SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event) November 25, 1998
Marvel Enterprises, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-13638 13-3711775
- --------------------------------------------------------------------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification
incorporation) No.)
685 Third Avenue, New York, New York 10017
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(Address of Principal Executive Offices) (Zip Code)
(212) 588-5100
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name or Former Address, If Changed Since Last Report.)
781010.4
<PAGE>
This Current Report on Form 8-K/A-2 is being filed to amend the Current
Report on Form 8-K, dated October 13, 1998 to include the financial statements
required by Item 7(a) and the pro forma financial information required by Item
7(b) in connection with the Registrant's acquisition of Marvel Entertainment
Group, Inc. ("Marvel") (the "Acquisition").
ITEM 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Unaudited Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997...............................................................................7
Unaudited Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997.................................................................8
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997........................................................................9
Notes to Unaudited Condensed Consolidated Financial Statements -
September 30, 1998 .....................................................................................10
</TABLE>
The consolidated financial statements of Marvel for the years
ended December 31, 1997 and 1996 are incorporated herein by reference
to Marvel's Form 10-K/A for the period ended December 31, 1997, as
filed with the Securities and Exchange Commission (the "SEC") and are
attached hereto as Exhibit 99.6.
The unaudited consolidated financial statements of Marvel for
the quarters ended March 31, 1998 and June 30, 1998 are incorporated
herein by reference to Marvel's Quarterly Reports on Form 10-Q for the
periods March 31, 1998 and June 30, 1998 and are attached hereto as
Exhibits 99.7 and 99.8 respectively.
(b) Pro Forma Financial Information.
<TABLE>
<CAPTION>
INDEX TO PRO FORMA FINANCIAL STATEMENTS
<S> <C>
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended September 30, 1998.........................................................................14
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year
ended December 31, 1997.................................................................................15
</TABLE>
781010.4
2
<PAGE>
The unaudited consolidated balance sheet of the Registrant as
of September 30, 1998 as reported in the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1998 reflects
the Acquisition and is incorporated herein by reference.
The unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 1998 and the year
ended December 31, 1997, for the Registrant give effect to the
adjustments set forth in the footnotes thereto as if the Acquisition
had been consummated at the beginning of the periods presented.
The unaudited pro forma financial information uses the
purchase method of accounting based on a preliminary allocation of the
purchase price for the Acquisition and reflects certain other
adjustments described in the footnotes thereto. It is not intended to
reflect the results of operations which would have actually resulted
had the Acquisition been consummated at the beginning of the periods
presented. Moreover, the pro forma information is not intended to be
indicative of future results of operations. The pro forma financial
information should be read in conjunction with the footnotes thereto,
the historical financial statements of Marvel incorporated herein by
reference and attached hereto as Exhibits 99.6, 99.7 and 99.8 set forth
herein, and the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1998 incorporated herein by reference.
(c) Exhibits.
2.1 Fourth Amended Plan of Reorganization filed with the United States
District Court for the District of Delaware on July 31, 1998 by the
Fixed Senior Secured Lenders and the Registrant, with attached exhibits
(previously filed on the Current Report on Form 8-K, dated as of
October 13, 1998, and filed on October 14, 1998).
2.2 Agreement and Plan of Merger, dated as of August 12, 1998, by and among
the Registrant, Marvel Entertainment Group, Inc., and MEG Acquisition
Corp (previously filed on the Current Report on Form 8-K, dated as of
October 13, 1998, and filed on October 14, 1998).
4.1 Restated Certificate of Incorporation of the Registrant (previously
filed on the Current Report on Form 8-K, dated as of October 13, 1998,
and filed on October 14, 1998).
4.2 Plan Warrant Agreement, dated as of October 1, 1998, between the
Registrant and American Stock Transfer and Trust Company, as warrant
agent (previously filed on the Current Report on Form 8-K, dated as of
October 13, 1998, and filed on October 14, 1998).
781010.4
3
<PAGE>
4.3 Class A Warrant Agreement, dated as of October 1,1998, between the
Registrant and American Stock Transfer and Trust Company, as warrant
agent (previously filed on the Current Report on Form 8-K, dated as of
October 13, 1998, and filed on October 14, 1998).
4.4 Class B Warrant Agreement, dated as of October 1,1998, between the
Registrant and American Stock Transfer and Trust Company, as warrant
agent (previously filed on the Current Report on Form 8-K, dated as of
October 13, 1998, and filed on October 14, 1998).
4.5 Class C Warrant Agreement, dated as of October 1,1998, between the
Registrant and American Stock Transfer and Trust Company, as warrant
agent (previously filed on the Current Report on Form 8-K, dated as of
October 13, 1998, and filed on October 14, 1998).
99.1 Credit Agreement, dated September 28, 1998, among the Registrant (by
change of name Marvel Enterprises, Inc.) and UBS AG Stamford Branch, as
Agent and Collateral Agent, et al (previously filed on the Current
Report on Form 8-K, dated as of October 13, 1998, and filed on October
14, 1998).
99.2 Security Agreement, dated September 28, 1998, among the Registrant (by
change of name Marvel Enterprises, Inc.) and UBS AG Stamford Branch AG,
as Collateral Agent, et al (previously filed on Current Report on Form
8-K, dated as of October 13, 1998, and filed on October 14, 1998).
99.3 Stock Purchase Agreement, dated as of October 1, 1998, among the
Registrant and Dickstein & Co., L.P., Dickstein Focus Fund L.P.,
Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and
Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark
Dickstein and Elyssa Dickstein, as Trustees of the Mark and Elyssa
Dickstein Foundation, Elyssa Dickstein, Object Trading Corp., and
Whippoorwill Associates, Incorporated (previously filed on Current
Report on Form 8-K/A, dated as of October 16, 1998, and filed on
October 16, 1998).
99.4 Stockholders' Agreement, dated as of October 1, 1998, by and among Avi
Arad, Dickstein & Co., L.P., Dickstein Focus Fund L.P., Dickstein
International Limited, Elyssa Dickstein, Jeffrey Schwarz and Alan
Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark
Dickstein and Elyssa Dickstein, as Trustees of the Mark and Elyssa
Dickstein Foundation, Elyssa Dickstein, Isaac Perlmutter, Isaac
Perlmutter T.A., The Laura & Isaac Perlmutter Foundation Inc., Object
Trading Corp., Zib Inc., Whippoorwill Associates, Incorporated, and the
Registrant (previously filed on Current Report on Form 8-K/A, dated as
of October 16, 1998, and filed on October 16, 1998).
781010.4
4
<PAGE>
99.5 Registration Rights Agreement, dated as of October 1, 1998, by and
among the Registrant, Dickstein & Co., L.P., Dickstein Focus Fund L.P.,
Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and
Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark
Dickstein and Elyssa Dickstein, as Trustees of the Mark and Elyssa
Dickstein Foundation, Elyssa Dickstein, Object Trading Corp.,
Whippoorwill/Marvel Obligations Trust - 1997, and Whippoorwill
Associates, Incorporated (previously filed on Current Report on Form
8-K/A, dated as of October 16, 1998, and filed on October 16, 1998).
99.6 The financial statements, and the notes thereto, found on pages F-3 to
F-36 of the 1997 Annual Report on Form 10-K/A of Marvel filed with the
SEC on April 30, 1998.
99.7 The financial statements, and the notes thereto, found on pages 3-13 of
the Quarterly Report for the Period Ended March 31, 1998 on Form 10-Q
of Marvel filed with the SEC on May 15, 1998.
99.8 The financial statements, and the notes thereto, found on pages 3-14 of
the Quarterly Report for the Period Ended June 30, 1998 on Form 10-Q of
Marvel filed with the SEC on August 19, 1998.
781010.4
5
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
(Business Acquired by Marvel Enterprises, Inc.)
Financial Statements of Business Acquired
6
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1998 December 31, 1997
----------------- ---------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $12.6 $21.7
Accounts receivable, net 76.6 86.8
Inventories, net 33.7 43.9
Prepaid expenses and other 35.7 36.1
--------------- -------------------
Total Current Assets 158.6 188.5
Property, plant equipment, net 49.8 55.5
Goodwill and other intangibles, net 173.7 174.7
Investment in Toy Biz 33.0 33.0
Deferred charges and other 12.5 24.8
--------------- --------------------
Total Assets $427.6 $476.5
=============== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Debtor-in-Possession Loan $91.2 $91.2
Accounts payable 66.0 78.3
Admin. claims payable 27.9 --
Accrued expenses and other 131.9 127.3
Panini short term borrowings 19.1 39.5
Current portion of Panini long-term debt 121.9 121.9
----------------- ---------------------
Total Current Liabilities 458.0 458.2
Panini long-term debt 15.6 8.5
Other long-term liabilities 20.0 19.6
Liabilities subject to settlement under reorganization 502.2 502.2
--------------- ---------------------
Total Liabilities 995.8 988.5
Stockholders' equity (deficit):
Common stock 1.0 1.0
Additional paid-in capital 93.1 93.1
Accumulated deficit (660.8) (604.6)
Comprehensive loss (1.5) (1.5)
--------------- ---------------------
Total Stockholders' Equity (deficit) (568.2) (512.0)
--------------- ---------------------
Total Liabilities and Stockholders' Equity (deficit) $427.6 $476.5
=============== =====================
</TABLE>
7
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
Net sales $70.3 $91.9 $273.5 $378.2
Cost of sales 52.6 73.9 201.5 274.8
Selling, general & administrative expenses 14.8 29.0 60.9 129.0
Depreciation and amortization 2.3 2.0 6.2 14.5
Amortization of goodwill, intangibles and deferred 2.0 4.1 7.2 12.5
charges
Interest expense, net 7.2 8.4 20.5 37.2
Foreign exchange loss (gain) 1.4 0.2 2.0 (1.3)
Loss on sale of confectionery assets -- 4.7 3.9 4.7
Equity in net (loss) income of unconsolidated (3.4) 0.1 (5.0) (5.1)
subsidiaries and other, net
-------------- ------------- -------------- ----------------
Loss before reorganization items, provision for income (13.4) (30.3) (33.7) (98.3)
taxes and minority interest
Reorganization items 10.3 2.3 19.7 8.3
-------------- ------------- -------------- ----------------
Loss before provision for income taxes and minority (23.7) (32.6) (53.4) (106.6)
interest
Provision (benefit) for income taxes 0.6 (2.0) 2.8 (2.8)
-------------- ------------- -------------- ----------------
Loss before minority interest (24.3) (30.6) (56.2) (103.8)
Minority interest in loss of Toy Biz -- -- -- 3.5
-------------- ------------- -------------- ----------------
Net loss (24.3) (30.6) (56.2) (100.3)
-------------- ------------- -------------- ----------------
Earnings (loss) per Common Share - basic and diluted ($0.24) ($0.30) ($0.55) ($0.99)
============== ============= ============== ================
Common Shares outstanding - basic and diluted (in 101.8 101.8 101.8 101.8
millions)
============== ============= ============== ================
</TABLE>
8
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($56.2) ($100.3)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: 52.4 32.7
------------------ ------------------
Net cash provided by (used in) operating activities (3.8) (67.6)
------------------ ------------------
Cash flows from investing activities:
Capital expenditures (2.7) (16.3)
Other investing activities, net 8.4 (7.1)
------------------ ------------------
Net cash provided by (used in) investing activities 5.7 (23.4)
------------------ ------------------
Cash flows from financing activities:
Net borrowings under credit facilities / DIP Loan -- 88.1
Net repayments under other debt (11.0) (0.2)
------------------ ------------------
Net cash (used in) provided by financing activities (11.0) 87.9
------------------ ------------------
Effect of exchange rate changes on cash -- (1.7)
------------------ ------------------
Cash balance of formerly consolidated subsidiary -- (4.6)
------------------ ------------------
Net decrease in cash (9.1) (9.4)
Cash, at beginning of period 21.7 25.1
------------------ ------------------
Cash, at end of period $12.6 $15.7
------------------ ------------------
Supplemental disclosures of cash flow information:
Interest paid during the period $10.3 $37.3
Income taxes, net (refunded) paid during the period $0.6 $0.8
</TABLE>
9
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Marvel Entertainment Group, Inc. ("Marvel" and together with its
subsidiaries, the "Company") was incorporated on December 2, 1986, in the State
of Delaware. On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries (together with Marvel, the "Debtor Companies") commenced
cases (the "Marvel Cases") under Chapter 11, Title 11 of the United State Code
(the "Bankruptcy Code") by filing voluntary petitions for relief in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). In
November 1997, the United States District Court for the District of Delaware
(the "District Court") withdrew the order referring the Marvel Cases to the
Bankruptcy Court. On July 30, 1998, Marvel, Toy Biz, Inc. and its subsidiaries
(collectively "Toy Biz"), the secured creditors, the official committee of
unsecured creditors, the official committee of equity holders and other
interested parties reached a global settlement and on July 31, 1998, the
District Court approved the settlement and confirmed the Fourth Amended Plan of
Reorganization (the "Toy Biz Plan"). The consummation of the Toy Biz Plan
occurred on October 1, 1998.
In connection with the consummation of the Toy Biz Plan as of October 1,
1998, outstanding debt of approximately $576.8 million (excluding Panini debt)
was extinguished. Toy Biz paid approximately $446.9 million in cash and
securities directly to the banks for the extinguishment of debt and for the
acquisition of the Company, which will be accounted for using the purchase
method of accounting. The accompanying financial statements do not give any
recognition to adjustments including adjustments of the carrying values of the
Company's assets and liabilities that will result from such purchase accounting.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Marvel Entertainment Group, Inc. and its subsidiaries.
The unaudited condensed consolidated financial statements of the Company include
the consolidation of Toy Biz since its initial public offering on March 2, 1995
(the "Toy Biz IPO") through June 30, 1997. Since July 1, 1997, due to the
dispute over Marvel's ability to control or influence Toy Biz and because Toy
Biz ceased reporting its financial information to the Company, the Company
deconsolidated Toy Biz. The Company's operations currently consist of (i) the
publication and sale of comic books and children's magazines, (ii) the
manufacture and distribution of sports and entertainment trading cards and
children's activity sticker collections, (iii) licensing of the various
characters owned by the Company for consumer products, media and
advertising-promotion and (iv) the manufacture and distribution of adhesive
paper products. In the opinion of management, all adjustments and intercompany
eliminations necessary for a fair presentation of the results of operations,
financial position and cash flows have been made and were of a normal recurring
nature. These interim condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements on Marvel's Form 10-K
and amendment thereto for the year ended December 31, 1997. Certain prior year
amounts have been reclassified to conform to current year presentation.
10
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
2. INVENTORY September 30, December 31,
1998 1997
--------------------- ---------------------
<S> <C> <C>
Inventories, net:
Finished goods $17.8 $26.0
Work in process 11.7 12.7
Raw materials 8.9 13.9
Less: Reserve for obsolescence (4.7) (8.7)
--------------------- ---------------------
$33.7 $43.9
===================== =====================
</TABLE>
11
<PAGE>
MARVEL ENTERPRISES, INC.
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
12
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
The unaudited pro forma condensed consolidated statements of operations for
the nine months ended September 30, 1998 and the year ended December 31, 1997,
for the Registrant give effect to the adjustments set forth in the footnotes
thereto as if the Acquisition had been consummated at the beginning of the
periods presented.
The unaudited pro forma financial information uses the purchase method of
accounting based on a preliminary allocation of the purchase price for the
Acquisition and reflects certain other adjustments described in the footnotes
thereto. It is not intended to reflect the results of operations which would
have actually resulted had the Acquisition been consummated at the beginning of
the periods presented. Moreover, the pro forma information is not intended to be
indicative of future results of operations. The pro forma financial information
should be read in conjunction with the footnotes thereto, the historical
financial statements of Marvel incorporated herein by reference and attached
hereto as Exhibits 99.6, 99.7 and 99.8 set forth herein, and the Registrant's
Quarterly Report on Form 10-Q for the period ended September 30, 1998
incorporated herein by reference.
