of 12/31/97................... 74 -
Additional paid-in capital.......................................... 70,587 70,578
Retained earnings................................................... 66,591 37,126
-------- --------
Total stockholders' equity....................................... 137,455 107,981
-------- --------
Total liabilities and stockholders' equity....................... $171,732 $150,366
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TOY BIZ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
--------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales.............................................. $196,395 $221,624 $150,812
Cost of sales.......................................... 88,397 116,455 106,951
--------- --------- ---------
Gross profit...................................... 107,998 105,169 43,861
Operating expenses:
Selling, general and administrative.................. 48,234 61,876 72,081
Depreciation and amortization........................ 12,750 16,078 21,068
-------- -------- --------
Total expenses.................................... 60,984 77,954 93,149
-------- -------- --------
Operating income (loss)................................ 47,014 27,215 (49,288)
Interest expense....................................... (490) (112) (776)
Other income, net...................................... 1,050 708 414
-------- --------- ---------
Income (loss) before income taxes.................... 47,574 27,811 (49,650)
Income taxes (benefit) (Note 6)...................... 19,172 11,124 (20,185)
-------- -------- ---------
Net income (loss)................................. $28,402 $16,687 ($29,465)
======= ======= =========
Basic and dilutive net income (loss) per share......... $1.05 $0.61 ($1.06)
Weighted average number of common and
common equivalent shares outstanding (in
thousands).......................................... 27,115 27,366 27,746
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TOY BIZ, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ --------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C>
Balance at December 31, 1994......................... -- 16,914 21,502 38,416
Proceeds from initial public offering................ $270 43,875 -- 44,145
Exercise of stock options............................ -- 411 -- 411
Accretion of redeemable preferred stock.............. -- (42) -- (42)
Net income for 1995.................................. -- -- 28,402 28,402
---- ------- ------- --------
Balance at December 31, 1995......................... 270 61,158 49,904 111,332
Proceeds from secondary offering..................... 7 9,096 -- 9,103
Exercise of stock options............................ -- 438 -- 438
Accretion of redeemable preferred stock.............. -- (105) -- (105)
Net income for 1996.................................. -- -- 16,687 16,687
---- ------- ------- --------
Balance at December 31, 1996......................... 277 70,587 66,591 137,455
Exercise of stock options............................ -- 62 -- 62
Accretion of redeemable preferred stock.............. -- (71) -- (71)
Net (loss) for 1997.................................. -- -- (29,465) (29,465)
---- ------- ------- --------
Balance at December 31, 1997......................... $277 $70,578 $37,126 $107,981
==== ======= ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TOY BIZ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1996 1997
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Net income (loss)................................................ $28,402 $16,687 ($29,465)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 12,750 16,078 20,168
Deferred income taxes........................................ 696 (2,032) (1,321)
Changes in operating assets and liabilities:
Accounts receivable........................................ (11,260) (20,843) 45,076
Inventories................................................ 1,130 (3,740) (2,452)
Income tax receivable...................................... -- -- (17,542)
Prepaid expenses and other................................. (2,378) (1,591) (581)
Other assets............................................... (17) (283) (127)
Accounts payable........................................... 3,656 1,407 (4,883)
Accrued expenses and other................................. 2,028 (6,838) 2,851
Due to affiliates.......................................... 517 -- --
------- -------- --------
Net cash provided by (used in) operating activities.............. 35,524 (1,155) 11,724
------- -------- --------
Cash flow used in investing activities:
Purchases of molds, tools and equipment........................ (9,591) (15,352) (11,748)
Expenditures for product and package
design costs................................................. (6,545) (8,213) (4,969)
Acquisition of Spectra Star, Quest and Colorforms.............. (9,004) -- (4,556)
-------- -------- --------
Net cash used in investing activities.......................... (25,140) (23,565) (21,273)
-------- -------- --------
Cash flow from financing activities:
Payment of notes to stockholder................................ (15,119) -- --
Exercise of stock option....................................... 411 438 62
Net (repayments) borrowings under credit agreement............. (21,500) -- 12,000
Redemption of Preferred Stock.................................. -- (1,440) (939)
Proceeds from initial public offering.......................... 44,166 -- --
Proceeds from additional public offering....................... -- 9,260 --
------- -------- -------
Net cash provided by financing activities........................ 7,958 8,258 11,123
------- -------- -------
Net increase (decrease) in cash and cash equivalents............. 18,342 (16,462) 1,574
Cash and cash equivalents at beginning of year................... 4,142 22,484 6,022
------- ------- -------
Cash and cash equivalents at end of year......................... $22,484 $ 6,022 $ 7,596
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid during the period................................ $ 2,335 $ 149 $ 820
Net income taxes paid (recovered) during the year.............. 16,410 16,156 (476)
Other non-cash transactions:
Issuance of preferred stock for Spectra Star,
including accretion of preferred dividend of $42
for 1995, $105 for 1996 and $71 for 1997 (See Note 12)......... 3,016 105 71
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Summary of Significant Accounting Policies
Description of Business
Toy Biz, Inc. ("Toy Biz" or the "Company") was formed on April 30, 1993
pursuant to a Formation and Contribution Agreement ("Formation Agreement"),
entered into by the Predecessor Company, Mr. Isaac Perlmutter (the sole
stockholder of the Predecessor Company), Marvel Entertainment Group, Inc.
("Marvel") and Avi Arad ("Mr. Arad"). The Predecessor Company had been Marvel's
largest toy licensee. Toy Biz designs, markets and distributes boys', girls',
preschool, activity and electronic toys based on popular entertainment
properties and consumer brand names. The Company also designs, markets and
distributes its own line of proprietary toys. The Predecessor Company was
incorporated in 1990, pursuant to an asset purchase agreement with Charan
Industries, Inc.
In accordance with the Formation Agreement, the Predecessor Company
contributed all of its and an affiliate's assets ($23,335,000) and certain
specified liabilities ($21,949,000) to the Company for 44% of Toy Biz's capital
stock. Such specified liabilities included approximately $15,363,000 due to Mr.
Perlmutter and other affiliated companies of the Predecessor Company. A portion
of the assumed liabilities due to Mr. Perlmutter was paid in cash ($8,752,000)
and the remainder of the assumed liabilities due to Mr. Perlmutter was converted
into a promissory note ($6,611,000). Marvel made a capital contribution of
$500,000 for 46% of the Company's capital stock and a loan, in the form of a
note, of $8,507,000. In addition, Marvel granted the Company an exclusive,
perpetual and paid-up license to design and distribute toys based on Marvel
characters. Pursuant to the Formation Agreement, in exchange for the
contribution to the Company of his interests in certain license agreements with
the Company and cash, Mr. Arad received 10% of the Company's capital stock. In
addition, the Company granted Mr. Arad the Arad Stock Option (the "Option") to
acquire an additional 10% of the Company's capital stock. Mr. Arad also agreed
to enter into the Arad Consulting Agreement and the Master License Agreement.
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries in Hong Kong and Mexico. Upon consolidation, all
significant intercompany accounts and transactions are eliminated.
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 of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The principal areas of judgement relate to provisions for
returns and other sales allowances, and doubtful accounts, and the realizability
of inventories, molds, tools and equipment, and product and package design
costs. Actual results could differ from those estimates.
F-7
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
1. Summary of Significant Accounting Policies--(Continued)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
Molds, Tools, and Equipment
Molds, tools and equipment are stated at cost less accumulated
depreciation and amortization. The Company owns the molds and tools used in
production of the Company's products by third-party manufacturers. At December
31, 1997, certain of these costs related to products that were not yet in
production or were not yet being sold by the Company. For financial reporting
purposes, depreciation and amortization is computed by the straight-line method
over a three year period (the estimated life) for molds and tooling costs and
over the useful life for furniture and fixtures and office equipment. On an
ongoing basis the Company reviews the lives and carrying value of molds and
tools based on the sales and operating results of the related products. If the
facts and circumstances suggest a change in useful lives or an impairment in the
carrying value, the useful lives are adjusted and unamortized costs are written
off accordingly. Write-offs, in excess of normal amortization, which are
included in depreciation and amortization on the accompanying Consolidated
Statements of Income for the years ended December 31, 1995, 1996 and 1997 were
approximately $636,000, $364,000 and $2,174,000, respectively.
Product and Package Design Costs
The Company capitalizes costs related to product and package design
when such products are determined to be commercially acceptable. Product design
costs include costs relating to the preparation of precise detailed mechanical
drawings and the production of sculptings and other handcrafted models from
which molds and dies are made. Package design costs include costs relating to
art work, modeling and printing separations used in the production of packaging.
At December 31, 1997, certain of these costs related to products that were not
yet in production or were not yet being sold by the Company. For financial
reporting purposes, depreciation and amortization of product and package design
is computed by the straight-line method over a three year period (the estimated
life). On an ongoing basis the Company reviews the useful lives and carrying
value of product and package design costs based on the sales and operating
results of the related products. If the facts and circumstances suggest a change
in useful lives or an impairment in the carrying value, the useful lives are
adjusted and unamortized costs are written off accordingly. Write-offs, in
excess of normal amortization, which are included in depreciation and
amortization on the accompanying Consolidated Statements of Income, for the
years ended December 31, 1995, 1996 and 1997 were approximately $1,276,000,
$1,164,000 and $1,230,000, respectively.
F-8
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
1. Summary of Significant Accounting Policies--(Continued)
Goodwill and Other Intangibles
Goodwill and other intangibles are stated at cost less accumulated
amortization. Goodwill is amortized over 40 years and other intangibles are
amortized over 3 years. For the years ended December 31, 1995, 1996 and 1997,
amortization of goodwill was $68,000, $245,000 and $299,000, respectively.
Research and Development
Research and development ("R&D") costs are charged to operations as
incurred. For the years ended December 31, 1995, 1996 and 1997, R&D expenses
were $4,980,000, $5,298,000 and $4,599,000, respectively.
Revenue Recognition
Sales are recorded upon shipment of merchandise and a provision for
future returns and other sales allowances is established based upon historical
experience and management estimates. Income from distribution fees and
sub-licensing of characters owned by the Company are recorded in accordance with
the distribution agreement and at the time characters are available to the
licensee and collection is reasonably assured. For the years ended December 31,
1995, 1996 and 1997, distribution fees and sub-licensing revenues were
$5,730,000, $13,637,000 and $3,265,000, respectively.
Advertising Costs
Advertising production costs are expensed when the advertisement is
first run. Media advertising costs are expensed on the projected unit of sales
method during interim periods. For the years ended December 31, 1995, 1996 and
1997, advertising expenses were $18,864,000, $25,471,000 and $27,910,000
respectively. At December 31, 1996 and 1997, the Company had incurred $433,000
and $420,000 respectively, of prepaid advertising costs, principally related to
production of advertisement that will be first run in fiscal 1997 and 1998,
respectively.
Royalties
Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are expensed based on sales of related products. The realizability
of minimum guarantees paid is evaluated by the Company based on the projected
sales of the related products.
Income Taxes
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and the tax bases of
assets and liabilities and are measured using tax rates and laws that are
scheduled to be in effect when the differences are scheduled to reverse.
F-9
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
1. Summary of Significant Accounting Policies--(Continued)
Income tax expense includes U.S. and foreign income taxes, including
U.S. Federal taxes on undistributed earnings of foreign subsidiaries to the
extent that such earnings are planned to be remitted.
Foreign Currency Translation
The financial position and results of operations of the Company's Hong
Kong and Mexican subsidiaries are measured using the U.S. dollar as the
functional currency. Assets and liabilities 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. Translations
adjustments, which were not material, arising from the use of differing exchange
rates are included in the results of operations.
Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share ("Statement 128"). Statement 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Net income (loss) per common share is
computed by dividing net income (loss), less the amount applicable to preferred
dividends, by the weighted average common and common equivalent shares
outstanding during the year. All income (loss) per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements.
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB")
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", the Company records impairment losses on
long-lived assets used in operations, including intangible assets, when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
2. Sales to Major Customers and International Operations
The Company primarily sells its merchandise to major retailers,
principally throughout the United States. Credit is extended based on an
evaluation of the customer's financial condition, and, generally, collateral is
not required. Credit losses are provided for in the financial statements and
consistently were within management's expectation until the recent Marvel
bankruptcy and concerns among retailers about the future of the Marvel brand.
During the year ended December 31, 1995, three customers accounted for
approximately 29%, 19% and 12% of total net sales. During the year ended
December 31, 1996, two customers accounted for approximately 23% and 18% of
total net sales. During the year ended December 31, 1997, three customers
accounted for approximately 22%, 15% and 12% of total net sales.
F-10
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
2. Sales to Major Customers and International Operations (Continued)
The Company's Hong Kong subsidiary supervises the manufacturing of the
Company's products in China and sells such products internationally. All sales
are made F.O.B. Hong Kong against letters of credit. During the years ended
December 31, 1995, 1996 and 1997, international sales were approximately 11%,
20% and 22%, respectively, of total net sales. During those periods, the Hong
Kong operations reported operating income of approximately $6,642,000,
$18,880,000 and $5,868,000 and income before income taxes of $6,721,000,
$19,079,000 and $6,102,000, respectively. At December 31, 1996 and 1997 the
Company had assets in Hong Kong of approximately $29,342,000 and $28,660,000,
respectively, and the Hong Kong subsidiary represents $24,785,000 and
$26,670,000, respectively, of the Company's consolidated retained earnings.
F-11
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
3. Details of Certain Balance Sheet Accounts
(in thousands)
<TABLE>
<CAPTION>
December 31,
1996 1997
------------------ ------------------
<S> <C> <C>
Accounts receivable, net, consists of the following:
Accounts receivable.................................................. $110,932 $80,212
Less allowances for:
Doubtful accounts.................................................. (485) (430)
Advertising, markdowns, returns, volume discounts and other........ (14,856) (29,387)
------------------ ------------------
Total............................................................ $95,591 $50,395
================== ==================
Inventories, net, consist of the following:
Finished goods....................................................... $16,918 $17,518
Component parts, raw materials and work-in-process................... 4,017 5,167
------------------ ------------------
Total............................................................ $20,935 $22,685
================== ==================
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment........................................... $23,055 $26,873
Office equipment and other........................................... 4,092 7,539
Less accumulated depreciation and amortization....................... (9,467) (17,399)
------------------ ------------------
Total............................................................ $17,680 $17,013
================== ==================
Product and package design costs, net, consists of the following:
Product design costs................................................. $10,047 $11,113
Package design costs................................................. 3,612 4,404
Less accumulated amortization........................................ (4,376) (7,901)
------------------ ------------------
Total............................................................ $9,283 $ 7,616
================== ==================
Goodwill and other intangibles, net, consists of the following:
Goodwill............................................................. $9,815 $ 9,453
Patents and other intangibles........................................ 692 818
Less accumulated amortization........................................ (526) (966)
------------------ ------------------
Total............................................................ $9,981 $ 9,305
================== ==================
Accrued expenses and other consists of the following:
Accrued advertising costs............................................ $7,330 $11,544
Accrued royalties.................................................... 180 2,228
Income taxes payable................................................. 4,343 3,495
Deferred income...................................................... 134 315
Other accrued expenses............................................... 10,372 7,449
------------------ ------------------
Total............................................................ $22,359 $25,031
================== ==================
</TABLE>
F-12
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
4. Related Party Transactions
Interest expense on notes payable to stockholders amounted to
approximately $235,000 for the year ended December 31, 1995 and was added to the
notes.
Marvel provides support to the Company relating to licensing
agreements, promotion, legal and financial matters. The cost for these support
services has been included in selling, general and administrative expenses, and
amounted to $306,000, $262,000 and $141,000 for the years ended December 31,
1995, 1996 and 1997, respectively. At December 31, 1996 and 1997, the Company
had a receivable from Marvel of $165,000 and $94,000, respectively.
The Company and Marvel have entered into an exclusive license agreement
pursuant to which Marvel may use the Toy Biz trademark on online services and
electronic networks, including the Internet. The license is limited to
Marvel-related products of the Company. Marvel paid the Company $500,000 in 1996
for such license.
An affiliate of the Company, which is wholly-owned by Mr. Perlmutter,
acts as the Company's media consultant in placing the Company's advertising and,
in connection therewith, receives certain fees and commissions based on the cost
of the placement of such advertising. During the years ended December 31, 1995,
1996 and 1997 the Company paid fees and commissions to the affiliate totaling
approximately $970,000, $965,000 and $1,274,000, respectively, relating to such
advertisements.
The Company sold merchandise totaling $1,616,000 and $324,000 to a
subsidiary of Marvel during the years ended December 31, 1995 and 1996,
respectively. Related receivables were $207,000 as of December 31, 1996. These
amounts were subsequently collected.
The Company accrued royalties to Mr. Arad for toys he invented or
designed of $5,734,000, $1,848,000 and $3,624,000 during the years ended
December 31, 1995, 1996 and 1997, respectively. At December 31, 1996 the Company
had a receivable from Mr. Arad for $505,000 related to reimbursement of expenses
which was subsequently collected.
The Company shares office space and certain general and administrative
costs with affiliated entities. Rent received from affiliates for the years
ended December 31, 1995, 1996 and 1997 was $172,000, $109,000 and $116,000 ,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.
F-13
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
5. Commitments and Contingencies
Leases: The Company is a party to various noncancellable operating
leases involving office and warehouse space expiring on various dates from
November 18, 1999 through March 31, 2006. The leases are subject to escalations
based on cost of living adjustments and tax allocations. Minimum future
obligations on these leases are as follows:
1998 $ 692,000
1999 703,000
2000 418,000
2001 172,000
2002 172,000
Thereafter 253,000
----------
$2,410,000
==========
Rent expense amounted to approximately $522,000, $788,000 and
$1,220,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company is a party to various royalty agreements with future
guaranteed payments through 2000. Minimum future obligations are as follows:
1998 $2,234,000
1999 1,357,000
2000 150,000
----------
$3,741,000
==========
Legal Matters: On December 28, 1995 G.D.L. Management Incorporated
("GDL") commenced an action against the Company, Mr. Perlmutter and the
Predecessor Company in the Supreme Court of the State of New York, County of New
York. The amended complaint alleged that GDL was entitled to receive ten percent
of the capital stock of the Predecessor Company pursuant to a 1990 agreement
between GDL and Mr. Perlmutter and sought money damages based on the value of
ten percent of the Company's Class A Common Stock beneficially owned by Mr.
Perlmutter and a variety of equitable remedies. The action was settled by Mr.
Perlmutter and GDL without liability to the Company in December 1997.
On June 23, 1997, the Company, Zib Inc., Isaac Perlmutter T.A., Isaac
Perlmutter and Avi Arad commenced adversary proceedings in the United States
Bankruptcy Court for the District of Delaware in the Marvel bankruptcy cases
against Marvel, Marvel Characters, Inc. and one of Marvel's parents, Marvel
Holdings Inc., for a declaration that the Class B Common Stock owned of record
by Characters converted to Class A Common Stock on or before June 20, 1997, and
that the incumbent board of the Company is the Company's duly constituted board
and for an injunction enjoining the Marvel defendants from interfering with the
proper and orderly functioning of the Company's incumbent board of directors.
The District Court held a hearing on the Company's request for summary judgment
in its favor on these claims on March 12, 1998. On March 30, 1998, the District
Court granted the Company's motion for summary judgment and directed the entry
of a judgment declaring that as a result of the June 20, 1997 change of control
of Marvel, the Class B Common Stock owned by Characters converted, as of that
date, into Class A Common Stock.
F-14
<PAGE>
On October 30, 1997, Marvel and its subsidiaries filed an action
against the Company, its directors and a number of other defendants in the
United States District Court for the District of Delaware. The complaint against
the Company and its directors alleges that the Company and its directors have
breached their fiduciary duty to Marvel, as a minority stockholder in Toy Biz,
and have otherwise wrongfully acted, in putting forward the reorganization
proposal to combine the Company and Marvel and thereby conclude Marvel's
bankruptcy proceedings and by refusing to recognize Marvel's designees to the
Company's board of directors. The complaint also alleges that the Company's
proposed reorganization plan violates certain provisions of the bankruptcy code
and is therefore invalid. The complaint further alleges that the Company has
breached an agreement with Marvel by failing to contribute any amounts to the
operations of Marvel Studios. Finally, the complaint alleges that the Company
has wrongfully interfered with Marvel's efforts to negotiate with the Marvel
secured lenders for the resolution of the bankruptcy proceedings. On December 8,
1997, the Company and its directors filed a motion to dismiss various claims
asserted against them in this action. That motion has not yet been scheduled for
hearing. The Company believes that the action was not properly commenced and
that the claims against it and the Company's directors are without merit and the
Company intends to defend this action vigorously.
During 1995, the Company licensed the Apple name to be used in
educational toys in exchange for $1,000,000 and future royalty payments. Shortly
after licensing the Apple name, Apple made public certain financial difficulties
Apple was experiencing. The Company has not made minimum royalty payments of
$1,000,000 for 1996 and 1997 and has commenced an arbitration proceeding against
Apple for return of the original 1995 payment. Apple is asserting the right to
receive the $2,000,000 in unpaid royalties.
The Company is involved in various other legal proceedings arising in
the normal course of business. The Company believes that the final outcome of
these proceedings will not have a material adverse effect on the Company's
results of operations or financial position.
F-15
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
6. Income Taxes
The provision (benefit) for income taxes for the years ended December
31, 1995, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $15,429,000 $ 8,474,000 ($19,196,000)
State 1,923,000 1,943,000 (191,000)
Foreign 1,124,000 2,739,000 523,000
----------- ------------ -------------
$18,476,000 $ 13,156,000 ($18,864,000)
Deferred:
Federal $ 543,000 ($ 1,586,000) $ 1,287,000
State 153,000 ( 446,000) (2,608,000)
----------- ------------ -------------
696,000 ( 2,032,000) (1,321,000)
----------- ------------ -------------
Provision (benefit) for income
taxes $19,172,000 $11,124,000 ($20,185,000)
=========== ============ =============
</TABLE>
The differences between statutory Federal income tax rate and the
effective tax rate for the years ended December 31, 1995, 1996 and 1997 are
attributable to the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision computed at the
statutory rate 35.0% 35.0% 35.0%
State taxes, net of Federal income tax effect 5.3% 5.0% 5.7%
---- ---- ----
40.3% 40.0% 40.7%
==== ====== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets at December 31, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Allowance for future returns, other sales adjustments
and doubtful accounts and other matters $1,620,000 $ 2,767,000
Inventory valuation 2,861,000 2,447,000
Depreciation 1,762,000 (247,000)
Amortization (70,000) (293,000)
State and local NOL carryforward - 2,820,000
----------- ----------
$6,173,000 $7,494,000
=========== ==========
</TABLE>
F-16
<PAGE>
At December 31, 1997, the Company has a net operating loss carryforward
of approximately $34.1 million for state and local income tax purposes. Such
carryforward expires in various jurisdictions in years 2003 through 2012. The
1997 provision reflects full benefit for such losses.
7. Credit Facility
Since 1995 the Company has had a revolving line of credit (the "Credit
Facility") with a syndicate of banks for which The Chase Manhattan Bank
(formerly named Chemical Bank) serves as administrative agent. The change in
control of the Company resulting from the conversion of Marvel's Class B Common
Stock during 1997, could have allowed the banks to terminate the Credit
Facility. In addition the Company did not reduce its borrowings to zero for a
period of 45 consecutive days commencing during the first six months of 1997, as
required by the Credit Facility, and did not satisfy certain of the financial
covenants under the Credit Facility during 1997. As a result of these
circumstances, on October 21, 1997, the Company and The Chase Manhattan Bank
agreed that the Company would not seek to borrow any additional funds under the
Credit Facility and the banks agreed not to demand immediate repayment of the
amounts outstanding.
In March 1998, the Company and the Chase Manhattan Bank entered into an
amendment to the Credit Facility extending the duration of the Credit Facility
and modifying its terms. The Credit Facility, as amended (the "Amended Credit
Facility") provides the Company can borrow an aggregate amount of up to $20.0
million (increasing during October through mid-November 1998 to up to $29
million), subject to certain borrowing base limitations based upon the level of
the Company's receivables and inventory. Substantially all of the assets of the
Company continue to be pledged to secure borrowings under the Amended Credit
Facility. Borrowings under the Amended Credit Facility bear interest at either
The Chase Manhattan Bank's alternate base rate or at the Eurodollar rate plus
the applicable margin. The applicable margin is 1% with respect to base rate
loans and 2% with respect to Eurodollar loans. The Amended Credit Facility
requires the Company to pay a commitment fee of 3/8 of 1% per annum on the
average daily unused portion of the Amended Credit Facility. The Company had
$9.0 million in outstanding borrowings under the line of credit as of March 25,
1998. The Amended Credit Facility is scheduled to expire in February 1999.
The Amended Credit Facility contains various financial covenants, as
well as restrictions, on new indebtedness, prepaying or amending subordinated
debt, acquisitions and similar investments, the sale or transfer of assets,
capital expenditures, limitations on restricted payments, dividends, issuing
guarantees and creating liens. In addition, the Credit Facility also requires
that (a) the current board of directors or successors designated by them remain
in office, (b) the toy license agreement between the Company and Marvel remains
in effect and (c) Messrs. Perlmutter and Arad continue to own at least 50% of
the Common Stock held by them as of February 21, 1998. The Credit Facility is
not guaranteed by Marvel.
Certain indebtedness of Marvel and Marvel's direct and indirect parent
companies impose restrictions that limit the ability of Marvel and its
subsidiaries, including the Company, to incur debt, make restricted payments,
enter into transactions with affiliates and sell or transfer assets.
The interest rate for borrowing as of December 31, 1996 and 1997 was
8.25% and 8.5%, respectively and the weighted average interest rate for 1996 and
1997 was 8.27% and 8.44%, respectively. The maximum amounts outstanding during
1996 and 1997 were $4,000,000 and $12,000,000, respectively. The amount
available under the Credit Facility at December 31, 1997 was $0. The Credit
Facility requires the Company to pay a commitment fee of 3/8 of 1% per annum on
the unused portion. Proceedings in the Marvel bankruptcy have resulted in a
change in control in the Company which, prior to the most recent amendment,
could have caused the Credit Facility to terminate. In addition, the Company did
not reduce its borrowings to zero for a period of 45 consecutive days commencing
during the first six months of 1997 and the Company did not satisfy certain of
the financial covenants that were previously applicable under the Credit
Facility. As a result of these circumstances, on October 21, 1 Bank agreed that
the Company would not seek to borrow additional funds under the Credit Facility
and the banks agreed not to demand immediate repayment of the amounts
outstanding.
F-17
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
8. Capital Stock Structure
In addition to Class A and Class B common stock shown on the
accompanying balance sheet, the Company has authorized 25,000,000 shares of
preferred stock, par value $.01.
The Class A Common Stock has ten votes (super-voting rights) for each
share outstanding for most matters brought to a vote of the stockholders; where
as Class A Common Stock has only one vote per share on such matters. In
connection with the Marvel bankruptcy and a related change in control of Marvel,
the Class B Common Stock held by Marvel was automatically converted into equal
number of shares of Class A Common Stock and Marvel's voting power was reduced
from 78.4% to 26.6% for matters brought to a vote of the stockholders. Certain
creditors of Marvel are disputing the automatic conversion of the Class B Common
Stock to Class A Common Stock. See Note 5.
On March 2, 1995, the Company completed an initial public offering (the
"Offering") by issuing 2,750,000 new shares of its Class A Common Stock at
$18.00 per share. The net proceeds of the Offering to the Company ($44,145,000)
were used to repay notes payable to the principal shareholders and to increase
working capital. As part of the Offering, Mr. Arad sold 700,000 shares of Class
A Common Stock owned by him to pay taxes due in connection with the exercise of
a stock option.