13
<PAGE>
MARVEL ENTERPRISES, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Nine
Adjustments Months Ended
Marvel Toy Biz Amount Sept. 30, 1998
------------- ------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $273,497 $156,361 $429,858
Cost of sales 201,554 87,758 289,312
Selling, general & administrative expenses 60,883 60,925 121,808
Depreciation and amortization 6,185 14,158 (619) (3) 19,724
Amortization of goodwill, 7,161 -- (7,161) (1) 20,397
intangibles and deferred charges 20,397 (2)
Interest expense, net 20,489 335 (7,217) (4) 31,607
18,000 (5)
Loss on sale of portion of confectionery
business 3,920 -- 3,920
Foreign exchange loss, net 2,045 -- 2,045
Equity in net loss of unconsolidated
subsidiaries and other, net (4,971) -- (4,971)
----------- ------------- ------------ ------------------
Loss before reorganization items and
provision for income taxes (33,711) (6,815) (23,400) (63,926)
Reorganization items 19,744 -- (19,744) (6) --
----------- ------------- ------------ ------------------
Loss before provision for income taxes (53,455) (6,815) (3,656) (63,926)
Provision (benefit) for income taxes 2,832 (2,774) 58
----------- ------------- ------------ ------------------
Net loss ($56,287) ($4,041) ($3,656) ($63,984)
=========== ============= ============ ==================
Basic and diluted loss per share ($0.55) ($0.15) ($2.22)
=========== ============= ============ ==================
Weighted average number of basic and
diluted shares outstanding (in thousands) 101,800 27,746 33,452
=========== ============= ============ ==================
</TABLE>
(1) Reflects the elimination of Marvel's amortization of
goodwill, intangibles and deferred charges.
(2) Reflects the amortization of goodwill created pursuant to the
combination of the Company and Marvel based on an assumed twenty year
life.
(3) Reflects the reduction of depreciation expense resulting from the
partial write-off of property, plant and equipment.
(4) Reflects the elimination of interest expense on all Marvel debt except
Panini debt.
(5) Reflects the interest expense on the $200 million Bridge Loan at an
assumed rate of 12.0%.
(6) Reflects the elimination of non-recurring reorganization items related
to consummation of the Plan.
14
<PAGE>
MARVEL ENTERPRISES, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Pro Forma
Marvel Toy Biz Pro Forma Year-end
Year Ended Dec. 31, 1997 Adjustments Dec. 31, 1997
--------------------------- ------------------ ----------------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues $471,700 $150,812 ($68,900)(1) $553,612
Cost of sales 366,500 106,951 (42,200)(1) 431,251
Selling, general & administrative expenses 155,000 72,081 (27,800)(1) 199,281
Depreciation and amortization 17,800 21,068 (6,800)(1) 30,288
(1,780)(4)
Amortization of goodwill, intangibles and
deferred charges 123,800 -- (123,800)(2) 27,195
27,195)(3)
Interest expense, net 46,300 362 (100)(1) 44,262
(26,300)(5)
24,000 (6)
Foreign exchange gain, net 1,600 -- 1,600
Loss on sale of portion of confectionery
business (4,700) -- (4,700)
Equity in net loss of unconsolidated
subsidiaries and other, net (5,000) -- (5,000)
-------------- ------------ ------------- ----------------
Loss before reorganization items, provision
(benefit) for income taxes and minority interest (245,800) (49,650) 108,685 (186,765)
Reorganization items 11,300 -- (11,300)(7) --
-------------- ------------ ------------- ----------------
Loss before provision (benefit) for income
taxes and minority interest (257,100) (49,650) 119,985 (186,765)
Provision (benefit) for income taxes 600 (20,185) 3,200(1) (16,385)
-------------- ------------ ------------- ----------------
Loss before minority interest (257,700) (29,465) 116,785 (170,380)
Minority interest in earnings of Toy Biz (3,400) -- 3,400(1) 0
-------------- ------------ ------------- ----------------
Net loss ($254,300) ($29,465) $113,385 ($170,380)
============== ============ ============= ================
Basic and diluted loss per share ($2.50) ($1.06) ($5.50)
============== ============ ============= ================
Weighted average number of basic and diluted
shares outstanding (in thousands) 101,800 27,746 33,452
============== ============ ============= ================
</TABLE>
(1) Reflects the elimination of Toy Biz's activity which was previously
consolidated into Marvel's Statement of Operations for the period
presented.
(2) Reflects the elimination of Marvel's amortization of goodwill,
intangibles and deferred charges.
(3) Reflects the amortization of goodwill created pursuant to the
combination of the Company and Marvel based on an assumed twenty year
life.
(4) Reflects the reduction of depreciation expense resulting from the
partial write-off of property, plant and equipment.
(5) Reflects the elimination of interest expense on all Marvel debt except
Panini debt.
(6) Reflects the interest expense on the $200 million Bridge Loan at an
assumed rate of 12.0%.
(7) Reflects the elimination of non-recurring reorganization items related
to the consummation of the Plan.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Date: November 25, 1998
By: /s/ Morton E. Handel
_______________________________________
Name: Morton E. Handel
Title: Chairman of the Board
Exhibit 99.6
MARVEL ENTERTAINMENT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FROM THE 1997 FORM 10-K/A
Page
----
Report of Independent Auditors .......................................... F - 2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ............ F - 3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996, and 1995 ..................................... F - 4
Consolidated Statements of Changes in Stockholders' (Deficit)
Equity for the years ended December 31, 1997, 1996, and 1995 .......... F - 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ...................................... F - 6
Notes to Consolidated Financial Statements .............................. F - 7
<PAGE> F-1
REPORT OF INDEPENDENT AUDITORS
Stockholders and Chapter 11 Trustee
Marvel Entertainment Group, Inc.
We have audited the accompanying consolidated balance sheets of Marvel
Entertainment Group, Inc. (the "Company") as of December 31, 1997 and 1996, and
the related consolidated statements of operations, changes in stockholders'
(deficit) equity and cash flows for each of the three years in the period ended
December 31, 1997. These consolidated financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Marvel Entertainment Group, Inc. at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, on December 27, 1996, the Company, together
with eight of its subsidiaries, filed a voluntary petition for relief under
chapter 11 of the United States Bankruptcy Code. The Company is currently
operating its business under the jurisdiction of the Chapter 11 Trustee
appointed by the United States District Court for the District of Delaware (the
"District Court"), and continuation of the Company as a going concern is
contingent upon, among other things, the ability to formulate a plan of
reorganization which will gain approval of requisite parties under the United
States Bankruptcy Code and confirmation of the District Court, the ability to
comply with its debtor-in-possession financing agreement, resolution of various
litigations against the Company, the Company's ability to make its information
systems Year 2000 compliant, and the Company's ability to generate sufficient
cash from operations and obtain financing sources to meet its future
obligations. In addition, the Company has experienced recurring operating
losses, working capital deficiencies, negative operating cash flows and is
currently in default under substantially all of its debt agreements. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. In the event a plan of reorganization is accepted, continuation
of the business thereafter is dependent on the Company's ability to achieve
sufficient cash flow to meet its restructured debt obligations. The accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might result from the outcome of these
uncertainties.
Ernst & Young LLP
New York, New York
April 14, 1998
F-2
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash ......................................................................... $ 21.7 $ 25.1
Accounts receivable, net...................................................... 86.8 229.1
Inventories, net.............................................................. 43.9 78.1
Deferred income taxes......................................................... 2.0 6.2
Prepaid expenses and other.................................................... 34.1 61.0
------- -------
Total current assets.......................................................... 188.5 399.5
Property, plant and equipment, net............................................ 55.5 79.5
Goodwill and other intangibles, net........................................... 174.7 317.6
Investment in Toy Biz......................................................... 33.0 --
Deferred charges and other.................................................... 24.8 47.4
------- -------
Total Assets................................................................. $ 476.5 $ 844.0
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Debtor-in-Possession Loan..................................................... $ 91.2 $ 10.0
Accounts payable.............................................................. 78.3 98.5
Accrued expenses and other.................................................... 127.3 174.7
Panini Credit Arrangements.................................................... 39.5 37.3
Panini debt................................................................... 121.9 10.6
------- -------
Total current liabilities..................................................... 458.2 331.1
Long-term debt................................................................ 8.5 145.0
Other long-term liabilities................................................... 19.6 20.4
Liabilities subject to settlement under reorganization........................ 502.2 503.2
------- -------
Total Liabilities............................................................. 988.5 999.7
Minority interest in Toy Biz.................................................. -- 100.6
Stockholders' deficit:
Preferred stock, $.01 par value; 50,000,000 shares authorized,
none issued................................................................... -- --
Common Stock, $.01 par value; 250,000,000 shares authorized,
101,809,657 shares issued and outstanding at December 31, 1997
and 1996, respectively........................................................ 1.0 1.0
Additional paid-in capital.................................................... 93.1 93.1
Accumulated deficit........................................................... (604.6) (350.3)
Cumulative translation adjustment............................................. (1.5) (0.1)
------- -------
Total Stockholders' Deficit..................................... (512.0) (256.3)
------- -------
Total Liabilities and Stockholders' Deficit..................... $ 476.5 $ 844.0
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------
1997 1996 1995
----------- -------- -----------
<S> <C> <C> <C>
Net revenues........................................................ $ 471.7 $ 745.5 $ 828.9
Cost of sales....................................................... 366.5 536.4 533.3
Selling, general & administrative expenses.......................... 155.0 244.5 226.7
Restructuring charges............................................... -- 15.8 25.0
Depreciation and amortization....................................... 17.8 31.8 21.2
Amortization and write-off of
goodwill, intangibles and deferred charges......................... 123.8 303.3 17.9
Interest expense, net (contractual interest for the
year ended December 31, 1997 was $77.1)............................ 46.3 58.9 43.2
Foreign exchange loss/(gain), net................................... (1.6) 1.1 (0.4)
Loss on sale of portion of confectionery business................... 4.7 -- --
Gain on sale of Toy Biz common stock................................ -- 22.0 14.3
Equity in net (loss) income of unconsolidated
subsidiaries and other, net........................................ (5.0) (1.2) 1.7
-------- -------- -------
Loss before reorganization items, provision for
income taxes, minority interest and extraordinary
item............................................................... (245.8) (425.5) (22.0)
Reorganization items................................................ 11.3 5.5 --
-------- -------- -------
Loss before provision for income taxes, minority
interest and extraordinary item.................................... (257.1) (431.0) (22.0)
Provision for income taxes.......................................... 0.6 21.7 5.7
-------- -------- -------
Loss before minority interest and extraordinary
item............................................................... (257.7) (452.7) (27.7)
Minority interest in (loss) earnings of Toy Biz..................... (3.4) 11.7 17.4
-------- -------- -------
Loss before extraordinary item...................................... (254.3) (464.4) (45.1)
Extraordinary item, net of taxes.................................... -- -- (3.3)
-------- -------- -------
Net loss............................................................ ($254.3) ($464.4) ($48.4)
======== ======== =======
Loss Per Common Share-Basic and Diluted:
Loss before extraordinary item............................. ($2.50) ($4.56) ($0.45)
Extraordinary item......................................... -- -- ($0.03)
-------- -------- -------
Net loss per share......................................... ($2.50) ($4.56) ($0.48)
======== ======== =======
Common shares outstanding - Basic and Diluted (in
millions).......................................................... 101.8 101.8 101.3
======== ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
(ACCUMULATED
ADDITIONAL DEFICIT)/ CUMULATIVE
COMMON PAID-IN RETAINED TRANSLATION
STOCK CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ---------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $1.0 $81.2 $ 162.5 ($1.7) $243.0
Exercise of stock options. -- 8.1 -- -- 8.1
Tax benefit from exercise
of stock options ......... -- 3.1 -- -- 3.1
Currency translation
adjustment ............... -- -- -- 2.0 2.0
Net loss ................. -- -- (48.4) -- (48.4)
------ ---------- ------------ ----------- ------
Balance at December 31,
1995 ..................... 1.0 92.4 114.1 0.3 207.8
Exercise of stock options. -- 0.5 -- -- 0.5
Tax benefit from exercise -- 0.2
of stock options ......... -- 0.2 --
Currency translation
adjustment ............... -- -- -- (0.4) (0.4)
Net loss ................. -- -- (464.4) -- (464.4)
------ ---------- ------------ ----------- ------
Balance at December 31,
1996 ..................... 1.0 93.1 (350.3) (0.1) (256.3)
Currency translation
adjustment ............... -- -- -- (1.4) (1.4)
Net loss ................. -- -- (254.3) -- (254.3)
------ ---------- ------------ ----------- ------
Balance at December 31,
1997 ..................... $1.0 $93.1 ($604.6) ($1.5) ($512.0)
====== ========== ============ =========== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(SEE NOTE 1 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS)
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................... ($ 254.3) ($ 464.4) ($ 48.4)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization .............. 34.9 56.6 39.2
Writedown of goodwill and other
intangibles .............................. 106.7 278.5 --
Provision (benefit) for deferred income
taxes .................................... -- 24.2 (5.2)
Extraordinary item, net .................... -- -- 3.3
Undistributed earnings of unconsolidated
subsidiaries ............................. 5.0 (0.8) (1.7)
Distributions from unconsolidated
subsidiary ............................... -- -- 3.0
Gain from sale of Toy Biz common stock ..... -- (22.0) (14.3)
Minority interest in earnings (loss) of
Toy Biz .................................. (3.4) 11.7 17.4
Loss on sale of a portion of confectionery
business ................................. 4.7 -- --
Other ...................................... -- -- (0.5)
Changes in assets and liabilities, net of
effect of acquisitions and a previously
unconsolidated subsidiary:
Decrease (increase) in accounts
receivable, net ........................ 56.9 8.1 (7.5)
Decrease (increase) in inventories ....... 3.4 2.1 (9.1)
Decrease (increase) in other assets ...... (0.8) 6.7 (19.3)
(Decrease) increase in accounts payable .. (1.1) (8.3) 14.9
(Decrease) increase in accrued expenses
and other ............................. (13.3) 4.7 31.7
Total adjustments: 193.0 361.5 51.9
----------- ----------- -----------
Net cash (used in) provided by
operating activities ................. (61.3) (102.9) 3.5
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures ....................... (17.4) (43.2) (42.5)
Net proceeds from sale of investment in
Toy Biz .................................. -- 35.7 --
Cash proceeds from sale of a portion of
confectionery business ................... 3.0 -- --
</TABLE>
<TABLE>
<S> <C> <C> <C>
Acquisition of SkyBox, net of cash and
cash equivalents acquired ............... -- -- (162.5)
Other acquisitions, net of cash and cash
equivalents acquired ..................... (3.9) -- (27.5)
Other investing activities ................. (7.4) (3.3) 2.0
----------- ----------- -----------
Net cash used in investing activities. (25.7) (10.8) (230.5)
----------- ----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings under term
portion of credit agreements ............ (5.1) (5.3) 184.8
Net borrowings under revolving portion of
credit agreement ........................ -- 47.5 5.0
Net borrowings under
Debtor-in-Possession Loan ............... 81.2 10.0 --
Net borrowings under credit agreement
and other debt .......................... 13.1 27.0 20.2
Net proceeds to Toy Biz from common
stock offerings ......................... -- 9.3 44.1
Proceeds from exercise of stock options .... -- 0.5 8.1
Debt issuance costs ........................ -- (3.2) (9.6)
Other financing activities ................. -- (1.0) 0.4
----------- ----------- -----------
Net cash provided by financing
activities ........................ 89.2 84.8 253.0
----------- ----------- -----------
Effect of exchange rate changes on
cash ............................. (1.0) 0.4 2.0
----------- ----------- -----------
Cash balance from previously
(consolidated)/unconsolidated
subsidiary ...................... (4.6) -- 7.5
----------- ----------- -----------
Net (decrease) increase in cash .... (3.4) (28.5) 35.5
Cash, at beginning of period ....... 25.1 53.6 18.1
----------- ----------- -----------
Cash, at end of period ............. $ 21.7 $ 25.1 $ 53.6
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Marvel Entertainment Group, Inc. ("Marvel" and together with its
subsidiaries, the "Company") was incorporated on December 2, 1986, in the State
of Delaware. On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries (together with Marvel, the "Debtor Companies") commenced
cases (the "Marvel Cases") under chapter 11, Title 11 of the United States Code
(the "Bankruptcy Code") by filing voluntary petitions for relief in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). The
filing by the Debtor Companies of their voluntary petitions for reorganization
operated as an automatic stay against the commencement or continuation of any
judicial, administrative or other proceedings against the Debtor Companies, any
act to obtain possession of property of or from the Debtor Companies, or any act
to create, perfect or enforce any lien against property of the Debtor Companies,
with certain exceptions under the Bankruptcy Code. Consequently, the Debtor
Companies' creditors are prohibited from attempting to collect pre-petition
debts without the consent of the Bankruptcy Court. Any creditor may seek relief
from the automatic stay and, if applicable, enforce a lien against any security,
if authorized to do so by the Bankruptcy Court. In November 1997, the United
States District Court for the District of Delaware (the "District Court")
withdrew the order referring the Marvel Cases to the Bankruptcy Court.
Accordingly, the Marvel Cases are being heard in the District Court.
The accompanying consolidated financial statements include the accounts
of Marvel Entertainment Group, Inc. and its subsidiaries. The consolidated
financial statements of the Company include the operations of SkyBox
International Inc. and its subsidiaries (collectively, "SkyBox") from the date
of its acquisition on April 27, 1995, and the consolidation of Toy Biz, Inc. and
its subsidiaries (collectively "Toy Biz") since its initial public offering on
March 2, 1995 (the "Toy Biz IPO") through June 30, 1997. Since July 1, 1997, due
to the dispute over Marvel's ability to control or influence Toy Biz and because
Toy Biz ceased reporting its financial information to the Company, the Company
deconsolidated Toy Biz (see Note 4). The Company's operations currently consist
of (i) the publication and sale of comic books and children's magazines, (ii)
the manufacture and distribution of sports and entertainment trading cards and
children's activity sticker collections, (iii) licensing of the various
characters owned by the Company for consumer products, media and
advertising-promotion and (iv) the manufacture and distribution of adhesives and
confectionery products. All significant intercompany transactions and accounts
have been eliminated in consolidation.
The Debtor Companies have been in bankruptcy since December 27, 1996. The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. Continuation of the Company as a
going concern is contingent upon, among other things, the ability to formulate a
plan of reorganization which will gain approval of requisite parties under the
United States Bankruptcy Code and confirmation of the District Court, the
ability to comply with its debtor-in-possession financing agreement, resolution
of various litigations against the Company, the Company's ability to make its
information systems Year 2000 compliant, and the Company's ability to generate
sufficient cash from operations and obtain financing sources to meet its future
obligations. In addition, the Company has experienced recurring operating
losses, working capital deficiencies, negative operating cash flows and is
currently in default under substantially all of its debt agreements. These
matters raise substantial doubt about the Company's ability to continue as a
going concern.
If a plan of reorganization regarding the Debtor Companies is confirmed,
the consolidated results of operations and the financial condition of the
Company may be materially affected.
2. CHAPTER 11 REORGANIZATION
Operating Companies
Marvel Parent Holdings, Inc. ("Marvel Parent") was an indirect wholly
owned subsidiary of Andrews Group Incorporated ("Andrews Group"), a wholly owned
subsidiary of MacAndrews & Forbes Holdings Inc. ("MacAndrews Holdings"), a
corporation wholly owned through Mafco Holdings Inc. ("Mafco", and together with
MacAndrews Holdings, "MacAndrews & Forbes") by Ronald O. Perelman. As of
December 31, 1996, Mafco beneficially owned
F-7
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
approximately 81.2% of the Common Stock of the Company. As more fully discussed
below, bankruptcy proceedings commenced under chapter 11 by Marvel Parent and
its affiliates have resulted in the loss of control of Marvel by such entities.
The Company experienced significant operating losses during 1995 and
1996, and failed to satisfy certain financial covenants contained in the Credit
Agreements (see Note 5) beginning in the fall of 1996. The Company commenced
discussions in the fall of 1996 with Andrews Group, its then indirect parent,
regarding an equity infusion in order to provide for the Company's cash
requirements and with The Chase Manhattan Bank, agent bank for the Credit
Agreements, regarding a restructuring of the Credit Agreements.
On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries, Fleer Corp. ("Fleer"), SkyBox International, Inc.
("SkyBox"), Marvel Characters, Inc., Heroes World Distribution, Inc. ("Heroes
World"), The Asher Candy Company, Malibu Comics Entertainment, Inc. ("Malibu"),
Frank H. Fleer Corp. and Marvel Direct Marketing Inc. (together with Marvel, the
"Debtor Companies") commenced the Marvel Cases in the Bankruptcy Court. Panini
S.p.A. ("Panini") and Marvel Restaurant Venture Corp. ("Marvel Restaurants") (a
general partner in the joint venture developing Marvel Mania restaurants), which
were then active subsidiaries of Marvel, and Toy Biz, Inc. ("Toy Biz"), an
affiliate of Marvel, as well as certain other inactive subsidiaries, did not
file petitions under the Bankruptcy Code.
As part of the first day order in the Marvel Cases, the Debtor Companies
received approval from the Bankruptcy Court to pay on time and in full
undisputed pre-petition obligations including salaries, wages and benefits to
all of its employees, debts due to its trade creditors and independent
contractors and to continue funding its strategic initiatives. As discussed
below, the unsecured creditors committee has applied for an order vacating the
first day order. In January 1998, the Debtor Companies ceased making payments on
pre-petition obligations.
On January 24, 1997 the Bankruptcy Court approved a $100
debtor-in-possession financing facility (the "DIP Loan"), which was provided by
a syndicate of lenders, including The Chase Manhattan Bank, as agent bank (the
"DIP Lenders"). As of December 31, 1997, the current outstanding debt under this
facility was $91.2. The DIP Loan matured on June 30, 1997 and no repayment has
occurred except for $3.0, the cash resulting from the sale of a portion of the
Company's confectionery business in August 1997, and the current payment of
interest and related administrative fees. The DIP Lenders have agreed to forbear
from taking any action. Such forbearance is continuing on a daily basis. In
connection with the appointment of the Chapter 11 Trustee for the Company as
more fully discussed herein, The Chase Manhattan Bank has advised the Company
that it is willing to lead a syndicate to make loans to Marvel subject to
execution of definitive documentation and agreement on key terms. The Chapter 11
Trustee has not determined that such additional financing is necessary. In any
event, District Court approval is required for such additional loans to the
Debtor Companies and there can be no assurance such approval would be granted by
the court.
On February 12, 1997, the Office of the United States Trustee appointed a
committee of equity security holders of the Debtor Companies under Section
1102(a)(1) of the Bankruptcy Code (the "Equity Committee"). As of April 14,
1998, the Equity Committee consists of: Karen Nagel, Esq., Marty Solomon, Peter
E. Kelly, Jr., Gladys V. Veidemanis and Ronald Cantor.
On October 22, 1997, the Office of the United States Trustee appointed a
committee of unsecured creditors of the Debtor Companies. As of April 14, 1998,
such committee is comprised of: James E. Ladd, Jr., Standard Folding Cartons,
Inc., Frank J. O'Connell, Scott M. Rosenberg and Snyder Ventures, Inc. The
unsecured creditors committee has applied under Rule 60-b of the Federal Rules
of Civil Procedure for an order vacating the first day order concerning the
payment of pre-petition debt. As of April 14, 1998, no hearing has occurred as
of yet on this motion and none is scheduled by the District Court. Nevertheless,
the Debtor Companies have discontinued the payment of such pre-petition debt and
do not intend to make any further payments regarding such debt without first
applying to the District Court for approval.
As a result of the several failed attempts at a plan of reorganization,
the acrimony among the parties involved, the conflicts of interest between the
parties and the significant amount of professional fees and other
F-8
<PAGE>
bankruptcy related costs incurred by the Company, on December 22, 1997, John J.
Gibbons was appointed as Chapter 11 Trustee for the Company. The order
appointing the Chapter 11 Trustee was appealed by certain creditors of the
Company and was affirmed on March 25, 1998 by the United States Court of Appeals
for the Third Circuit.
The Chapter 11 Trustee has all of the powers of management and the Board
of Directors of the Debtor Companies to operate and manage the Debtor Companies,
but generally may not engage in transactions outside the ordinary course of
business without approval, after notice and hearing of the District Court. Since
the appointment of the Chapter 11 Trustee, the Board of Directors of Marvel no
longer controls the business of Marvel.
Plans of Reorganization
On December 27, 1996, Marvel filed a Plan of Reorganization (as amended,
the "Initial Plan") which contemplated that pursuant to a stock purchase
agreement dated December 26, 1996, between Andrews Group and Marvel, Andrews
Group, or an affiliate thereof, would acquire from Marvel a number of shares of
common stock (or its equivalent) that would represent 80.1% of the shares of a
reorganized Marvel after giving effect to such acquisition, in consideration for
$365 in cash or, at the option of Andrews Group, shares of Class A Common Stock
of Toy Biz, or a combination of the foregoing (the "Andrews Investment"). The
Initial Plan contemplated that in connection with the Andrews Investment, the
Company would acquire the Class A Common Stock of Toy Biz not owned by Marvel,
Andrews Group or their affiliates pursuant to various agreements with the
principal stockholders of Toy Biz.
On March 7, 1997, Andrews Group exercised its right to terminate the
stock purchase agreement with the Company. On the same date, Andrews Group
informed Toy Biz and the two principal stockholders of Toy Biz (other than the
Company) that, as a result of the termination of the Andrews Investment, a
condition to closing under the agreements that provided for the purchase of the
Class A Common Stock of Toy Biz would not be satisfied, that Andrews Group did
not intend to waive the satisfaction of such condition and therefore the
transaction contemplated by such agreements would not be consummated. As a
consequence of the termination of the stock purchase agreement and the Andrews
Investment, the Initial Plan was withdrawn.
On July 10, 1997 it was announced that Marvel, High River Limited
Partnership ("High River"), Westgate International, L.P. ("Westgate"), Toy Biz,
Isaac Perlmutter, Avi Arad and The Chase Manhattan Bank had reached agreement in
principle on certain key economic terms relating to the Marvel Cases. The
agreement in principle provided that, pursuant to a plan of reorganization (the
"July Proposal") to be proposed by the Company, Marvel and Toy Biz would be
combined in a transaction in which the stockholders of Toy Biz (other than the
Company) would have received, in exchange for their Toy Biz shares, 49% of the
outstanding shares of common stock of the Company, as reorganized.
Additionally, pursuant to the July Proposal, the currently outstanding
shares of Marvel common stock, par value $.01 per share (the "Common Stock"),
would have been canceled and Marvel's equity holders (including the holders of
certain notes issued by the Holding Companies) would have been offered rights to
purchase on a pro rata basis: (1) new shares equal to 51% of outstanding common
stock of the reorganized company for an aggregate price of $170.0 and (2) $225.0
of new debt securities of the reorganized company. High River and Westgate would
have appointed a majority of the board of directors of the reorganized company.
High River and Westgate were to have purchased all of the pre-petition and
post-petition claims and liens of the secured lenders of the Company, except for
certain debt of Panini and Fleer/Sky Box, and the proceeds of the rights
offering would have been used to retire all of the bank claims so acquired by
High River and Westgate.
Consummation of the July Proposal was subject to: (1) negotiation and
execution of definitive documentation regarding the agreement; (2) approvals of
the Boards of Directors of Marvel and Toy Biz; (3) approval by holders of at
least 67% in principal amount and 51% in number of secured lender claims (other
than secured lender claims against Panini); and (4) approval of the Bankruptcy
Court. The parties, however, could not reach agreement on definitive
documentation and as a result, the July Proposal was terminated.
F-9
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
On September 29, 1997, it was announced that Marvel had reached an
agreement with its primary lenders, led by The Chase Manhattan Bank, that would
allow it to emerge from bankruptcy protection. High River and Westgate had
agreed to purchase pre-petition and post-petition bank claims from lenders in
exchange for $385.0 in cash and the transfer by Marvel of the common stock of
Panini owned by Marvel. High River and Westgate funded an escrow account in the
amount of $385.0 in order to consummate the agreement. The agreement however,
was subject to approvals from at least 67% in principal amount and a majority in
number of members of the bank syndicate, as well as the Bankruptcy Court. On
October 8, 1997, The Chase Manhattan Bank advised Marvel that although a
majority in number of the bank lenders had approved the agreement, less than the
required 67% in principal amount of the bank debt had approved the agreement
and, accordingly, the $385.0 deposit was returned to High River and Westgate and
the agreement in principle was terminated.
In September 1997, prior to the appointment of the Chapter 11 Trustee,
the Company, as debtor-in-possession, filed a plan of reorganization with the
Bankruptcy Court. The Court has not set a date for a confirmation hearing on
this plan and the Company has indicated that it will not proceed with this plan
given the appointment of the Chapter 11 Trustee.
On October 7, 1997, Toy Biz announced an unsolicited merger proposal for
Marvel (the "Toy Biz Plan"). Under the Toy Biz Plan, shares of Toy Biz common
stock would convert into equal number of shares of common stock in the combined
company, giving Toy Biz stockholders (other than Marvel) an ownership interest
of approximately 41% in the combined company. Marvel's senior secured creditors
and DIP Lenders would receive approximately $230.0 in cash from new borrowings
and Marvel's senior secured creditors would also receive common and convertible
preferred stock, giving them a 40% ownership interest in the combined company.
The Toy Biz Plan also provides for new investors to purchase $90.0 in
convertible preferred stock, giving them an ownership interest of approximately
19% in the combined company.
Under the Toy Biz Plan, unsecured creditors of the Company will receive,
on a pro rata basis, a cash distribution of 15% of the amount of the allowed
unsecured claims plus $2.0, up to a maximum of $8.0. In addition, unsecured
creditors of the Company would receive warrants to purchase up to 1.75 million
shares of common stock in the combined Toy Biz/Marvel company. The warrants
would have a four-year term and would be exercisable at a price of $17.25 per
share. Furthermore, shareholders in the Company would receive warrants to
purchase up to 4 million shares of common stock in the combined company for 6
months following consummation of the Toy Biz Plan at an exercise price of $15.00
per share. Finally, holders of allowed unsecured claims would be entitled to
receive distributions from any recovery on certain litigation. The Toy Biz Plan
is subject to confirmation by the District Court and the approval of the senior
secured creditors of the Company, who have agreed to support this plan. There
can be no assurance that the Toy Biz Plan will be confirmed.
On March 13, 1998, the District Court approved the disclosure statement
for the Toy Biz Plan. The District Court has set May 4th and 5th, 1998, as the
dates for a confirmation hearing for the proposed Toy Biz Plan. On April 13,
1998, the United States Court of Appeals for the Third Circuit issued an order
granting a motion to expedite the appeal of a March 30, 1998 decision by the
District Court regarding the Company's voting control over Toy Biz. Pending the
expedited determination of this appeal, the order also stayed the effectiveness
of the District Court's decision and the hearing scheduled for May 4, 1998 for
confirmation of the Toy Biz Plan. The Chapter 11 Trustee, management of Toy Biz
and the secured lenders of the Company are currently in negotiations attempting
to settle the claims that are the subject of the appeal as well as other
matters. There can be no assurance that such negotiations will be successful and
that such claims will be settled.
In addition to the Toy Biz Plan, the Company has received preliminary
indications of interest from third parties to purchase the Company or all or
part of the Company's assets. As of this date, the Company cannot predict
whether any of these indications of interest will result in a more formal offer
to purchase any or all of the Company or its assets, nor can the Company
determine whether any such indications of interest will result in offers
superior to the Toy Biz Plan. Several third parties have conducted due diligence
reviews with respect to the Company. The Chapter 11 Trustee has retained the
services of an investment banking firm to assist him in this process.
F-10
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
There can be no assurance that any plan of reorganization, including the
Toy Biz Plan, will be confirmed under the Bankruptcy Code.
If the Company is unable to obtain confirmation of a plan of
reorganization, its creditors or equity security holders may seek other
alternatives for the Company, including bids for the Company or parts thereof
through an auction process, or possible liquidation.
Holding Companies
Marvel Holdings, Inc. ("Holdings"), Marvel Parent, Marvel III Holdings,
Inc. ("Marvel III", and collectively with Holdings and Marvel Parent, the
"Holding Companies") own approximately 78% of common stock of Marvel.
Each of the Holding Companies has issued debt obligations (collectively,
the "Notes") pursuant to certain indentures (collectively, the "Indentures"),
which debt is secured, in part, by shares of Common Stock of Marvel owned by
such Holding Company. Approximately 77.3 million shares of Common Stock of
Marvel are pledged to secure the Notes. The debt issued by Marvel Parent was
additionally secured by 100% of the issued and outstanding shares of common
stock of Holdings ("Holding Stock").