On August 13, 1996, the Company completed an additional public offering
by issuing 700,000 new shares of Class A Common Stock at $15.00 per share. As
part of such offering, Marvel Entertainment Group, Inc. ("Marvel"), a principal
stockholder, also sold 2,500,000 shares of Class A Common Stock. The Company
originally intended to use the net proceeds from the sale of the new shares of
Class A Common Stock, of approximately $9.1 million, after deducting fees and
expenses, to fund a portion of its capital commitment to Marvel Studios ("Marvel
Studios"), an entity to be formed with Marvel to facilitate the development of
television programming, feature films and other media and theatrical productions
based on Marvel characters. At this time, the Company has no plans to invest a
material amount of funds in Marvel Studios until the resolution of Marvel's
bankruptcy proceedings. (See Note 5) The nused for working capital and general
corporate purposes.
9. Stock Options
The Company's 1995 Stock Option Plan (the "Plan) provides for the
issuance of Stock Options ("Options") and Stock Appreciation Rights ("SAR's")
for up to 1,350,000 shares of the Company's Class A Common Stock at fair market
value at the time of grant. One-third of the Options become exercisable at the
date of the grant (the "Grant Date"), and the balance of the Options become
exercisable in equal increments on the first and second anniversaries of the
Grant Date. No SAR's have been granted and Options with respect to 670,987
shares are available for future grants.
F-18
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
(FAS 123). Accordingly, no compensation expense has been recognized for the
stock option plans. For 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:
1995 1996 1997
---- ---- ----
(in thousands except per share data)
Pro forma net income (loss).............. $25,433 $15,195 ($29,816)
Pro forma net income (loss) per share.... $0.94 $0.55 ($1.08)
================================================================================
The fair value for each option grant 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 from 5.26% to 7.19%; no dividend yield; expected volatility of .354 and
expected lives of three to five years.
The Black Scholes 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, option valuation models require 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 models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
<TABLE>
<CAPTION>
1996 1997
----------------------------------- -----------------------------------
Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............ 995,602 18.183 1,120,885 18.002
Granted..................................... 195,250 17.111 -- --
Exercised................................... 22,664 18.000 3,333 18.000
Forfeited................................... 47,303 18.119 484,666 18.115
Outstanding at end of year.................. 1,120,885 18.002 632,886 17.916
Exercisable at end of year.................. 691,211 18.089 577,295 18.035
Weighted-average fair value of
options granted during the year............. 6.15 --
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$15.00 to $22.625.
10. Assets Held for Resale
On March 25, 1997, the Company acquired all of the assets of Colorforms
Inc. The purchase price was approximately $5.0 million, excluding fees and
expenses, consisting of approximately $2.9 million in cash paid at the closing
and the assumption of approximately $2.1 million of accounts payable and accrued
liabilities at the closing date. The Company utilized cash available under its
credit facility to finance the acquisition. The transaction was
F-19
<PAGE>
accounted for as a purchase. The results of Colorforms are included in the
Company's consolidated financial statements from the date of acquisition.
During 1997 the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash with a promissory note
representing the remainder of $1.35 million due in August 1998 through May 1999.
The sales price is subject to adjustment based upon inventory levels. As of
December 31, 1997, assets held for resale are $4,136,000.
11. Quarterly Financial Data (unaudited)
Summarized quarterly financial information for the years ended December 31, 1996
and 1997 is as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
1996 1997
---------------------------------------------- -------------------------------------------
Quarter Ended March 31 June 30 September December 31 March 31 June 30 September December 31
30 30
---------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $38,369 $45,814 $83,437 $54,004 $34,414 $34,452 $40,765 $41,181
Gross Profit 18,636 22,875 42,988 20,670 14,513 12,195 10,245 6,908
Operating income (loss) 5,123 7,472 18,884 (4,264) 765 (8,676) (18,505) (22,872)
Net income (loss) 3,173 4,594 11,417 (2,497) 475 (5,266) (11,219) (13,455)
Net income (loss) per
share $0.12 $0.17 $0.42 ($0.09) $0.02 ($0.19) ($0.41) ($0.48)
Weighted average number
of common and common
equivalent shares out-
standing (in thousands) 27,201 27,134 27,398 27,761 27,756 27,746 27,746 27,746
</TABLE>
The income (loss) per common share computation for each quarter and the year are
separate calculations. Accordingly, the sum of the quarterly income (loss) per
common share amounts may not equal the income (loss) per common share for the
year.
The fourth quarter of 1996 and 1997 includes pretax adjustments of $3,250,000
and $7,762,000 related to year end audit adjustments which were not previously
estimable. The Company believes most of these adjustments relate to the Marvel
bankruptcy and concerns among retailers about the future of the Marvel brand.
12. Acquisition
On September 11, 1995, pursuant to an Asset Purchase Agreement dated as
of August 17, 1995, as amended, between the Company and Spectra Star, Inc.
("Spectra Star"), the Company acquired certain assets and assumed certain
liabilities of Spectra Star (the "Acquisition"). Spectra Star is the leading
U.S. manufacturer and marketer of children's and performance kites. They also
manufacture other toy and recreation products, many of which feature popular
children's entertainment characters. The purchase price, including estimated
fees related to the Acquisition, totaled approximately $13.6 million, consisting
of approximately $10.6 million of cash and assumed liabilities and a maximum of
130,303 shares of Series A Preferred Stock (the "Preferred Stock") with a
maximum redemption value of $4.3 million. The Preferred Stock was convertible at
any time after March 10, 1996 at the option of the holders into 130,303 shares
of Class A Common Stock or cash at the then present value of the Preferred
Stock. During the year ended December 31, 1996, 53,030 shares of the Preferred
Stock were redeemed for $1.4 million and during the year ended December 31,
1997, 31,818 shares of the Preferred Stock were redeemed for $939,000. The
balance of the shares of Preferred Stock were retired in connection with the
final settlement of the
F-20
<PAGE>
TOY BIZ, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
12. Acquisition (Continued)
acquisition of Spectra Star. The Company utilized available cash to finance the
Acquisition and to redeem the Preferred Stock. The Acquisition was accounted for
using the purchase method of accounting.
13. Combination with Marvel
Due to the significance of the Marvel license on the Company's overall
boys' toys business and the negative impact that Marvel's bankruptcy has had on
such business during 1997, the Company had participated in discussions
concerning a number of proposed plans of reorganization that would have resulted
in a combination of the Company and various segments of Marvel's business and
that would have facilitated a resolution of Marvel's bankruptcy proceedings. In
connection with these proposals, the Company participated in discussions with
various parties interested in the bankruptcy proceedings including Marvel, the
largest holders of the Marvel Holding Companies bonds and Marvel's senior
secured creditors. None of these discussions resulted in definitive agreements
not subject to due diligence, board approval or other contingencies which failed
to occur.
On October 8, 1997, the Company and certain creditors of Marvel
announced a further proposal for the combination of the Company and Marvel (the
"Combined Company"). In connection with the Joint Plan of Reorganization
proposing the combination of the Company and Marvel (as since amended, the
"Plan"), the Company stockholders, other than Marvel Characters, Inc., currently
would receive approximately 41% of the common stock of the Combined Company
(assuming the conversion of all preferred stock but not assuming any exercise of
warrants) and the senior secured creditors of Marvel would receive a combination
of cash and common and preferred securities issued by the Combined Company which
(under the same assumptions) would represent approximately 40% of the common
stock of the Combined Company. An investor group, in which Mr. Perlmutter is
expected to be a participant, would purchase securities that (under the same
assumptions) would represent approximately 19% of the common stock of the
Combined Company. The Plan is being proposed by in excess of two-thirds in
amount of Marvel's senior secured lenders and is supported by the Official
Committee of the Unsecured Creditors of Marvel. Consummation of the Plan is
subject to a number of conditions including approval of the Company's
stockholders and the District Court. A hearing has been ordered by the District
Court for May 4, 1998, to consider a motion by the Company to confirm the Plan.
The Company currently anticipates that a meeting of the stockholders of the
Company will be held in the second quarter of 1998 for the purpose of
considering and voting upon approval of the Plan.
In connection with any such meeting, the Company will distribute
separate proxy materials describing the transactions contemplated by the Plan
and the other circumstances in connection therewith. As part of the agreements
setting forth the terms of the Plan, Messrs. Perlmutter and Arad have agreed to
vote all shares of Common Stock owned by them in favor of the Plan.
The Plan contemplates that for a period of 30 days after the
confirmation of the Plan, the Company will cooperate in efforts to sell Marvel
and the Company on a combined basis and that if a transaction can be arranged
which would result in stockholders of the Company (other than Characters)
receiving approximately $13.75 in exchange for each share of Common Stock held
by them, the Company will be sold in that transaction. The Plan provides that
any excess proceeds payable by the buyer in that transaction will not increase
the amount to be received by holders of Common Stock, but instead will inure to
the benefit of claimants in the Marvel bankruptcy.
F-21
<PAGE>
TOY BIZ, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance Charged to Sales Charged to Balance
at Beginning or Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- ------------ ----------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995,
Allowances included in Accounts
Receivable, Net:
Doubtful accounts $ 516,000 $ 443,000 (1) -- $ 443,000 $ 516,000
Advertising, markdowns, 9,753,000 21,682,000 (2) -- 20,680,000 10,755,000
returns, volume discounts,
and other
Year Ended December 31, 1996,
Allowances included in Accounts
Receivable, Net:
Doubtful accounts 516,000 -- (1) -- 31,000 485,000
Advertising, markdowns, 10,755,000 39,317,000 (2) -- 35,216,000 14,856,000
returns, volume discounts,
and other
Year Ended December 31, 1997,
Allowances included in Accounts
Receivable, Net:
Doubtful accounts 485,000 -- -- 55,000 430,000
Advertising, markdowns, 14,856,000 55,746,000 (2) -- 41,215,000 29,387,000
returns, volume discounts,
and other
</TABLE>
- ----------
(1) Charged to costs and expenses.
(2) Charged to sales.
F-22
<PAGE>
EXHIBIT 10.26
MASTER AGREEMENT
This Amended and Restated Master Agreement, dated as of November 19,
1997 (this "Agreement"), amends and restates the Master Agreement dated as of
October 7, 1997 (the "Original Agreement"), by and among (i) Toy Biz, Inc., a
Delaware corporation ("Toy Biz"), (ii) the secured creditors of Marvel
Entertainment Group, Inc., a Delaware corporation ("Entertainment"), and certain
of its direct and indirect subsidiaries who become parties to this Agreement by
executing and delivering a separate Consenting Lender Execution Page in the form
attached as Exhibit 1 to this Agreement (the "Consenting Lenders") and (iii) the
Panini Lenders (as defined in the Plan of Reorganization) who become parties to
this Agreement by executing and delivering a separate Consenting Panini Lender
Execution Page in the form attached as Exhibit 2 to this Agreement (the
"Consenting Panini Lenders").
PRELIMINARY STATEMENT
A. Entertainment, together with eight of its wholly owned
subsidiaries (collectively with Entertainment, the "Debtors"), are chapter 11
debtors and debtors in possession in cases pending under chapter 11 of title 11
of the United States Code (11 U.S.C. (S)(S) 101 et seq.) (the "Bankruptcy
Code"), having commenced voluntary cases (Nos. 96-2066 through 96-2077 (HSB))
(the "Reorganization Cases") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court").
B. Entertainment, certain affiliates of Entertainment, and The Chase
Manhattan Bank ("Chase") as administrative agent for the holders of Senior
Secured Claims (as defined in the Plan of Reorganization referred to below) are
parties to the Existing Credit Agreements (as such term is defined in the Plan
of Reorganization) pursuant to which the Debtors are indebted to the holders of
Senior Secured Claims.
C. Entertainment (i) owns approximately 26.7% of the Class A Common
Stock of Toy Biz, (ii) licenses certain intellectual property to Toy Biz, and
(iii) has entered into certain agreements with Toy Biz.
D. The Consenting Lenders and Toy Biz intend to jointly propose a
chapter 11 plan of reorganization (substantially in the form attached hereto as
Exhibit 3 (the "Plan of Reorganization"), as creditors and parties in interest
<PAGE>
in the Reorganization Cases pending in the Bankruptcy Court. The Plan of
Reorganization will provide, among other things, that pursuant to an Agreement
and Plan of Merger (the "Merger Agreement"), Toy Biz and Entertainment will
combine (the "Merger") to form Newco ("Newco"), and each holder of Class A
Shares (as hereinafter defined) will receive a certain amount of shares of Newco
Common Stock (as hereinafter defined), other than Marvel, and (ii) Newco's
certificate of incorporation and by-laws will be amended and restated as
provided in the Plan of Reorganization.
E. At the same time as the execution and delivery of the Original
Agreement by Toy Biz, Isaac Perlmutter, Isaac Perlmutter T.A., and Zib Inc. (the
"Perlmutter Stockholders") and Avi Arad executed and delivered into escrow a
stockholders agreement (the "New Stockholders Agreement") having substantially
the same terms as the Stockholders' Agreement, dated as of March 2, 1995, by and
among Toy Biz, the Perlmutter Stockholders, Avi Arad and Entertainment, and each
of Isaac Perlmutter and Avi Arad executed and delivered into escrow voting trust
agreements having substantially the same terms as the Voting Trust Agreements,
dated as of March 2, 1995, by and among Entertainment and each of Isaac
Perlmutter and Avi Arad (the "New Voting Trust Agreements").
F. At the same time as the execution and delivery of this Agreement
by Toy Biz, the Perlmutter Stockholders and Avi Arad have executed and delivered
Amended and Restated Proxy and Stock Option Agreements (the "Proxy and Stock
Option Agreements") which amend and restate the Proxy and Stock Option
Agreements dated as of October 7, 1997, by and between the Perlmutter
Stockholders and Avi Arad, respectively, and the Consenting Lenders (as defined
in the Proxy and Stock Option Agreements), pursuant to which the Perlmutter
Stockholders and Avi Arad have, among other things, granted to the Designated
Consenting Lender a proxy to vote their Class A Shares in favor of the
transactions contemplated by this Agreement.
G. The parties hereto desire that the parties take the actions set
forth in this Agreement, subject to the terms and conditions contained herein,
so that (i) the Plan of Reorganization is confirmed by the Bankruptcy Court (or
such other court as may from time to time exercise jurisdiction over the
Debtors' Bankruptcy cases) in accordance with the Bankruptcy Code, (ii) the
Merger is consummated as provided in the Plan of Reorganization and the Merger
Agreement, and (iii) certain other related transactions are consummated as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants set forth herein, and on the terms and subject to the
conditions set forth herein, the parties hereto agree as follows:
2
<PAGE>
ARTICLE 1
DEFINITIONS
For the purpose of this Agreement, capitalized terms which are used
herein and not otherwise defined shall have the meanings given such terms in the
Plan of Reorganization and the following terms shall have the meanings specified
in this Article 1.
"Adverse Order" shall mean an order of any court preventing Toy Biz
from complying with this Agreement or consummating the Plan of Reorganization
based wholly or in part on any contention that the board of directors of Toy Biz
which approved this Agreement was not the duly authorized board of directors of
Toy Biz at such time.
"Agreement" shall have the meaning set forth in the preamble.
"Antitrust Division" shall have the meaning set forth in Section 2.7.
"Bankruptcy Code" shall have the meaning set forth in the Preliminary
Statement.
"Bankruptcy Court" shall have the meaning set forth in the Preliminary
Statement.
"Change in Control" shall mean a determination of any court that the
board of directors of Toy Biz which approved the Master Agreement was not at
such time the duly authorized board of directors of Toy Biz.
"Chase" shall have the meaning set forth in the Preliminary Statement.
"Class A Shares" means shares of Class A common stock, par value $.01
per share, of Toy Biz.
"Class B Shares" means shares of Class B common stock, par value $.01
per share, of Toy Biz.
"Consenting Lenders" shall have the meaning set forth in the preamble.
"Consenting Lenders Threshold" means holders of Senior Secured Claims
holding at least two-thirds in principal amount and a majority in number of the
Senior Secured Claims, excluding Excluded Claims. For purposes hereof, if a
secured creditor is a Consenting Lender, all of the Senior Secured Claims in
which it has a beneficial interest, to the extent of its beneficial
3
<PAGE>
interest therein, shall be included for purposes of the computations in this
definition.
"Consenting Lenders Threshold Date" means the date this Agreement has
been executed and delivered by holders of Senior Secured Claims who constitute
the Consenting Lenders Threshold.
"Consenting Panini Lenders" shall have the meaning set forth in the
preamble.
"Contingent Senior Secured Claims" shall have the meaning set forth in
the Plan of Reorganization.
"Converted Class B Shares" means the Class A Shares issued upon
conversion of the Class B Shares as a result of a change in control of
Entertainment pursuant to the Toy Biz Stockholders Agreement, dated as of March
2, 1995.
"Debtors" shall have the meaning set forth in the Preliminary
Statement.
"Designated Consenting Lender" shall have the meaning set forth in the
Proxy and Stock Option Agreements.
"DIP Claim" shall have the meaning set forth in the Plan of
Reorganization.
"DIP Credit Agreement" shall have the meaning set forth in the Plan of
Reorganization.
"Disclosure Schedule" means the disclosure schedule separately
delivered by Toy Biz to the Consenting Lenders with the Original Agreement.
"Disclosure Statement" shall have the meaning set forth in Section
2.2.
"DGCL" means the General Corporation Law of the State of Delaware.
"Effective Time" shall have the meaning set forth in the Merger
Agreement.
"Employee Option" have the meaning set forth in Section 2.12.
"Entertainment" shall have the meaning set forth in the preamble.
"Excluded Claims" means Senior Secured Claims which are held or
controlled, directly or indirectly, by Carl Icahn, High River Limited
Partnership, Elliott Associates, L.P., Westgate
4
<PAGE>
International, L.P. or any affiliates of any of the foregoing or in which any of
the foregoing have any interest, including any participation interest, solely to
the extent of such interest.
"Form S-4" shall have the meaning set forth in Section 2.3.
"FTC" shall have the meaning set forth in Section 2.7.
"Governmental Entity" means any court, arbitral tribunal,
administrative agency or commission, or other governmental or regulatory
authority or agency.
"HSR Act" shall have the meaning set forth in Section 2.7.
"Information Statement/Prospectus" shall have the meaning set forth in
Section 2.3.
"Merger" shall have the meaning set forth in the Preliminary
Statement.
"Merger Agreement" shall have the meaning set forth in the Preliminary
Statement.
"Newco" shall have the meaning set forth in the Preliminary Statement.
"Newco Common Stock" shall mean Common Stock as defined in the Plan of
Reorganization.
"New Investment" shall mean the $90 million investment in Newco to be
made in exchange for the issuance by Newco of Convertible Preferred Stock or New
Convertible Notes (as defined in the Plan of Reorganization).
"New Stockholders Agreements" shall have the meaning set forth in the
Preliminary Statement.
"New Voting Trust Agreements" shall have the meaning set forth in the
Preliminary Statement.
"Perlmutter Stockholders" shall have the meaning set forth in the
Preliminary Statement.
"Plan of Reorganization" shall have the meaning set forth in the
Preliminary Statement.
"Preferred Shares" means Preferred Stock, par value $.01 per share of
Toy Biz.
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"Proxy and Stock Option Agreements" shall have the meaning set forth
in the Preliminary Statement.
"Qualifying Transaction" shall have the meaning set forth in the Plan
of Reorganization.
"Reorganization Cases" shall have the meaning set forth in the
Preliminary Statement.
"Requisite Amount of the Consenting Lenders" means Consenting Lenders
holding at least two-thirds in principal amount of the Fixed Senior Secured
Claims held by all of the Consenting Lenders, as shown on the Consenting Lender
Execution Pages signed by the Consenting Lenders.
"Requisite Amount of the Consenting Panini Lenders" means Panini
Lenders holding at least two-thirds in principal amount of the Contingent Senior
Secured Claims held by all of the Panini Lenders, as shown on the Panini Lenders
Execution Pages signed by the Consenting Panini Lenders.
"SEC" means the Securities and Exchange Commission.
"Senior Secured Claims" shall have the meaning set forth in the Plan
of Reorganization.
"Stock Option Plan" shall have the meaning set forth in Section 2.12.
"Subsidiary" means all of the corporations or other entities of which
Toy Biz owns a majority of the issued and outstanding capital stock or similar
interests.
"Toy Biz" shall have the meaning set forth in the preamble.
"Toy Biz Shares" shall mean the Class A Shares and Preferred Shares.
"Voting Debt" shall have the meaning set forth in Section 3.2.
ARTICLE 2
COVENANTS
2.1 Interim Operations of Toy Biz. Toy Biz covenants and agrees that,
-----------------------------
except (x) as expressly contemplated by this Agreement, the Plan of
Reorganization or the Merger Agreement or as disclosed on Schedule 2.1 in the
Disclosure Schedule or (y) as agreed in writing by a Requisite Amount of the
6
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Consenting Lenders after the date hereof and prior to the Effective Time, the
business of Toy Biz and its Subsidiary shall be conducted only in the ordinary
and usual course, in substantially the same manner as heretofore conducted, and,
in particular, Toy Biz will not, directly or indirectly, (i) issue, sell,
transfer, pledge or otherwise encumber, or agree (including pursuant to options
or warrants) to issue, sell, transfer, pledge or otherwise encumber, any of the
Toy Biz Shares (other than Class A Shares reserved for issuance on the date
hereof pursuant to the exercise of Employee Options outstanding on the date
hereof and upon the conversion of shares of Toy Biz' outstanding Series A
Preferred Stock) or capital stock of its Subsidiary beneficially owned by it;
(ii) amend its certificate of incorporation, by-laws or other comparable
organizational documents; (iii) split, combine or reclassify the outstanding Toy
Biz Shares; (iv) declare, set aside or pay any dividend or other distribution
payable in cash, stock or property with respect to its capital stock; (v)
redeem, purchase or otherwise acquire directly or indirectly any shares of
capital stock of Toy Biz or its Subsidiary; (vi) acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial portion of the
assets of, any business or any corporation, partnership, joint venture or other
business organization; (vii) subject to any lien, mortgage, security interest,
pledge or other encumbrance or sell, lease or otherwise dispose of a material
portion of its assets other than in the ordinary course of business and any such
actions in connection with the refinancing of Toy Biz's current revolving credit
agreement; (viii) incur any indebtedness for borrowed money or guarantee any
such indebtedness, other than borrowings and guarantees incurred in the ordinary
course of business and except for refinancings of Toy Biz's current revolving
credit agreement; or (ix) enter into any transactions or agreements with any
directors or officers of Toy Biz or Isaac Perlmutter or Avi Arad or any
affiliates of any of the foregoing, other than consistent with past practice.
2.2 Consents and Approvals. Upon the terms and subject to the
----------------------
conditions of this Agreement, Toy Biz and the Consenting Lenders, acting
collectively, agree to use their reasonable best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement and the Plan of
Reorganization as promptly as practicable including, but not limited to: (i) the
preparation and filing of all forms, registrations, notices and pleadings
required to be filed to consummate the transactions contemplated by this
Agreement and the taking of such actions as are necessary to obtain any
requisite approvals, consents, order, exemptions or waivers by any third party
or Governmental Entity, including, but not limited to the Bankruptcy Court; (ii)
the defending of any lawsuits or other legal proceedings, whether judicial or
7
<PAGE>
administrative, challenging this Agreement or the consummation of the
transactions contemplated by this Agreement including seeking to have any stay
or temporary restraining order entered by any court or other Governmental Entity
vacated or reversed; (iii) the filing of the Plan of Reorganization, together
with a disclosure statement (the "Disclosure Statement") with respect thereto,
as required by section 1125 of the Bankruptcy Code, no later than ten business
days after the Consenting Lender Threshold Date; and (iv) causing the
satisfaction of all conditions to the Merger as provided in the Merger
Agreement. In connection with and without limiting the foregoing, Toy Biz and
its board of directors shall (i) take all action it has the power to take
necessary so that no state takeover statute or similar statute or regulation is
or becomes applicable to the Merger, the Merger Agreement, this Agreement or any
other transaction contemplated by this Agreement and (ii) if any state takeover
statute or similar statute or regulation becomes applicable to the Merger, the
Merger Agreement, this Agreement or any other transaction contemplated by this
Agreement, take all action it has the power to take necessary so that the Merger
and the other transactions contemplated by this Agreement may be consummated as
promptly as practicable on the terms contemplated by this Agreement and
otherwise to minimize the effect of such statute or regulation on the Merger and
the other transactions contemplated by this Agreement.
2.3 Information Statement/Prospectus, Form S-4, etc.
------------------------------------------------
(a) To the extent required by applicable law, Toy Biz shall use
its best efforts to prepare and file with the SEC no later than thirty (30) days
after the Consenting Lender Threshold Date, a combined information statement and
prospectus on Form S-4 (the "Form S-4") with respect to the Toy Biz stockholder
action to approve the Merger and the registration of the shares of Newco Common
Stock to be issued in the Merger and shall use its best efforts to have the Form
S-4 declared effective by the SEC as promptly as practicable. Toy Biz shall also
take any action reasonably required to be taken under state blue sky or other
securities laws in connection with the issuance of shares of Newco Common Stock
in the Merger.
(b) Toy Biz shall promptly prepare and thereafter promptly
distribute to its stockholders, the combined information statement and
prospectus which is included in the Form S-4 to be filed pursuant to Section
2.3(a) hereof (the "Information Statement/Prospectus"), which Information
Statement/Prospectus shall comply in all material respects with the rules and
regulations of the SEC. The Information Statement/Prospectus shall be mailed to
stockholders of Toy Biz in accordance with Rule 14c-2 under the Securities
Exchange Act of 1934, as amended, at least 20 calendar days in advance of the
Effective Time.
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(c) Toy Biz shall notify the Consenting Lenders and the
Consenting Panini Lenders of the receipt of any comments from the SEC and of any
requests by the SEC for amendments or supplements to the Form S-4 or the
Information Statement/Prospectus or for additional information, and shall
promptly supply Chase with copies of all correspondence between Toy Biz (or
their representatives) and the SEC (or its staff) with respect thereto.
2.4 Stock Exchange Listing. Toy Biz shall use its best efforts to
----------------------
cause the shares of Newco Common Stock to be issued in the Merger and the Plan
of Reorganization and the Convertible Preferred Stock to be issued pursuant to
the Plan of Reorganization to be approved for listing on the New York Stock
Exchange, subject to official notice of issuance, prior to the Effective Time.
2.5 Publicity. After the initial press release with respect to the
---------
execution of this Agreement, so long as this Agreement is in effect, neither Toy
Biz, the Consenting Lenders, the Consenting Panini Lenders, nor any of their
respective affiliates shall issue or cause the publication of any press release
or other announcement with respect to the Merger, this Agreement, the Plan of
Reorganization or the other transactions contemplated hereby without the
exercise of reasonable efforts to consult with the Consenting Lenders, the
Consenting Panini Lenders and Toy Biz, except as may be required by law or by
any listing agreement with a national securities exchange or trading market.
2.6 Notification of Certain Matters.
-------------------------------
(a) Toy Biz shall give prompt notice to the Consenting Lenders
and the Consenting Panini Lenders of (i) the occurrence or non-occurrence of any
event the occurrence or nonoccurrence of which would cause any representation or
warranty of Toy Biz contained in this Agreement to be untrue or inaccurate in
any material respect at or prior to the Effective Time and (ii) any material
failure of Toy Biz to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such party hereunder; provided,
however, that the failure to deliver any notice pursuant to this Section 2.6
shall not limit or otherwise affect the remedies available hereunder to the
nondefaulting or non-breaching party.
(b) Each of the Consenting Lenders and each of the Consenting
Panini Lenders shall give prompt notice to Toy Biz of (i) the occurrence or non-
occurrence of any event the occurrence or non-occurrence of which would cause
any representation or warranty of such Consenting Lender or such Consenting
Panini Lender contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the
9
<PAGE>
Effective Time and (ii) any material failure of such Consenting Lender or such
Consenting Panini Lender, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by such party hereunder; provided
however, that the failure to deliver any notice pursuant to this Section 2.6
shall not limit or otherwise affect the remedies available hereunder to the non-
defaulting or non-breaching party.
2.7 HSR Act. Toy Biz shall, as soon as practicable, file a
-------
Notification and Report Forms under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended ("HSR Act") with the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division") with respect to the Merger and shall use its best efforts to respond
as promptly as practicable to all inquiries received from the FTC or the
Antitrust Division, including any request for additional information or
documentary material.
2.8 Required Actions. Each of the parties hereto hereby agrees to use
----------------
its reasonable best efforts to take, or cause to be done, all things necessary,
proper or advisable under applicable laws or regulations to:
(a) obtain approval of the Disclosure Statement in accordance
with section 1125 of the Bankruptcy Code as soon as
reasonably practicable, including, without limitation,
requesting that on or before January 5, 1998, the Bankruptcy
Court or such other court as may from time to time exercise
jurisdiction over the Debtors' Bankruptcy Cases schedule a
hearing on or before February 15, 1998 to consider the
adequacy of the Disclosure Statement;
(b) obtain entry of the Confirmation Order as soon as reasonably
practicable;
(c) cause the Consummation Date of the Plan of Reorganization to
occur as soon as reasonably practicable; and
(d) obtain from the Bankruptcy Court or such other court as may
from time to time exercise jurisdiction over the Debtors'
Bankruptcy Cases such other relief as may be necessary or
appropriate in connection with this Agreement, the Plan of
Reorganization and the consummation of the transactions
contemplated hereby and thereby.
10
<PAGE>
In addition, the parties to this Agreement shall consult with one another
concerning additional motions and/or pleadings that may be made in connection
with any of the foregoing or otherwise in connection with the Plan of
Reorganization.
2.9 Prohibited Actions. Each of the parties hereto hereby agrees not
------------------
to:
(a) object to the Disclosure Statement;
(b) object to entry of the Confirmation Order;
(c) take any action to hinder, delay, preclude or interfere with
the entry of an order approving the Disclosure Statement,
the entry of the Confirmation Order or the occurrence of the
Consummation Date;
(d) with respect to the Consenting Lenders, foreclose against
any collateral without the consent of Toy Biz which consent
will not be unreasonably withheld, unless a Requisite Amount
of the Consenting Lenders shall have first confirmed in
writing to Toy Biz that they will thereafter use reasonable
best efforts to effect transactions substantially similar to
those contemplated by this Agreement or, in the case of an
asset of immaterial value, provide an appropriate cash
credit, provided, however, that under no circumstance may
the Consenting Lenders foreclose against the Common Stock of
Fleer Corp.;
(e) with respect to the Consenting Panini Lenders, each
Consenting Panini Lender agrees that it shall not exercise
any of its remedies under the Existing Panini Credit
Agreements, to collect any of the Panini Obligations or to
realize on any of the collateral security or guarantee
obligations held with respect to any of the Panini
Obligations against any subsidiary of any of the Debtors
that is not the subject of a case under Title 11 of the
United States Code, except to the extent reasonably
necessary to protect their rights under the Existing Panini
Credit Agreements if (x) Panini becomes the subject of a
bankruptcy, insolvency, liquidation or similar proceeding
and/or (y) creditors of Panini, other than Panini Lenders,
holding claims against Panini
11
<PAGE>
aggregating greater than $1,000,000 exercise their rights
and remedies against Panini under their applicable credit
documents or under applicable law; provided, however,
notwithstanding the foregoing, the Consenting Panini Lenders
shall be entitled to seek adequate protection and object to
continued use of cash collateral.
(f) with respect to the Consenting Lenders and the Consenting
Panini Lenders, file a motion to dismiss or convert one or
more of the Reorganization Cases without the consent of Toy
Biz which consent will not be unreasonably withheld, unless
a Requisite Amount of the Consenting Lenders and a Requisite
Amount of the Consenting Panini Lenders shall have first
confirmed in writing to Toy Biz that they will thereafter
effect transactions substantially similar to those
contemplated by this Agreement;
(g) with respect to Toy Biz, file a motion to dismiss or convert
one or more of the Reorganization Cases without the consent
of the Requisite Amount of the Consenting Lenders which
consent will not be unreasonably withheld, unless Toy Biz
shall have first confirmed in writing to the Consenting
Lenders and the Panini Lenders that it will thereafter
effect transactions substantially similar to those
contemplated by this Agreement;
(h) with respect to the Consenting Lenders, transfer, sell or
assign, or agree to transfer, sell or assign their
respective Senior Secured Claims unless the transferee of
such Senior Secured Claims agrees in a writing reasonably
acceptable to Toy Biz to be bound by the terms and
conditions of this Agreement;
(i) with respect to the Consenting Panini Lenders, transfer,
sell or assign, or agree to transfer, sell or assign their
respective Senior Secured Claims unless the transferee of
such Senior Secured Claims agrees in writing reasonably
acceptable to Toy Biz to be bound by the terms and
conditions of this Agreement; or
12
<PAGE>
(j) support any other plan of reorganization, arrangement or
other settlement in any way inconsistent with the Plan of
Reorganization.
2.10 Merger. Upon satisfaction of the conditions set forth in Section
------
5.3, Toy Biz shall, in accordance with the Plan of Reorganization, (i) execute
and deliver the Merger Agreement and any other documents or instruments required
to be executed and delivered by it pursuant to the Merger Agreement, and (ii)
take any and all other action required under the Plan of Reorganization and the
Merger Agreement to effect the Merger.
2.11 Financing. On or before the Confirmation Date, Toy Biz shall
---------
provide the Consenting Lenders and the Consenting Panini Lenders with written
evidence of firm commitments, subject to customary exceptions, for the Term Loan
Facility, the Working Capital Facility and the New Investment. On or before the
Consummation Date, Toy Biz shall obtain the Term Loan Facility, the Working
Capital Facility and the New Investment; it being understood and agreed that
such financing obligation of Toy Biz is absolute and unconditional.
2.12 Company Stock Options.
---------------------
(a) Toy Biz's board of directors, or, if appropriate, any
committee administering Toy Biz's 1995 Stock Option Plan (the "Stock Option
Plan") shall, prior to the Effective Time, terminate, or adopt such resolutions
or take such actions as may be required to adjust, the terms of all then
outstanding employee stock options to purchase Toy Biz Shares granted under the
Stock Option Plan (each, an "Employee Option") and the terms of the Stock Option
Plan to provide that at the Effective Time, each Employee Option outstanding
immediately prior to the Effective Time will be deemed to constitute an option
to acquire, on the same terms and conditions as under such Employee Option, the
number of shares of Newco Common Stock as the holder of such Employee Option
would have been entitled to receive pursuant to the Merger Agreement had such
holder exercised such Employee Option in full immediately prior to the Effective
Time, at the price provided for in the Merger Agreement and any such shares
issuable under such Employee Options shall dilute only the shares to be issued
to holders of Toy Biz Shares in the Merger. Any such Employee Options which are
not terminated will dilute only the Newco Common Stock to be issued to holders
of Class A Shares in the Merger.
(b) Toy Biz shall not grant any stock options or stock
appreciation rights under the Stock Option Plan and will not accelerate the
exercisability of Employee Options and/or permit cash payments to holders of
Employee Options with respect to such options.
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2.13 Qualifying Transactions. Toy Biz shall use its reasonable best
-----------------------
efforts, without being required to incur any material expense, to cooperate with
efforts by the Secured Lenders or the Debtors to consummate a Qualifying
Transaction and, in connection therewith, shall cooperate with financial
advisors, accountants and other advisors to the Consenting Lenders and provide
financial information and projections and other information, subject to
customary confidentiality agreements, to such advisors and potential parties to
a Qualifying Transaction.
2.14 Restructuring of Panini Loan Documents. The Consenting Panini
--------------------------------------
Lenders shall restructure the Panini Obligations (as such term is defined in the
Plan of Reorganization) in accordance with the Plan of Reorganization.
ARTICLE 3
REPRESENTATIONS AND
WARRANTIES OF TOY BIZ
Toy Biz hereby represents and warrants to each Consenting Lender and
each Consenting Panini Lender as follows:
3.1 Organization. Each of Toy Biz and its Subsidiary is a corporation
------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation.
3.2 Capitalization.
--------------
(a) The authorized capital stock of Toy Biz consists of
100,000,000 Class A Shares, 20,000,000 Class B Shares and 25,000,000 shares of
Preferred Stock. As of the date of this Agreement, (i) 27,746,127 Class A Shares
are issued and outstanding and no Class A Shares are held in the treasury of Toy
Biz, (ii) no Class B Shares are issued and outstanding or held in the treasury
of Toy Biz, (iii) no shares of Preferred Stock are issued and outstanding, and
(iv) 704,386 Class A Shares are reserved for issuance upon exercise of
outstanding Employee Options. All the outstanding shares of Toy Biz's capital
stock are, and all Class A Shares which may be issued pursuant to the exercise
of outstanding Employee Options will be, when issued in accordance with the
respective terms thereof, duly authorized, validly issued, fully paid and non-
assessable. There are no bonds, debentures, notes or other indebtedness having
general voting rights (or convertible into securities having such rights)
("Voting Debt") of Toy Biz or its Subsidiary issued and outstanding. Except as
set forth above, as of the date hereof, (i) there are no shares of capital stock
of Toy Biz authorized, issued or outstanding, and (ii) there are no existing
options,
14
<PAGE>
warrants, calls, preemptive rights, subscriptions or other rights, agreements,
arrangements or commitments of any character, relating to the issued or unissued
capital stock of Toy Biz or its Subsidiary, obligating Toy Biz or its Subsidiary
to issue, transfer or sell or cause to be issued, transferred or sold any shares
of capital stock or Voting Debt of Toy Biz or its Subsidiary or securities
convertible into or exchangeable for such shares or equity interests, or
obligating Toy Biz or its Subsidiary to grant, extend or enter into any such
option, warrant, call, subscription or other right, agreement, arrangement or
commitment.
(b) Except as disclosed in Schedule 3.2(b) of the Disclosure
Schedule, all of the outstanding shares of capital stock of Toy Biz's Subsidiary
are owned of record and beneficially by Toy Biz, directly or indirectly. All
such shares have been validly issued and are fully paid and non-assessable and
are owned by Toy Biz free and clear of all liens, charges, claims or
encumbrances.
(c) Neither Toy Biz nor its Subsidiary is required to redeem,
repurchase or otherwise acquire shares of capital stock of Toy Biz, or its
Subsidiary, respectively, as a result of the transactions contemplated by this
Agreement.
3.3 Authorization; Validity of Agreement; Corporate Action. Toy Biz
------------------------------------------------------
has all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance by Toy Biz of this Agreement, and the consummation by
it of the transactions contemplated hereby, have been duly authorized by the
board of directors of Toy Biz and no other corporate action on the part of Toy
Biz is necessary to authorize the execution and delivery by Toy Biz of this
Agreement and, except for the approval of the stockholders of Toy Biz, the
consummation by it of the transactions contemplated hereby. This Agreement has
been duly executed and delivered by Toy Biz and constitutes a valid and binding
obligation of Toy Biz enforceable against Toy Biz in accordance with its terms
except that the enforcement thereof may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or similar laws now or hereafter in
effect relating to creditors' rights generally and (b) general principles of
equity (regardless of whether enforceability is considered in a proceeding at
law or in equity). Except as disclosed in Schedule 3.3 of the Disclosure
Schedule, the execution delivery and performance of this Agreement by Toy Biz do
not breach, violate, conflict with or constitute a default under any material
agreement to which Toy Biz is a party.
The Consenting Lenders and the Consenting Panini Lenders acknowledge
that Toy Biz is engaged in litigation with Entertainment concerning the status
of Toy Biz's class B common
15
<PAGE>
stock and its stockholders' agreement (the "Stockholder Agreement Litigation").
The representations in this Article 3 are qualified by the Stockholder Agreement
Litigation.
3.4 Information. Toy Biz has adequate information concerning the
-----------
business and financial condition of the Debtors, the Reorganization Cases and
the transactions contemplated by this Agreement and the Plan of Reorganization
to make an informed decision with respect to this transactions contemplated by
this Agreement and the Plan of Reorganization. Toy Biz has independently and
without reliance upon any of the Consenting Lenders or any of the Consenting
Panini Lenders (except for the representations, warranties, and covenants and
agreements contained herein) and based on such information as Toy Biz has deemed
appropriate in its independent judgment, made its own analysis and decision to
enter into this Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE
CONSENTING LENDERS AND THE CONSENTING PANINI LENDERS
Each of the Consenting Lenders and each of the Consenting Panini
Lenders hereby represents and warrants with respect to itself to Toy Biz as
follows:
4.1 Organization. It is an entity duly organized, validly existing
------------
and in good standing under the laws of the jurisdiction of its formation.
4.2 Authorization; Validity of Agreement; Corporate Action. It has
------------------------------------------------------
all requisite corporate or similar power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby; the
execution, delivery and performance by such party of this Agreement, and the
consummation by it of the transactions contemplated hereby, have been duly
authorized by all necessary action by such party and no further action on the
part of such part is necessary to authorize the execution and delivery by such
party of this Agreement and the consummation by it of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by such
party, and assuming due and valid authorization, execution and delivery hereof
of the other parties hereto, is a valid and binding obligation of such party
enforceable against such party in accordance with its terms except that the
enforcement thereof may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect relating
to creditor's rights generally and (b) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity).
16
<PAGE>
4.3 Ownership of Claims. Each Consenting Lender and each Consenting
-------------------
Panini Lender owns or beneficially owns, respectively, the outstanding principal
amount of Senior Secured Claims set forth on its Consenting Lender Execution
Page or Consenting Panini Lender Execution Page and, with respect to each such
claim, such party has the legal right to exercise all voting rights relating
thereto (collectively, "Controlled Claims"); and such party represents that to
the extent that it has previously pledged, hypothecated, transferred,
participated or otherwise encumbered any interests in such Senior Secured Claim,
the other party to any such conveyance has agreed to be bound hereby.
4.4 Information. Each Consenting Lender and each Consenting Panini
-----------
Lender has adequate information concerning the business and financial condition
of Toy Biz, the Debtors, the Reorganization Cases and the transactions
contemplated by this Agreement and the Plan of Reorganization to make an
informed decision with respect to the transactions contemplated by this
Agreement and the Plan of Reorganization. Each Consenting Lender and each
Consenting Panini Lender has independently and without reliance upon Toy Biz,
and its officers, directors and representatives whatsoever (except for the
representations, warranties, and covenants and agreements contained herein) and
based on such information as such party has deemed appropriate in its
independent judgment, made its own analysis and decision to enter into this
Agreement.
ARTICLE 5
CONDITIONS
5.1 Conditions to Each Party's Obligations to Continue to Perform Its
-----------------------------------------------------------------
Respective Obligations in Accordance with Article 2. The obligations of each
- ---------------------------------------------------
party to perform its respective obligations under Article 2 (other than Section
2.10) during the term of this Agreement shall be subject to there being no order
or injunction of a Governmental Entity of competent jurisdiction in effect
precluding, restraining, enjoining or prohibiting the transactions contemplated
in this Agreement and in the Plan of Reorganization during the term hereof,
which condition may be waived in whole or in part by Toy Biz or a Requisite
Amount of the Consenting Lenders as the case may be, to the extent permitted by
applicable law.
5.2 Conditions to Consenting Lenders' Obligations to Perform Their
--------------------------------------------------------------
Respective Obligations in Accordance with Article 2. The obligations of the
- ---------------------------------------------------
Consenting Lenders and the Consenting Panini Lenders to perform their respective
obligations under Article 2 during the term of this Agreement shall be subject
to the satisfaction of each of the following conditions
17
<PAGE>
during the term hereof, any and all of which may be waived in whole or part by a
Requisite Amount of the Consenting Lenders to the extent permitted by applicable
law.
(a) Representations and Warranties of Toy Biz. The
-----------------------------------------
representations and warranties of Toy Biz shall be true and correct in all
material respects during the term hereof (except for those representations and
warranties that address matters only as of a particular date which need only be
true and correct in all material respects as of such date).
(b) Covenants of Toy Biz. Toy Biz shall have performed in all
--------------------
material respects its obligations required to be performed during the term of
this Agreement.
(c) No Stockholder Breach Event. No Stockholder Breach Event, as
---------------------------
defined in the Proxy and Stock Option Agreements, shall have occurred and be
continuing.
(d) Opinion of Counsel. No later than 5:00 p.m., New York Time,
------------------
on November 24, 1997, Battle Fowler LLP, counsel to Toy Biz shall have delivered
to Wachtell, Lipton, Rosen & Katz, its opinion in the form attached hereto as
Exhibit 5.2(d).
(e) Stockholders Agreement. Toy Biz, Avi Arad and the Perlmutter
----------------------
Stockholders shall have entered into a stockholders agreement pursuant to which
Avi Arad and the Perlmutter Stockholders agree to vote their shares of Newco
Common Stock in favor of the election to the Newco board of directors of five
nominees designated by the Consenting Lenders and certain of their transferees
for as long as the Consenting Lenders and those transferees hold more than a
specified percentage of the outstanding Newco Common Stock.
5.3 Conditions to Toy Biz's Obligation to Execute and Deliver the
-------------------------------------------------------------
Merger Agreement. The obligation of Toy Biz to execute and deliver the Merger
- ----------------
Agreement and to perform its obligation under Section 2.10 shall be subject to
the satisfaction on or prior to the date upon which Toy Biz executes the Merger
Agreement of each of the following conditions, any and all of which may be
waived in whole or in part by Toy Biz, to the extent permitted by applicable
law:
(a) Effectiveness of Form S-4. If required by applicable law,
-------------------------
the Form S-4 shall have become effective and no stop order suspending the
effectiveness of the Form S-4 shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
(b) HSR Act. Any waiting period (including any extension
-------
thereof) under the HSR Act applicable to the Merger shall have expired or been
terminated.
18
<PAGE>
(c) Injunctions. There shall be no order or injunction of a
-----------
Governmental Entity of competent jurisdiction in effect precluding, restraining,
enjoining or prohibiting consummation of the Merger.
(d) Confirmation Order. The Bankruptcy Court (or such other
------------------
court as may from time to time exercise jurisdiction over the Debtors'
Bankruptcy Cases) shall have entered the Confirmation Order and its
effectiveness and enforceability shall not be subject to any stay or injunction
and all conditions to the consummation of the Plan of Reorganization shall have
been satisfied or duly waived in accordance with the Plan of Reorganization.
ARTICLE 6
CONVERSION OF MARVEL-OWNED SHARES
6.1 Conversion of Marvel-Owned Shares. If this Agreement is
---------------------------------
terminated by the Consenting Lenders under Section 7.1(d) or the Merger
Agreement is terminated in accordance with Section 6.1(d) thereof, a Requisite
Amount of the Consenting Lenders shall have the right to direct Toy Biz to, and
Toy Biz shall thereupon be obligated to, convert the Converted Class B Shares
into an equal number of duly authorized, fully paid and nonassessable Class B
Shares. Following that conversion, the holders of the Converted Class B Shares
shall thereafter be deemed to be the holders of such new Class B Shares and the
certificates evidencing those Converted Class B Shares shall be deemed to
evidence those new Class B Shares. As a condition precedent to that conversion,
the New Stockholders Agreement and New Voting Trust Agreements will be released
from escrow and the holders of such new Class B Shares will be required to
complete, execute and deliver to each of the parties thereto the New
Stockholders Agreement and the New Voting Trust Agreements and Toy Biz will
deposit one of the Class B Shares into each of the voting trusts established
under the New Voting Trust Agreements as contemplated by the New Voting Trust
Agreements.
ARTICLE 7
TERMINATION AND WITHDRAWAL
7.1 Termination. This Agreement shall terminate upon the consummation
-----------
of the Merger at the Effective Time unless terminated sooner in accordance with
this Section 7.1. This Agreement may be terminated and the Merger contemplated
herein may be abandoned at any time prior to the Effective Time:
19
<PAGE>
(a) by mutual written agreement of each of the Consenting
Lenders and Toy Biz;
(b) by Toy Biz if the Consummation Date has not occurred on or
before September 21, 1998, provided that the failure of the Consummation Date to
occur on or before such date is not the result of the breach of any
representation or warranty or the failure to perform any covenant or agreement
or satisfy any condition under this Agreement or the Merger Agreement by Toy
Biz, it being understood and agreed that the Consummation Date will be deemed to
have occurred if the parties effect a substantially similar transaction as
contemplated by Sections 2.9 (d) hereof on terms no less favorable to Toy Biz's
shareholders (other than the Debtors) than those contemplated by this Master
Agreement on or before September 21, 1998;
(c) by any Consenting Lenders or Toy Biz upon written notice
given to the other if there shall be any law or regulation of any competent
authority that makes consummation of the Merger illegal or otherwise prohibited,
or if any Governmental Entity of competent jurisdiction shall have issued a
final non-appealable order, judgment, injunction or order enjoining or otherwise
prohibiting the transactions contemplated by this Agreement, other than an
Adverse Order or a Change in Control;
(d) by a Requisite Amount of the Consenting Lenders if Toy Biz
breaches or fails in any material respect to perform or comply with any of its
covenants and agreements contained herein or breaches its representations and
warranties in any material respect and such breach has not been cured to the
reasonable satisfaction of the Consenting Lenders within 10 days of the notice
by a Requisite Amount of the Consenting Lenders of such breach;
(e) by a Requisite Amount of the Consenting Lenders if there is
a Stockholder Breach Event (as defined in the Proxy and Stock Option
Agreements);
(f) by Toy Biz or any Consenting Lender if the Consenting Lender
Threshold Date has not occurred by 5:00 p.m., New York Time on November 21,
1997;
(g) by Toy Biz after the Consenting Lender Threshold Date if one
or more Consenting Lenders breach their respective representations, warranties
or covenants contained herein in any material respect, such breaches have not
been cured to Toy Biz's reasonable satisfaction within 10 days' receipt by such
Consenting Lender of notice by Toy Biz and, as a result of such breach, the
amount of Senior Secured Claims held by, or number of, non-breaching Consenting
Lenders falls below the Consenting Lender Threshold; and/or
20
<PAGE>
(h) by Toy Biz or any Consenting Lender after the Consenting
Lender Threshold Date, if as a result of breaches by one or more Consenting
Lenders contemplated by Section 7.1(f) and/or withdrawals by Consenting Lenders
pursuant to Section 7.2 and 8.2, the amount of Senior Secured Claims held by, or
number of, non-breaching Consenting Lenders and non-withdrawing Consenting
Lenders falls below the Consenting Lenders Threshold.
7.2 Withdrawal. A Consenting Lender shall have the right to withdraw
----------
from this Agreement during the following periods. Upon withdrawal from this
Agreement by a Consenting Lender the withdrawing Consenting Lender shall
thereupon cease to have any rights or obligations under this Agreement, and
shall no longer be deemed to be a Consenting Lender. A Consenting Lender may
withdraw:
(a) at any time prior to 5:00 p.m., New York Time, January 15,
1998, if a court of competent jurisdiction has not by January 5, 1998
established a date on or prior to February 15, 1998 to consider the adequacy of
the Disclosure Statement provided that failure to establish such a date is not
the result of the breach of any representation or warranty or the failure to
perform any covenant or agreement or satisfy any condition under this Agreement
or the Merger Agreement by any of the Consenting Lenders or any of the
Consenting Panini Lenders;
(b) at any time prior to 5:00 p.m., New York Time, February 25,
1998, if the Disclosure Statement relating to the Plan of Reorganization has not
been approved by the Bankruptcy Court (or such other court as may from time to
time exercise jurisdiction over the Debtors' Bankruptcy Cases) by February 15,
1998 provided that failure to approve the Disclosure Statement by such date is
not the result of the breach of any representation or warranty or the failure to
perform any covenant or agreement or satisfy any condition under this Agreement
or the Merger Agreement by any of the Consenting Lenders or any of the
Consenting Panini Lenders;
(c) at any time prior to 5:00 p.m., New York Time, April 10,
1998, if the Confirmation Date has not occurred on or before April 1, 1998,
provided that failure of the Confirmation Date to occur on or before such date
is not the result of the breach of any representation or warranty or the failure
to perform any covenant or agreement or satisfy any condition under this
Agreement or the Merger Agreement by any of the Consenting Lenders or any of the
Consenting Panini Lenders;
(d) at any time prior to 5:00 p.m., New York Time, May 25, 1998,
if the Consummation Date has not occurred on or before May 15, 1998, provided
that the failure of the Consummation Date to occur on or before such date is not
the result of the breach of any representation or warranty or the
21
<PAGE>
failure to perform any covenant or agreement or satisfy any condition under this
Agreement or the Merger Agreement by any of the Consenting Lenders or any of the
Consenting Panini Lenders;
(e) at any time during the sixty (60) day period following the
entry of an Adverse Order.
(f) at any time during the thirty (30) day period following a
Change in Control.
ARTICLE 8
MISCELLANEOUS
8.1 Fees and Expenses. Except as contemplated by this Agreement and
-----------------
the Plan of Reorganization, all costs and expenses incurred in connection with
this Agreement and the consummation of the transactions contemplated hereby
shall be paid by the party incurring such expenses.
8.2 Amendment, Modification, Waiver and Other Action. Subject to
------------------------------------------------
applicable law, this Agreement may be amended, modified and supplemented in any
and all respects, and any provision hereof may be waived, by written agreement
of Toy Biz and a Requisite Amount of the Consenting Lenders, provided that any
Consenting Lender who does not agree to any such amendment, modification,
supplement or waiver shall have the right to withdraw from this Agreement within
ten days after such amendment, modification, supplement or waiver becomes
effective, and in addition, provided that no such amendment, modification
supplement or waiver shall affect the amount of the Newco Guaranty, the
collateral securing the Newco Guaranty or any of the terms of the Restructured
Panini Obligations without the written agreement of a Requisite Amount of the
Consenting Panini Lenders.
8.3 Nonsurvival of Representations and Warranties. None of the
---------------------------------------------
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.
8.4 Notices. All notices and other communications hereunder shall be
-------
in writing and shall be sufficient if in writing and delivered personally,
telecopied (which is confirmed) or sent by an overnight courier service, such as
Federal Express, and shall be deemed given when so delivered personally,
telecopied or if mailed or sent by overnight courier service, on the scheduled
delivery date, to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
22
<PAGE>
if to the Consenting Lenders, to:
To the address of that
Consenting Lender set forth
adjacent to the signature of
that Consenting Lender on
the signature pages to this
Agreement
with a copy to:
Chaim J. Fortgang
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telephone No.: (212) 403-1000
Telecopy No.: (212) 403-2000
and
if to the Consenting Panini Lenders, to:
To the address of that
Consenting Panini Lender set forth
adjacent to the signature of
that Consenting Panini Lender on
the signature pages to this
Agreement
with a copy to:
Chaim J. Fortgang
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telephone No.: (212) 403-1000
Telecopy No.: (212) 403-2000
and
if to Toy Biz, to:
Toy Biz, Inc.
333 East 38th Street
New York, New York 10016
Attention: General Counsel
Telephone No.: (212) 682-4700
Telecopy No.: (212) 682-3516
23
<PAGE>
with a copy to:
Lawrence Mittman
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Telephone No.: (212) 856-7177
Telecopy No.: (212) 856-7807
8.5 Interpretation. When a reference is made in this Agreement to
--------------
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include", "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation". As used in this Agreement, the term "affiliate(s)" shall have the
meaning set forth in Rule 12b-2 of the Exchange Act.
8.6 Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties. Delivery of an executed
signature page of this Agreement by facsimile transmission shall be effective as
delivery of a manually executed counterpart hereof.