On December 27, 1996, the Holding Companies filed voluntary petitions for
relief under the Bankruptcy Code with the Bankruptcy Court. The chapter 11 cases
commenced by the Holding Companies (the "Holding Cases") have not been
procedurally consolidated with the Marvel Cases and are not jointly administered
with the Marvel Cases. The filing by the Holding Companies of voluntary
petitions for reorganization operated as an automatic stay against the
commencement or continuation of any judicial, administrative or other
proceedings against the Holding Companies, any act to obtain possession of
property of or from the Holding Companies, or any act to create, perfect or
enforce any lien against property of the Holding Companies, with certain
exceptions under the Bankruptcy Code.
On January 9, 1997, the United States Trustee appointed an Official
Bondholder Committee (the "Bondholder Committee") to represent the interest of
all holders (collectively, the "Noteholders") of the Notes. The Bondholder
Committee is currently comprised of High River, Westgate, Schultz Investments,
WHERCO, Inc., M3, LLC and United Equities Commodities Company.
The commencement of the Holding Cases was an event of default under each
of the Indentures. On January 13, 1997, the Bondholder Committee filed a motion
(the "Lift Stay Motion") with the Bankruptcy Court seeking an order lifting the
automatic stay in the Holding Cases and thus permitting the trustee under the
Indentures (the "Indentures Trustee") to vote the shares of stock pledged to
secure repayment of the Notes, including (i) 100% of the Holding Stock (ii) 100%
of the stock of Marvel Parent and (iii) approximately 78.8% of the Marvel Common
Stock (collectively, the "Pledged Stock"). On January 13, 1997, The Bank of New
York, then trustee under the Indentures, joined in the Lift Stay Motion, and on
January 30, 1997, LaSalle National Bank (after its appointment as the successor
trustee under the Indentures) also joined in the Lift Stay Motion. On February
26, 1997, the Bankruptcy Court entered an order granting the Lift Stay Motion
and permitting the Bondholder Committee and the Indentures Trustee, on behalf of
the Noteholders, to vote the Pledged Stock (the "Lift Stay Order"). On February
27, 1997, the Company and the Holding Companies filed a notice of appeal with
respect to such Lift Stay Order.
On March 19, 1997, the Bondholders Committee notified the Company that on
March 25, 1997 it would cause the Indentures Trustee to vote the Pledged Stock
to replace the Board of Directors of Marvel. On March 24, 1997, at the request
of Marvel and its pre-petition bank lenders (the "Bank Lenders"), the Bankruptcy
Court issued a
F-11
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
restraining order (the "Stay Order") enjoining the Bondholder
Committee and the Indentures Trustee from voting the Pledged Stock or otherwise
replacing the Board of Marvel without first seeking and obtaining relief from
the automatic stay imposed under the Bankruptcy Code in the Marvel Cases. The
Stay Order, however, did not prevent the holders of the Notes issued by Marvel
Parent from exercising voting power over the Holding Stock for the purpose of
removing and replacing the Board of Directors of Holdings.
On April 24, 1997, the Indentures Trustee, at the direction of the holder
of a majority of the Notes issued by Marvel Parent, removed the members of the
Board of Directors of Holdings and appointed Carl C. Icahn, Vincent J. Intrieri
and Robert J. Mitchell to the Holdings Board. As a result, Marvel was no longer
consolidated for federal income tax purpose with Mafco. As a result of such tax
deconsolidation, the Company will retain an allocated portion, if any, of net
operating loss carryforwards of the Mafco affiliated group. Such allocation is
not yet determinable (See Note 7).
Between March 24, 1997 and June 20, 1997, Marvel and the Bank Lenders
requested action by the Bankruptcy Court and the District Court seeking, among
other things, to prevent the Noteholders and Holdings from exercising voting
authority with respect to the shares of Common Stock of Marvel owned by Holdings
for the purpose of removing the existing Board of Directors of Marvel and
replacing it with the New Board (as defined below). At the same time, the
Bondholder Committee and Indentures Trustee also requested action by the
Bankruptcy Court and the District Court seeking to permit the Noteholders and/or
Holdings to exercise voting authority over such shares for such purpose. Such
litigation culminated in the issuance of an order by the District Court vacating
the Bankruptcy Court's Stay Lift Order effective as of 5:00 p.m. (New York time)
on June 20, 1997. The effect of such order was to permit Holdings, as a majority
stockholder of Marvel, to vote such stock to remove the existing Board of
Directors of Marvel and replace it with a new board of directors (the "New
Board") which was comprised of the following directors: Carl C. Icahn, Harold
First, Charles K. MacDonald, Glen Adams, J. Winston Fowlkes, III, Robert J.
Mitchell, Jouko T. Tamminen, Vincent J. Intrieri, and Michael J. Koblitz. Jouko
T. Tamminen resigned from the Board of Directors effective August 3, 1997.
Additionally, the New Board by written consent amended and modified Marvel's
Bylaws to provide that Marvel's Board of Directors shall be composed of nine
persons or such other number of persons as may thereafter be fixed by Marvel's
Board of Directors. As a result of the replacement of the existing board with
the New Board, Toy Biz has taken the position that a change in control of Marvel
occurred and that pursuant to the provisions of the stockholder agreement
between the Company, Toy Biz and certain other stockholders of Toy Biz, the
Company's shares of Toy Biz Class B common stock automatically converted to
Class A common stock of Toy Biz, reducing the Company's voting control of Toy
Biz from 78.4% to 26.6%. The Company disputes Toy Biz's position and maintains
that it continues to own Class B common stock of Toy Biz. On March 30, 1998, the
District Court issued an order in favor of Toy Biz on this issue. The Company
and other interested parties have filed an appeal of this determination to the
United States Court of Appeals for the Third Circuit. The Chapter 11 Trustee,
management of Toy Biz and the secured lenders of the Company are currently in
negotiations attempting to settle the claims that are the subject of the appeal
as well as other matters. There can be no assurance that such negotiations will
be successful and that such claims will be settled.
On March 3, 1998, the District Court entered an order permitting the
distribution to the Noteholders of up to 12.5 million outstanding shares of
Common Stock of Marvel which were pledged to secure the Notes. Further, the
order authorized the sale by Holdings for cash of an additional 2.5 million
shares of Common Stock of Marvel currently held by Holdings in escrow to pay
certain administrative expenses. The Indentures Trustee subsequently sought an
order from the District Court permitting the distribution to the Noteholders of
additional shares of Common Stock which were pledged to secure the Notes. By an
order dated April 9, 1998, the District Court authorized the distribution to the
Noteholders of an additional 21.5 million shares of Common Stock and the sale of
approximately 400,000 additional shares of Common Stock currently held by
Holdings to pay certain administrative expenses.
Other:
F-12
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
As part of the chapter 11 process, the Debtor Companies have received a
significant number of proofs of claims. The Company is currently in the process
of reviewing these claims and believes that a majority of these claims may have
been paid or are without merit. Although the Company believes that amounts
recorded as of December 31, 1997 are adequate to cover the ultimate liability
under these claims, there can be no assurance that these claims will not be
settled for amounts in excess of these amounts.
Financial accounting and reporting during a chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be subject to settlement, have been
classified as obligations subject to chapter 11 settlement under reorganization
and consist of the following estimated amounts:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------- ---------------------
<S> <C> <C>
Total accrued expenses $ 13.7 $ 14.7
Debt:
U.S. Term Loan Agreement 350.0 350.0
Amended and Restated Credit Agreement 120.0 120.0
Chase Revolving Line of Credit 15.0 15.0
-------------------- ---------------------
Total debt 485.0 485.0
-------------------- ---------------------
Other long-term liabilities 3.5 3.5
-------------------- ---------------------
Total liabilities subject to settlement under
reorganization $502.2 $503.2
==================== =====================
</TABLE>
Total bankruptcy reorganization items of $11.3 and $5.5 for the years
ended December 31, 1997 and 1996, respectively, include professional charges and
other costs typical to those incurred by entities in bankruptcy.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales are recorded upon shipment of products. Sales made on a returnable
basis are recorded net of provisions for estimated returns. These estimates are
revised, as necessary, to reflect actual experience and market conditions.
Subscription revenues generally are collected in advance for a one year
subscription and are recognized as income on a pro-rata basis over the
subscription period. Income from licensing of characters owned by the Company is
recorded at the time characters are available to the licensee and collection is
reasonably assured. Receivables due more than one year beyond the balance sheet
date are discounted to their present value.
ADVERTISING EXPENSE
Advertising production costs are expensed when the advertisement is first
run. Advertising expense was $31.0, $69.0, and $69.2 in 1997, 1996, and 1995,
respectively. The amount of advertising costs included in prepaid expenses and
other as of December 31, 1997 and 1996 was $0.6 and $2.2, respectively.
ROYALTIES
Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are generally expensed as incurred based on sales of related
products.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure
F-13
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
principal areas of judgment relate to provision for returns and other sales
allowances, doubtful accounts, the realizability of inventories, goodwill and
other intangible asset impairment, reserve for royalty guarantees and advances,
income taxes, proofs of claims, resolution of litigation and pro forma
information related to stock options.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out (FIFO))
or market.
PROPERTY, PLANT AND EQUIPMENT
All expenditures for additions and improvements to property, plant and
equipment are capitalized and normal repairs and maintenance are charged to
expense as incurred. Construction-in-progress principally includes machinery and
equipment being constructed for the Company by outside vendors under contract.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on the straight-line basis
over 15 to 40 years. The Company's accounting policy regarding the assessment of
the recoverability of the carrying value of goodwill and other intangibles is to
review the carrying value of goodwill and other intangibles if the facts and
circumstances suggest that they may be impaired. If this review indicates that
goodwill and other intangibles will not be recoverable, as determined based on
the undiscounted future cash flows of the Company relating to such assets, the
carrying value of goodwill and other intangibles will be reduced to its
estimated fair value.
As described above, continuing operating losses in the trading card
business and losses in the sticker business through the fourth quarter of 1997,
as well as significant long-term changes in industry conditions which resulted
in lower than expected fourth-quarter sales, including basketball trading card
sales, indicated to the Company, at that time, that there may be asset
impairment. During the fourth quarter of 1997, the Company also completed its
1998 business plan which anticipates a continuation of the trend of lower
revenues from the trading card and children's activity stickers businesses.
Accordingly, the Company evaluated the recoverability of the carrying value of
long-lived assets, including goodwill and other intangibles, in accordance with
its previously stated accounting policies and recorded a non-cash charge of
approximately $106.7, of which $78.5 related to trading cards and $28.2 related
to activity stickers. The Company had recorded a non-cash charge of
approximately $278.5 during the fourth-quarter of 1996 to write-off impaired
goodwill related substantially to its trading card business, and to a lesser
extent, its publishing business. Remaining goodwill associated with the
Company's trading cards operations is approximately $24.0, which will be
amortized on the straight-line basis over 10 years and remaining goodwill
associated with its sticker operations is $70.0, which will be amortized on the
straight line basis over the next 20 years (see Note 13).
DEFERRED CHARGES
Deferred charges and other includes deferred debt issue costs, which are
mainly costs associated with the Company's credit facilities that are amortized
over the term of the related agreements (see Note 5).
TRANSLATION OF FOREIGN CURRENCIES
The financial position and results of operations of the Company's foreign
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities of subsidiaries are translated at the exchange rate in
effect at year-end. Income statement accounts and cash flows are translated at
the average rate of exchange prevailing during the period. Translation
adjustments arising from the use of differing exchange rates are included in the
cumulative translation adjustment account in stockholders' equity. Transaction
adjustments arising from the use of differing exchange rates, including
intercompany account balances, are included in net income.
F-14
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("FAS 128"). This statement replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have been presented
and restated as necessary to conform to FAS 128's requirements.
The following table sets forth the components for the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Numerator:
Loss before extraordinary item $ (254.3) $ (464.4) $ (45.1)
Denominator:
Weighted average shares outstanding 101,809,657 101,796,100 101,287,467
</TABLE>
RECENT PRONOUNCEMENTS
In 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("FAS 130"). The Company is not required to disclose financial
statements in accordance with FAS 130 until the first quarter of 1998, at which
time it will reclassify interim financial statements for the prior year for
comparative purposes.
In 1997, the FASB issued Statement of Financial Accounting Standards No
131, "Disclosures about Segments of and Enterprise and Related Information"
("FAS 131"). The Company is not required to disclose segment information in
accordance with FAS 131 until December 31, 1998, at which time it will restate
prior years' segment disclosures to conform with FAS 131 segment presentation.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
4. TOY BIZ
On March 2, 1995, Toy Biz completed the Toy Biz IPO in which it issued
and sold 2,750,000 shares of Class A Common Stock at $18 per share. As part of
the Toy Biz IPO, a stockholder sold 700,000 shares of Class A Common Stock at
$18 per share. The net proceeds to Toy Biz, after deducting commissions and
offering expenses, of $44.1 were used to pay outstanding amounts due under
subordinated notes held by the Company and the sole stockholder of the
predecessor to Toy Biz and for working capital and general corporate purposes.
In 1995, the Company recorded a gain of $14.3 on the Toy Biz IPO in recognition
of the net increase of the Company's equity investment in Toy Biz based on fair
value. In August 1996, Toy Biz sold in an offering 700,000 shares of its Class A
Common Stock at a price to the public of $15 per share. As part of the Toy Biz
offering, the Company sold 2.5 million shares of its Toy Biz Class A Common
Stock. In the third quarter of 1996, the Company recorded a gain on the sale of
this common stock of approximately $22.0. The net proceeds to Toy Biz and the
Company were approximately $9.3 and $35.7, respectively, after deducting amounts
for fees and expenses.
In conjunction with the Toy Biz IPO, the Company's equity ownership
percentage of Toy Biz decreased to 36.6% and its voting control increased to
85.3% and, as a result of the increase in voting control, the consolidated
financial statements of the Company from March 1, 1995 through June 30, 1997
include the results of operations,
F-15
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
financial position and cash flows of Toy Biz. For the period prior to the Toy
Biz IPO, Toy Biz was accounted for under the equity method. As a result of the
Company's sale of Class A Common Stock of Toy Biz in August 1996, the Company's
ownership percentage of Toy Biz decreased to 26.6% and its voting control
decreased to 78.4%.
In connection with the Toy Biz IPO, Marvel, certain principal
shareholders of Toy Biz and their affiliates and Toy Biz entered into a
stockholders' agreement (the "Stockholders' Agreement"). The Stockholders'
Agreement provides that upon a change of control of Marvel, Marvel is obligated
to convert its shares of Class B Common Stock of Toy Biz into Class A Common
Stock of Toy Biz, unless such shareholders consent to such shares remaining as
Class B Common Stock. Due to the replacement of Marvel's existing board with a
new Board of Directors, Toy Biz had taken the position that a change in control
occurred under the Stockholders' Agreement and that the Company's shares of Toy
Biz Class B Common Stock automatically converted to Class A Common Stock,
reducing the Company's voting control of Toy Biz from 78.4% to 26.6%. The
Company had disputed Toy Biz's position and maintained that it owned Class B
Common Stock of Toy Biz. On March 30, 1998, the District Court issued an order
that resulted in the Company's voting power over Toy Biz being reduced from
78.4% to 26.6%. The Chapter 11 Trustee and other interested parties have
appealed this order. On April 13, 1998, the United States Court of Appeals for
the Third Circuit issued an order granting a motion to expedite the appeal of a
March 30, 1998 decision by the District Court regarding the Company's voting
control over Toy Biz. Pending the expedited determination of this appeal, the
order also stayed the effectiveness of the District Court's decision and the
hearing scheduled for May 4, 1998 for confirmation of the Toy Biz Plan. Since
July 1, 1997, due to the dispute over Marvel's ability to control or influence
Toy Biz and because Toy Biz ceased reporting its financial information to the
Company, the Company deconsolidated Toy Biz. The Company's Consolidated
Financial Statements do not include any adjustments to its investment in Toy Biz
in the Consolidated Financial Statements since July 1, 1997. The Consolidated
Balance Sheet, as of December 31, 1997, reflects Marvel's investment of
approximately 7.4 million shares of Toy Biz common stock at the historical cost
adjusted for the equity method of accounting through the date of
deconsolidation. As of December 31, 1997 the Company's investment in Toy Biz was
$33.0. Had the Company reinstated accounting for its investment in Toy Biz on
the equity method, the carrying value would have been $26.4 at December 31, 1997
based on Toy Biz's published results.