8.7 Entire Agreement, No Third Party Beneficiaries. This Agreement
----------------------------------------------
(including the documents and the instruments referred to herein) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder.
8.8 Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a Governmental Entity of competent jurisdiction to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
8.9 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the general corporation law of the State of Delaware with
respect to matters covered therein and otherwise in accordance with the laws of
the State of New York, in each case without giving effect to the principles of
conflicts of law thereof.
24
<PAGE>
8.10 Enforcement; Damages. The parties agree that irreparable damage
--------------------
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law or in equity; provided, however, in no
-------- -------
event shall Toy Biz be liable for any damages as a result of a breach or
failure by Toy Biz to perform or comply with any of its covenants or agreements
contained in this Agreement which (i)(x) occurs after there has been a Change
in Control and (y) is caused by the action or inaction of the new board of
directors or new management of Toy Biz or (ii) occurs as a result of an Adverse
Order.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the date
first written above.
TOY BIZ, INC.
By:
-----------------------------------
Name: Joseph M. Ahearn
Title: President
<PAGE>
CONSENTING LENDER EXECUTION PAGE
By signing below, the undersigned is hereby executing and agreeing to be bound
by the (a) Amended and Restated Master Agreement (the "Master Agreement"), dated
as of November 19, 1997, by and among (i) Toy Biz, Inc., (ii) certain secured
creditors of Marvel Entertainment Group, Inc. and certain of its direct and
indirect subsidiaries (the "Marvel Debtors"), and (iii) the Panini Lenders (as
defined in the Plan of Reorganization referred to in the Master Agreement), (b)
Amended and Restated Proxy and Stock Option Agreement, dated as of November 19,
1997, by and among Isaac Perlmutter, Isaac Perlmutter, T.A. and Zib, Inc. and
certain secured creditors of the Marvel Debtors, and (c) Amended and Restated
Proxy and Stock Option Agreement, dated as of November 19, 1997, by and among
Avi Arad and certain secured creditors of the Marvel Debtors. This Consenting
Lender Execution Page shall be deemed to be a signature page to each of the
agreements listed above and the undersigned shall be deemed to have signed each
as a "Consenting Lender."
Name of Consenting Lender:
--------------------------------------------
By:
-----------------------------------------
Name:
Title:
Address for Notices:
--------------------------------------------
--------------------------------------------
--------------------------------------------
Telephone No.:
------------------------------
Telecopy No.:
-------------------------------
Principal amount of Fixed Senior Secured
Claims owned or beneficially owned and which
is consenting as set forth above: $ .
--------
<PAGE>
CONSENTING PANINI LENDER EXECUTION PAGE
By signing below, the undersigned is hereby executing and agreeing to be bound
by the Amended and Restated Master Agreement (the "Master Agreement"), dated
as of November 19, 1997, by and among (i) Toy Biz, Inc., (ii) certain secured
creditors of Marvel Entertainment Group, Inc. and certain of its direct and
indirect subsidiaries, and (iii) the Panini Lenders (as defined in the Plan of
Reorganization referred to in the Master Agreement).
Name of Consenting Panini Lender:
--------------------------------
By:
-----------------------------
Name:
Title:
Address for Notices:
--------------------------------
--------------------------------
--------------------------------
Telephone No.:
------------------
Telecopy No.:
-------------------
Principal amount of claims under the
Existing Panini Junior Credit Agreements
owned or beneficially owned and which is
consenting as set forth above: It.
Lire .
------------------
Principal amount of claims under the
Existing Panini Senior Credit Agreements
owned or beneficially owned and which is
consenting as set forth above: It.
Lire .
------------------
<PAGE>
AMENDMENT NO. 1 TO THE
AMENDED AND RESTATED MASTER AGREEMENT
This Amendment No. 1, dated as of February 3, 1998 (this "Amendment"),
to the Amended and Restated Master Agreement, dated as of November 19, 1997 (the
"Master Agreement"), by and among (i) Toy Biz, Inc., a Delaware corporation
("Toy Biz"), (ii) certain secured creditors (the "Consenting Lenders") of Marvel
Entertainment Group, Inc., a Delaware corporation ("Entertainment"), and certain
of its direct and indirect subsidiaries and (iii) certain creditors (the
"Consenting Panini Lenders") of Panini S.p.A. and its subsidiaries.
PRELIMINARY STATEMENT
Each of the parties to this Amendment is a party to the Master
Agreement. Sections 7.1(b) and 7.2 of the Master Agreement specify certain
dates by which events are contemplated to occur. The parties to this Amendment
wish to extend the dates specified in those sections of the Master Agreement by
30 days as provided in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants set forth herein, and on the terms and subject to the
conditions set forth herein, the parties hereto agree as follows:
Section 1. The following dates referred to in the Master Agreement are
hereby amended as follows:
(a) The date "February 15, 1998" in Section 7.2(a) of the Master
Agreement is hereby extended to March 17, 1998.
(c) The dates "February 25, 1998" and "February 15, 1998" in Section
7.2(b) of the Master Agreement are hereby extended to March 27, 1998 and
March 17, 1998, respectively.
(d) The dates "April 10, 1998" and "April 1, 1998" in Section 7.2(c)
of the Master Agreement are hereby extended to May 10, 1998 and May 1,
1998, respectively.
(e) The dates "May 25, 1998" and "May 15, 1998" in Section 7.2(d) of
the Master Agreement are hereby extended to June 24, 1998 and June 14,
1998, respectively.
<PAGE>
(f) The date September 21, 1998 in Section 7.1(b) of the Master
Agreement is hereby extended to October 21, 1998.
Section 2. This Amendment shall become effective when it has been
executed by Consenting Lenders who are parties to the Master Agreement and who
constitute the Consenting Lender Threshold (as that terms is defined in the
Master Agreement). This Amendment may be executed in two or more counterparts,
all of which shall be considered one and the same agreement. Delivery of an
executed signature page of this Amendment by facsimile transmission shall be
effective as delivery of a manually executed counterpart hereof.
Section 3. Except as specifically amended in this Amendment, the
Master Agreement is ratified and confirmed in all respects and remains in full
force and effect in accordance with its terms.
Section 4. The joint plan of reorganization of Entertainment and
certain of its direct and indirect subsidiaries, filed on November 19, 1997,
shall be amended to be substantially consistent with Exhibit A hereto.
THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK
iii
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be signed by their respective officers thereunto duly authorized as of the date
first written above.
TOY BIZ, INC.
By:
------------------------------------
Name: Joseph M. Ahearn
Title: President
CONSENTS TO EXTENSION
I, Avi Arad, consent to this Amendment No. 1 to the Amended and
Restated Master Agreement, dated as of February 3, 1998 (the "Master Agreement
Amendment"), and confirm that the Amended and Restated Proxy and Stock Option
Agreement, dated as of November 19, 1997, between myself and secured creditors
of Marvel Entertainment Group, Inc., remains in full force and effect despite
the Master Agreement Amendment.
----------------------------------------
Avi Arad
I, Isaac Perlmutter, consent to this Amendment No. 1 to the Amended
and Restated Master Agreement, dated as of February 3, 1998 (the "Master
Agreement Amendment"), and confirm that the Amended and Restated Proxy and Stock
Option Agreement, dated as of November 19, 1997, between myself and secured
creditors of Marvel Entertainment Group, Inc., remains in full force and effect
despite the Master Agreement Amendment.
----------------------------------------
Isaac Perlmutter
<PAGE>
CONSENTING LENDER EXECUTION PAGE
By signing below, the undersigned is hereby executing and agreeing to be bound
by (a) Amendment No. 1, dated as of February 3, 1998, to the Amended and
Restated Master Agreement, dated as of November 19, 1997, by and among (i) Toy
Biz, Inc., (ii) certain secured creditors (the "Consenting Lenders") of Marvel
Entertainment Group, Inc., a Delaware corporation ("Entertainment"), and certain
of its direct and indirect subsidiaries (the "Marvel Debtors") and (iii) certain
creditors of Panini S.p.A. and its subsidiaries.
Name of Consenting Lender:
----------------------------------------
By:
-------------------------------------
Name:
Title:
<PAGE>
AMENDMENT NO. 2 TO THE
AMENDED AND RESTATED MASTER AGREEMENT
This Amendment No. 2, dated as of March 12, 1998 (this "Second
Amendment"), to the Amended and Restated Master Agreement, dated as of November
19, 1997 (the "Master Agreement"), by and among (i) Toy Biz, Inc., a Delaware
corporation ("Toy Biz"), (ii) certain secured creditors (the "Consenting
Lenders") of Marvel Entertainment Group, Inc., a Delaware corporation
("Entertainment"), and certain of its direct and indirect subsidiaries and
(iii) certain creditors (the "Consenting Panini Lenders") of Panini S.p.A. and
its subsidiaries.
PRELIMINARY STATEMENT
Each of the parties to this Second Amendment is a party to the Master
Agreement. Sections 7.1(b) and 7.2 of the Master Agreement originally specified
certain dates by which events were contemplated to occur. Those dates were
extended by 30 days by Amendment No. 1, dated as of February 3, 1998, to the
Master Agreement (the "First Amendment"). The parties to this Second Amendment
wish to further extend those dates by 30 days as provided in this Second
Amendment.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants set forth herein, and on the terms and subject to the
conditions set forth herein, the parties hereto agree as follows:
Section 1. The following dates referred to in the Master Agreement are
hereby amended as follows:
(a) The dates "April 10, 1998" and "April 1, 1998" in Section 7.2(c) of
the Master Agreement, extended by the First Amendment to May 10, 1998 and
May 1, 1998, respectively, are hereby extended to June 9, 1998 and June 1,
1998, respectively.
(b) The dates "May 25, 1998" and "May 15, 1998" in Section 7.2(d) of the
Master Agreement, extended by the First Amendment to June 24, 1998 and June
14, 1998, respectively, are hereby extended to July 24, 1998 and July 14,
1998, respectively.
<PAGE>
(c) The date September 21, 1998 in Section 7.1(b) of the Master
Agreement, extended by the First Amendment to October 21, 1998, is
hereby extended to November 20, 1998.
Section 2. This Second Amendment shall become effective when it
has been executed by Consenting Lenders who are parties to the Master Agreement
and who constitute the Consenting Lender Threshold (as that terms is defined in
the Master Agreement). This Second Amendment may be executed in two or more
counterparts, all of which shall be considered one and the same agreement.
Delivery of an executed signature page of this Second Amendment by facsimile
transmission shall be effective as delivery of a manually executed counterpart
hereof.
Section 3. Except as specifically amended in this Second
Amendment, the Master Agreement is ratified and confirmed in all respects and
remains in full force and effect in accordance with its terms.
Section 4. The joint plan of reorganization of Entertainment and
certain of its direct and indirect subsidiaries; filed on November 19, 1997,
and amended on February 12, 1998, shall be further amended to be substantially
in the form attached as Exhibit A hereto.
THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK
iv
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be signed by their respective officers thereunto duly authorized
as of the date first written above.
TOY BIZ, INC.
By:
------------------------------------
Name: Joseph M. Ahearn
Title: President
CONSENTS TO EXTENSION
I, Avi Arad, consent to this Amendment No. 2, dated as of March 12,
1998, to the Amended and Restated Master Agreement (the "Master Agreement
Second Amendment"), and confirm that the Amended and Restated Proxy and Stock
Option Agreement, dated as of November 19, 1997, between myself and secured
creditors of Marvel Entertainment Group, Inc., remains in full force and effect
despite the Master Agreement Second Amendment.
---------------------------------------
Avi Arad
I, Isaac Perlmutter, consent to this Amendment No. 2, dated as of
March 12, 1998, to the Amended and Restated Master Agreement (the "Master
Agreement Second Amendment"), and confirm that the Amended and Restated Proxy
and Stock Option Agreement, dated as of November 19, 1997, between myself and
secured creditors of Marvel Entertainment Group, Inc., remains in full force
and effect despite the Master Agreement Second Amendment.
---------------------------------------
Isaac Perlmutter
<PAGE>
CONSENTING LENDER EXECUTION PAGE
By signing below, the undersigned is hereby executing and agreeing to be bound
by (a) Amendment No. 2, dated as of March 10, 1998, to the Amended and Restated
Master Agreement, dated as of November 19, 1997, by and among (i) Toy Biz, Inc.,
(ii) certain secured creditors (the "Consenting Lenders") of Marvel
Entertainment Group, Inc., a Delaware corporation ("Entertainment"), and certain
of its direct and indirect subsidiaries (the "Marvel Debtors") and (iii) certain
creditors of Panini S.p.A. and its subsidiaries.
Name of Consenting Lender:
------------------------------------------
By:
---------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 10.31
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
)
IN RE: )
)
MARVEL ENTERTAINMENT GROUP, INC.; THE )
ASHER CANDY COMPANY; FLEER CORP.; )
FRANK H. FLEER CORP.; HEROES WORLD )
DISTRIBUTION, INC.; MALIBU COMICS ) Case No. 97-638-RRM
ENTERTAINMENT, INC.; MARVEL )
CHARACTERS, INC.; MARVEL DIRECT )
MARKETING INC.; and SKYBOX )
INTERNATIONAL, INC., )
)
Debtors. )
SECOND AMENDED JOINT PLAN OF REORGANIZATION PROPOSED BY
THE SECURED LENDERS AND TOY BIZ, INC.
WACHTELL, LIPTON, ROSEN & KATZ BATTLE FOWLER LLP
Attorneys for The Secured Attorneys for Toy Biz, Inc.
Lenders 75 East 55th Street
51 West 52nd Street New York, New York 10022
New York, New York 10019 (212) 856-7000
(212) 403-1000
-and- -and-
RICHARDS, LAYTON & FINGER, P.A. PEPPER HAMILTON LLP
Attorneys for The Secured Attorneys for Toy Biz, Inc.
Lenders 1201 Market Street
One Rodney Square P.O. Box 1709
Wilmington, Delaware 19899 Wilmington, Delaware 19899
(302) 658-6541 (302) 777-6500
Dated: Wilmington, Delaware
<PAGE>
March 12, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. DEFINITIONS AND INTERPRETATION.................................. 1
A. Definitions..................................................... 1
B. Interpretation; Application of Definitions
and Rules of Construction ..................................... 18
C. Exhibits and Schedules.......................................... 18
SECTION 2. PROVISIONS FOR PAYMENT OF ADMINISTRATION EXPENSE
CLAIMS AND PRIORITY TAX CLAIMS ................................ 19
2.1 Administration Expense Claims................................... 19
2.2 Compensation and Reimbursement Claims........................... 19
2.3 Priority Tax Claims............................................. 19
SECTION 3. CLASSIFICATION OF CLAIMS AND EQUITY INTERESTS................... 20
SECTION 4. PROVISIONS FOR TREATMENT OF CLAIMS
AND EQUITY INTERESTS UNDER THE
PLAN............................................................ 21
4.1 Priority Non-Tax Claims (Class 1)............................... 21
4.2 Senior Secured Claims (Class 2)................................ 21
(a) Allowance of Senior Secured Claims......................... 21
(b) Treatment of Allowed Fixed Senior Secured
Claims..................................................... 21
(i) No Qualifying.......................................... 21
(A) Distributions................................. 21
(B) Panini Obligations............................ 22
(ii) Qualifying........................................... 22
(c) Treatment of Allowed Contingent Secured Claims
.......................................................... 23
(i) No Panini.............................................. 23
(ii) Panini................................................ 23
4.3 Other Secured Claims (Class 3).................................. 23
4.4 Unsecured Claims (Class 4)...................................... 23
(a) Distributions................................................. 23
(b) Intercompany Claims.................................. 24
(c) Insider Claims....................................... 24
(d) Waiver of Deficiency Claim........................... 25
4.5 Class Securities Litigation Claims (Class 5).................... 25
(a) Distributions........................................ 25
(b) Calculation of Distribution.......................... 25
(c) Parity of and Limitation on Distributions............ 25
4.6 Equity Interests (Class 6)...................................... 26
(a) Entertainment (Subclass 6A).......................... 26
(i) Distributions................................... 26
(ii) Parity of and Limitation on Distributions
......................................... 26
(b) Subsidiary Equity Interest (Subclass 6B)............. 26
4.7 Existing Warrants (Class 7)..................................... 27
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SECTION 5. IDENTIFICATION OF CLASSES OF CLAIMS AND INTERESTS
IMPAIRED AND NOT IMPAIRED UNDER THE PLAN; ACCEPTANCE
OR REJECTION OF THE PLAN........................................ 27
5.1 Holders of Claims and Equity Interests Entitled to
Vote.......................................................... 27
5.2 Subtraction and Addition of Classes and Subclasses.............. 27
(a) Subtraction of Classes and Subclasses.................... 27
(b) Addition of Classes and Subclasses....................... 28
5.3 Nonconsensual Confirmation...................................... 28
5.4 Severability of Plan of Reorganization.......................... 28
SECTION 6. MEANS OF IMPLEMENTATION......................................... 28
6.1 Closing of Transaction.......................................... 28
6.2 Derivative Securities Litigation Claims......................... 29
6.3 Board of Directors of the Reorganized Debtors................... 29
6.4 Officers of the Reorganized Debtors............................. 29
6.5 Distribution to New Investors................................... 29
6.6 Toy Biz Distribution............................................ 30
(a) No Qualifying Transaction................................ 30
(b) Qualifying Transaction................................... 30
6.7 Fees to New Investors........................................... 30
6.8 Dissolution of Committees....................................... 30
6.9 Transfer of Panini.............................................. 31
6.10 Newco Financing................................................ 31
6.11 Vote of Characters' Toy Biz Stock.............................. 31
6.12 Forgiveness of Panini Obligations.............................. 31
6.13 Panini Indemnity............................................... 31
6.14 Outstanding Toy Biz Stock Interests............................ 31
SECTION 7. LITIGATION TRUST................................................ 32
7.1 Assignment of Rights............................................ 32
7.2 Control of Litigation........................................... 32
7.3 Liability of Trustee............................................ 32
7.4 Distribution of Net Litigation Proceeds and Net
Avoidance Litigation Proceeds................................... 33
7.5 Professional Fees and Expenses.................................. 33
7.6 Timing of Distributions......................................... 34
SECTION 8. PROVISIONS GOVERNING DISTRIBUTIONS.............................. 34
8.1 Date of Distributions........................................... 34
8.2 Entities to Exercise Function of Disbursing Agent............... 34
8.3 Surrender and Cancellation of Instruments....................... 34
8.4 Delivery of Distributions....................................... 35
8.5 Manner of Payment Under Plan of Reorganization.................. 35
8.6 Reserves and Distributions...................................... 35
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Page
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8.7 Distributions After Consummation Date......................... 35
8.8 Rights And Powers Of Disbursing Agent......................... 36
(a) Powers of the Disbursing Agent........................... 36
(b) Expenses Incurred on or after the Consummation Date...... 36
(c) Exculpation.............................................. 36
SECTION 9. PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER THE
PLAN OF REORGANIZATION........................................ 36
9.1 Objections to Claims.......................................... 36
9.2 No Distributions Pending Allowance............................ 37
9.3 Distributions After Allowance................................. 37
SECTION 10. PROVISION GOVERNING EXECUTORY CONTRACTS AND
UNEXPIRED LEASES UNDER THE PLAN............................... 37
10.1 General Treatment............................................. 37
10.2 Amendments to Schedule; Effect of Amendments.................. 38
10.3 Bar to Rejection Damage Claims................................ 38
10.4 Certain Panini Agreements..................................... 38
(a) Panini Sticker Agreement............................. 38
(b) Panini Comic Distribution Agreement.................. 39
SECTION 11. CONDITIONS PRECEDENT TO CONFIRMATION DATE AND
CONSUMMATION DATE............................................. 39
11.1 Conditions Precedent to Confirmation of Plan of
Reorganization................................................ 39
(a) Confirmation Order................................... 39
11.2 Conditions Precedent to Consummation Date of Plan of
Reorganization................................................ 40
(a) SEC Information Statement................................ 40
(b) HSR ..................................................... 40
(c) Restructured Panini Loan Documents....................... 40
(d) Secured Lender Consummation Date......................... 40
(e) Toy Biz Consummation Date................................ 40
11.3 Waiver of Conditions Precedent................................ 40
SECTION 12. EFFECT OF CONFIRMATION........................................ 40
12.1 General Authority............................................. 40
12.2 Discharge of Debtors.......................................... 41
(a) General Discharge....................................... 41
(b) Exculpations............................................ 41
(c) Treatment of Indemnification Claims..................... 41
12.3 Term of Injunctions or Stays.................................. 42
SECTION 13. WAIVER OF CLAIMS.............................................. 42
13.1 Avoidance Actions............................................. 42
SECTION 14. RETENTION OF JURISDICTION..................................... 43
14.1 Retention of Jurisdiction..................................... 43
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14.2 Amendment of Plan of Reorganization.......................44
SECTION 15. MISCELLANEOUS PROVISIONS..................................45
15.1 Payment of Statutory Fees.................................45
15.2 Retiree Benefits..........................................45
15.3 Compliance with Tax Requirements..........................45
15.4 Recognition of Guaranty Rights............................45
15.5 Severability of Plan Provisions...........................45
15.6 Governing Law.............................................46
15.7 Further Assurances........................................46
15.8 Time of the Essence.......................................46
15.9 Counterparts..............................................46
15.10 Notices...................................................46
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EXHIBITS
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1. Bylaws for Newco
2. Charter for Newco
3. Confirmation Order
4. Convertible Preferred Stock
5. Designated Competitors
6. Excess Administration Claims Note
7. Intercompany Agreement
8. Litigation Trust Agreement
9. Litigation Trust Professional Fee Guaranty
10. Merger Agreement
11. New Investors
12. Newco Guaranty
13. Panini Indemnity
14. Plan Warrant Agreement
15. Professional Fee Reimbursement Note
16. Secured Lenders
17. Stockholder Warrant Agreement
SCHEDULES
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6.1. Letter of Credit and related obligations
10.1. Rejection Schedule
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<PAGE>
JOINT PLAN OF REORGANIZATION
The Secured Lenders and Toy Biz, Inc., creditors and parties
in interest in these chapter 11 cases, hereby propose this Plan of
Reorganization dated March 12, 1998 for Marvel Entertainment Group, Inc., The
Asher Candy Company, Fleer Corp., Frank H. Fleer Corp., Heroes World
Distribution, Inc., Malibu Comics Entertainment, Inc., Marvel Characters, Inc.,
Marvel Direct Marketing Inc. and SkyBox International Inc.
SECTION 1. DEFINITIONS AND INTERPRETATION
------------------------------
A. Definitions.
-----------
The following terms used herein shall have the respective
meanings defined below:
"Administration Expense Claim" means any right to payment
constituting a cost or expense of administration of any of the Reorganization
Cases allowed under Sections 503(b) and 507(a)(1) of the Bankruptcy Code,
including, without limitation, (a) any actual and necessary costs and expenses
of preserving the estates of the Debtors, (b) any actual and necessary costs and
expenses of operating the business of the Debtors, (c) any allowances of
compensation and reimbursement of expenses to the extent allowed by Final Order
under Section 330 or 503 of the Bankruptcy Code, and (d) any fees or charges
assessed against the estates of the Debtors under Section 1930, title 28, United
States Code.
"Administrative Agent" means The Chase Manhattan Bank as
administrative agent under each of the applicable Existing Credit Agreements or
any successor administrative agent appointed in accordance with any of the
applicable Existing Credit Agreements.
"Affiliate" means, with reference to any person or entity, any
other person or entity that, within the meaning of Rule 12b-2 promulgated under
the Securities Exchange Act of 1934, as amended, "controls," is "controlled by"
or is under "common control with" such entity or person
"Allowed" means, with reference to any Claim or Equity
Interest, (a) any and all DIP Claims, (b) any Claim or Equity Interest or any
portion thereof against any Debtor which has been listed by such Debtor in its
Schedules, as such Schedules may be amended by the Debtors from time to time in
accordance with Bankruptcy Rule 1009, as liquidated in amount and not disputed
or contingent and for which no contrary proof of claim has been filed, (c) any
Claim or Equity Interest allowed by Final Order, (d) any Claim or Equity
Interest as to which the liability of the
<PAGE>
Debtors and the amount thereof are determined by final order of a court of
competent jurisdiction other than the Bankruptcy Court,(e) any Claim allowed
expressly hereunder, or (f) for purposes of voting only, any Claim evidenced by
a proof of Claim filed by or before the last date designated by the Bankruptcy
Court as the last date for filing Claims against the Debtors, provided that such
Claim has not been disallowed by order of the Court or the Bankruptcy Court, and
is not the subject of an objection filed at least ten (10) days prior to the
voting deadline.
"Ballot" means any form or forms distributed to each holder of
a Claim or Equity Interest entitled to vote on this Plan of Reorganization on
which is to be indicated the acceptance or rejection by such holder of this Plan
of Reorganization.
"Ballot Date" means the date fixed by the Bankruptcy Court as
the date by which all Ballots must be received by the Balloting Agent (as such
term is defined in the Disclosure Statement) from holders of impaired Claims and
Equity Interests other than holders of Equity Interests in Subclass 6B (Fleer
Corp.) of Class 6 Equity Interests in Class 7 (Existing Warrants) to be counted
as acceptances or rejections of this Plan of Reorganization.
"Bankruptcy Code" means title 11, United States Code, as
applicable to the Reorganization Cases as in effect on the Confirmation Date.
"Bankruptcy Court" means the United States District Court for
the District of Delaware having jurisdiction over the Reorganization Cases and,
to the extent of any reference under section 157, title 28, United States Code,
the unit of such District Court under section 151, title 28, United States Code.
"Bankruptcy Rules" means the Federal Rules of Bankruptcy
Procedure as promulgated by the United States Supreme Court under section 2075,
title 28, United States Code, and any Local Rules of the Bankruptcy Court.
"Beneficiaries" means all holders of Allowed Unsecured Claims
(other than Intercompany Claims and Insider Claims), holders of Allowed Fixed
Senior Secured Claims and Newco.
"Breakup Fee" means Cash in the amount of the breakup fee
payable pursuant to the Convertible Preferred Stock Purchase Agreement but in no
event more than eight million dollars ($8,000,000).
"Business Day" means any day other than a Saturday, a
Sunday or any other day on which banking institutions in New
2
<PAGE>
York, New York are required or authorized to close by law or executive order.
"Bylaws" means the bylaws for Newco in substantially
the form of Exhibit 1 hereto.
"Cash" means legal tender of the United States of America and,
with respect to payments under this Plan of Reorganization, cash (U.S. dollars),
certified check, bank check or wire transfer from a domestic bank.
"Causes of Action" means, without limitation, any and all
actions, causes of action, liabilities, obligations, rights, suits, debts, sums
of money, damages, judgments, claims and demands whatsoever, whether known or
unknown, in law, equity or otherwise.
"Characters" means Marvel Characters, Inc., one of the
Debtors herein.
"Charter" means the Certificate of Incorporation for in
substantially the form of Exhibit 2 hereto.
"Chase" means The Chase Manhattan Bank in its capacity as
agent under the Existing Credit Agreements.
"Claim" means (a) any right to payment from any of the
Debtors, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured, or unsecured, or (b) any right to an equitable remedy
for breach of performance if such breach gives rise to a right of payment from
any of the Debtors, whether or not such right to an equitable remedy is reduced
to judgment, fixed, contingent, matured, unmatured, disputed, undisputed,
secured, or unsecured.
"Class Securities Litigation Claim" means any Claim whether or
not the subject of an existing lawsuit arising from rescission of a purchase or
sale of shares of common stock of Entertainment, for damages arising from the
purchase or sale of any such security, or for reimbursement or contribution
allowed under section 502 of the Bankruptcy Code on account of any such Claim
(which shall include, without limitation, any Claim asserted by LaSalle National
Bank on behalf of itself or any holders of bonds) which Claims shall be
subordinated in accordance with section 510(b) of the Bankruptcy Code.
"Collateral" means any property or interest in property of the
estate of any Debtor subject to a Lien to secure the payment or performance of a
Claim, which Lien is not subject to avoidance under the Bankruptcy Code.
3
<PAGE>
"Confection Business" means any and all of the assets and
properties relating to the confection business operated and owned by Fleer
including, without limitation, all of its rights relating to Dubble Bubble,
Razzles and any other food and candy products produced thereby.
"Confirmation Date" means the date on which the Clerk of the
Bankruptcy Court enters the Confirmation Order on its docket.
"Confirmation Hearing" means the hearing held by the
Bankruptcy Court on confirmation of this Plan of Reorganization, as such hearing
may be adjourned or continued from time to time.
"Confirmation Order" means the order of the Bankruptcy Court
confirming this Plan of Reorganization in substantially the form of the order
annexed as Exhibit 3 hereto.
"Consummation Date" means the latest to occur of (a) the
thirtieth (30th) day (calculated under Bankruptcy Rule 9006) after the
Confirmation Date if no stay of the Confirmation Order is then in effect, (b)
the first Business Day after any stay of the Confirmation Order expires or
otherwise terminates, and (c) such other date as may be fixed from time to time
after the Confirmation Date by filing a notice thereof by the Proponents with
the Bankruptcy Court upon the consent of the Creditors Committee not to be
unreasonably withheld or delayed; provided, however, that in no event shall the
Consummation Date occur earlier than the date of the satisfaction of each of the
conditions precedent to the occurrence of the Consummation Date of this Plan of
Reorganization in Section 11.2 hereof unless waived as provided in Section 11.3
hereof.
"Contingent Senior Secured Claim" means any Claim against
Entertainment or any of its Debtor subsidiaries governed by or arising out of
the guaranty provisions contained in the Existing Panini Credit Agreements or
evidenced by any of the promissory notes issued thereunder or any letter of
credit issued by a bank or other financial institution which is a party to the
Existing Panini Credit Agreements for the account of Panini or any of its
subsidiaries and any Claim for adequate protection relating to the Collateral
securing the Claims previously referred to in this definition arising out of
that certain Revolving Credit Guaranty Agreement by and among Entertainment, the
other Debtors and Chase dated December 27, 1996, the order entered by the
Bankruptcy Court on January 24, 1997, or any amendments entered into or further
orders entered by the Bankruptcy Court with respect to either of the foregoing.
"Convertible Preferred Stock" means the one million, six
hundred ninety thousand (1,690,000) shares of convertible preferred stock in
Newco to be issued pursuant to this Plan of
4
<PAGE>
Reorganization which shall (a) be convertible into seventeen million, five
hundred fifty eight thousand, four hundred forty two (17,558,442) shares of
Newco Common Stock, (b) have the terms set forth in the Charter, and (c) be in
substantially the form of Exhibit 4 hereto.
"Convertible Preferred Stock Purchase Agreement" means
a Convertible Preferred Stock Purchase Agreement to be executed
on the Confirmation Date.
"Creditors Committee" means the Official Committee of
Unsecured Creditors appointed for the Debtors by the United States Trustee for
the District of Delaware on October 22, 1997.
"Debtor" means each of Entertainment, The Asher Candy Company,
Fleer Corp., Frank H. Fleer Corp., Heroes World Distribution, Inc., Malibu
Comics Entertainment, Inc., Marvel Characters, Inc., Marvel Direct Marketing,
Inc., and SkyBox International Inc., each (other than Marvel Characters, Inc.
and Malibu Comics Entertainment, Inc.) being a Delaware corporation and Marvel
Characters, Inc. and Malibu Comics Entertainment, Inc. being California
corporations, the debtors in Chapter 11 Case Nos. 96-2069 (HSB) through 96-2077
(HSB), respectively.
"Debtor in Possession" means each Debtor in its capacity as a
debtor in possession under sections 1107(a) and 1108 of the Bankruptcy Code.
"Designated Competitor" means those entities listed on
Exhibit 5 hereto.
"Designated Contingent Senior Secured Claims" means on any
date all Contingent Senior Secured Claims other than those beneficially owned or
controlled (directly, indirectly or by participation) by (a) any entity that
serves or has served as a member of Entertainment's board of directors, or (b)
any entity purchasing Convertible Preferred Stock pursuant to the Convertible
Preferred Stock Purchase Agreement, or if applicable, New Convertible Notes,
other than solely by virtue of the exercise of such entity's rights pursuant to
Section 4.2(b)(i)(A)(7) hereof.
"Designated Fixed Senior Secured Claims" means on any date all
Fixed Senior Secured Claims other than those beneficially owned or controlled
(directly, indirectly or by participation) by (a) any entity that serves or has
served as a member of Entertainment's board of directors, or (b) any entity
purchasing Convertible Preferred Stock pursuant to the Convertible Preferred
Stock Purchase Agreement, or if applicable, New Convertible Notes, other than
solely by virtue of the exercise of such entity's rights pursuant to Section
4.2(b)(i)(A)(7) hereof.
5
<PAGE>
"DIP Claim" shall mean any claim arising under the DIP Credit
Agreement.
"DIP Credit Agreement" means that certain Revolving Credit and
Guaranty Agreement dated as of December 27, 1996 among Marvel Entertainment
Group, Inc., the guarantors named therein, the banks party thereto and The Chase
Manhattan Bank as agent as the same may be amended from time to time in
accordance with the terms thereof or the agreements or other documents
evidencing any successor or replacement post-petition financing facility.
"Disbursing Agent" means any entity in its capacity as a
disbursing agent under Section 8.2 hereof.
"Disclosure Statement" means that certain Disclosure
Statement, including, without limitation, all exhibits and schedules thereto, in
the form approved by the Bankruptcy Court relating to this Plan of
Reorganization as the same may be amended from time to time.
"Disputed Claim" means a Claim against a Debtor that is
not an Allowed Claim.
"Effective Time" shall have the meaning given to such term in
the Merger Agreement.
"Entertainment" means Marvel Entertainment Group, Inc.
"Equity Committee" means the Official Committee of Equity
Security Holders appointed for Entertainment by the United States Trustee for
the District of Delaware on February 12,1997.
"Equity Interest" means any share of common stock or other
instrument evidencing a present ownership interest in any of the Debtors,
whether or not transferable, or any option, warrant or right, contractual or
otherwise, to acquire any such interest. For purposes of Subclass 6A
(Entertainment) of Class 6 (Equity Interests), the Existing Warrants shall not
be included in such subclass.
"Excess Administration Claims Amount" means the amount, if
any, by which the sum of (a) all Allowed Administration Expense Claims,
(exclusive of all DIP Claims through October 7, 1997), and (b) the aggregate
amount of all professional fees, costs and expenses of professionals engaged by
Chase in its capacity as agent or acting on behalf of all of the holders of
Senior Secured Claims including, without limitation, all fees and expenses of
counsel and financial advisors incurred in connection with the Reorganization
Cases, exceeds thirty-five million dollars ($35,000,000).
6
<PAGE>
"Excess Administration Claims Note" means an unsecured note of
Newco and its subsidiaries in substantially the form of Exhibit 6 hereto in an
original principal amount equal to the Excess Administration Claims Amount
bearing interest at the rate of ten percent (10%) per annum which shall, at the
--- -----
election of Newco, be paid semi-annually or accrue and compound, and shall have
a maturity date of the fifth anniversary of the Consummation Date.
"Excess Proceeds" means all net proceeds of a Qualifying
Transaction which closes on the Consummation Date in excess of the aggregate
amount required to satisfy Fixed Senior Secured Claims in full in accordance
with the Existing Fleer Credit Agreements, to pay the Toy Biz Cash Distribution
and all amounts (other than Excess Proceeds) due to holders of Allowed Unsecured
Claims pursuant to Section 4.4(a)(ii) hereof.
"Exculpated Persons" means (a) the Reorganized Debtors, Newco,
all past, present and future holders of DIP Claims, all past, present and future
holders of Senior Secured Claims (other than those beneficially owned or
controlled directly, indirectly or by participation by entities or Affiliates of
entities that serve or have served on Entertainment's board of directors),
Chase, Toy Biz, the New Investors, the Creditors Committee, all members of the
Creditors Committee, Affiliates of any of the foregoing, and all officers,
directors, employees, shareholders, limited liability entity members, partners,
consultants, advisors, investment bankers, attorneys, accountants or other
representatives or agents of any of the foregoing acting as such, and (b) the
Debtors.
"Existing Credit Agreements" means, collectively, the
Existing Fleer Credit Agreements and the Existing Panini Credit
Agreements.
"Existing Fleer Credit Agreements" means, collectively, (a)
that certain Amended and Restated Credit and Guarantee Agreement dated as of
August 30, 1994, as amended, among Entertainment, Fleer Corp., the financial
institutions parties thereto, the co-agents named therein and The Chase
Manhattan Bank (formerly named Chemical Bank) as administrative agent, (b) that
certain Credit and Guarantee Agreement dated as of April 24, 1995, as amended,
by and among Entertainment, Fleer Corp., the financial institutions party
thereto, the co-agents named therein and The Chase Manhattan Bank (formerly
named Chemical Bank) as administrative agent, (c) that certain Line of Credit,
dated as of March 27, 1996, as amended, among Fleer Corp., the banks and other
financial institutions parties thereto and The Chase Manhattan Bank as
Administrative Agent,(d)(i)(A) any letter of credit issued for the account of
Entertainment or any of its subsidiaries by a bank or other financial
institution which is a party to any of the Existing Credit Agreements referred
to in
7
<PAGE>
clauses (a) or (b) of this definition of "Existing Fleer Credit Agreements" and
(B) any related letter of credit applications and any agreements governing or
evidencing reimbursement obligations relating to any letters of credit referred
to in clause (d)(i)(A) of this definition of "Existing Fleer Credit Agreements"
or (ii) any interest rate agreement between Entertainment or any of its
subsidiaries and a bank or other financial institution which is a party to any
of the Existing Credit Agreements referred to in clauses (a) through (c),
inclusive, of this definition of "Existing Fleer Credit Agreements", and (e) any
guarantees and security documents, including, without limitation, mortgages,
pledge agreements, security agreements and trademark security agreements,
executed and delivered in connection with any of the foregoing agreements.
"Existing Panini Credit Agreements" means the Existing
Panini Junior Credit Agreements and the Existing Panini Senior
Credit Agreements.
"Existing Panini Junior Credit Agreements" means (a) that
certain Term Loan and Guarantee Agreement dated as of August 30, 1994, as
amended, supplemented or otherwise modified from time to time, among
Entertainment, Panini, S.p.A. (formerly named Marvel Comics Italia S.r.l.), and
Isituto Bancario San Paolo di Torino, S.p.A.; (b) the Panini Participation
Agreements; (c)(i)(A) any letter of credit issued for the account of any of the
Panini Entities by a bank or other financial institution pursuant to any of the
Panini Credit Agreements referred to in clauses (a) or (b) and (B) any related
letter of credit applications and any agreements governing or evidencing
reimbursement obligations relating to any letters of credit referred to in
clause (c)(i)(A) or (ii) any interest rate agreement between any of the Panini
Entities and a bank or other financial institution pursuant to any of the Panini
Credit Agreements referred to in clauses (a) and (b); and (d) any guarantees and
security documents, including, without limitation, mortgages, pledge agreements,
security agreements and trademark security agreements, executed and delivered in
connection with any of the foregoing agreements, together in each case with all
related documents, instruments, consents, amendments, modifications and waivers.
"Existing Panini Senior Credit Agreements" means that certain
Italian Lire 27,000,000,000 Term Loan and Guaranty Agreement dated as of August
5, 1997 as amended, supplemented or otherwise modified from time to time, among
Entertainment, Panini, the lenders listed on Schedule 1 thereto as lenders, and
The Chase Manhattan Bank as agent, and the related Panini financing order
entered by the Bankruptcy Court and any guarantees and security documents,
including, without limitation, mortgages, pledge agreements, security agreements
and trademark security agreements, executed and delivered in connection with
8
<PAGE>
any of the foregoing agreements, together in each case with all related
documents, instruments, consents, amendments, modifications and waivers.
"Existing Warrants" means, collectively, all incentive stock
options, non-qualified stock options and stock appreciation rights granted under
that certain Entertainment Amended and Restated Stock Option Plan and any other
options, warrants or rights, contractual or otherwise, if any, to acquire an
Equity Interest.
"Final Order" means an order or judgment of the Bankruptcy
Court entered by the Clerk of the Bankruptcy Court on the docket in the
Reorganization Cases, which has not been reversed, vacated or stayed and as to
which (a) the time to appeal, petition for certiorari or move for a new trial,
----------
reargument or rehearing has expired and as to which no appeal, petition for
certiorari or other proceedings for a new trial, reargument or rehearing shall
- ----------
then be pending or (b) if an appeal, writ of certiorari, new trial, reargument
----------
or rehearing thereof has been sought, such order or judgment of the Bankruptcy
Court shall have been affirmed by the highest court to which such order was
appealed, or certiorari shall have been denied or a new trial, reargument or
----------
rehearing shall have been denied or resulted in no modification of such order,
and the time to take any further appeal, petition for certiorari or move for a
----------
new trial, reargument or rehearing shall have expired; provided, that the
possibility that a motion under Rule 60 of the Federal Rules of Civil Procedure,
or any analogous rule under the Bankruptcy Rules, may be filed relating to such
order, shall not cause such order not to be a Final Order.
"Fixed Senior Secured Claim" means any Claim governed by any
of the Existing Fleer Credit Agreements or evidenced by any of the promissory
notes issued thereunder or any letter of credit issued by a bank or other
financial institution which is a party to any of the Existing Fleer Credit
Agreements for the account of Entertainment or any of its subsidiaries (other
than the Panini Entities) or any interest rate agreement between Entertainment
or any of its subsidiaries (other than the Panini Entities) and a bank or other
financial institution which is a party to any of the Existing Fleer Credit
Agreements and any Claim for adequate protection relating to the Collateral
securing the Claims previously referred to in this definition arising out of
that certain Revolving Credit Guaranty Agreement by and among Entertainment, the
other Debtors and Chase dated December 27, 1996, the order entered by the
Bankruptcy Court on January 24, 1997, or any amendments entered into or further
orders entered by the Bankruptcy Court with respect to either of the foregoing.
"Fleer" means Fleer Corp., one of the Debtors.
9
<PAGE>
"Immaterial Debtors" means The Asher Candy Company, Frank H.
Fleer Corp., Heroes World Distribution, Inc. and any other Debtor which the
Proponents, acting reasonably, jointly determine to have de minimis value.
"Insider Claim" means any Unsecured Claim (other than a Senior
Secured Claim) of an insider (as defined in section 101 of the Bankruptcy Code)
or Affiliate of any Debtor.
"Intercompany Agreement" means those agreements set forth on
Exhibit 7 hereto.
"Intercompany Claim" means any Claim held by any Debtor
against any other Debtor, including, without limitation, all derivative Claims
asserted by or on behalf of any one Debtor against any other Debtor.
"Lien" means any charge against or interest in property or an
interest in property to secure payment of a debt or performance of an
obligation.
"Litigation Claim" means all Causes of Action (including any
avoidance action pursuant to sections 510, 544, 545, 547, 548, 549, 550, 551 and
553 of the Bankruptcy Code) of the Debtors other than (i) those relating to any
tax sharing or other similar agreement, or (ii) against any person or entity
released or exculpated pursuant to this Plan.
"Litigation Trust" means the trust created by the Litigation
Trust Agreement to be executed on the Consummation Date pursuant to Section 7.1
hereof by the Debtors and the Litigation Trustee.
"Litigation Trust Agreement" means the trust agreement to be
executed by the Debtors and the Litigation Trustee in substantially the form of
Exhibit 8 hereto.
"Litigation Trustee" means such person or entity as may be
designated by the Creditors Committee on or before the Consummation Date subject
to the consent of the Proponents, and from and after the Consummation Date, any
successor trustee designated in accordance with the Litigation Trust Agreement.
"Litigation Trust Professional Fee Guaranty" means the
guaranty of payment to be executed by Newco in substantially the form of Exhibit
9 hereto.
"Marvel" means, collectively, Entertainment and each of its
subsidiaries other than the Panini Entities.
10
<PAGE>
"Master Agreement" means that certain Master Agreement by and
among the Proponents dated as of October 7, 1997 as the same may be amended from
time to time.
"Merger Agreement" means that certain Agreement and Plan of
Merger dated as of the Consummation Date in substantially the form annexed as
Exhibit 10 hereto.
"NBA License Agreement" means that certain Retail Product
License Agreement dated July 21, 1995 between Entertainment and NBA Properties,
Inc., as amended, supplemented or otherwise modified from time to time.
"Net Avoidance Litigation Proceeds" means the gross proceeds
of all Causes of Action pursuant to sections 510, 544, 545, 547, 548, 549, 550,
551 and 553 of the Bankruptcy Code realized by the Litigation Trust net of
payment of all expenses of the Litigation Trust including, without limitation,
(i) payment without duplication of all sums due and owing pursuant to the
Professional Fee Reimbursement Note, and (ii) any set-off effected by the
holders of Resulting Claims pursuant to Section 8.7 hereof.
"Net Cash Proceeds" means the gross proceeds in Cash realized
from the sale of capital stock of Newco net of Cash payments, if necessary to
cause the occurrence of the Consummation Date, in an amount equal to the
aggregate of (i) Administration Expense Claims, including, without limitation,
all DIP Claims, (ii) Priority Non-Tax Claims, (iii) Priority Tax Claims, and
(iv) any other Cash payments necessary to cause the occurrence of the
Consummation Date other than the Toy Biz Cash Distribution and the Required
Secured Lender Consideration.
"Net Litigation Proceeds" means the gross proceeds realized by
the Litigation Trust (exclusive of Net Avoidance Litigation Proceeds) net of
payment of all expenses of the Litigation Trust including, without limitation,
payment without duplication of all sums due and owing pursuant to the
Professional Fee Reimbursement Note.
"New Convertible Notes" means unsecured notes to be issued by
Newco in lieu of all of the Convertible Preferred Stock at the request of Toy
Biz, which request shall be made not later than the commencement of the hearing
to consider the adequacy of the Disclosure Statement, having priority and other
rights identical to those attendant to the Convertible Preferred Stock and
otherwise reasonably satisfactory to the Proponents.
"New Investors" means the individuals set forth on Exhibit 11
hereto and the holders of Fixed Senior Secured Claims exercising the right to
purchase Convertible Preferred Stock or,
11
<PAGE>
if applicable, New Convertible Notes in accordance with Section 4.2(b)(i)(A)(7)
hereof.
"New Panini Securities" means debt securities of Newco having
a present value as of the Consummation Date of forty million dollars
($40,000,000) as confirmed by a fairness opinion (taking into account, inter
-----
alia, the liquidity of the securities) of a nationally recognized investment
- ----
banking firm reasonably acceptable to Toy Biz and the Panini Lenders, provided,
--------
however, that such securities may be equity securities with the consent of the
- -------
holders two-thirds in amount of the Contingent Senior Secured Claims.
"Newco" means, as applicable, (a) the parent entity resulting
from the combination of Marvel and Toy Biz contemplated by the Merger Agreement,
or (b)(i) in the event that such combination is effected through a merger or
other combination of a subsidiary of Entertainment and Toy Biz, Entertainment
after the Effective Time of such merger and (ii) in the event that such
combination is effected through a merger or other combination of a subsidiary of
Toy Biz and Entertainment, Toy Biz after the Effective Time of such merger.
"Newco Common Stock" means the issued and outstanding shares
of common stock of Newco as of the Consummation Date.
"Newco Guaranty" means an absolute and unconditional guaranty
of Newco and its subsidiaries secured by a valid, binding, enforceable and
perfected first priority lien against the Confection Business and the Panini
Stock to be executed and delivered by Newco in substantially the form annexed
hereto as Exhibit 12 pursuant to which Newco and its subsidiaries shall guaranty
the Restructured Panini Obligations; provided, however, that such guaranty
-------- -------
obligation shall be limited to forty million dollars ($40,000,000), eight
million dollars ($8,000,000) of which shall be payable in Cash and thirty two
million dollars ($32,000,000) of which shall be payable, at the election of
Newco, in the form of either Cash or debt securities of Newco having a then
present value of thirty two million dollars ($32,000,000) as the latter value
may be confirmed by a fairness opinion (taking into account, inter alia, the
----- ----
liquidity of the securities) of a nationally recognized investment banking firm
reasonably acceptable to Newco and the Panini Lenders, provided, further, that
-------- -------
such securities may be equity securities with the consent of the holders
two-thirds in amount of the Contingent Senior Secured Claims.
"Other Secured Claims" means any Secured Claim not
constituting a Senior Secured Claim.
"Panini" means Panini S.p.A.
12
<PAGE>
"Panini Comic Distribution Agreement" means that certain
agreement to manufacture, reprint, publish and sell Marvel Comics dated December
1995 between Panini and Entertainment.
"Panini Entities" means Panini and its subsidiaries.
"Panini Indemnified Liabilities" means any and all claims,
liabilities, obligations, losses, damages, distributions, recoveries, penalties,
actions, judgments, suits, costs, expenses (including reasonable fees and
expenses of counsel and other professionals) and disbursements of any kind
whatsoever which may at any time be imposed on, incurred by or asserted against
any Panini Entity in any way relating to, or arising out of, directly or
indirectly, any contracts or other agreements to which any of the Debtors are
party, including, without limitation, the NBA License Agreement, provided,
however that (i) obligations to repay the Panini Lenders pursuant to the Panini
Credit Agreements shall not constitute Panini Indemnified Liabilities and (ii)
the Debtors shall not be responsible for making any royalty payments owed to or
for the benefit of the National Basketball Association under the NBA License
Agreement solely in respect of sticker sales or card sales made by the Panini
Entities from and after the Consummation Date; provided that Newco shall control
-------- ----
the prosecution, settlement or resolution of such Panini Indemnified Liabilities
and provided further that the Panini Entities shall not assert any claims
against Newco in respect of Panini Indemnified Liabilities that are asserted
outside of any applicable statute of limitations period.
"Panini Indemnity" means an indemnity substantially in the
form of Exhibit 13 hereto pursuant to which Newco will indemnify and hold
harmless Panini from and against any and all claims, liabilities, obligations,
losses, damages, distributions, recoveries, penalties, actions, judgments,
suits, costs, expenses (including reasonable fees and expenses of counsel and
other professionals) and disbursements of any kind whatsoever which may at any
time be imposed on, incurred by or asserted against any Panini Entity in any way
relating to, or arising out of directly or indirectly, any contracts or other
agreements to which any of the Debtors are party, including, without limitation,
the NBA License Agreement, provided, however that (i) obligations to repay the
Panini Lenders pursuant to the Existing Credit Agreements shall not constitute
Panini Indemnified Liabilities and (ii) Newco shall not be responsible for
making any royalty payments owed to or for benefit of the National Basketball
Association under the NBA License Agreement solely in respect of sticker sales
or card sales made by Panini from and after the Consummation Date.
"Panini Lenders" means each of the holders of Panini
Obligations arising under the Existing Panini Credit Agreements
13
<PAGE>
including, any holder of a Panini Obligation through the Panini Participation
Agreements.
"Panini Liquidation Event" means the commencement of any
insolvency proceeding under the laws of the Republic of Italy or other
applicable law which mandates the liquidation of Panini.
"Panini Obligations" means all of the obligations of the
Panini Entities arising under the Existing Panini Credit Agreements including,
without limitation, outstanding principal, accrued and unpaid interest, fees ,
costs, expenses, charges and any other amounts owing under the Existing Panini
Credit Agreements.
"Panini Participation Agreement" means collectively, (i) the
Participation Agreement dated as of August 30, 1994 among Istituto Bancario San
Paolo di Torino, S.p.A., New York Limited Branch, as Italian Lender, The Chase
Manhattan Bank, as Administrative Agent, and the financial institutions
signatory thereto, as participants and (ii) the Participation Agreement dated as
of August 5, 1997 among The Chase Manhattan Bank, as Lender, The Chase Manhattan
Bank, as Administrative Agent, and the financial institutions signatory thereto,
as participants.
"Panini Sticker Agreement" means that certain License
Agreement dated as of November 15, 1996 by and between Characters and Panini.
"Panini Stock" means all of the issued and outstanding
capital stock of Panini.
"Petition Date" means December 27, 1996, the date on which
each of the Debtors filed its voluntary petition for relief under the Bankruptcy
Code.
"Plan of Reorganization" means this Plan of Reorganization
dated as of November 19, 1997, including, without limitation, the exhibits and
schedules hereto, as the same may be amended or modified from time to time in
accordance with the terms hereof.
"Plan Warrant Agreement" means that certain Warrant Agreement
in substantially the form of Exhibit 14 hereto.
"Plan Warrants" means warrants exercisable not later than the
fourth (4th) anniversary of the Consummation Date entitling the holder thereof
to acquire one share of Newco Common Stock, subject to customary anti-dilution
protections, based upon an exercise price of seventeen dollars and twenty-five
cents ($17.25) per share and otherwise upon the terms and conditions contained
in the Plan Warrant Agreement.
14
<PAGE>
"Priority Non-Tax Claim" means any Claim of a kind specified
in section 507(a)(2), (3), (4), (5), (6), (7) or (9) of the Bankruptcy Code.
"Priority Tax Claim" means any Claim of a governmental unit of
the kind specified in section 507(a)(8) of the Bankruptcy Code.
"Professional Fee Reimbursement Note" means the note to be
executed by the Litigation Trustee on behalf of the Litigation Trust in
substantially the form of Exhibit 15 hereto.
"Proponents" means Toy Biz and the Secured Lenders.
"Qualifying Transaction" means a transaction to be closed on
the Consummation Date to acquire all or a portion of the capital stock of Newco
which transaction generates Net Cash Proceeds equal to or greater than the sum
of (i) the Toy Biz Cash Distribution, (ii) the Required Secured Lender
Consideration, and (iii) the amounts (other than Excess Proceeds) due to holders
of Allowed Unsecured Claims pursuant to Section 4.4(a)(ii) hereof, is otherwise
consistent with the terms of this Plan of Reorganization and has been approved
as to the Newco Guaranty by Requisite Panini Lender Consent not to be
unreasonably withheld.
"Ratable Proportion" means, with reference to any distribution
on account of any Allowed Claim or Allowed Equity Interest in any class or
subclass, as applicable, a distribution equal in amount to the ratio (expressed
as a percentage) that the amount of such Allowed Claim or Allowed Equity
Interest, as applicable, bears to the aggregate amount of Allowed Claims or
Allowed Equity Interests of the same class or subclass, as applicable.
"Reorganization Cases" means the cases commenced under chapter
11 of the Bankruptcy Code by the Debtors on the Petition Date.
"Reorganized" means, with reference to any Debtor, such Debtor
(unless such Debtor is a Debtor for which this Plan of Reorganization is not
confirmed in accordance with Section 5.4 hereof) or any successor in interest
thereto from and after the Consummation Date, including, without limitation,
Newco.
"Requisite Panini Lender Consent" means the written consent of
holders of Designated Contingent Senior Secured Claims holding a majority in
amount of Designated Contingent Senior Secured Claims.
"Required Secured Lender Consideration" means four
hundred and thirty five million dollars ($435,000,000) in Cash or
15
<PAGE>
such other amount which has been approved by Requisite Secured Lender Consent.
"Requisite Secured Lender Consent" means the written consent
of holders of Designated Fixed Senior Secured Claims holding at least eighty
five percent (85%) in amount of such Designated Fixed Senior Secured Claims.
"Restructured Panini Obligations" means all of the obligations
under the Restructured Panini Loan Documents.