5. AMOUNTS PAYABLE TO BANKS
Debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
U.S. Term Loan Agreement $ 350.0 $ 350.0
Amended and Restated Credit Agreement 120.0 120.0
Chase Revolving Line of Credit 15.0 15.0
Panini Term Loan Agreement 116.2 139.3
Other Long Term Panini Debt 14.2 16.3
----------------- -----------------
Subtotal 615.4 640.6
Included in liabilities subject to settlement (485.0) (485.0)
Less Panini debt in default (116.2) (10.6)
Less current maturities of other Panini debt (5.7) -
----------------- -----------------
$ 8.5 $ 145.0
================= =================
</TABLE>
On December 20, 1996, the banks and financial institutions that were
parties to the U.S. Term Loan Agreement (as defined below), the Amended and
Restated Credit Agreements (as defined below), the Chase Revolving Line of
Credit (as defined below) and the Panini Term Loan Agreement (as defined below),
(collectively, the "Credit Agreements") entered into a Standstill Agreement and
Amendment (the "Standstill Agreement") which granted the Company the right to
maintain any outstanding loans under the Credit Agreements as either Eurodollar
in Eurocurrency Loans during the Standstill Period (as defined below). The
Standstill Agreement also provided that the commitments under the Credit
Agreements would not automatically terminate or be accelerated upon the
commencement of the reorganization cases but rather would be suspended and
reinstated upon confirmation of the Initial Plan. Unless a payment default was
continuing or certain other termination events were triggered, each lender under
the Credit
F-16
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Agreements agreed not to exercise any remedies against any subsidiary of Marvel
which is not one of the Debtor Companies during the Standstill Period. The
Standstill Period commenced on December 27, 1996 and ended on June 30, 1997. As
a result of the lapse of the Standstill Period (as defined in the Standstill
Agreement), all principal and interest incurred under the Company's Credit
Agreements is now due and owing. The Company currently operates its business
using cash collateral as authorized by the pre-petition banks from time to time.
However, there can be no assurance that such authorization will continue in the
future.
On June 5, 1997, the Bankruptcy court approved an order suspending the
adequate protection payments being made by the Company to the Bank Lenders. As a
result, the Company has ceased making interest payments on the U.S. Term Loan
Agreement, the Amended and Restated Credit Agreement and the Chase Revolving
Line of Credit. The amount of the suspended adequate protection payments as of
December 31, 1997 was $29.4 and is not included in the liabilities of the
Company.
In July 1997, Panini, a subsidiary of the Company that has not filed for
protection under chapter 11 and, therefore, is not one of the Debtor Companies,
suspended all payments of interest and principal under the Panini Term Loan
Agreement. As of December 31, 1997, suspended payments of interest and principal
under the Panini Term Loan are lire 22.0 billion (approximately $12.4 based on
the exchange rates at December 31, 1997), and is included in the Consolidated
Balance Sheet at December 31, 1997 in accrued expenses. This suspension
constituted an event of default under the Panini Term Loan Agreement, and,
consequently, the Company has reclassified the Panini Term Loan to current
liabilities. On August 11, 1997, Panini entered into an agreement with The Chase
Manhattan Bank for a loan of lire 27 billion (approximately $15.3 based on the
exchange rate at December 31, 1997) to provide short term liquidity. On August
5, 1997, the Company received approval from Bankruptcy Court to guarantee this
loan. The guarantee is junior to all liens of the DIP Lenders, but is senior to
the Secured Lenders. This loan is subject to a number of financial and other
covenants and conditions of borrowing. As of December 31, 1997, the credit line
was fully used. The loan expired on October 31, 1997, and by stipulation, the
maturity date was extended to March 31, 1998. As a result of Panini's
significant operating losses in 1997 and continued liquidity crisis, the Company
was able to further extend the payment date of this loan to September 1998.
On June 30, 1997, the DIP Loan matured and no repayment has occurred,
except $3.0 from the net proceeds resulting from the sale of a portion of the
Company's confectionery business, and the current payment of interest and
related administrative fees. The DIP Lenders have agreed to forbear from taking
any actions. Such forbearance is continuing on a daily basis. With a full
reservation of all rights, the DIP Lenders and the pre-petition secured lenders
have agreed to the Debtor's continued use of the cash collateral on the same
terms and conditions and with most of the same protections as set forth in the
current financing and cash collateral order approved by the Bankruptcy Court. In
connection with the appointment of the Chapter 11 Trustee, The Chase Manhattan
Bank has advised the Company that it is willing to lead a syndicate to make
loans to the Company subject to the execution of definitive documentation and
agreement on key terms. The District Court's approval is required for such
additional loans to the Company. There can be no assurance that such approval
will be granted by the court or that the DIP Lenders and the pre-petition
secured lenders will allow for the Company to continue to use their cash
collateral.
The liens securing the DIP Loan take first position (prime) over the
liens securing the Credit Agreements and are secured by a lien on the Company's
26.6% equity interest in Toy Biz. Borrowings under the DIP Loan bear interest at
a rate per annum equal to the one month Eurodollar Rate (as defined in the DIP
Loan) rounded upwards to the next 1/16 of 1%, or Alternate Base Rate (as defined
in the DIP Loan) plus the Applicable Margin (as defined in the DIP Loan) of 2-
1/2% with respect to Eurodollar Loans and 1-1/2% with respect with Alternate
Base Rate loans. Interest on Alternate Base Rate Loans is payable monthly in
arrears, and interest on Eurodollar Rate Loans is payable at the end of the
applicable interest period. Pursuant to the terms of the DIP Loan, the
outstanding balances under the current DIP Loan after June 30, 1997 bear
interest at the penalty rate of Alternate Base Rate plus a margin of 3-1/2%,
which, at December 31, 1997 was approximately 12%.
The DIP Loan includes various restrictive covenants prohibiting the
Company from, among other things, incurring additional indebtedness (with
certain limited exceptions), making investments, including for the Company's
strategic initiatives (with certain limited exceptions), and making dividend,
redemption and certain other payments on
F-17
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
its capital stock. The DIP Loan also contains certain financial covenants and
events of default if the royalty free license from Marvel to Toy Biz is rejected
in the Marvel Cases.
Under separate credit arrangements for short term borrowings arranged
with the various European financial institutions, Panini may borrow up to lire
42.7 billion as of December 31, 1997 (approximately $24.2 based on the exchange
rate at December 31, 1997) on such terms as Panini and the banks may mutually
agree upon. These arrangements generally do not have termination dates but are
reviewed periodically for renewal. At December 31, 1997, the credit lines were
fully used. The weighted average interest rate on short-term borrowings as of
December 31, 1997 was 6.7%.
In April 1995, the Company entered into a $350.0 term loan agreement (as
amended) with a syndicate of banks, the Co-Agents and The Chase Manhattan Bank,
as administrative agent (the "U.S. Term Loan Agreement"). Loans under the U.S.
Term Loan Agreement bear interest at a rate per annum equal to the Eurodollar
Rate (as defined in the U.S. Term Loan Agreement), or the Alternate Base Rate
(as defined in the U.S. Term Loan Agreement) plus, in each case, the Applicable
Margin (as defined in this paragraph). Applicable Margin means (a) with respect
to Eurodollar Rate Loans, 3% and (b) with respect to Alternate Base Rate loans,
2%. If adequate protection payments were not suspended, Alternate Base Rate
borrowings would have a rate of 10.5% as of December 31, 1997.
On August 30, 1994, the Company entered into a $120.0 revolving loan
agreement with a syndicate of banks, the Co-Agents and The Chase Manhattan Bank,
as administrative agent (the "Amended and Restated Credit Agreement"). Loans
under the Amended and Restated Credit Agreement bear interest at a rate per
annum equal to the Eurodollar Rate (as defined in the Amended and Restated
Credit Agreement) plus, in each case, the Applicable Margin (as defined in this
paragraph). Applicable Margin means (a) with respect to Eurodollar Rate loans,
3% and (b) with respect to Alternate Base Rate loans, 2%. If adequate protection
payments were not suspended, Alternate Base Rate borrowings would have a rate of
10.5% as of December 31, 1997.
During March 1996, the Company entered into a $25.0 revolving line of
credit (as amended) with The Chase Manhattan Bank (the "Chase Revolving Line of
Credit"). Through November 20, 1996 the Company borrowed $15.0, at which time
the line of credit was reduced to the amount outstanding. The Chase Revolving
Line of Credit is pari passu with the U.S. Term Loan Agreement, the Amended and
Restated Credit Agreement, and the Panini Term Loan Agreement. The Chase
Revolving Line of Credit bears interest at a rate per annum equal to the
Eurodollar Rate (as defined in the Amended and Restated Credit Agreement), plus
3%, or the Alternate Base Rate Loan (as defined in the Amended and Restated
Credit Agreement) plus 2%. If adequate protection payments were not suspended,
ABR borrowings would have a rate of 10.5% as of December 31, 1997.
On August 30, 1994, the Company, Marvel Italia Srl (now Panini S.p.A.)
and Insituto Bancario San Paolo Di Torino S.p.A. (the "Lenders"), entered into a
term loan and guarantee agreement (the "Panini Term Loan Agreement") providing
for a term loan credit facility of lire 244.5 billion (approximately $154.0
based on exchange rates in effect on the date of acquisition).
The Panini Term Loan Agreement requires interest at a rate per annum
equal to the Eurocurrency Rate (as defined in the Panini Term Loan Agreement)
or, in certain limited circumstances, the Negotiated Rate (as defined in the
Panini Term Loan Agreement), in each case plus the Applicable Margin (as defined
in this paragraph). Eurocurrency Rate Loans have, at the option of Panini,
interest periods of one, two, three or six months. Applicable Margin means (a)
with respect to Eurocurrency Loans 3% and (b) with respect to Negotiated Rate
Loans, 2%. Panini suspended all payments of interest and principal for the
Panini Term Loan Agreement in July 1997.
The U.S. Term Loan Agreement (through incorporation by reference to the
Amended and Restated Credit Agreement), the Amended and Restated Credit
Agreement, Chase Revolving Line of Credit Agreement (through incorporation by
reference to the Panini Term Loan Agreement), and the Panini Term Loan Agreement
include various restrictive covenants prohibiting the Company from, among other
things, incurring additional indebtedness, with certain limited exceptions, and
making dividend, redemption and certain other payments on its capital stock. The
U.S. Term Loan Agreement, the Amended and Restated Credit Agreement and the
Panini Term Loan Agreement also contain
F-18
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
certain customary financial covenants and events of default for financing of
this type, including a change of control covenant. Mandatory prepayments are
required to be made out of net proceeds from sales of assets by the Company,
with certain exceptions, and from certain excess cash flow (as defined in the
Amended and Restated Credit Agreement).
Pursuant to the terms of the Credit Agreements, the respective lenders
(the "secured lenders") are secured by substantially all of the Company's
domestic assets, other than the Company's investment in common stock of Toy Biz,
and all of the capital stock of the Company's domestic subsidiaries and 65% of
the capital stock of the Company's first tier foreign subsidiaries.
The filing of petitions for relief under chapter 11 of the Bankruptcy
Code in the Bankruptcy Court by the Debtor Companies is an event of default
under the Credit Agreements.
The average cost of borrowings for the U.S. Term Loan Agreement and the
Amended and Restated Credit Agreement was 8.65% for the period of January 1,
1997 through June 5, 1997, the date the Company stopped paying and accruing
interest. The average cost of borrowing for the Term Loan Agreement was
approximately 11.13% for the year ended December 31, 1997. The average cost of
borrowings for the U.S. Term Loan Agreement, the Amended and Restated Credit
Agreement and the Term Loan Agreement was approximately 8.83% and 8.88% for the
years ended December 31, 1996 and 1995, respectively. The average cost of
borrowings for the DIP Loan was 8.23% for the year ended December 31, 1997.
Interest expense was $47.7, $60.8, and $47.1 in 1997, 1996, and 1995,
respectively. Contractual interest was $77.1 for the year ended December 31,
1997. Interest paid was $43.3, $60.6, and $42.7 in 1997, 1996, and 1995,
respectively. The revolving credit portion of the Amended and Restated Credit
Agreement at December 31, 1997 was fully drawn. The Amended and Restated Credit
Agreement requires the Company to pay a commitment fee of 1/4 to 3/8 of 1% per
annum on the unused portion.
Due to the extenuating circumstances involving the Credit Facilities and
other debt as a result of the chapter 11 filings, it is not practicable to
estimate the fair value of these obligations as of December 31, 1997.
Financing charges of $21.8 were incurred in connection with the Company's
credit facilities which were deferred and are being amortized over the remaining
term of the respective facilities.
The scheduled aggregate maturities of the Company's long term debt, not
subject to settlement under reorganization, per the underlying credit agreements
that support each debt facility are as follows:
For the Years Ending December 31,
---------------------------------
1998............................. $121.9
1999............................. 5.7
2000............................. 2.8
----------
$130.4
==========
F-19
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The scheduled aggregate maturities of the Company's long term debt which
is subject to settlement under reorganization per the underlying credit
agreements that support each debt facility are as follows:
For the Years Ending December 31,
---------------------------------
1998............................. $ 15.0
1999............................. 57.5
2000............................. 125.0
2001............................. 187.5
2002............................. 100.0
----------
$485.0
==========
6. EMPLOYEE BENEFIT PLANS
SAVINGS PLANS
The Marvel Entertainment Group, Inc. Savings and Investment Plan is a
defined contribution plan qualified under Section 401(k) of the Internal Revenue
Code of 1986, as amended, covering all full-time non-union salaried and hourly
employees who have at least one year of service and matches contributions by
employees in an amount equal to 100% of the first 3% of eligible compensation
contributed and 25% of the next 3% of eligible compensation contributed, up to a
maximum of 3.75% of the employees' compensation. The provisions for
contributions under this plan was $.5 in each of 1997, 1996 and 1995.
PENSION PLANS
Fleer and SkyBox have noncontributory defined benefit pension plans for
salaried employees. During prior years, these plans were amended to prohibit
participation by new employees. Effective as of September 1, 1996, such pension
plans were merged with Fleer becoming the plan sponsor. The benefits were based
on the employee's years of service and highest five years of compensation.
Contributions are intended to provide for benefits attributed to service to
date. The projected benefit obligation was $18.0 and $17.7 and plan assets were
approximately $17.1 and $14.5 at December 31, 1997 and 1996, respectively.
Pension expense for all periods was insignificant.
STOCK OPTION PLAN
Under the terms of the Marvel Entertainment Group, Inc. Amended and
Restated Stock Option Plan (the "Stock Option Plan"), incentive stock options
("ISOs"), non-qualified stock options ("NQSOs") and stock appreciation rights
("SARs") may be granted to key employees of, or consultants to, the Company and
any of its affiliates from time to time. In May 1995, the Company was authorized
to increase the aggregate number of shares of Common Stock as to which options
and rights may be granted under the Stock Option Plan from 11,000,000 to
16,000,000 shares, including options described below.
F-20
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Information with respect to options under the Stock Option Plan follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Option price per share Price
------------ ---------------------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1995.............................. 8,072,603 $ 2.0625 - $26.75
Exercised................................................... (1,046,940) $ 2.0625 - $14.50 $15.623
Canceled.................................................... (1,267,002) $2.0625 - $17.625 $16.296
Granted..................................................... 2,200,000 $14.25 - $15.50 $14.909
------------
Outstanding at December 31, 1995............................ 7,958,661 $ 2.0625 - $26.75
Exercised................................................... (106,993) $ 2.0625 - $7.75 $11.945
Canceled.................................................... (1,127,668) $ 2.0625 - $26.75 $15.658
Granted..................................................... 1,745,000 $5.00 - $12.625 $ 9.851
------------
Outstanding at December 31, 1996............................ 8,469,000 $ 2.0625 - $26.75
Canceled.................................................... (4,435,800) $ 2.0625 - $18.00 $10.266
Exercised................................................... --- --- ---
Granted..................................................... --- --- ---
------------
Outstanding at December 31, 1997............................ 4,033,200 $ 2.0625 - $26.75
============
</TABLE>
At December 31, 1997, 3,523,200 shares (6,078,867 shares at December 31,
1996) were exercisable and 6,158,143 shares (1,722,343 shares at December 31,
1996) were available for future grants of options and rights. The current Toy
Biz Plan and all other previous plans of reorganization involve a
recapitalization of the Company. As a result, any outstanding grants would be
canceled as the Company's stock option plan will be terminated.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------------------
Number Weighted
Outstanding at Average Weighted Number Weighted
Ranges of Exercise December 31, Remaining Average Exercisable at Average
Prices 1997 Contractual Exercise Price December 31, Exercise Price
Life 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.06 - $ 5.00 496,000 3.53 $ 2.06 496,000 $ 2.06
$ 5.01 - $10.00 2,296,500 5.20 $ 9.33 2,296,500 $ 9.33
$10.01 - $15.00 1,010,700 7.67 $12.82 550,700 $13.41
$15.01 - $26.75 230,000 7.28 $15.84 180,000 $15.93
</TABLE>
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on date of grant, no compensation expense is recognized. In 1996, the Company
elected to follow the disclosure-only provisions under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("FAS 123"). For the purposes of FAS
123 pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period. The Company's pro forma information
follows:
1997 1996
---------- ---------
Net loss, as reported ($254.3) ($464.4)
Pro forma net loss ($260.7) ($470.4)
Pro forma net loss per share - basic and diluted ($2.56) ($4.62)
========== =========
F-21
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The fair value for each option grant under the Stock Option Plan was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the various grants made during
1995 and 1996: risk free interest rates ranging from 5.40% to 6.53%; no dividend
yield; expected volatility ranging from .466 to .487; and expected life of three
years. The option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, the option valuation model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
7. INCOME TAXES
The domestic members of the Company, with the exception of Toy Biz (Toy
Biz files separate federal and state income tax returns), were included in the
consolidated federal income tax return, and in some cases the state income tax
returns, of Mafco and its subsidiaries from May 19, 1993 until April 24, 1997.