"Restructured Panini Loan Documents" means loan documents (i)
extending the maturity of the Panini Obligations until thirty-six (36) months
after the earlier of (a) the Consummation Date or (b) March 31, 1998; (ii)
providing that interest in respect of the obligations evidenced by the Existing
Panini Senior Credit Agreements shall be paid monthly at the non-default rate
thereof; (iii) providing that interest in respect of the obligations evidenced
by the Existing Panini Junior Credit Agreements may, at the election of Newco,
be paid in Cash or in kind by the issuance of additional notes on a quarterly
basis on the last day of March, June, September and December until December 31,
1998, in either case at the non-default rate thereof; (iv) containing customary
and reasonable defaults for a transaction of this nature, it being understood
and agreed that all defaults which predate the Consummation Date shall be waived
and that there shall be no events of default which are inconsistent with the
transactions contemplated hereby; (v) requiring Panini to commence paying
interest in respect of the obligations evidenced by the Existing Panini Junior
Credit Agreements, at the non-default rate thereof, in Cash by making one
quarterly Cash interest payment as of January 1, 1999 (on the principal amount
thereof including any capitalized amounts) in advance, and thereafter making
quarterly Cash interest payments (on the principal amount thereof including any
capitalized amounts) in arrears on the last day of March, June, September and
December until maturity, it being understood that the first quarterly interest
payment in arrears will be due on June 30, 1999 and that no payment will be due
on March 31, 1999; (vi) fixing the non-default rate of interest in respect of
the Panini Obligations at the same rate as in the Existing Panini Credit
Agreements; (vii) fixing the default rate of interest in respect of the Panini
Obligations at two hundred (200) basis points above the non-default rate of
interest in the Existing Panini Credit Agreements; (viii) containing cure
periods consistent with those contained in the Existing Panini Credit Agreements
but in no event less than five (5) Business Days; and (ix) which are otherwise
in form and substance reasonably acceptable to Toy Biz and the Panini Lenders.
16
<PAGE>
"Resulting Claim" means any Claim arising pursuant to section
502(h) of the Bankruptcy Code from the recovery of property under section 550 of
the Bankruptcy Code.
"Schedules" means the schedules of assets and liabilities and
the statements of financial affairs filed by the Debtors under section 521 of
the Bankruptcy Code and the Official Bankruptcy Forms of the Bankruptcy Rules as
such schedules and statements have been or may be supplemented or amended.
"Secured Claim" means a Claim secured by a Lien on Collateral
to the extent of the value of such Collateral, as determined in accordance with
section 506(a) of the Bankruptcy Code or, in the event that such Claim is
subject to setoff under section 553 of the Bankruptcy Code, to the extent of
such setoff.
"Secured Lenders" means those holders of Senior Secured Claims
set forth on Exhibit 16 hereof.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Senior Secured Claim" means any Contingent Senior
Secured Claim and any Fixed Senior Secured Claim.
"Shareholder Agreement" means a shareholders' agreement by and
between Isaac Perlmutter, Isaac Perlmutter, T.A., Zib Inc., Avi Arad, the New
Investors and the Secured Lenders in form and substance reasonably acceptable to
each of the foregoing and Toy Biz.
"Stockholder Warrants" means warrants exercisable not later
than the six (6) month anniversary of the Consummation Date entitling the holder
thereof to acquire one share of Newco Common Stock, subject to customary
anti-dilution protections, based upon an exercise price of fifteen ($15.00) per
share and otherwise upon the terms and conditions contained in the Stockholder
Warrant Agreement.
"Stockholder Warrant Agreement" means that certain Warrant
Agreement in substantially the form of Exhibit 17 hereto.
"Subsidiary Equity Interests" means the Equity Interests in
any of the Debtors held by any of the other Debtors.
"Term Loan Facility" means a term loan facility or facilities
for Newco and its subsidiaries in the amount of one hundred and forty million
dollars ($140,000,000) secured by all of the assets of Newco upon market rate
terms and conditions and otherwise in form and substance reasonably acceptable
to each of the Proponents.
17
<PAGE>
"Toy Biz" means Toy Biz, Inc., a Delaware corporation.
"Toy Biz Cash Distribution" means an amount of Cash equal to
the aggregate of (a) two hundred and eighty million dollars ($280,000,000), (b)
any commitment or facility fees actually paid in connection with obtaining
financing commitments required by this Plan of Reorganization, (c) the fees,
expenses and costs of Toy Biz's attorneys, investment bankers, and other
professionals incurred in connection with the Reorganization Cases and the
transactions contemplated hereby, including, without limitation, in connection
with or related to the preparation of any proxy statement, the making of any
securities registration and the solicitation of any proxies for Toy Biz in an
amount not to exceed in the aggregate (i) three million five hundred thousand
dollars ($3,500,000) for the period through and including November 30, 1997,
(ii) one million dollars ($1,000,000) for a fairness opinion, (iii) one million,
five hundred thousand dollars ($1,500,000) as a success fee, and (iv) an average
of six hundred and twenty-five thousand dollars ($625,000) per month thereafter
through and including the Consummation Date, and (d) the Breakup Fee.
"Transaction" means the transactions contemplated by the
Merger Agreement, and/or, to the extent applicable, the documents governing any
Qualifying Transaction.
"Unsecured Claim" means any Claim against a Debtor that is not
an Administration Expense Claim, a Priority Non-Tax Claim, a Priority Tax Claim,
a DIP Claim, a Secured Claim, a Class Securities Litigation Claim or any
deficiency Claim in respect of any Senior Secured Claim.
"Unsecured Creditor Payment" means Cash in an amount equal to
fifteen percent (15%) of the aggregate amount of Allowed Unsecured Claims plus
two million dollars ($2,000,000), but in no event more than eight million
dollars ($8,000,000) in the aggregate.
"U.S. Trustee" means the United States Trustee appointed under
section 581, title 28, United States Code to serve in the District of Delaware.
"Working Capital Facility" means a revolving credit loan
facility for Newco and its subsidiaries in the amount of seventy-five million
dollars ($75,000,000) upon market rate terms and conditions and otherwise in
form and substance reasonably acceptable to each of the Proponents.
18
<PAGE>
B. Interpretation; Application of
Definitions and Rules of Construction
-------------------------------------
Unless otherwise specified, all Section, schedule or exhibit
references in this Plan of Reorganization are to the respective Section in,
article of, or schedule or exhibit to, this Plan of Reorganization, as the same
may be amended, waived, or modified from time to time. The words "herein,"
"hereof," "hereto," "hereunder," and other words of similar import refer to this
Plan of Reorganization as a whole and not to any particular Section, subsection
or clause contained in this Plan of Reorganization. Except as otherwise
expressly provided herein, a term used herein that is not defined herein shall
have the meaning assigned to that term in the Bankruptcy Code. The rules of
construction contained in section 102 of the Bankruptcy Code shall apply to the
construction of this Plan of Reorganization. The headings in this Plan of
Reorganization are for convenience of reference only and shall not limit or
otherwise affect the provisions hereof.
C. Exhibits and Schedules
----------------------
The Merger Agreement, Charter and Bylaws are contained in a
separate Exhibit Volume that was filed with the Clerk of the Bankruptcy Court on
November 21, 1997. All other Exhibits and Schedules to this Plan of
Reorganization, including any materially modified or amended Merger Agreement,
Charter or Bylaws, all of which shall be in form and substance reasonably
acceptable to the Proponents, shall be contained in a supplemental Exhibit
Volume that shall be filed with the Clerk of the Bankruptcy Court not later than
ten (10) days prior to the commencement of the Confirmation Hearing or such
later date as the Bankruptcy Court may fix.
SECTION 2. PROVISIONS FOR PAYMENT OF ADMINISTRATION
EXPENSE CLAIMS AND PRIORITY TAX CLAIMS
--------------------------------------
2.1 Administration Expense Claims.
------------------------------
On the Consummation Date, each holder of an Allowed
Administration Expense Claim (including all DIP Claims) shall be paid by Newco
on account of such Allowed Administration Expense Claim an amount in Cash equal
to the amount of such Allowed Administration Expense Claim, except to the extent
that any entity entitled to payment of any Allowed Administration Expense Claim
agrees to a different treatment of such Administration Expense Claim; provided,
that Allowed Administration Expense Claims representing liabilities incurred in
the ordinary course of business by the Debtors in Possession shall be assumed
and paid by Newco in accordance with the terms and subject to the conditions of
any agreements governing, instruments evidencing or other documents relating to
such transactions.
19
<PAGE>
This Plan of Reorganization constitutes a motion by the
Proponents to fix a bar date for the filing of Administrative Expense Claims
other than the Administration Expense Claims treated under Section 2.2 hereof,
which shall be a date fixed by
order of the Bankruptcy Court.
2.2 Compensation and Reimbursement Claims.
-------------------------------------
All entities seeking an award by the Bankruptcy Court of
compensation for services rendered or reimbursement of expenses incurred through
and including the Consummation Date under sections 330 or 503(b)(2) of the
Bankruptcy Code (a) shall file their respective final applications for
allowances of compensation for services rendered and reimbursement of expenses
incurred by the date that is forty-five (45) days after the Consummation Date
and, if granted such an award by the Bankruptcy Court, (b) shall be paid in full
by Newco in such amounts as are allowed by the Bankruptcy Court (i) upon the
later of (A) the Consummation Date, and (B) the date upon which the order
relating to any such Administration Expense Claim becomes a Final Order or (ii)
upon such other terms as may be mutually agreed upon between such holder of an
Administration Expense Claim and the Proponents or, on and after the
Consummation Date, Newco.
2.3 Priority Tax Claims.
-------------------
On the Consummation Date, each holder of an Allowed Priority
Tax Claim shall be distributed on account of such Allowed Priority Tax Claim a
payment in Cash equal to the amount of such Allowed Priority Tax Claim.
SECTION 3. CLASSIFICATION OF CLAIMS
AND EQUITY INTERESTS
------------------------
Claims against and Equity Interests in the Debtors are divided
into the following classes:
Class 1 -- Priority Non-Tax Claims
Class 2 -- Senior Secured Claims
Subclass 2A -- Fixed Senior Secured Claims
Subclass 2B -- Contingent Senior Secured Claims
Class 3 -- Other Secured Claims
Subclass 3A -- Entertainment
Subclass 3B -- The Asher Candy Company
Subclass 3C -- Fleer Corp.
Subclass 3D -- Frank H. Fleer Corp.
Subclass 3E -- Heroes World Distribution, Inc.
Subclass 3F -- Malibu Comics Entertainment, Inc.
20
<PAGE>
Subclass 3G -- Marvel Characters, Inc.
Subclass 3H -- Marvel Direct Marketing Inc.
Subclass 3I -- SkyBox International Inc.
Class 4 -- Unsecured Claims
Subclass 4A -- Entertainment
Subclass 4B -- The Asher Candy Company
Subclass 4C -- Fleer Corp.
Subclass 4D -- Frank H. Fleer Corp.
Subclass 4E -- Heroes World Distribution, Inc.
Subclass 4F -- Malibu Comics Entertainment, Inc.
Subclass 4G -- Marvel Characters, Inc.
Subclass 4H -- Marvel Direct Marketing Inc.
Subclass 4I -- SkyBox International Inc.
Subclass 4J -- Intercompany Claims
Subclass 4K -- Insider Claims
Class 5 -- Class Securities Litigation Claims
Class 6 -- Equity Interests
Subclass 6A -- Entertainment
Subclass 6B -- Subsidiary Equity Interests
Class 7 -- Existing Warrants
SECTION 4. PROVISIONS FOR TREATMENT OF CLAIMS
AND EQUITY INTERESTS UNDER THE PLAN
-----------------------------------
4.1 Priority Non-Tax Claims (Class 1).
---------------------------------
On the Consummation Date, each holder of an Allowed Priority
Non-Tax Claim shall be distributed on account of such Allowed Priority Non-Tax
Claim a payment in Cash equal to the amount of its Allowed Priority Non-Tax
Claim.
4.2 Senior Secured Claims (Class 2).
-------------------------------
(a) Allowance of Senior Secured Claims. On the
----------------------------------
Consummation Date, the Claims of each holder of a Senior Secured Claim under
each of the Existing Credit Agreements (other than and to the extent of Claims
beneficially owned or controlled directly, indirectly or by participation by any
entity or Affiliate of any entity that serves or has served as a member of
Entertainment's board of directors) shall be allowed in an amount equal to the
amount owing to such holder under the applicable Existing Credit Agreement as of
the date hereof, together with interest, fees, charges and other amounts owing
under the Existing Credit Agreement through the Consummation Date, but in no
event more than an amount equal to the value of the Collateral as of the
Consummation Date securing such Senior Secured Claim
21
<PAGE>
plus any Claim for adequate protection relating to the Collateral, arising out
of that certain Revolving Credit Guaranty Agreement by and among Entertainment,
the other Debtors and Chase dated December 27, 1996, the order entered by the
Bankruptcy Court on January 24, 1997, or any amendments entered into or further
orders entered by the Bankruptcy Court with respect to either of the foregoing.
(b) Treatment of Allowed Fixed Senior Secured Claims
------------------------------------------------
(Subclass 2A).
- -------------
(i) No Qualifying Transaction.
-------------------------
(A) Distributions. In the event that no Qualifying
-------------
Transaction closes, each holder of an Allowed Fixed Senior Secured Claim shall
be distributed on the Consummation Date, in full and complete satisfaction and
discharge of its Fixed Senior Secured Claims, its Ratable Proportion of:
(1) two hundred and thirty million, two hundred and fifty thousand
dollars ($230,250,000) in Cash less the sum of (a) all amounts paid to satisfy
DIP Claims in full (exclusive of any increase in the amount of the DIP Claims
from and after October 7, 1997 including, without limitation, any interest or
charges which may accrue and all amounts advanced under the DIP Credit
Agreements), and (b) the Excess Administration Claims Amount;
(2) eleven million, six hundred thousand (11,600,000) shares
of Newco Common Stock;
(3) seven hundred ninety thousand (790,000) shares of Convertible
Preferred Stock, or, if applicable, an equivalent amount of New Convertible
Notes;
(4) the Excess Administration Claims Note;
(5) one thousand (1,000) shares of new common stock of each of the
Debtors other than Entertainment representing one hundred percent (100%) of the
issued and outstanding stock of such Debtors, which stock shall be transferred
to Newco in accordance with section 6.15 hereof;
(6) the right to purchase up to thirty million dollars ($30,000,000) of
Convertible Preferred Stock of Newco, or, if applicable, an equivalent amount of
New Convertible Notes as New Investors that would otherwise be issued to the New
Investors set forth on Exhibit 11; and
(7) four and nine tenths percent(4.9%) of the Net Avoidance Litigation
Proceeds to be distributed pursuant to Section 7.4(a) hereof.
22
<PAGE>
Subject to the preceding sentence and without duplication, Chase and the holders
of Senior Secured Claims shall be reimbursed for all of the professional fees,
costs and expenses of professionals engaged by Chase in its capacity as agent or
to act on behalf of all holders of Senior Secured Claims, including, without
limitation, all fees and expenses of counsel and financial advisors incurred in
connection with the Reorganization Cases, it being understood that(a) to the
extent that there is an Excess Administration Claims Amount, an amount equal to
all or a portion of such fees may be included in the Excess Administration
Claims Note as set forth above, and (b) in no event shall the aggregate value
(as of the Consummation Date) of the property distributed to holders of Fixed
Senior Secured Claims exceed the amount of such Fixed Senior Secured Claims or
the sum of the value (as of the Consummation Date), of the collateral securing
such Fixed Senior Secured Claims plus any Claim for adequate protection relating
to the collateral, arising out of that certain Revolving Credit Guaranty
Agreement by and among Entertainment, the other Debtors and Chase dated December
27, 1996, the order entered by the Bankruptcy Court on January 24, 1997, or any
amendments entered into or further orders entered by the Bankruptcy Court with
respect to either of the foregoing.
(B) Panini Obligations. All Intercompany
------------------
Agreements shall remain in full force and effect unless (a) modified or
terminated in the ordinary course of business or pursuant to the Plan of
Reorganization or (b) the Proponents agree in writing otherwise.
(ii) Qualifying Transaction. In the event of a
----------------------
Qualifying Transaction, each holder of an Allowed Fixed Senior Secured Claim
shall be distributed on the Consummation Date, in full and complete satisfaction
and discharge of its Fixed Senior Secured Claims, its Ratable Proportion of all
consideration received in connection with such transaction other than (i) the
Toy Biz Cash Distribution, and (ii) any property to be distributed pursuant to
Sections 2, 4.1, 4.2(c), 4.3, 4.4, 4.5 and 4.6 hereof; provided, however, that
in no event shall the holders of Allowed Fixed Senior Secured Claims receive
more than payment in full in accordance with the Existing Fleer Credit
Agreements.
(c) Treatment of Allowed Contingent Senior Secured
----------------------------------------------
Claims (Subclass 2B).
- --------------------
(i) No Panini Liquidation Event. If no Panini
---------------------------
Liquidation Event occurs on or prior to Consummation Date, the holders of
Allowed Contingent Senior Secured Claims shall receive, in full and complete
satisfaction and discharge of their Contingent Senior Secured Claims, the Newco
Guaranty of the Restructured Panini Obligations.
23
<PAGE>
(ii) Panini Liquidation Event. If a Panini
------------------------
Liquidation Event occurs on or prior to Consummation Date, the holders of
Allowed Contingent Senior Secured Claims shall receive, in full and complete
satisfaction and discharge of their Contingent Senior Secured Claims, their
Ratable Proportion of the New Panini Securities.
4.3 Other Secured Claims (Class 3).
------------------------------
On the Consummation Date, each holder of an Allowed Other
Secured Claim in each subclass of Class 3 (Other Secured Claims) shall in full
and complete satisfaction and discharge of its Other Secured Claim (a) be
distributed on account of such Allowed Other Secured Claim Cash equal to such
Allowed Other Secured Claim, (b) be distributed on account of such Allowed Other
Secured Claim the Collateral securing such Allowed Other Secured Claim or (c)
have such Allowed Other Secured Claim reinstated as against the applicable
Reorganized Debtor and made unimpaired in accordance with section 1124(2) of the
Bankruptcy Code, notwithstanding any contractual provision or applicable
non-bankruptcy law that entitles the holder of an Allowed Other Secured Claim to
demand and receive payment of such Claim prior to the stated maturity of such
Claim from and after the occurrence of a default. Such treatment shall be
determined by the Proponents.
4.4 Unsecured Claims (Class 4).
--------------------------
(a) Distributions.
-------------
(i) No Qualifying Transaction.
-------------------------
In the event that no Qualifying Transaction occurs
and except as set forth in Sections 4.4(b) and 4.4(c) hereof, in full and
complete satisfaction and discharge of its Allowed Unsecured Claim, each holder
of an Allowed Unsecured Claim in each of Subclass 4A (Entertainment), Subclass
4B (The Asher Candy Company), Subclass 4C (Fleer Corp.), Subclass 4D (Frank H.
Fleer Corp.), Subclass 4E (Heroes World Distribution, Inc.), Subclass 4F (Malibu
Comics Entertainment, Inc.), Subclass 4G (Marvel Characters, Inc.), Subclass 4H
(Marvel Direct Marketing Inc.) and Subclass 4I (Skybox International Inc.)of
Class 4 (Unsecured Claims) shall, to the extent not paid prior to the
Consummation Date, be distributed:
(1) its Ratable Proportion of the Unsecured Creditor Payment;
(2) its Ratable Proportion of one million (1,000,000) Plan Warrants
plus three (3) Plan Warrants for each eighty dollars ($80) of Allowed Unsecured
Claim in excess of twenty million dollars ($20,000,000) but in no event more
than one million seven
24
<PAGE>
hundred and fifty thousand (1,750,000) Plan Warrants in the aggregate;
(3) its Ratable Proportion of the thirty percent (30%) interest in the
Net Avoidance Litigation Proceeds to be distributed pursuant to Section 7.4(b)
hereof; and
(4) its Ratable Proportion of the thirty percent (30%) interest in the
Net Litigation Proceeds to be distributed pursuant to Section 7.4(b) hereof.
Notwithstanding anything else contained herein to the contrary, each of the
foregoing Subclasses that does not vote as a Subclass to accept this Plan of
Reorganization shall not receive the distributions provided for in items (2),
(3) and (4) of this Section 4.4(a)(i).
(ii) Qualifying Transaction.
----------------------
In the event that a Qualifying Transaction occurs and except
as set forth in Sections 4.4(b) and 4.4(c) hereof, in full and complete
satisfaction and discharge of its Allowed Unsecured Claim, each holder of an
Allowed Unsecured Claim in each of Subclass 4A (Entertainment), Subclass 4B (The
Asher Candy Company), Subclass 4C (Fleer Corp.), Subclass 4D (Frank H. Fleer
Corp.), Subclass 4E (Heroes World Distribution, Inc.), Subclass 4F (Malibu
Comics Entertainment, Inc.), Subclass 4G (Marvel Characters, Inc.), Subclass 4H
(Marvel Direct Marketing Inc.) and Subclass 4I (Skybox International Inc.) of
Class 4 (Unsecured Claims) shall, to the extent not paid prior to the
Consummation Date, be distributed the same property as set forth in Section
4.4(a)(i) above except that each holder of an Allowed Unsecured Claim shall
receive in lieu of the Plan Warrants to be distributed pursuant to Section
4.4(a)(i)(2) above one dollar and thirty cents ($1.30) for each Plan Warrant
which would have otherwise been distributed to such holder. In addition, holders
of Allowed Unsecured Claims shall receive all Excess Proceeds until all holders
of Allowed Unsecured Claims have received payment in full. Notwithstanding
anything else contained herein to the contrary, each of the foregoing Subclasses
that does not vote as a Subclass to accept this Plan of Reorganization shall not
receive the right to any distributions in respect of Net Litigation Proceeds or
Net Avoidance Litigation Proceeds and shall not receive any Cash distribution in
lieu of Plan Warrants.
(b) Intercompany Claims. No distribution shall be made on
-------------------
account of Intercompany Claims, and the holders of Intercompany Claims shall not
receive or retain on account of such Claims any property or interest in property
on account of such Claims. At the election of Newco, any Intercompany Claims
25
<PAGE>
shall be treated as contributions to the capital of the obligor on such
Intercompany Claims.
(c) Insider Claims. Each holder of an Allowed
--------------
Insider Claim shall receive, in full and complete satisfaction and discharge of
its Insider Claim, its Ratable Proportion of one dollar ($1) and, in the event a
Qualifying Transaction closes pursuant to which holders of Fixed Senior Secured
Claims and holders of all other Unsecured Claims (other than Intercompany
Claims) are paid in full, all Excess Proceeds not distributed to holders of
Unsecured Claims.
4.5 Class Securities Litigation Claims (Class 5).
(a) Distributions. In the event that each of Subclass
-------------
4A, Class 5 and Subclass 6A vote to accept this Plan of Reorganization and
subject to allocation between holders of Allowed Class Securities Litigation
Claims and holders of Allowed Equity Interests in Subclass 6A (Entertainment) of
Class 6 (Equity Interests) in accordance with Section 4.5(b) hereof, each holder
of an Allowed Class Securities Litigation Claim shall be distributed, in full
and complete satisfaction and discharge of its Allowed Class Securities
Litigation on account of such Allowed Class Securities Litigation Claim its
Ratable Proportion of four million ($4,000,000) Stockholder Warrants and, in the
event a Qualifying Transaction closes pursuant to which holders of Fixed Senior
Secured Claims and holders of Unsecured Claims are paid in full, all Excess
Proceeds not distributed to holders of Unsecured Claims. In the event that each
of Subclass 4A, Class 5 and Subclass 6A do not accept this Plan of
Reorganization, holders of Allowed Class Securities Litigation Claims shall not
receive any distribution hereunder.
(b) Calculation of Distribution. For purposes of
---------------------------
effecting distributions hereunder on account of Allowed Class Securities
Litigation Claims and Allowed Equity Interests in Subclass 6A (Entertainment) of
Class 6 (Equity Interests), any judgment evidencing any Allowed Class Securities
Litigation Claim shall be converted into an implied number of shares of common
stock of Entertainment calculated as the quotient of (i) the aggregate amount of
any such judgment, divided by (ii) the average of intraday high and low average
sales prices of a share of common stock of Entertainment on the New York Stock
Exchange, as reported in The Wall Street Journal (National Edition) for the ten
-----------------------
consecutive trading days ending on the trading day immediately preceding the
date of the commencement of any action underlying any Allowed Class Securities
Litigation Claim.
(c) Parity of and Limitation on Distributions. The
-----------------------------------------
distributions to be made under this Section 4.5 on account of Allowed Class
Securities Litigation Claims shall be made on the basis of parity with the
Equity Interests in Subclass 6A
26
<PAGE>
(Entertainment) of Class 6 (Equity Interests) and subject to the limitation that
holders of Allowed Class Securities Litigation Claims and Equity Interests in
Subclass 6A (Entertainment) of Class 6 (Equity Interests) shall only be entitled
to a single recovery on account of such Claims and Equity Interests.
4.6 Equity Interests (Class 6).
--------------------------
(a) Entertainment (Subclass 6A).
---------------------------
(i) Distributions. In the event that each of
-------------
Subclass 4A, Class 5 and Subclass 6A vote to accept this Plan of Reorganization
and subject to allocation between holders of Allowed Class Securities Litigation
Claims and holders of Allowed Equity Interests in Subclass 6A (Entertainment) of
Class 6 (Equity Interests) in accordance with Section 4.5(b) and 4.5(c) hereof,
each holder of an Allowed Equity Interest in Subclass 6A (Entertainment) of
Class 6 (Equity Interests) shall be distributed, in full and complete
satisfaction and discharge of such Allowed Equity Interest, on account of such
Allowed Equity Interest its Ratable Proportion of four million ($4,000,000)
Stockholder Warrants and, in the event a Qualifying Transaction closes pursuant
to which holders of Fixed Senior Secured Claims and holders of Unsecured Claims
are paid in full, all Excess Proceeds not distributed to holders of Unsecured
Claims. In the event that each of Subclass 4A, Class 5 and Subclass 6A do not
accept this Plan of Reorganization, holders of Allowed Equity Interests in
Subclass 6A shall not receive any distribution hereunder.
(ii) Parity of and Limitation on Distributions. The
-----------------------------------------
distributions to be made under this Section 4.6 on account of Equity Interests
in Subclass 6A (Entertainment) of Class 6 (Equity Interests) shall be made on
the basis of parity with the Allowed Class Securities Litigation Claims and
subject to the limitation that holders of Allowed Class Securities Litigation
Claims and Equity Interests in Subclass 6A (Entertainment) of Class 6 (Equity
Interests) shall only be entitled to a single recovery on account of such Claims
and Equity Interests.
(b) Subsidiary Equity Interest (Subclass 6B). On the
----------------------------------------
Consummation Date, all Subsidiary Equity Interests shall be canceled, and the
holders of Subsidiary Equity Interests shall not be entitled to, and shall not,
receive or retain any property or interest in property on account of such
Subsidiary Equity Interest.
4.7 Existing Warrants (Class 7).
---------------------------
On the Consummation Date, the Existing Warrants shall be
canceled, and the holders of Existing Warrants shall not be
27
<PAGE>
entitled to, and shall not, receive or retain any property or interest in
property on account of such Equity Interests in Class 7 (Existing Warrants).
SECTION 5. IDENTIFICATION OF CLASSES OF CLAIMS AND
INTERESTS IMPAIRED AND NOT IMPAIRED UNDER THE
PLAN; ACCEPTANCE OR REJECTION OF THE PLAN
----------------------------------------------
5.1 Holders of Claims and Equity Interests Entitled to
--------------------------------------------------
Vote.