Throughout the Mafco consolidated period, the Company has been operating
under a tax sharing agreement with Mafco or an affiliate of Mafco which provides
that federal income taxes be paid to Mafco or an affiliate as if the Company
were a separate taxpayer. The Company previously filed separate federal income
tax returns for the periods July 23, 1991 (the date of its initial public
offering) through May 18, 1993. By operation of net operating loss carrybacks,
Marvel has received refunds of substantially all Federal tax previously paid to
Mafco or its affiliates. An additional refund of $0.4 related to these
carrybacks is due from the Internal Revenue Service (the "IRS"), but has not yet
been received. Federal income taxes paid to Mafco affiliates were $0.1 and $13.6
in 1996 and 1995, respectively. Refunds received from Mafco affiliates were
$10.4 and $17.1 in 1997 and 1996, respectively, relating to prior years. Total
income taxes paid (refunded), including the payments to and from Mafco
affiliates, were $(10.3), $(6.1) and $16.5 in 1997, 1996 and 1995, respectively.
As more fully described in Note 2, the Board of Directors of Marvel
Holdings Inc. (a 50.08% shareholder of the Company) was replaced by the
Indentures Trustee on April 24, 1997. Stock ownership in Marvel by members of
the Mafco affiliated group declined below 80% (measured by vote or value), and
Marvel and its subsidiaries ceased to be members of the Mafco affiliated group
at such time for tax purposes (a "deconsolidation"). Accordingly, for the period
from January 1, 1997 through April 24, 1997, the Marvel group will be included
in the Federal consolidated return and the combined returns of a few states of
the Mafco group. The members of the Marvel group will additionally file Federal
returns separate from the Mafco group for the period April 25, 1997 through
December 31, 1997.
The Tax Sharing Agreement with Mafco and its affiliates related to the
Mafco consolidated years has not yet been settled. Additionally, the IRS has
filed proof of claims during the bankruptcy process totaling approximately $10.2
with respect to the 1995 and 1996 tax years. These years have not yet been
examined by the IRS, and the Company has not been able to learn from the IRS how
the claim amount was derived. The Company believes a majority of these claims
are without merit (See Note 2).
At December 31, 1997, the Company expects to have a Federal net operating
loss carry forward of approximately $102 related to the loss generated in the
period April 25, 1997 through December 31, 1997. This loss carryforward will
expire in 2012. Additionally, as a result of the deconsolidation with Mafco, the
Company believes that additional net operating loss will be allocated to the
Company. The amount to be allocated cannot be determined until Mafco completes
its Federal tax return for the 1997 year. The Company also has state and foreign
net operating loss carryforwards in various state, local, and foreign tax
jurisdictions at December 31, 1997.
At such time as the Company emerges from bankruptcy, it is likely that
there will be a 50% "change of ownership" pursuant to Section 382 of the
Internal Revenue Code of 1986, as amended, which may severely limit
F-22
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
future utilization of net operating losses. The Company does not believe that
there have been any changes in ownership through April 14, 1998 that would have
caused a Section 382 limitation. In addition to any possible limitation on the
utilization of net operating losses due to Section 382, there may be a further
limitation imposed by Treasury Regulations related to separate return limitation
years (commonly referred to as the "SRLY" limitation).
In addition to the probable Section 382 change of ownership at emergence
from bankruptcy, there could be one or more other Section 382 changes in
ownership prior to such emergence. This could occur, for example, were a
sufficiently large enough number of shares transferred to certain persons or
entities prior to the Company's emergence from bankruptcy. Multiple Section 382
changes in ownership have the potential to more greatly limit the future
utilization of net operating losses than would a single ownership change.
Toy Biz has announced an unsolicited merger proposal for Marvel (see Note
2). The Company is working with Toy Biz in an effort to structure the
reorganization to allow the maximum utilization of net operating losses and
minimum loss of tax attributes should such proposal be confirmed.
At the emergence from bankruptcy, there may be discharge of both bank and
trade debt. Such discharge should, due to the application of special rules
related to companies in bankruptcy, not be income recognized currently for tax
purposes. Rather, tax attributes should be reduced by the amount of debt
discharged. The Company believes that application of the attribute reduction
rules to the Company would primarily reduce or eliminate the amount of tax net
operating losses and asset tax bases in the legal entities in which forgiveness
occurs, primarily Fleer Corporation. Attribute reduction would occur on the
first day of the tax year following the year in which the Company emerges from
bankruptcy.
Due to the fact that a plan of reorganization has not yet been approved
by the District Court, the Company is not able at this time to determine whether
any net operating losses or the ability to utilize such losses would survive a
Section 382 limitation, multiple Section 382 limitations, or the attribute
reduction that might occur from debt forgiveness.
For financial statement purposes, the Company records income taxes in
accordance with Statement of Financial Accounting Standards No. 109 using a
liability approach for financial accounting and reporting which results in the
recognition and measurement of deferred tax assets based on the likelihood of
realization of tax benefits in future years.
F-23
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
For all periods presented, federal and state income taxes are provided as
if the Company filed its own income tax returns. Tax benefit for federal and
state purposes as well as for certain foreign jurisdictions was generally not
provided for in either 1996 or 1997. Components of the provision for income
taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Income (loss) before provision for taxes:
Domestic............................................... $(226.2) $(421.2) $(56.6)
Foreign................................................ (30.9) (9.8) 34.6
---------- ---------- ---------
$(257.1) $(431.0) $(22.0)
========== ========== =========
Provision (Benefit) for income taxes:
Current:
Federal................................................ $ (1.6) $ (5.0) $ (0.1)
State and local........................................ (0.2) 2.9 2.9
Foreign................................................ 0.6 (0.4) 8.1
---------- ---------- ---------
(1.2) (2.5) 10.9
---------- ---------- ---------
Deferred:
Federal................................................ 0.0 22.8 (12.9)
State and local........................................ 0.0 4.2 1.0
Foreign................................................ 1.8 (2.8) 6.7
---------- ---------- ---------
1.8 (24.2) (5.2)
---------- ---------- ---------
$ 0.6 $ 21.7 $ 5.7
========== ========== =========
</TABLE>
During 1997 and 1996, the Company recorded a valuation allowance against
its domestic and certain foreign deferred tax assets as management determined
that it was not more likely than not that such assets would be realized in the
future.
Deferred taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes and
differences between the fair value of assets acquired in business combinations
accounted for as purchases and their tax bases. The approximate effect of
temporary differences that gave rise to deferred tax balances at December 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable........................................ $ 3.1 $ 3.5
Inventory.................................................. 4.3 13.6
Sales returns reserves..................................... 15.9 21.7
Restructuring reserves..................................... 10.7 22.4
Reserve related to foreign investments..................... 9.8 7.5
Net operating loss carryforwards........................... 101.6 61.4
Tax credit carry forwards.................................. 4.7 4.7
Other...................................................... 7.9 11.2
--------- --------
Total gross deferred tax assets............................ 158.0 146.0
Less valuation allowance................................... (144.5) (112.5)
--------- --------
Net deferred tax assets.................................... 13.5 33.5
--------- --------
Deferred tax liabilities:
Equity investments......................................... 3.2 3.4
Depreciation/ amortization................................. 9.2 20.9
Licensing income........................................... 6.3 6.6
Other...................................................... 0.5 2.5
--------- --------
Total gross deferred tax liabilities....................... 19.2 33.4
--------- --------
Net deferred tax asset (liability).............................. $ (5.7) $ 0.1
========== =======
</TABLE>
F-24
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
As discussed more fully in Note 1, the results of operations of Toy Biz
are not included in the Company's consolidated financial statements for the last
six months ended December 31, 1997. Accordingly, the net deferred tax assets at
December 31, 1997 do not include the net deferred tax assets of Toy Biz. At
December 31, 1996, net deferred tax assets of $6.2 related to Toy Biz are
included in the Company's net deferred tax assets.
The total valuation allowance for 1997 and 1996 includes $12.8, which if
realized, will be accounted for as a reduction of goodwill.
The income tax on (loss) income before provision for income taxes,
minority interest and extraordinary item varies from the current statutory
federal income tax as follows:
<TABLE>
<CAPTION>
For the years ended December
31,
--------------------------------
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Statutory rate......................................... (35.0)% (35.0)% (35.0)%
State and local taxes, net............................. (0.2) (2.2) 16.0
Non-deductible amortization expense.................... 1.2 21.5 17.5
Foreign taxes.......................................... 0.5 (0.8) 18.8
Increase in Valuation Allowance........................ 32.6 21.6 -
Other.................................................. 0.6 (0.1) 8.6
---------- -------- --------
Total provision for income taxes....................... (0.2)% 5.0 25.9
========== ======== ========
</TABLE>
8. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
ACCOUNTS RECEIVABLE, NET:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Accounts receivable.......................................... $109.6 $275.3
Less: Allowances.......................................... (22.8) (46.2)
--------- --------
$ 86.8 $229.1
========= ========
</TABLE>
Included in the Company's net accounts receivable balance as of December
31, 1996 was $95.6 related to Toy Biz. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. Receivables generally are due within 30-90 days. At December 31,
1997, the Company did not have any significant concentrations of credit risk.
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Finished goods................................................ $26.0 $ 69.4
Work in process............................................... 12.7 16.3
Raw materials................................................. 13.9 22.0
Less: Reserve for obsolescence................................ (8.7) (29.6)
-------- -------
$43.9 $ 78.1
======== =======
</TABLE>
Included in the Company's net inventory as of December 31, 1996 was $20.9
related to Toy Biz.
F-25
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
PROPERTY, PLANT AND EQUIPMENT (AT COST), NET:
Depreciation and amortization of property, plant and equipment are
provided on the straight-line basis over the estimated asset lives indicated
below.
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Land and buildings (20 to 33 years for buildings)................ $ 33.0 $ 35.5
Machinery and equipment (3 to 10 years).......................... 35.0 65.1
Furniture and fixtures (5 to 10 years)........................... 5.8 6.2
Leasehold improvements and other (3 to 10 years)................. 2.8 2.5
Construction-in-progress......................................... 1.0 1.8
---------- ---------
77.6 111.1
Less: Accumulated depreciation and amortization................. (22.1) (31.6)
---------- ---------
$ 55.5 $ 79.5
========== =========
</TABLE>
Included in the Company's net property, plant and equipment as of
December 31,1996 was $19.9 related to Toy Biz. Depreciation and amortization was
$10.3, $19.1 and $13.3 in 1997, 1996 and 1995, respectively.
GOODWILL AND OTHER INTANGIBLES, NET:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Goodwill and other intangibles.............................. $243.9 $376.1
Less: Accumulated amortization............................. (69.2) (58.5)
--------- ---------
$174.7 $317.6
========= =========
</TABLE>
Amortization, excluding the write-off of goodwill, was $12.5, $16.8 and
$15.0 in 1997, 1996 and 1995, respectively.
ACCRUED EXPENSES AND OTHER:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Royalties and incentives.................................... $ 31.5 $ 23.0
Reserve for returns......................................... 44.6 51.2
Interest.................................................... 15.0 9.0
Other....................................................... 49.9 106.2
Less amounts reclassified to liabilities subject to
settlement under reorganization (See Note 3)............. (13.7) (14.7)
--------- ---------
$127.3 $174.7
========= =========
</TABLE>
Included in the Company's accrued expenses and other as of December 31,
1996 was $22.4 related to Toy Biz.
9. RELATED PARTY TRANSACTIONS
The Company had been a subsidiary of MacAndrews & Forbes or an affiliate
thereof from 1989 through the middle of 1997.
The Company was charged for certain services provided by affiliates of
Mafco on behalf of the Company. These charges did not exceed 1/2 of 1% of the
Company's net revenues for the years ended December 31, 1997, 1996, and 1995.
During the years ended December 31, 1996 and 1995, Toy Biz accrued
royalties of $1.8 and $5.7, respectively, to Mr. Arad, a director and
stockholder of Toy Biz, for toys he invented or designed. Mr. Arad was later
F-26
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
employed by the Company where he was in charge of Marvel Studios until August
1997. For the year ended December 31, 1997, the Company paid Mr. Arad
approximately $.3 for his services.
In 1995, the Company terminated a contract with Classic Heroes, Inc., an
affiliate of Toy Biz, and incurred $4.0 of costs, which has been charged to
operations.
During 1993, the Company entered into agreements to license certain of
the Company's characters to New World Communications Group Incorporated ("New
World"), then a subsidiary of Mafco, for the production of animated series for
television. These agreements provide for New World to participate in licensing
and other revenues generated from the exhibition of certain animated series.
Results of operations for 1996 and 1995 includes an expense for this
participation that did not exceed 1/2 of 1% of the Company's net revenues for
the years ended December 31, 1996 and 1995, respectively. During 1996, the
Company and New World entered into an agreement whereby New World produced for
the Company episodes 1-13 of THE INCREDIBLE HULK animated television series at
the cost of approximately $4.0.
During 1995, the Company extended two unsecured loans totaling $0.5 to
one of its executive officers. The unpaid principal and accrued interest on such
loans was paid to the Company by Andrews Group during March, 1997.
The Company was party to a tax sharing agreement with certain of its
affiliates through April 24, 1997, the date the Company became deconsolidated
from the MacAndrews and Forbes tax group (see Note 7). During 1997 and 1996, the
Company received tax refunds from Mafco in the amounts of $10.4. and $17.1,
respectively.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Consolidated rent expense under operating leases covering production
facilities, office facilities, warehouse facilities and equipment was $5.9, $7.9
and $7.0 for the years ended December 31, 1997, 1996 and 1995, respectively.
These leases expire through 2005 and are subject to price escalation's for
certain costs. Aggregate future minimum rental commitments, excluding amounts
included within restructuring charges, for these leases as of December 31, 1997
were as follows:
For the Years Ending December 31,
---------------------------------
1998 ............................... $3.7
1999 ............................... 2.7
2000 ............................... 1.9
2001 ............................... 1.0
2002 ............................... 0.3
2003 and thereafter................. 0.3
SPORTS AND ENTERTAINMENT LICENSING CONTRACTS
Minimum payments under the Company's sports and entertainment license
agreements are $57.3, $37.1, $9.0, $7.2 and $6.3 in 1998, 1999, 2000, 2001 and
2002 respectively.
LEGAL MATTERS
On December 27, 1996, the Debtor Companies filed petitions under chapter
11 of the Bankruptcy Code and in connection with such filing have been parties
to various legal proceedings. The filing by the Debtor Companies of the
voluntary petitions for reorganization operated as an automatic stay against the
commencement or continuation of any judicial, administrative or other proceeding
against the Debtor Companies, any act to obtain possession of property of
F-27
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
or from the Debtor Companies, or any act to create, perfect or enforce any lien
against property of the Debtor Companies, with certain exceptions under the
Bankruptcy Code.