- ----
Each of Class 1 (Priority Non-Tax Claims), Class 2 (Senior
Secured Claims), Class 3 (Other Secured Claims), Class 4 (Unsecured Claims),
Class 5 (Class Securities Litigation Claims), Subclass 6A (Marvel Entertainment
Group) of Class 6 (Equity Interests), Subclass 6B (Subsidiary Equity Interests)
of Class 6 (Equity Interests) and Class 7 (Existing Warrants) and, as
applicable, each subclass thereof, are impaired hereunder, and the holders of
Claims in each of Class 1 (Priority Non-Tax Claims), Class 2 (Senior Secured
Claims), Class 4 (Unsecured Claims), Class 5 (Class Securities Litigation
Claims) and Subclass 6A (Entertainment) of Class 6 (Equity Interests) and, as
applicable, each subclass thereof, are entitled to vote separately to accept or
reject this Plan of Reorganization as provided in the order of the Bankruptcy
Court fixing the Ballot Date and otherwise governing the balloting procedures
applicable to this Plan of Reorganization. Holders of Claims in Subclass 4J
(Intercompany Claims) of Class 4 (Unsecured Claims) and Equity Interests in
Subclass 6B (Subsidiary Equity Interests) of Class 6 (Equity Interests) and
Class 7 (Existing Warrants) are not entitled to vote on this Plan of
Reorganization and are presumed to have rejected it in accordance with section
1126(g) of the Bankruptcy Code. Notwithstanding anything else contained herein
to the contrary, Class 5 (Class Securities Litigation Claims) and Subclass 6A
(Marvel Entertainment Group) of Class 6 (Equity Interests) shall be conclusively
presumed to have rejected the Plan in accordance with section 1126(g) of the
Bankruptcy Code in the event that Subclass 4A votes to reject the Plan and
Subclass 6A (Marvel Entertainment Group) of Class 6 (Equity Interests) shall be
conclusively presumed to have rejected the Plan in accordance with section
1126(g) of the Bankruptcy Code in the event that Class 5 votes to reject the
Plan.
For purposes of calculating the number of Allowed Claims held
by holders of Allowed Claims that have voted to accept or reject this Plan of
Reorganization under section 1126(c) of the Bankruptcy Code, all Allowed Claims
held by any entity of any Affiliate thereof that acquired record ownership of
such Allowed Claims after the Petition Date shall be aggregated and treated as
one Allowed Claim.
28
<PAGE>
5.2 Subtraction and Addition of Classes and Subclasses.
--------------------------------------------------
(a) Subtraction of Classes and Subclasses. Any
-------------------------------------
class or subclass of Claims that does not contain as an element thereof an
Allowed Claim or a Claim temporarily allowed under Bankruptcy Rule 3018 as of
the date of the commencement of the Confirmation Hearing shall be deemed
subtracted from this Plan of Reorganization for purposes of voting to accept or
reject this Plan of Reorganization and for purposes of determining acceptance or
rejection of this Plan of Reorganization by such class or subclass under section
1129(a)(8) of the Bankruptcy Code.
(b) Addition of Classes and Subclasses. In the
----------------------------------
event that any subclass of Class 3 (Other Secured Claims) would contain as
elements thereof two or more Secured Claims collateralized by different
properties or interests in property or collateralized by Liens against the same
property or interest in property having different priority, such claims shall be
divided into separate subclasses of such subclass of Class 3 (Other Secured
Claims).
5.3 Nonconsensual Confirmation.
--------------------------
In the event that any impaired class of Claims or Equity
Interests entitled to vote shall not accept this Plan of Reorganization by the
requisite statutory majorities provided in sections 1126(c) or 1126(d) of the
Bankruptcy Code, as applicable, after giving effect to any vote designated under
section 1126(e) of the Bankruptcy Code, the Proponents shall move to have the
Bankruptcy Court confirm this Plan of Reorganization under section 1129(b) of
the Bankruptcy Code notwithstanding such rejection and notwithstanding the
deemed rejection of this Plan of Reorganization by holders of Claims in Subclass
4J (Intercompany Claims) of Class 4 (Unsecured Claims) and Equity Interests in
Subclass 6B (Subsidiary Equity Interests) of Class 6 (Equity Interests) and
Existing Warrants in Class 7 (Existing Warrants) in accordance with Section 5.1
hereof.
5.4 Severability of Plan of Reorganization.
--------------------------------------
This Plan of Reorganization is, severally, a plan of
reorganization for each of the Debtors. In the event that this Plan of
Reorganization is not confirmed for all Debtors, then this Plan of
Reorganization may not be confirmed for any Debtor without the consent of each
of the Proponents, provided, however, that this Plan of Reorganization may be
-------- -------
confirmed if it can be confirmed for all Debtors other than Immaterial Debtors.
29
<PAGE>
SECTION 6. MEANS OF IMPLEMENTATION
-----------------------
6.1 Closing of Transaction.
----------------------
On the Consummation Date, the closing of the Transaction shall
occur in accordance with the Merger Agreement and, in the event of a Qualifying
Transaction, any other applicable document on the terms and subject to the
conditions contained in such Merger Agreement and/or other applicable document,
free and clear of all Liens, claims, encumbrances and interests. In connection
therewith, all outstanding letters of credit or other similar obligations as set
forth on Schedule 6.1 hereto issued for the account of any of the Debtors or the
Debtors in Possession under the Existing Credit Agreements or the DIP Credit
Agreement, as applicable, shall be (a) canceled and terminated with Chase
receiving releases reasonably acceptable to Chase from the beneficiaries
thereof, or (b) Newco shall issue a back to back letter of credit in form and
substance reasonably acceptable to Chase.
6.2 Derivative Securities Litigation Claims.
---------------------------------------
Any derivative securities litigation claims are property of
the estate of Entertainment under section 541 of the Bankruptcy Code and shall
become the property of Newco.
6.3 Board of Directors of the Reorganized Debtors.
---------------------------------------------
The initial Board of Directors of Newco shall consist of six
(6) individuals designated by Toy Biz and the New Investors and five (5)
individuals designated by the Secured Lenders. The initial members of the Board
of Directors of Newco, assuming its formation, are or shall be stated in the
Disclosure Statement under "GENERAL INFORMATION - Board of Directors and
Executive Officers of the Reorganized Debtors" or an amendment or supplement to
the Disclosure Statement or such other filing as may be made with the Bankruptcy
Court. Thereafter, and subject to the Shareholder Agreement, the Board of
Directors of Newco shall be elected in accordance with the Charter and Bylaws.
6.4 Officers of the Reorganized Debtors.
-----------------------------------
The initial officers of Newco shall be determined by the
Proponents. The initial officers of Newco, assuming its formation, are stated in
the Disclosure Statement under "GENERAL INFORMATION - Board of Directors and
Executive Officers of the Reorganized Debtors." The selection of officers of the
Reorganized Debtors after the Consummation Date shall be as provided in the
Charter and Bylaws.
30
<PAGE>
6.5 Distribution to New Investors.
-----------------------------
In the event that no Qualifying Transaction closes, the New
Investors shall receive nine hundred thousand (900,000) shares of Convertible
Preferred Stock, or, if applicable, an equivalent amount of New Convertible
Notes on the Consummation Date in exchange for ninety million dollars
($90,000,000) in Cash.
6.6 Toy Biz Distribution.
--------------------
(a) No Qualifying Transaction.
-------------------------
In the event that no Qualifying Transaction closes, holders of
Toy Biz common stock (other than the Debtors) shall receive on the Consummation
Date twenty million, three hundred fifty-two thousand, one hundred twenty-seven
(20,352,127) shares of Newco Common Stock, and such shares shall be distributed
to holders of Toy Biz common stock on the Consummation Date.
(b) Qualifying Transaction.
----------------------
In the event that a Qualifying Transaction closes, holders of
Toy Biz common stock (other than the Debtors) shall receive on the Consummation
Date an amount of Cash equal to the Toy Biz Cash Distribution less the Breakup
Fee and certain professional fees which net amount shall be payable in
immediately available funds in accordance with instructions to be provided to
the Debtors by Toy Biz on or before the Consummation Date.
6.7 Fees to New Investors.
---------------------
(a) Professional Fees. On the Consummation Date,
-----------------
the New Investors (other than any New Investors which are New Investors solely
by virtue of having purchased Convertible Preferred Stock pursuant to section
4.2(b)(i)(A)(7) hereof or are Affiliates of Isaac Perlmutter, Isaac Perlmutter
T.A., Zib Inc. or Avi Arad or any assignee of any of the foregoing) shall be
reimbursed by Newco in an amount not to exceed two hundred thousand dollars
($200,000) for all of the professional fees, costs and expenses incurred solely
in connection with the negotiation of the Convertible Preferred Stock Purchase
Agreement and related agreements and documentation, it being understood that
such New Investors shall not be reimbursed for any other professional fees,
costs or expenses relating to these Reorganization Cases including, without
limitation, any litigation relating to the Reorganization Cases, this Plan of
Reorganization, the Convertible Preferred Stock Purchase Agreement or Toy Biz.
31
<PAGE>
(b) Breakup Fee. In the event that a Qualifying
-----------
Transaction closes, the Breakup Fee shall be payable in Cash in immediately
available funds as may be required by the Convertible Preferred Stock Purchase
Agreement.
6.8 Dissolution of Committees.
-------------------------
On the Consummation Date, all statutory committees (other than
the Creditors Committee to the extent provided in Section 6.16 hereof) appointed
by the U.S. Trustee in the Reorganization Cases shall automatically dissolve and
such committees shall cease to exercise any functions and be divested of all
rights, powers and duties.
6.9 Transfer of Panini. All Intercompany Agreements between
------------------
the Panini Entities and Marvel or any of its Affiliates, including, without
limitation, any material licensing agreement designated by the holders of a
majority of the Senior Secured Claims shall remain in full force and effect
unless modified or terminated in the ordinary course of business or the holders
of the Senior Secured Claims and Toy Biz otherwise agree in writing.
6.10 Newco Financing.
---------------
In the event that no Qualifying Transaction closes, Toy Biz
shall arrange for Newco to obtain the Term Loan Facility, the Working Capital
Facility and investors to purchase ninety million dollars ($90,000,000) of
Convertible Preferred Stock, or, if applicable, an equivalent amount of the New
Convertible Notes for ninety million dollars ($90,000,000) in Cash.
6.11 Vote of Characters' Toy Biz Stock.
---------------------------------
As of the Consummation Date, Characters shall be deemed to
have voted all of its Toy Biz common stock in favor of the Merger Agreement, any
Qualifying Transaction and the transactions contemplated hereby.
6.12 Forgiveness of Panini Obligations.
---------------------------------
On the Consummation Date, each of the Debtors shall forgive
all monetary obligations of Panini to such Debtor due and payable as of December
31, 1997.
6.13 Panini Indemnity.
----------------
On the Consummation Date, Newco shall execute and deliver the
Panini Indemnity.
32
<PAGE>
6.14 Outstanding Toy Biz Stock Interests. Any outstanding Toy
-----------------------------------
Biz preferred stock or stock options shall be eliminated prior to the
Consummation Date or will only dilute the Newco Common Stock to be distributed
pursuant to Section 6.6 hereof.
6.15 Distribution of Subsidiary Equity Interests.
-------------------------------------------
In connection with and in consideration for the
distributions to be made under section 4.2(b)(i) hereof by Entertainment on
account of the Allowed Fixed Senior Secured Claims, each holder of a Fixed
Senior Secured Claim shall transfer to Entertainment, and Entertainment shall
acquire by subrogation, all Fixed Senior Secured Claims against any Debtor other
than Entertainment. The distributions of shares of new common stock of Debtors
other than Entertainment provided for under section 4.2(b)(i)(A) (5) hereof
shall be made directly to Newco.
6.16 Continuation of Creditors Committee.
-----------------------------------
From and after the Consummation Date, the Creditors Committee
may continue to exist for the sole purpose of monitoring the Claims objection
process it being understood that the reasonable professional fees and expenses
of the Creditors Committee and the expenses of its members shall be paid by the
Litigation Trust in an amount not to exceed one hundred thousand dollars
($100,000) and that neither Newco nor any of its subsidiaries or affiliates
shall have any liability therefor.
6.17 Right to Object to Fees.
-----------------------
Nothing contained herein shall be construed as in any way
limiting the right of any party in interest to object to any of the fees and
expenses of any professionals retained pursuant to sections 327 or 1103 of the
Bankruptcy Code.
SECTION 7. LITIGATION TRUST
----------------
7.1 Assignment of Rights.
--------------------
On the Consummation Date, each of the Debtors and the
Litigation Trustee shall execute and deliver the Litigation Trust Agreement
pursuant to which (i) the Debtors shall grant, assign, transfer, convey and
deliver to the Litigation Trustee, without representation, warranty or recourse,
for the benefit of the Beneficiaries all of the Debtors' right, title and
interest in and to any and all Litigation Claims, and (ii) pursuant to the
Litigation Trust Agreement, the Litigation Trustee shall accept the rights and
properties assigned and transferred to it and the trust imposed upon it, agree
to retain and enforce the Litigation
33
<PAGE>
Claims for the benefit of the Beneficiaries, further agree to be appointed for
such purpose under section 1123(b)(3)(B) of the Bankruptcy Code and hold the Net
Litigation Proceeds and the Net Avoidance Litigation Proceeds in trust for the
Beneficiaries.
7.2 Control of Litigation.
---------------------
Except as set forth in this Section 7.2, the Litigation
Trustee shall have the full power and discretion to select and to hire
professionals, and to initiate, to prosecute, to supervise, to direct, to
compromise and to settle all Litigation Claims. Notwithstanding the foregoing,
Newco may, in its sole and absolute discretion, direct the Trustee to dismiss
with prejudice, to compromise or to settle any Cause of Action against any
person or entity which is a provider of goods or services to Newco or any of its
direct or indirect subsidiaries from and after the Consummation Date which Newco
reasonably believes could have an adverse effect on its business.
7.3 Liability of Trustee.
--------------------
The Trustee shall not have any liability for any of its acts
or omissions in connection with the selection and hiring of professionals, or
the initiation, prosecution, supervision, direction, compromising or settling of
any Litigation Claims, except in the case of its recklessness or its own
intentional or wanton misconduct resulting in personal gain, and in no event
shall be liable for any action taken in reliance upon the advice of
professionals retained by it in respect of the subject matter in question.
Notwithstanding the foregoing, the Litigation Trustee may, without liability
therefor, retain the services of any professional services firm with which the
Litigation Trustee is affiliated.
7.4 Distribution of Net Litigation Proceeds and Net Avoidance
---------------------------------------------------------
Litigation Proceeds. Net Litigation Proceeds and Net Avoidance Litigation
- -------------------
Proceeds shall be distributed as follows:
(a) four and nine tenths percent (4.9%) of the Net Avoidance
Litigation Proceeds shall be distributed to the holders of Allowed Fixed Senior
Secured Claims pursuant to Section 4.2(b)(i)(7) hereof.
(b) thirty percent (30%) of Net Litigation Proceeds and thirty
percent (30%) of Net Avoidance Litigation Proceeds shall be distributed to the
holders of Allowed Unsecured Claims pursuant to section 4.4 hereof.
(c) seventy percent (70%) of Net Litigation Proceeds and sixty
five and one tenth percent (65.1%) of Net Avoidance Litigation Proceeds shall be
distributed to Newco.
34
<PAGE>
7.5 Professional Fees and Expenses. On the Consummation Date,
------------------------------
Newco shall execute and deliver to the Litigation Trustee the Litigation Trust
Professional Fee Guaranty pursuant to which it shall guaranty for a period of
five (5) years from and after the Consummation Date, the payment of all
professional fees and expenses of the Litigation Trustee in an amount not to
exceed two million one hundred thousand dollars ($2,100,000) in the aggregate,
it being understood that one hundred thousand dollars of such amount shall be
for the exclusive purpose of paying fees and expenses of the Creditors Committee
which may become due and payable pursuant to Section 6.16 hereof. On the
Consummation Date, the Litigation Trustee shall execute and deliver to Newco the
Professional Fee Reimbursement Note pursuant to which the Litigation Trust shall
be obligated to reimburse Newco for any all sums advanced pursuant to the
Litigation Trust Professional Fee Guaranty together with simple interest at the
rate of ten percent (10%) per annum which obligation shall be secured by a
valid, binding, enforceable, perfected, first priority security interest in and
lien against all assets of the Litigation Trust. On the Consummation Date and
thereafter whenever reasonably requested to do so by Newco, the Litigation
Trustee shall execute and deliver UCC-1 financing statements and any other
documents or interests requested by Newco to evidence a perfected first priority
security interest in and lien against all assets of the Litigation Trust to
secure repayment of the Professional Fee Reimbursement Note. After payment in
full of the Professional Fee Reimbursement Note, the Litigation Trustee shall
have the right, but not the obligation, to reserve all or a portion of any
recoveries realized by the Litigation Trustee to pay for future professional
fees and expenses.
7.6 Commencement of Avoidance Actions. Unless otherwise
---------------------------------
authorized by the Court, the Litigation Trustee may not commence actions under
sections 510, 544, 545, 547, 548, 549, 550, 551 and 553 of the Bankruptcy Code
later than four (4) months after the Consummation Date.
7.7 Reduction of Judgment and Indemnifications. It is the
------------------------------------------
intention of the Proponents and the Creditors Committee that no Exculpated
Person shall have any liability to any person or entity, including, without
limitation, liability with respect to claims in the nature of contribution or
indemnification, however denominated or described, in connection with, arising
out of or in any way related to Litigation Claims asserted or threatened by the
Litigation Trust and that any such claims-over shall be extinguished and/or
satisfied as provided herein.
35
<PAGE>
(a) No Exculpated Person shall have any liability to any
person or entity for contribution or indemnification with respect to any
Litigation Claim asserted or threatened by the Litigation Trust and the
Litigation Trust (i) shall treat as a reduction or credit against any judgment
or settlement it may obtain against any person or entity the full amount of any
judgment or settlement such person or entity may obtain against any Exculpated
Person on whatsoever theory (whether by way of third- or subsequent
party-complaint, cross-claim, separate action or otherwise) in connection with,
arising out of, or which is any way related to any Litigation Claim; and (ii)
shall obtain from such person or entity for the benefit of any implicated
Exculpated Persons, a satisfaction in full of such entity's or person's judgment
or settlement against any such Exculpated Person.
(b) For good and valuable consideration including the
benefits to be received hereunder by holders of Claims against the Debtors, the
investment by the New Investors and the contribution of all issued and
outstanding common stock of Toy Biz to Newco, the Litigation Trust and Newco
shall indemnify and hold harmless each Exculpated Person from and against any
and all liability (including amounts paid in judgment, settlement, compromise,
penalty or otherwise) with respect to claims-over on whatsoever theory (whether
by way of third- or subsequent party complaint, cross-claim, separate action or
otherwise) by any person or entity to recover in whole or in part any liability,
direct or indirect, whether by way of judgment, settlement, compromise, penalty
or otherwise of any person or entity in connection with, arising out of, or
which is in any way related to any Litigation Claim, it being understood that
the Litigations Trust's indemnity shall be subordinate to its obligation to pay
up to two million one hundred thousand dollars ($2,100,000) of professional fees
and expenses of the professionals for the Litigation Trust and the Creditors
Committee. If separate counsel is required as to any such claim-over, the
Litigation Trust shall pay for the reasonable fees and expenses of competent
counsel selected by the Exculpated Person, subject to the approval of the
Litigation Trustee which will not be unreasonably withheld or delayed. No
settlement of any such claim-over shall require any financial contribution on
the part of any Exculpated Person.
7.8 Timing of Distributions.
-----------------------
Notwithstanding anything contained herein or in the Litigation
Trust Agreement to the contrary, no distributions may be made to any of the
Beneficiaries in their capacity as Beneficiaries of the Litigation Trust unless
and until (a) the Litigation Trustee has paid all sums due and owing pursuant to
the Professional Fee Reimbursement Note, and (b) the Litigation
36
<PAGE>
Trustee has provided Newco with an instrument in form and substance reasonably
satisfactory to Newco releasing Newco from any further liability pursuant to the
Litigation Trust Professional Fee Guaranty.
7.9 Objections to Claims.
--------------------
The Creditors Committee shall have the right to apply to the
Court to direct the Litigation Trustee to object to any Claim not Allowed by
this Plan if the Creditors Committee believes that Newco has not exercised
reasonable business judgement in failing to prosecute or in settling any
specified Claims objections. In the event that the Creditors Committee is
successful in connection with such application, Newco shall pay the reasonable
fees and expenses of the Litigation Trust in connection with the prosecution of
such objection.
SECTION 8. PROVISIONS GOVERNING DISTRIBUTIONS
----------------------------------
8.1 Date of Distributions.
---------------------
Any distributions and deliveries to be made hereunder shall be
made on the Consummation Date or as soon as practicable thereafter and deemed
made on the Consummation Date. In the event that any payment or act under this
Plan of Reorganization is required to be made or performed on a date that is not
a Business Day, then the making of such payment or the performance of such act
may be completed on the next succeeding Business Day, but shall be deemed to
have been completed as of the required date.
8.2 Entities to Exercise Function of Disbursing Agent.
-------------------------------------------------
All distributions under this Plan of Reorganization shall, at
the election of the Proponents, be made by Newco as Disbursing Agent or such
other entity designated by the Proponents prior to the conclusion of the
Confirmation Hearing as a Disbursing Agent. A Disbursing Agent shall not be
required to give any bond or surety or other security for the performance of its
duties unless otherwise ordered by the Bankruptcy Court; and, in the event that
a Disbursing Agent is so otherwise ordered, all costs and expenses of procuring
any such bond or surety shall be borne by Newco.
8.3 Surrender and Cancellation of Instruments.
-----------------------------------------
Each holder of a promissory note, Existing Warrant or other
instrument evidencing a Claim or Equity Interest (other than a holder of a
promissory note issued under any of the
37
<PAGE>
Existing Credit Agreements) shall surrender such promissory note, Existing
Warrant or instrument to the Disbursing Agent, and the Disbursing Agent shall
distribute or shall cause to be distributed to the holder thereof the
appropriate distribution, if any, hereunder. No distribution hereunder shall be
made to or on behalf of any holder of such a Claim unless and until such
promissory note or instrument is received or the unavailability of such note or
instrument is reasonably established to the satisfaction of the Disbursing
Agent. In accordance with section 1143 of the Bankruptcy Code, any such holder
of such a Claim or Equity Interest that fails to (a) surrender or cause to be
surrendered such promissory note or instrument or to execute and deliver an
affidavit of loss and indemnity reasonably satisfactory to the Disbursing Agent
and (b) in the event that the Disbursing Agent requests, furnish a bond in form
and substance (including, without limitation, amount) reasonably satisfactory to
the Disbursing Agent, within one (1) year from and after the Consummation Date
shall be deemed to have forfeited to Newco all rights, claims and interests and
shall not participate in any distribution hereunder.
8.4 Delivery of Distributions.
-------------------------
Subject to Bankruptcy Rule 9010, all distributions to any
holder of an Allowed Claim or an Allowed Equity Interest shall be made at the
address of such holder as scheduled on the Schedules filed with the Bankruptcy
Court unless the Debtors or Reorganized Debtors, as applicable, have been
notified in writing of a change of address, including, without limitation, by
the filing of a proof of claim or interest by such holder that relates an
address for such holder different from the address reflected on such Schedules
for such holder. In the event that any distribution to any holder is returned as
undeliverable, the Disbursing Agent shall use reasonable efforts to determine
the current address of such holder, but no distribution to such holder shall be
made unless and until the Disbursing Agent has determined the then current
address of such holder, at which time such distribution shall be made to such
holder without interest; provided that such distributions shall be deemed
unclaimed property under section 347(b) of the Bankruptcy Code at the expiration
of one year from the Consummation Date. After such date, all unclaimed property
or interests in property shall be the distributed on a pro rata basis to other
holders of Claims or Equity Interests in the same class or subclass and the
Claim or Equity Interest in respect of which such property or interest in
property was not delivered shall be discharged and forever barred. The
distributions to be made on the Consummation Date to each holder of an Allowed
Senior Secured Claim shall be made to the Administrative Agent for distribution
to holders of Allowed Senior Secured Claims in accordance with the provisions of
the Existing Credit Agreements.
38
<PAGE>
8.5 Manner of Payment Under Plan of Reorganization.
----------------------------------------------
At the option of the Disbursing Agent, any Cash payment to be
made hereunder may be made by a check or wire transfer or as otherwise required
or provided in applicable agreements.
8.6 Reserves and Distributions.
--------------------------
The Disbursing Agent shall reserve in a trust account for the
benefit of holders of Allowed Unsecured Claims cash, securities or other
property in an amount determined by the Bankruptcy Court on account of (a)
Disputed Claims in Class 4 (Unsecured Claims) and Class 5 (Class Securities
Litigation Claims) and, as applicable, each subclass thereof and (b) Resulting
Claims. Upon the resolution from time to time of Disputed Claims in Class 4
(Unsecured Claims) and Class 5 (Class Securities Litigation Claims) and, as
applicable, each subclass thereof, the Disbursing Agent may make distributions
on account of such claims in such manner deemed appropriate in the judgment of
the Disbursing Agent.
8.7 Resulting Claims.
----------------
In the event that any person or entity becomes entitled to an
Allowed Unsecured Claim in subclasses 4A through 4I and to receive distributions
on account of such Allowed Unsecured Claim as a result of the compromise,
adjustment, arbitration, settlement or enforcement or other resolution of an
action commenced, asserted or which could have been commenced or asserted by the
Litigation Trustee and such Allowed Unsecured claim is a Resulting Claim, such
person's or entity's only rights with respect to the Cash portions of the
distributions it would otherwise have been entitled to as a holder of such
Allowed Unsecured Claim is to take a set off equal to the aggregate amount of
all such Cash payments against any liability such person has or may have to the
Litigation Trust. Such setoff shall be deemed a distribution under the Plan on
account of such Allowed Claim.
8.8 Distributions After Consummation Date.
-------------------------------------
Distributions made after the Consummation Date to holders of
Disputed Claims that are not Allowed Claims as of the Consummation Date but
which later become Allowed Claims shall be deemed to have been made on the
Consummation Date.
8.9 Rights And Powers Of Disbursing Agent.
-------------------------------------
(a) Powers of the Disbursing Agent. The
------------------------------
Disbursing Agent shall be empowered to (a) effect all actions and execute all
agreements, instruments and other documents necessary
39
<PAGE>
to perform its duties this Plan of Reorganization, (b) make all distributions
contemplated hereby, (c) employ professionals to represent it with respect to
its responsibilities, and (d) exercise such other powers as may be vested in the
Disbursing Agent by order of the Bankruptcy Court, pursuant to this Plan of
Reorganization, or as deemed by the Disbursing Agent to be necessary and proper
to implement the provisions hereof.
(b) Expenses Incurred on or after the Consummation
----------------------------------------------
Date. Except as otherwise ordered by the Bankruptcy Court, the amount of any
- ----
reasonable fees and expenses incurred by the Disbursing Agent on or after the
Consummation Date (including, without limitation, taxes) and any reasonable
compensation and expense reimbursement claims (including, without limitation,
reasonable fees and expenses of counsel) made by the Disbursing Agent, shall be
paid in Cash by the Reorganized Debtors.
(c) Exculpation. Each Disbursing Agent, from and
-----------
after the Consummation Date, is hereby exculpated by all entities, including,
without limitation, holders of Claims and Equity Interests and other parties in
interest from any and all claims, Causes of Action and other assertions of
liability (including, without limitation, breach of fiduciary duty) arising out
of the discharge by such Disbursing Agent of the powers and duties conferred
upon it hereby or any order of the Bankruptcy Court entered pursuant to or in
furtherance hereof, or applicable law, except solely for actions or omissions
arising out of the gross negligence or willful misconduct of such Disbursing
Agent. No holder of a Claim or an Equity Interest or other party in interest
shall have or pursue any claim or cause of action against the Disbursing Agent
for making payments in accordance herewith or for implementing the terms hereof.
SECTION 9. PROCEDURES FOR TREATING DISPUTED CLAIMS UNDER
THE PLAN OF REORGANIZATION
---------------------------------------------
9.1 Objections to Claims.
--------------------
Subject to Section 7.9 hereof, Newco shall be the sole entity
to object to Claims. Any objections to Claims shall be filed by the latest of
(a) ninety (90) days after the Consummation Date, (b) thirty (30) days after a
proof of claim is filed and (c) such later date as may be fixed by the
Bankruptcy Court.
9.2 No Distributions Pending Allowance.
----------------------------------
Notwithstanding any other provision hereof, if any portion of
a Claim is a Disputed Claim, no payment or distribution provided hereunder shall
be made on account of the
40
<PAGE>
disputed portion of such Claim unless and until such Disputed Claim becomes an
Allowed Claim.
9.3 Cash Reserve.
------------
On the Consummation Date, Newco shall deposit the sum of eight
million dollars ($8,000,000) in an interest bearing trust account for the
benefit of holders of Allowed Unsecured Claims under the Plan.
9.4 Distributions After Allowance.
-----------------------------
Payments and distributions to each holder of a Disputed Claim
or Equity Interest or any other Claim or Equity Interest that is not an Allowed
Claim or Equity Interest, to the extent that such Claim or Equity Interest
ultimately becomes an Allowed Claim or Equity Interest, shall be made in
accordance with the provisions hereof governing the class or subclass of Claims
or Equity Interests in which such Claim or Equity Interest is classified. As
soon as practicable after the date that the order or judgment of the Bankruptcy
Court allowing any Disputed Claim or Equity Interest or any other Claim or
Equity Interest that is not an Allowed Claim or Equity Interest becomes a Final
Order, the Disbursing Agent shall distribute to the holders of such Claim or
Equity Interest any payment or property that would have been distributed to such
holder if the Claim or Equity Interest had been allowed on the Consummation
Date, together with any interest earned thereon.
SECTION 10. PROVISION GOVERNING EXECUTORY CONTRACTS AND
UNEXPIRED LEASES UNDER THE PLAN
-------------------------------------------
10.1 General Treatment.
-----------------
Except as set forth in Section 10.4 below, this Plan of
Reorganization constitutes a motion by the Debtors governed by this Plan of
Reorganization to assume, as of the Consummation Date, all executory contracts
and unexpired leases to which any of the Debtors are parties, except for an
executory contract or unexpired lease that (a) has been assumed or rejected
pursuant to Final Order of the Bankruptcy Court, or (b) is specifically rejected
on Schedule 10.1 hereto filed by the Proponents on or before the commencement of
the Confirmation Hearing or such later date as may be fixed by the Bankruptcy
Court, or (c) is otherwise assumed hereunder. Any executory contract or
unexpired lease assumed hereunder may be freely assigned by any Debtor to any
other Debtor or Reorganized Debtor or Newco and any such assignment shall
constitute a novation of the obligations of the assigning Debtor under any such
executory contract or unexpired lease. Any such assignment shall be effected by
filing a notice thereof with the Bankruptcy Court on or before the commencement
41
<PAGE>
of the Confirmation Hearing. For purposes hereof, each executory contract and
unexpired lease listed on Schedule 10.1 hereto that relates to the use of
occupancy of real property shall include (a) modifications, amendments,
supplements, restatements, or other agreements made directly or indirectly by
any agreement, instrument, or other document that in any manner affects such
executory contract or unexpired lease, without regard to whether such agreement,
instrument or other document is listed on Schedule 10.1 hereto and (b) executory
contracts or unexpired leases appurtenant to the premises listed on Schedule
10.1 hereto, including all easements, licenses, permits, rights, privileges,
immunities, options, rights of first refusal, powers, uses, usufructs,
reciprocal easement agreements, vault, tunnel or bridge agreements or
franchises, and any other interests in real estate or rights in rem relating to
such premises to the extent any of the foregoing are executory contracts or
unexpired leases, unless any of the foregoing agreements are assumed.
10.2 Amendments to Schedule; Effect of Amendments.
--------------------------------------------
The Debtors shall assume each of the executory contracts and
unexpired leases not listed in Schedule 10.1 hereto; provided, that the
Proponents may on or before the last Business Day before the Confirmation Date,
amend Schedule 10.1 hereto to delete or add any executory contract or unexpired
lease thereto, in which event such executory contract or unexpired lease shall
be deemed to be, respectively, assumed and, if applicable, assigned as provided
therein, or rejected. The Proponents shall provide notice of any amendments to
Schedule 10.1 hereto to the parties to the executory contracts or unexpired
leases affected thereby. The fact that any contract or lease is scheduled on
Schedule 10.1 hereto shall not constitute or be construed to constitute an
admission by any Proponent or any Debtor that any Debtor has any liability
thereunder.
10.3 Bar to Rejection Damage Claims.
------------------------------
In the event that the rejection of an executory contract or
unexpired lease by any of the Debtors results in damages to the other party or
parties to such contract or lease, a Claim for such damages, if not heretofore
evidenced by a filed proof of claim, shall be forever barred and shall not be
enforceable against the Debtors, or their properties or interests in property as
agents, successors, or assigns, unless a proof of claim is filed with the
Bankruptcy Court and served upon counsel for each of the Proponents on or before
thirty (30) days after the earlier to occur of (a) the giving of notice to such
party under Section 10.1 or 10.2 hereof and (b) the entry of an order by the
Bankruptcy Court authorizing rejection of a particular executory contract or
lease.
42
<PAGE>
10.4 Certain Panini Agreements.
-------------------------
(a) Panini Sticker Agreement. Notwithstanding
------------------------
anything else contained herein to the contrary, the Panini Sticker Agreement
shall be assumed and all amounts owing by any of the Panini Entities to any of
the Debtors on or prior to December 31, 1997 shall be forgiven. In addition,
Newco shall permit the Panini Entities to assign the Panini Sticker Agreement to
any other entity in connection with any subsequent sale of Panini except to a
Designated Competitor.
(b) Panini Comic Distribution Agreement.
-----------------------------------
Notwithstanding anything else contained herein to the contrary, the Panini Comic
Distribution Agreement shall be assumed and modified as follows: (i) the term
shall be through December 31, 1998, (ii) the royalty rate through December 31,
1998 shall be six percent (6%), (iii) the minimum guaranteed royalty (A) shall
be eliminated for the period from January 1, 1997 through December 31, 1997 and
(B) shall be two million dollars ($2,000,000) for the period from January 1,
1998 through December 31 1998, (iv) the license shall entitle the Panini
Entities to the use of a minimum of fifty (50) titles at all times during 1998,
and (v) any and all amounts owing thereunder to the Debtors on or prior to
December 31, 1997 shall be forgiven. In addition, Newco shall permit the Panini
Entities to assign the Panini Comic Distribution Agreement, as modified, to any
other entity in connection with a sale of the Panini Entities except to a
Designated Competitor. From and after the Consummation Date, any and all
royalties owed to the National Basketball Association in respect of sticker
sales and card sales made by Panini pursuant to the NBA License Agreement shall
be the sole responsibility of Panini.
SECTION 11. CONDITIONS PRECEDENT TO CONFIRMATION DATE
AND CONSUMMATION DATE
-----------------------------------------
11.1 Conditions Precedent to Confirmation of Plan of
-----------------------------------------------
Reorganization.
- --------------
The confirmation of this Plan of Reorganization is subject to
satisfaction of the following conditions precedent:
(a) Confirmation Order. The Confirmation Order to be entered
------------------
by the Clerk of the Bankruptcy Court shall be in a form that (i) does
not materially and adversely affect the benefits to be received
hereunder by any of (A) the Debtors' estates, (B) Toy Biz, (C) the
holders of Senior Secured Claims, (D) the holders of DIP Claims or (E)
the holders of Unsecured Claims, (ii) determines that the Plan
satisfies each of the applicable requirements of section 1129 of the
43
<PAGE>
Bankruptcy Code, and (iii) is otherwise in form and substance
reasonably acceptable to the Proponents.
11.2 Conditions Precedent to Consummation Date of Plan
-------------------------------------------------
of Reorganization.
- -----------------
The occurrence of the Consummation Date of this Plan of
Reorganization is subject to satisfaction of the following conditions precedent:
(a) SEC Information Statement. A combined proxy or information
-------------------------
and registration statement on Form S-4 shall have been declared
effective by the Securities and Exchange Commission and such combined
information and registration statement shall have been delivered to all
holders of Toy Biz common stock in accordance with the rules of the
Securities and Exchange Commission and twenty (20) business days
(computed in accordance with Rule 14C of the Securities and Exchange
Commission) shall have elapsed since such delivery;
(b) HSR. All necessary consents under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, shall have been made
and any specified waiting periods thereunder shall have expired without
challenge;
(c) Restructured Panini Loan Documents. The Restructured
----------------------------------
Panini Loan Documents shall be in full force and effect.
(d) Secured Lender Consummation Date. The Consummation Date
--------------------------------
shall occur not later than July 14, 1998; and
(e) Toy Biz Consummation Date. The Consummation Date shall
-------------------------
occur not later than November 20, 1998.
11.3 Waiver of Conditions Precedent.
------------------------------
Each of the conditions precedent in Sections 11.1 and 11.2
hereof may only effectively be waived, in whole or in part, if waived, by the
Proponents acting jointly except that the consent of Toy Biz is not required to
waive the condition precedent contained in Section 11.2(d) hereof. Any such
waiver of a condition precedent in Section 11.1 or 11.2 hereof may be effected
at any time, without notice, without leave or order of the Bankruptcy Court and
without any formal action other than filing a notice of waiver with the
Bankruptcy Court and otherwise proceeding to consummate this Plan of
Reorganization. Notwithstanding the foregoing, the condition precedent contained
44
<PAGE>
in Section 11.1(a)(i)(E) may only be waived with the consent of
the Creditors Committee.
SECTION 12. EFFECT OF CONFIRMATION
----------------------
12.1 General Authority.
-----------------
Until the completion of all transactions contemplated to occur
on the Consummation Date, the Bankruptcy Court shall retain custody and
jurisdiction of each of the Debtors, its properties and interests in property
and its operations. On the Consummation Date, each of the Debtors, its
properties and interests in property and its operations shall be released from
the custody and jurisdiction of the Bankruptcy Court, except as provided in
Section 14.1 hereof.
12.2 Discharge of Debtors.
--------------------
(a) General Discharge. The treatment of all Claims
-----------------
against or Equity Interests in each of the Debtors hereunder shall be in
exchange for and in complete satisfaction, discharge and release of all Claims
against any Equity Interests in such Debtor of any nature whatsoever, known or
unknown, including, without limitation, any interest accrued or expenses
incurred thereon from and after the Petition Date, or against its estate or
properties or interests in property. Except as otherwise provided herein, upon
the Consummation Date, all Claims against and Equity Interests in each of the
Debtors will be satisfied, discharged and released in full exchange for the
consideration provided hereunder. All entities shall be enjoined and precluded
from asserting against any Debtor, Reorganized Debtor or Newco or their
respective properties or interests in property, any other Claims based upon any
act or omission, transaction or other activity of any kind or nature that
occurred prior to the Consummation Date.
(b) Exculpations. From and after the Consummation Date,
------------
no Exculpated Person shall have or incur any liability to any other Exculpated
Person or any entity receiving any distribution under this Plan of
Reorganization (i) for any act taken or omission made in connection with or in
any manner related to negotiating, formulating, implementing, confirming or
consummating (x) this Plan of Reorganization or the transactions contemplated
hereby, or (y) any agreement, instrument or other documents created in
connection with this Plan of Reorganization, (ii) for the actions or other
participation of such Exculpated Person in respect of any of the Reorganization
Cases (including the negotiation of any other Plan of Reorganization, settlement
or arrangement) and (iii) that relate, directly or indirectly, by implication or
otherwise, to the Existing Credit Documents, the DIP Claims, or the Senior
Secured Claims; provided, however, that
45
<PAGE>
such exculpation shall not affect the rights and obligations of parties to
agreements entered into in connection with the Plan of Reorganization or under
the Plan of Reorganization. All Exculpated Persons as well as all entities
receiving any distribution under this Plan of Reorganization shall be enjoined
and precluded from asserting against the Exculpated Persons or their respective
properties or interests in property, any other Claims based upon liability
exculpated pursuant to the preceding sentence.
(c) Treatment of Indemnification Claims.
Notwithstanding Del. Code Ann. (General Corporation) (S) 145 (1997) or any other
state or local statute or rule, all existing indemnification and other similar
obligations as of the Confirmation Date of any Debtor are released or discharged
except as provided in this Section 12.2(c), and the Confirmation Order shall
contain injunctions enforcing such releases and discharge; provided, that: (i)
existing indemnity obligations may survive to the extent of insurance coverage,
but shall in no event entitle such directors or officers to assert any Claim
(including, without limitation, with respect to any deductible) against Newco,
Toy Biz, Marvel or any of their Affiliates, and (ii) any such directors or
officers shall be entitled to make Claims only against the insurance and the
proceeds thereof. This Section 12.2(c) shall not limit any right of directors or
officers or former directors and officers from asserting Claims against any
Debtor based upon timely filed proofs of claim or requests for payment of
Administration Expense Claims nor shall it limit the right of Newco to object to
any such Claim or request for payment of Administration Expense Claims. To the
extent such Claims are Allowed Claims, such Claims shall be treated under this
Plan of Reorganization with Claims in any class or subclass, as applicable,
having the same legal rights and priority as such Claims; provided, that the
Confirmation Order shall establish a bar date for Administration Expense Claims.
12.3 Term of Injunctions or Stays.
----------------------------
Unless otherwise provided, all injunctions or stays provided
for in the Reorganization Cases under sections 105 or 362 of the Bankruptcy
Code, or otherwise, and in existence on the Confirmation Date, shall remain in
full force and effect through and including the Consummation Date.
SECTION 13. WAIVER OF CLAIMS
----------------
13.1 Avoidance Actions.
-----------------
Effective as of the Consummation Date, Newco shall have
the right to prosecute and release any actions under
46
<PAGE>
sections 510, 544, 545, 547, 548, 549, 550, 551 and 553 of the Bankruptcy Code
that are not Litigation Claims and the Litigation Trust shall have the right to
prosecute and release any actions under sections 510, 544, 545, 547, 548, 549,
550, 551 and 553 of the Bankruptcy Code that are Litigation Claims; provided,
however, that notwithstanding the foregoing, the Litigation Trust, the Debtors
and Newco will be deemed to have waived the right to assert or pursue any
claims, rights, and causes of action to recover preferences or fraudulent
conveyances, or to pursue similar avoidance actions against any current
customers or suppliers of the Panini Entities (solely in such capacities) and,
or otherwise relating, directly or indirectly, to any of the Panini Entities.
SECTION 14. RETENTION OF JURISDICTION
-------------------------
14.1 Retention of Jurisdiction.
-------------------------
The Bankruptcy Court may retain jurisdiction of and, if the
Bankruptcy Court exercises its retained jurisdiction, shall have exclusive
jurisdiction of all matters arising out of, and related to, the Reorganization
Cases and this Plan of Reorganization pursuant to, and for the purposes of,
sections 105(a) and 1142 of the Bankruptcy Code and for, among other things, the
following purposes:
(a) To hear and determine pending applications for the
assumption or rejection of executory contracts or unexpired leases, if
any are pending, and the allowance of Claims resulting therefrom;
(b) To determine any and all adversary proceedings,
applications and contested matters including, without limitation,
proceedings relating to Litigation Claims, matters concerning the
Litigation Trust and actions pursuant to Section 7.9 hereof;
(c) To ensure that distributions to holders of Allowed Claims
and Allowed Equity Interests are accomplished as provided herein;
(d) To hear and determine any timely objections to
Administration Expense Claims or to proofs of claim and equity
interests filed, both before and after the Confirmation Date,
including, without limitation, any objections to the classification of
any Claim or Equity Interest, and to allow or disallow any Disputed
Claim or Equity Interest, in whole or in part;
47
<PAGE>
(e) To enter and implement such orders as may be appropriate
in the event the Confirmation Order is for any reason stayed, revoked,
modified, or vacated;
(f) To issue such orders in aide of execution of this Plan of
Reorganization, to the extent authorized by section 1142 of the
Bankruptcy Code;
(g) To consider any amendments to or modifications of this
Plan of Reorganization, to cure any defect or omission, or reconcile
any inconsistency in any order of the Bankruptcy Court, including,
without limitation, the Confirmation Order;
(h) To hear and determine all applications for awards of
compensation for services rendered and reimbursement of expenses
incurred prior to the Consummation Date;
(i) To hear and determine disputes arising in connection with
the interpretation, implementation, or enforcement of this Plan of
Reorganization, the Confirmation Order, any transactions or payments
contemplated hereby or any agreement, instrument or other document
governing or relating to any of the foregoing;
(j) To hear and determine matters concerning state, local and
federal taxes in accordance with sections 346, 505, and 1146 of the
Bankruptcy Code;
(k) To hear any other matter not inconsistent with the
Bankruptcy Code;
(l) To hear and determine all disputes involving the
existence, scope and nature of the discharges granted under Section
12.2 hereof;
(m) To issue injunctions and effect any other actions that may
be necessary or desirable to restrain interference by any entity with
the consummation or implementation of this Plan of Reorganization;
(n) To hear and determine all disputes regarding the
reasonableness of fees requested pursuant to the Litigation Trust
Professional Fee Guaranty or any other dispute concerning the
administration of the Litigation Trust; and
(o) To enter a final decree closing the Reorganization Cases.
48
<PAGE>
14.2 Amendment of Plan of Reorganization.
-----------------------------------
Amendments of this Plan of Reorganization may be proposed in
writing only jointly by the Proponents at any time before confirmation, provided
that this Plan of Reorganization, as amended, satisfies the conditions of
sections 1122 and 1123 of the Bankruptcy Code, and the Debtors shall have
complied with section 1125 of the Bankruptcy Code. This Plan of Reorganization
may be amended only by the Proponents acting jointly at any time after
confirmation and before substantial consummation, provided that this Plan of
Reorganization, as amended, satisfies the requirements of sections 1122 and 1123
of the Bankruptcy Code and the Bankruptcy Court, after notice and a hearing,
confirms this Plan of Reorganization as amended under section 1129 of the
Bankruptcy Code and the circumstances warrant such amendments. A holder of a
Claim or Equity Interest that has accepted this Plan of Reorganization shall be
deemed to have accepted this Plan of Reorganization as amended if the proposed
amendment does not materially and adversely change the treatment of the Claim or
Equity Interest of such holder. Notwithstanding the foregoing, this Plan may not
be amended in a manner which adversely changes the distributions to holders of
Unsecured Claims or otherwise materially and adversely affects the rights of
holders of Unsecured Claims without the consent of the Creditors Committee.
SECTION 15. MISCELLANEOUS PROVISIONS
------------------------
15.1 Payment of Statutory Fees.
-------------------------
All fees payable under section 1930, chapter 123, title 28,
United States Code, as determined by the Bankruptcy Court at the Confirmation
Hearing, shall be paid on the Consummation Date. Any such fees accrued after the
Consummation Date will constitute an Allowed Administration Expenses Claim and
be treated in accordance with Section 2.2 hereof.
15.2 Retiree Benefits.
----------------
On and after the Consummation Date, pursuant to section
1129(a)(13) of the Bankruptcy Code, the Reorganized Debtors or Newco, as
applicable, shall continue to pay all retiree benefits (within the meaning of
section 1114 of the Bankruptcy Code), at the level established in accordance
with subsection (e)(1)(B) or (g) of section 1114 of the Bankruptcy Code, at any
time prior to the Confirmation Date, for the duration of the period each Debtor
has obligated itself to provide such benefits and shall assume such obligations.
49
<PAGE>
15.3 Compliance with Tax Requirements.
--------------------------------
In connection with the consummation of this Plan of
Reorganization, the Debtors shall comply with all withholding and reporting
requirements imposed by any taxing authority, and all distributions hereunder
shall be subject to such withholding and reporting requirements.
15.4 Recognition of Guaranty Rights.
------------------------------
The classification of and manner of satisfying all Claims
hereunder take into account (a) the existence of guaranties by certain Debtors
of obligations of other Debtors and (b) the fact that the Debtors may be joint
obligors with each other or other entities with respect to an obligation. All
Claims against the Debtors based upon any such guaranties or joint obligations
shall be discharged in the manner provided in this Plan of Reorganization;
provided, that no creditor shall be entitled to receive more than a single
satisfaction of its Allowed Claims.
15.5 Severability of Plan Provisions.
-------------------------------
In the event that, prior to the Confirmation Date, any term or
provision of this Plan of Reorganization is held by the Bankruptcy Court to be
invalid, void or unenforceable, the Bankruptcy Court shall, with the consent of
the Proponents, have the power to alter and interpret such term or provision to
make it valid or enforceable to the maximum extent practicable, consistent with
the original purpose of the term or provision held to be invalid, void or
unenforceable, and such term or provision shall then be applicable as altered or
interpreted. Notwithstanding any such holding, alteration or interpretation, the
remainder of the terms and provisions hereof shall remain in full force and
effect and shall in no way be affected, impaired or invalidated by such holding,
alteration or interpretation. The Confirmation Order shall constitute a judicial
determination and shall provide that each term and provision hereof, as it may
have been altered or interpreted in accordance with the foregoing, is valid and
enforceable in accordance with its terms.
15.6 Governing Law.
-------------
Except to the extent that the Bankruptcy Code or other federal
law is applicable, or to the extent an Exhibit hereto provides otherwise, the
rights, duties and obligations arising under this Plan of Reorganization shall
be governed by, and construed and enforced in accordance with, the laws of the
State of New York without regard to the principles of the conflicts of law.
50
<PAGE>
15.7 Further Assurances. All parties in interest shall
------------------
execute and deliver such documents, instruments, certificates, assignments, and
other writings, and do such other acts as may be necessary or desirable to carry
out the intents and purposes of this Plan of Reorganization, including, without
limitation, effecting the Merger Agreement.
15.8 Time of the Essence.
-------------------
Time shall be of the essence relative to any and all dates
contained in this Plan of Reorganization on the Confirmation Date.
15.9 Counterparts.
------------
This Plan of Reorganization may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
15.10 Notices.
-------
All notices, requests, and demands to or upon the Debtors to
be effective shall be in writing (including by facsimile transmission) and,
unless otherwise expressly provided herein, shall be deemed to have been duly
given or made when actually delivered or, in the case of notice by facsimile
transmission, when received and telephonically confirmed, addressed as follows:
If to the Debtors:
MARVEL ENTERTAINMENT GROUP, INC.
387 Park Avenue South
12th Floor
New York, New York 10016
Attn: Mr. Joseph Calamari
Telephone: (212) 696-0808
Telecopier: (212) 576-9260
-and-
YOUNG, CONAWAY, STARGATT & TAYLOR
Rodney Square North
Wilmington, Delaware 19899
Attn: James L. Patton, Jr., Esq.
Laura Davis Jones, Esq.
Telephone: (302) 571-6600
Telecopier: (302) 571-1253
51
<PAGE>
If to Toy Biz:
TOY BIZ, INC.
685 Third Avenue
New York, New York 10017
Attn: Mr. Joseph M. Ahearn
Telephone: (212) 588-5103
Telecopier: (212) 588-5330
-and-
BATTLE FOWLER LLP
75 East 55th Street
New York, New York 10022
Attn: Lawrence Mittman, Esq.
Douglas L. Furth, Esq.
Madlyn Gleich Primoff, Esq.
Telephone: (212) 856-7000
Telecopier: (212) 856-7807
-and-
PEPPER HAMILTON LLP
1201 Market Street, Suite 1600
P.O. Box 1709
Wilmington, Delaware 19899
Attn: David B. Stratton
Telephone: (302) 777-6500
Telecopier: (302) 777-656-8865
If to The Secured Lenders:
THE CHASE MANHATTAN BANK
270 Park Avenue
New York, New York 10017-2070
Attn: Susan E. Atkins
Telephone: (212) 270-7142
Telecopier: (212) 270-5748
-and-
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, New York 10019
Attn: Chaim J. Fortgang, Esq.
Telephone: (212) 403-1000
Telecopier: (212) 403-2000
-and-
52
<PAGE>
ZALKIN, RODIN & GOODMAN LLP
750 Third Avenue
New York, New York 10017-2771
Attn: Richard S. Toder, Esq.
Telephone: (212) 455-0600
Telecopier: (212) 682-6331
If to The Chapter 11 Trustee:
John J. Gibbons
Gibbons, Del Deo, Dolan, Griffinger
& Vechione
One Riverfront Plaza
Newark, New Jersey 07102
Telephone: (973) 596-4521
Telecopier: (973) 639-6250
53
<PAGE>
Dated: Wilmington, Delaware
March 12, 1998
Respectfully submitted,
TOY BIZ, INC.
By:
----------------------------------------
Name: Joseph M. Ahearn
Title: President
BATTLE FOWLER LLP
Attorneys for Toy Biz, Inc.
75 East 55th Street
New York, New York 10022
(212) 856-7000
-and-
PEPPER HAMILTON LLP
1201 Market Street
Wilmington, Delaware 19899
(302) 777-6500
By:
----------------------------------------
<PAGE>
SECURED LENDER EXECUTION PAGE
Name of Secured Lender:
By:
----------------------
Name:
Title:
<PAGE>
WACHTELL, LIPTON, ROSEN, KATZ
Attorneys for The Secured
Lenders
51 West 52nd Street
New York, New York 10019
(212) 403-1000
-and-
RICHARDS, LAYTON & FINGER, P.A.
Attorneys for The
Lenders
One Rodney Square
Wilmington, Delaware 19899
(302) 658-6541
By:
-------------------------------
<PAGE>
The Bylaws of Newco, Charter for Newco and Merger Agreement have been filed in a
separate exhibit volume.
Pursuant to section 1(C) of the Plan of Reorganization, all other exhibits and
schedules to the Plan will be filed at least ten days prior to the hearing to
consider confirmation of the Plan.
57
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF TOY BIZ, INC.
-----------------------------
Name Jurisdiction of Incorporation
---- -----------------------------
1. Toy Biz International Limited Hong Kong
2. Compania De Juguetes Mexicanos S.A. de C.V. Mexico
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP
----------------------------
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-92094) pertaining to the 1995 Stock Option Plan of
Toy Biz, Inc. of our report dated March 9, 1998, except as to Note 7, as to
which the date is March 25, 1998, with respect to the consolidated financial
statements and schedule of Toy Biz, Inc. included in Toy Biz Inc.'s Annual
Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young
New York, New York
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM TOY BIZ,
INC. CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000933730
<NAME> TOY BIZ, INC.
<CURRENCY> U.S. DOLLARS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,596
<SECURITIES> 0
<RECEIVABLES> 80,212
<ALLOWANCES> 430
<INVENTORY> 22,685
<CURRENT-ASSETS> 116,432
<PP&E> 34,412
<DEPRECIATION> 17,399
<TOTAL-ASSETS> 150,366
<CURRENT-LIABILITIES> 42,385
<BONDS> 0
0
0
<COMMON> 277
<OTHER-SE> 107,704
<TOTAL-LIABILITY-AND-EQUITY> 150,366
<SALES> 150,812
<TOTAL-REVENUES> 150,812
<CGS> 106,951
<TOTAL-COSTS> 106,951
<OTHER-EXPENSES> 93,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 776
<INCOME-PRETAX> (49,650)
<INCOME-TAX> (20,185)
<INCOME-CONTINUING> (29,465)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,465)
<EPS-PRIMARY> ($1.06)
<EPS-DILUTED> 0
</TABLE>