The Indentures Trustee has alleged that events of defaults under each of
the Indentures have occurred by reason of the commencement of the Marvel Cases
under the Bankruptcy Code. The Indentures Trustee has also alleged that the
majority ownership and the anti-injunction provisions of each of the Indentures
have been violated. The Company is not a party to any of the Indentures
governing the Notes issued by the Holding Companies. In addition, the Company
believes the allegations of the Indentures Trustee are either without merit or
will be resolved in connection with the prosecution of the reorganization cases
of the Holding Companies. The Indentures Trustee has also filed claims with the
District Court alleging, among other things, "tortious interference" occasioned
by the filing of the Initial Plan. The Company believes that any such claims are
without merit. The Chapter 11 Trustee has indicated that he will support a
motion to expunge such claims in the bankruptcy proceedings of the Debtor
Companies.
There are twenty-seven purported class and derivative actions brought by
stockholders of the Company and the Noteholders and one action brought by a
purported class of Toy Biz shareholders presently pending in the Delaware Court
of Chancery (collectively, the "Delaware Actions") that challenge, among other
things, the Andrews Investment.
Twenty-one of the twenty-seven Delaware Actions assert either claims on
behalf of a purported class of all Marvel shareholders or shareholder derivative
claims on behalf of Marvel, or both. The complaints allege, among other things,
that the Andrews Investment represents a breach of defendants' fiduciary duties
because the proposed purchase price per share is unfair and such purchase would
dilute the minority shareholders' interest in Marvel. Plaintiffs in these
actions seek to enjoin the Andrews Investment, to rescind the Andrews Investment
if it is in fact consummated prior to the entry of the court's judgment, to
recover damages for defendants' alleged conduct and to recover costs and
disbursements in pursuing these actions, including reasonable attorneys' fees.
These actions have been consolidated for all purposes by order of the Delaware
Court of Chancery. A consolidated complaint has not yet been filed.
Six of the Delaware Actions assert claims on behalf of a purported class
consisting of the holders of Notes issued by the Holding Companies. These
complaints allege, among other things, that the Andrews Investment, if
consummated, would be a breach of defendants' duty of fair dealing and good
faith owed to the Noteholders because the Andrews Investment would result in the
substantial dilution of Marvel's outstanding stock, which is security for the
Notes, and will thus diminish the value of the Notes. These actions have been
separately consolidated by order of the Delaware Court of Chancery. The
consolidated complaint in these six actions does not name any of the Debtor
Companies as defendant. The parties to the consolidated complaint have agreed to
defer the filing of an answer.
All of the foregoing Delaware Actions name varying defendants consisting
in the aggregate of Marvel, Andrews Group, MacAndrews Holdings, Marvel Parent,
Marvel III, Holdings, Ronald O. Perelman, William C. Bevins, Donald G. Drapkin,
Michael Fuchs, Frank Gifford, E. Gregory Hookstratten, Morton L. Janklow, Quincy
Jones, Stan Lee, Scott C. Marden, Terry C. Stewart and Kenneth Ziffren.
One of the pending Delaware Actions asserts claims on behalf of a
purported class of all Toy Biz shareholders. Holl v. Toy Biz, Inc., Marvel
Entertainment Group, Inc., Andrews Group, Inc., Ronald O. Perelman, Joseph M.
Ahearn, Avi Arad and Issac Perlmutter, was filed on November 15, 1996. The
complaint alleges, among other things, that defendants Perelman, Ahearn, Arad
and Perlmutter have breached their fiduciary duties in pursuing the proposed
offers of Marvel and Andrews Group to purchase Toy Biz stock. In addition, the
complaint alleges that defendant Marvel aided and abetted the individual
defendants in their unlawful conduct. Damages in an unspecified amount are
sought for the alleged breach of fiduciary duties by defendants. Plaintiffs also
seek to enjoin the consummation of the transaction, to rescind the transaction
in the event it is consummated and to recover costs and disbursements and
reasonable allowances for plaintiff's counsel. This case has been stayed by
stipulation of the parties.
F-28
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
No classes have been certified in any of the Delaware Actions. On
December 27, 1996, Marvel filed a petition for protection under chapter 11 of
the Bankruptcy Code. As a result of Marvel's filing, all of the Delaware Actions
with respect to Marvel are automatically stayed pursuant to 11 U.S.C. Section
362. On March 7, 1997, Andrews Group terminated the Stock Purchase Agreement
with Marvel and withdrew the proposal for the Andrews Investment. On the same
date, Andrews Group informed Toy Biz and the two other principal stockholders of
Toy Biz that the transactions contemplated by the Merger Agreement and the Stock
Purchase Agreements with Toy Biz and each of such principal stockholders,
respectively, would not be consummated.
OTHER LEGAL PROCEEDINGS
The Company is a defendant in a purported class action filed on July 26,
1996 in the United States District Court for the Eastern District of New York
entitled Fishman, et al v. Marvel Entertainment Group, Inc., by four persons who
allegedly purchased sports and entertainment cards manufactured by Fleer/SkyBox.
The action is directed against standard business practices in the trading card
industry, including the practice of randomly placing insert cards in packages of
sports and entertainment trading cards, and alleges that these practices
constitute illegal gambling activity in violation of state and Federal law.
Plaintiffs seek certification of a class of persons who within four years prior
to the filing of the complaint purchased packages of trading cards that might
contain randomly inserted cards, and recovery of treble damages. On September
30, 1996, the Company filed a motion to dismiss the complaint. The complaint was
dismissed with prejudice on August 21, 1997. On October 17, 1997, the plaintiffs
filed a motion to alter, amend or vacate the dismissal. This motion is still
pending.
Marvel is named as a defendant in two actions which have been
consolidated for all purposes with certain related actions in proceedings now
pending in the Los Angeles County Superior Court in California. The consolidated
cases center around the ownership of certain rights in the production and
distribution of a live action motion picture based on the "SPIDER-MAN" character
owned by Marvel.
In the lead case, a dispute between 21st Century Film Corporation ("21st
Film"), Carolco Pictures, Inc. ("Carolco") and related entities, 21st Film
claims that it still possesses rights under an agreement with Marvel to produce
and distribute a live action film based on the "SPIDER-MAN" character, although
it had assigned all of its rights to Carolco. Metro Goldwyn Mayer, Inc. ("MGM")
has succeeded to the litigation position of both 21st Film and Carolco in the
respective bankruptcy proceeding of those two companies. In addition to its
purchase of 21st Film and Carolco litigation positions, MGM is a plaintiff in a
separate case that has been deemed related to the lead and consolidated cases.
Marvel has answered the complaint denying MGM's allegations.
An additional lawsuit, between Carolco and Columbia Tristar Home Video
("Columbia"), concerns the videocassette rights to any such film, and a third
lawsuit, between Carolco and Viacom International, Inc. ("Viacom"), involves
television rights to any such film. Both Columbia and Viacom claim that, before
21st Film assigned its rights under its agreement with Marvel to Carolco, 21st
Film had licensed ancillary rights to each company. Each seeks to enforce its
respective rights. Viacom, however, brought a separate suit naming Marvel, and
Marvel has answered that complaint, denying Viacom's allegations.
In its answer and other pleadings, Marvel contends that it is the sole
and exclusive holder of the unencumbered right to produce and distribute a live
action film based on the "SPIDER-MAN" character. Marvel contends that all rights
to produce or distribute a "SPIDER-MAN" film under its agreement with Carolco
and 21st Film have reverted to Marvel.
Marvel has notified the court in the consolidated action that Marvel has
filed for bankruptcy protection, and that the bankruptcy court filing stays all
further proceedings in the consolidated lawsuit as to Marvel. On April 2, 1998,
the Chapter 11 Trustee filed a separate action in the District Court asserting
that Marvel has the full unencumbered right to produce and distribute any
"SPIDER-MAN" films. There can be no assurance that the Chapter 11 Trustee will
be successful in this litigation.
The National Basketball Association, through NBA Properties, Inc.
("NBAP"), filed a complaint against Panini, NBA Properties, Inc. v. Panini, in
Federal Court in the Southern District of New York on October 14, 1997.
F-29
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The complaint seeks approximately $57 for accrued and unaccrued royalty and
other payments under a license agreement with Marvel. The license concerns the
manufacture and distribution of basketball trading cards and stickers. Panini is
not in bankruptcy. Panini has moved to dismiss for lack of personal jurisdiction
and NBAP intends to cross-move for summary judgment. The Chapter 11 Trustee is
moving to intervene in this action. The Company has accrued unpaid minimum
royalties due to NBAP through December 31, 1997 on its consolidated financial
statements, but has not accrued for any future royalty payments that may be owed
to NBAP from the Company.
As debtor-in-possession and prior to the appointment of the Chapter 11
Trustee, Marvel filed an adversary proceeding in the District Court, Marvel v.
NBA Properties, Inc., on December 9, 1997, seeking an injunction extending the
automatic stay and enjoining further proceedings in the action against Panini in
NBA Properties, Inc. v. Panini. Marvel's motion for a preliminary injunction is
scheduled to be heard by the District Court on April 24, 1998.
The Company is currently negotiating with the NBAP to, among other
things, reduce the minimum royalties due to NBAP pursuant to its license
agreement with Marvel. There can be no assurance that such negotiations will be
successful.
As successor Indentures Trustee for the Notes issued by Holding
Companies, La Salle National Bank brought an action against Mafco, MacAndrews
Holdings, Andrews Group and certain of their directors, La Salle National Bank
v. Ronald O. Perelman, et. al., in the District Court in December 1997 to
enforce the provisions of the Notes and the Indentures. The defendants are
alleged to have materially adversely affected the Holding Companies by executing
the Indentures and issuing the Notes, thus ultimately depriving the Noteholders
of any viable expectation of recovery. The directors are also alleged to have
undermined Marvel through an initial public offering, the acquisition of Fleer,
the purchase of stock in Toy Biz, the transfer of Marvel's toy license to Toy
Biz and misuse of the proceeds of the Notes. Plaintiff further alleges that the
defendants caused Marvel to acquire Panini and Skybox and used the financial
statements of these entities to disguise Marvel's financial condition. On
January 16, 1998, the defendants moved to dismiss the complaint on various
grounds. This motion is still pending.
Toy Biz initiated an action in the District Court in June 1997 against
the Company seeking a judicial determination as to the proper composition of its
board of directors and as to whether the Class B Common Stock of Toy Biz owned
by Marvel had automatically converted into Class A Common Stock of Toy Biz. In
July 1997 the Bondholders Committee and the Indentures Trustee moved to dismiss
this action. Toy Biz cross-moved for summary judgment which motion was opposed
by the Bondholders Committee, the Indentures Trustee and the Chapter 11 Trustee.
On March 30, 1998, the District Court granted Toy Biz's motion for summary
judgment. The Company and other interested parties have filed an appeal of this
determination to the United States Court of Appeals for the Third Circuit. The
Chapter 11 Trustee, management of Toy Biz and the secured lenders of the Company
are currently in negotiations attempting to settle the claims that are the
subject of the appeal as well as other matters. There can be no assurance that
such negotiations will be successful and that such claims will be settled.
In October 1997, an action was brought in the District Court in the name
of the Company against, among others, Ronald O. Perelman, The Chase Manhattan
Bank and other lenders who are holders of pre-petition debt of Marvel and Toy
Biz. The complaint seeks declaratory and injunctive relief and alleges improper,
manipulative and collusive conduct by the defendants. Among the violations
charged are breach of fiduciary duties, fraudulent conveyances, preferential
transfers, breach of contract, violation of the automatic stay under the
Bankruptcy Code and interference with contractual relations. This litigation is
the subject of various motions to dismiss. The Chapter 11 Trustee is in the
process of evaluating the claims in this litigation, interviewing parties and
witnesses and investigating the defendants' conduct under the applicable rules
and laws.
The Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding, the Company believes
that other than the litigation involving NBAP, all of its legal proceedings and
claims, individually and in the aggregate, are not likely to have a material
adverse effect on its financial condition or results of operations. As a result
of the
F-30
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
Debtor Companies filing of petitions pursuant to the Bankruptcy Code, the
Company's legal proceedings, other than the Debtor Companies' bankruptcy
proceedings and those proceedings involving subsidiaries of Marvel who are not
Debtor Companies (principally, Panini), have been automatically stayed.
POTENTIAL LITIGATION
On October 27, 1997, the Company received a Civil Investigative Demand
("CID") from the Antitrust Division of the U.S. Department of Justice (the
"Justice Department") as part of the Justice Department's investigation into
unreasonable trade restraints and monopolization in comic-book distribution and
sales. A CID is a formal request for information and a customary initial step of
any Justice Department investigation. The Justice Department is permitted to
issue a CID to anyone whom the Justice Department believes may have information
relevant to an investigation. Therefore, the receipt of a CID does not mean that
the recipient is the target of an investigation, nor does it presuppose that
there is a probable cause to believe that a violation of the antitrust laws has
occurred or that a formal complaint ultimately will be filed. The Company
believes that the primary focus of the CID relates to the distribution and sale
of comic books. The Company intends to cooperate fully with the Justice
Department inquiry, and submitted a response to the CID on January 28, 1998.
There can be no assurance that the Justice Department's investigation
will not result in litigation against the Company or that the Company will
prevail in any such litigation, if commenced. Any material restructuring of the
distribution arrangements by the Company for its comic books could have a
material negative effect on the Company's business, financial condition and
results of operations.
11. GEOGRAPHIC SEGMENTS
The Company operates in a single business segment. Information related to
the Company's geographic segments for the years ended December 31, 1997, 1996
and 1995 is presented below. Substantially all of the Company's foreign net
revenues were derived from Europe. As discussed more fully in Note 4, the
information for the year ended December 31, 1997 does not include the results of
operations for Toy Biz for the year ended December 31, 1997 due to the
unavailability of such information.
Operating profit, as presented below, is total sales less operating
expenses, amortization of goodwill and other intangibles, restructuring charges,
and identifiable miscellaneous income and expense. Unallocated income and
expenses represent interest expense, net interest and investment income, foreign
exchange loss (gain), loss on sale of a portion of confectionery business,
equity in net income of unconsolidated subsidiaries, reorganization items and
general corporate expenses incurred to manage all of the Company's activities.
Unallocated income for 1996 and 1995 includes a gain on the sale of Toy Biz
common stock.
Identifiable assets, as presented below, are those assets used in each
geographic area. Corporate assets are principally cash, certain property and
equipment and non-operating assets. Export sales, including those to affiliates,
are not significant.
The majority of the Company's foreign sales and thus the majority of the
risk of foreign currency fluctuations relate to Panini. As a hedge against
foreign currency fluctuation, the financing for the acquisition of Panini in
1994 has been denominated in Panini's functional currency. Additionally, from
time to time, Panini may enter into foreign currency forward exchange contracts,
swaps and options as hedges of various intercompany transactions. At December
31, 1997 and 1996, outstanding forward exchange contracts were insignificant.
Additionally, the fluctuation in Panini's functional currency for the years
ended December 31, 1997, 1996 and 1995 was not significant.
F-31
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
GEOGRAPHIC AREAS:
<TABLE>
<CAPTION>
Year Ended December 31,
1997* 1996 1995
---------------------------------
<S> <C> <C> <C>
Net sales:
Domestic........................................... $ 196.5 $ 462.8 $ 579.9
Foreign............................................ 214.3 309.9 278.6
Eliminations....................................... (8.0) (27.2) (29.6)
----------- ---------- ----------
$ 402.8 $ 745.5 $ 828.9
=========== ========== ==========
Operating profit:...........................................
Domestic........................................... ($134.8) ($384.4) ($28.6)
Foreign............................................ (37.8) 13.1 44.6
----------- ----------- ----------
(172.6) (371.3) 16.0
Unallocated expenses, net................................... (76.5) (59.7) (38.0)
----------- ----------- ----------
Loss before provision for income taxes...................... ($249.1) ($431.0) ($22.0)
=========== =========== ==========
Identifiable assets:
Domestic........................................... $ 169.7 $ 455.6 $ 786.7
Foreign............................................ 237.1 342.3 324.0
Corporate.......................................... 69.7 46.1 115.6
----------- ----------- ----------
$ 476.5 $ 844.0 $1,226.3
=========== =========== ==========
</TABLE>
* Excludes the operations of Toy Biz.
12. QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter*
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
1997
Net revenues $156.7 $129.6 $ 91.9 $ 93.5
Gross profit 52.2 33.2 18.0 1.8
Net loss (27.8) (41.9) (30.6) (154.0)
Loss per share $(0.27) $(0.41) $(0.30) $ (1.51)
1996
Net revenues $189.6 $182.2 $209.4 $ 164.3
Gross profit 75.7 66.8 66.3 0.3
Net loss (4.4) (11.0) (12.5) (436.5)
Loss per share $ (.04) $ (.11) $ (.12) $ (4.29)
</TABLE>
* 1997 - Includes the write down of trading card and children's activity sticker
goodwill of approximately $106.7.
* 1996 - Reflects fourth quarter charges, including: a write-down of goodwill
and other intangibles of approximately $278.5 and a valuation allowance of
approximately $32.2 provided to offset deferred tax assets of certain
subsidiaries that were previously recorded.
The loss per share amounts have been restated to comply with FAS 128.
F-32
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
13. UNUSUAL CHARGES
GOODWILL AND OTHER INTANGIBLES WRITE-DOWN:
Goodwill related to the trading card operations of Fleer and SkyBox and
the children's activity sticker operations of Panini was initially recorded at
the time of their respective acquisitions. This goodwill represented the excess
of the purchase price over the valuation of the net assets acquired in each
acquisition. Among other things, the purchase price was based on the Company's
expectations of future performance at the time of acquisition, considering
historical performance and industry trends. These expectations assumed various
growth rates in revenue and sufficient cash flow from operations to repay
acquisition indebtedness.
There has been a significant and continued contraction in the trading
card market since the Fleer and SkyBox acquisitions, related in part to lower
speculative purchases. In addition as a result of the labor unrest in baseball,
hockey and basketball in 1994 and 1995, fan interest declined which adversely
affected sports trading card sales and increased returns for those periods. The
level of fan interest, although showing recent signs of improvement, has not
returned to the levels experienced prior to such labor unrest. The Company
believes that all of these factors have negatively affected the sports trading
card business, causing the Company to experience lower sales, higher returns and
higher inventory obsolescence.
The level of demand for entertainment trading cards is dependent on,
among other factors, the commercial success and media exposure of the Marvel
Characters and third party licensed products, as well as the market conditions
in the comic book specialty stores. In 1994 and 1995, the sale of entertainment
cards based on the Marvel Characters and third party licensed characters
substantially offset the decline in sports trading cards. However, in 1996 and
1997 the Company's sales of entertainment trading cards was adversely affected
by lack of commercial success of properties licensed from third parties as well
as the lower demand for trading cards based on comic book characters.
As described above, continuing operating losses in the trading card business, as
well as significant long-term changes in industry conditions, indicated to the
Company that there may be asset impairment. During the fourth quarter of 1996,
the Company evaluated the recoverability of the carrying value of long-lived
assets, including goodwill and other intangibles, in accordance with its
previously stated accounting policies and recorded a non-cash charge of
approximately $252.9 related to Fleer and SkyBox that has been classified as
amortization and write-off of goodwill and other intangibles. The Company
recognized an impairment on a going concern basis related to certain assets of
the trading card business because the future undiscounted cash flows of the
assets were estimated to be insufficient to recover their related carrying
value. The write down was recorded based on the difference between the carrying
value of the asset and the fair value estimated by independent valuations on a
going concern basis. As part of the bankruptcy proceedings and reorganization
efforts involving the Company, certain valuations of the Company's business
units were prepared by investment banking firms. Considerable judgment was used
to estimate future cash flows and fair value. During the fourth quarter of 1997,
the continued operating losses in the trading card business as well as continued
significant long-term changes in industry conditions which resulted in lower
than expected fourth-quarter sales, including basketball trading card sales,
indicated to the Company that a further impairment of its trading card goodwill
occurred. The Company also completed, in the fourth quarter of 1997, its 1998
business plan which anticipates a continuation of the trend of lower revenues
from trading cards. The write-down of goodwill of $78.5 was recorded based on
the difference between the carrying value of the assets and the fair value of
the business based on several offers from willing buyers. Remaining goodwill
associated with the Company's trading cards operations is approximately $24.0,
which will be amortized over 10 years.
During 1997, the Company experienced a significant loss in its sticker
business due to a contraction in the sticker industry. In addition, the Company
had suffered a loss in 1996 for its sticker business. In the fourth quarter of
1997, Panini also completed its 1998 business plan which anticipates a
continuation of the trend of lower revenues from children's activity stickers.
As a result, the Company recognized an impairment on a going concern basis
related to certain assets of the children's activity sticker business because
the future undiscounted cash flows of the assets were
F-33
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
estimated to be insufficient to recover their related carrying value. The
write-down of goodwill of $28.2 was recorded based on the difference between the
carrying value of the assets and the fair value of the business based on several
bids. Remaining
goodwill associated with the Company's children's activity sticker business is
approximately $70.0, which will be amortized over the next 20 years.
In addition, the Company recorded, in the fourth quarter of 1996, an
approximate $19.8 noncash write-down of goodwill and other intangibles related
to the write off of long-lived assets, including goodwill and other intangibles,
related to the closing of Heroes World and the discontinuance of certain
magazines for children. This charge was classified as amortization and write-off
of goodwill and other intangibles. No such adjustment was required in 1997 and
1996 for the assets of the Company's ongoing publishing activity.
RESTRUCTURING:
In the fourth quarter of 1995, the Company recorded restructuring charges
of $25.0 related primarily to publishing and confections operations. As part of
the restructuring, the Company terminated approximately 275 employees, covering
editorial, production, distribution and administrative employee groups and,
accordingly, provided for $10.7 of termination benefits, of which $9.8 has been
paid as of December 31, 1997. Additionally, approximately $6.7 of the
restructuring charges relates to facility closure, of which $5.8 has been paid
as of December 31, 1997, and $7.6 of the restructuring charges relates to other
costs, of which $7.1 has been paid as of December 31, 1997. A substantial
portion of the remaining restructuring charge of $2.3 as of December 31, 1997,
which is included in accrued expenses and other, are "liabilities subject to
settlement under reorganization".
In the fourth quarter of 1996, the Company recorded restructuring charges
of $15.8 related primarily to the publishing and trading card operations; the
closing of the comic book distribution subsidiary and the closing of a
confections facility. As part of the restructuring, the Company terminated
approximately 200 employees, covering editorial, production, distribution and
administrative employee groups and, accordingly, provided for $6.6 of
termination benefits of which $3.1 has been paid as of December 31, 1997 and the
balance represents amounts due under employment contracts to be paid over time.
The remaining approximate $9.2 of the restructuring charges relates to facility
closure or sale of which $1.4 has been paid as of December 31, 1997 and $6.5 was
used to write-down certain fixed assets and facility closure. A substantial
portion of the remaining amount of $4.8 as of December 31, 1997, which is
included in accrued expenses and other, are "liabilities subject to settlement
under reorganization".
F-34
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
14. FINANCIAL STATEMENTS OF ENTITIES OPERATING UNDER CHAPTER 11
The combined balance sheet as of December 31, 1997 of the Debtor Companies is as
follows (See Note 2):
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash................................................................... $ 18.1
Accounts receivable, net............................................... 22.7
Inventories, net....................................................... 18.0
Deferred income taxes.................................................. 1.6
Prepaid expenses and other............................................. 4.4
---------
Total current assets............................................... 64.8
Property, plant and equipment, net..................................... 8.3
Goodwill and other intangibles, net.................................... 104.7
Deferred charges and other............................................. 19.9
Investment in Toy Biz.................................................. 33.0
Investments in and advances to subsidiaries,........................... (40.1)
at cost
---------
Total Assets....................................................... $ 190.6
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................................... $ 22.9
Accrued expenses and other............................................. 79.8
Debtor in Possession Loan (DIP)........................................ 91.2
---------
Total current liabilities.......................................... 193.9
Other long-term liabilities............................................ 6.5
Liabilities subject to settlement under
reorganization....................................................... 502.2
---------
Total Liabilities.................................................. 702.6
---------
Stockholders' deficit:
Common Stock........................................................... 1.0
Additional paid-in capital............................................. 93.1
Accumulated Deficit.................................................... (604.6)
Cumulative translation adjustment...................................... (1.5)
---------
Total Stockholders' Deficit........................................ (512.0)
---------
Total Liabilities and Stockholders' Deficit........................ $ 190.6
=========
</TABLE>
F-35
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
The combined statement of operations for the year ended December 31, 1997 of the
Debtor Companies is as follows:
<TABLE>
<S> <C>
Net revenues................................................................ $ 199.4
Cost of sales............................................................... 154.6
Selling, general & administrative expenses.................................. 81.1
Depreciation and amortization............................................... 6.2
Amortization and write-off of goodwill, intangibles and deferred charges.... 91.6
Interest expense, net (Contractual interest for the year ended
December 31, 1997 was $55.4).............................................. 26.0
Loss on sale of a portion of confectionery business......................... 4.7
Equity in net loss of unconsolidated subsidiaries and other, net............ (76.2)
---------
Loss before reorganization items and provision for income taxes............. (241.0)
Reorganization items........................................................ 11.3
---------
Loss before provision for income taxes...................................... (252.3)
Provision for income taxes.................................................. 2.0
---------
Net loss.................................................................... $ (254.3)
=========
</TABLE>
F-36
<PAGE>
Exhibit 99.7
MARVEL ENTERTAINMENT GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FROM THE FIRST QUARTER 1998 FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997........................................................ 3
Condensed Consolidated Statements of Operations for the quarters
ended March 31, 1998 and 1997.......................................... 4
Condensed Consolidated Statements of Cash Flows for the quarters
ended March 31, 1998 and 1997.......................................... 5
Condensed Consolidated Statements of Comprehensive Loss for the
quarters ended March 31, 1998 and 1997................................. 6
Notes to Condensed Consolidated Financial Statements..................... 7
</TABLE>
2
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................. $ 24.0 $ 21.7
Accounts receivable, net............................................. 93.5 86.8
Inventories, net..................................................... 34.6 43.9
Assets held for sale................................................. 12.9 --
Deferred income taxes................................................ 2.0 2.0
Prepaid expenses and other........................................... 28.6 34.1
--------------------------
Total current assets............................................... 195.6 188.5
Property, plant and equipment, net...................................... 47.8 55.5
Goodwill and other intangibles, net..................................... 169.6 174.7
Investment in Toy Biz................................................... 33.0 33.0
Deferred charges and other.............................................. 21.2 24.8
--------------------------
Total Assets....................................................... $ 467.2 $ 476.5
==========================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Debtor-in-Possession Loan............................................ $ 91.2 $ 91.2
Accounts payable..................................................... 76.8 78.3
Accrued expenses and other........................................... 136.7 127.3
Panini short term borrowings......................................... 46.1 39.5
Panini debt.......................................................... 119.2 121.9
--------------------------
Total current liabilities.......................................... 470.0 458.2
Long-term debt.......................................................... 8.3 8.5
Other long-term liabilities............................................. 19.1 19.6
Liabilities subject to settlement under reorganization.................. 502.2 502.2
--------------------------
Total Liabilities.................................................. 999.6 988.5
Stockholders' deficit:..................................................
Common Stock......................................................... 1.0 1.0
Additional paid-in capital........................................... 93.1 93.1
Accumulated deficit.................................................. (623.7) (604.6)
Comprehensive loss................................................... (2.8) (1.5)
--------------------------
Total Stockholders' Deficit........................................ (532.4) (512.0)
--------------------------
Total Liabilities and Stockholders' Deficit........................ $ 467.2 $ 476.5
==========================
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net revenues.......................................................... $ 97.1 $ 156.7
Cost of sales......................................................... 72.7 104.5
Selling, general & administrative expenses............................ 23.3 48.5
Depreciation and amortization......................................... 2.1 4.8
Amortization of goodwill, intangibles and deferred changes............ 2.6 4.3
Interest expense, net (contractual interest for the quarter
ended March 31, 1998 was $19.7)..................................... 6.9 15.6
Foreign exchange gain................................................. (0.3) (0.7)
Loss on sale of confectionery business................................ 3.4 --
Equity in net income of unconsolidated subsidiaries and other,
net................................................................. 0.1 0.1
------------ ------------
Loss before reorganization items, provision for income
taxes and minority interest......................................... (13.5) (20.2)
Reorganization items.................................................. 5.1 3.4
------------ ------------
Loss before provision for income taxes and minority interest.......... (18.6) (23.6)
Provision for income taxes............................................ 0.5 3.8
------------ ------------
Loss before minority interest......................................... (19.1) (27.4)
Minority interest in earnings of Toy Biz.............................. -- 0.4
------------ ------------
Net loss.............................................................. ($19.1) ($27.8)
============ ============
Loss per Common Share-Basic and Diluted............................... ($.19) ($.27)
============ ============
Common shares outstanding - Basic and Diluted (in millions)........... 101.8 101.8
============ ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. ($ 19.1) ($ 27.8)
------------ ------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 4.7 9.2
Provision for deferred income taxes.................................... -- 2.7
Undistributed earnings of unconsolidated subsidiaries.................. (0.1) (0.1)
Minority interest in earnings of Toy Biz............................... -- 0.4
Other.................................................................. 3.4 0.3
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net...................... (3.1) 9.7
Decrease (increase) in inventories................................... 1.0 (2.0)
Decrease (increase) in prepaid expenses and other assets............. (1.2) (5.2)
(Decrease) increase in accounts payable.............................. (2.0) (7.8)
(Decrease) increase in accrued expenses and other................... 13.4 (3.3)
------------ ------------
Total adjustments......................................................... 16.1 3.9
------------ ------------
Net cash used in operating activities.............................. (3.0) (23.9)
------------ ------------
Cash flows from investing activities:
Capital expenditures...................................................... (0.4) (7.3)
Other investing activities, net........................................... (0.2) (5.3)
------------ ------------
Net cash used in investing activities.............................. (0.6) (12.6)
------------ ------------
Cash flows from financing activities:
Net (repayments) borrowings under term portion of
credit agreements...................................................... -- (5.1)
Net borrowings under revolving portion of credit agreement................ -- 5.0
Net borrowings under Debtor-in-Possession Loan............................ -- 40.0
Net (repayments) borrowings under other debt.............................. 6.3 (4.7)
Other financing activities................................................ -- 0.1
------------ ------------
Net cash provided by financing activities.......................... 6.3 35.3
------------ ------------
Effect of exchange rate changes on cash................................... (0.4) (2.2)
------------ ------------
Net increase (decrease)in cash........................................... 2.3 (3.4)
Cash, at beginning of period.................................................. 21.7 25.1
Cash, at end of period........................................................ ------------ ------------
$ 24.0 $ 21.7
============ ============
Supplemental disclosures of cash flow information:
Interest paid during the period........................................... $ 2.2 $ 17.3
Income taxes paid, net of refunds, during the period...................... -- $ 1.4
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(SEE NOTE 1 OF NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
(UNAUDITED)
For the
Three Months Ended
March 31,
----------------------
1998 1997
---------- ----------
Net loss............................................ ($19.1) ($27.8)
Foreign currency translation adjustments.......... (1.3) (0.9)
========== ==========
Comprehensive loss.................................. ($20.4) ($28.7)
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Marvel Entertainment Group, Inc. ("Marvel" and together with its
subsidiaries, the "Company") was incorporated on December 2, 1986, in the State
of Delaware. On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries (together with Marvel, the "Debtor Companies") commenced
cases (the "Marvel Cases") under chapter 11, Title 11 of the United States Code
(the "Bankruptcy Code") by filing voluntary petitions for relief in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). In
November 1997, the United States District Court for the District of Delaware
(the "District Court") withdrew the order referring the Marvel Cases to the
Bankruptcy Court. Accordingly, the Marvel Cases are being heard in the District
Court.
The accompanying unaudited condensed consolidated financial
statements include the accounts of Marvel Entertainment Group, Inc. and its
subsidiaries. The unaudited condensed consolidated financial statements of the
Company include the consolidation of Toy Biz, Inc. and its subsidiaries
(collectively "Toy Biz") since its initial public offering on March 2, 1995 (the
"Toy Biz IPO") through June 30, 1997. Since July 1, 1997, due to the dispute
over Marvel's ability to control or influence Toy Biz and because Toy Biz ceased
reporting its financial information to the Company, the Company deconsolidated
Toy Biz. The Company's operations currently consist of (i) the publication and
sale of comic books and children's magazines, (ii) the manufacture and
distribution of sports and entertainment trading cards and children's activity
sticker collections, (iii) licensing of the various characters owned by the
Company for consumer products, media and advertising-promotion and (iv) the
manufacture and distribution of adhesives and confectionery products. In the
opinion of management, all adjustments and intercompany eliminations necessary
for a fair presentation to the results of operations, financial position and
cash flows have been made and were of a normal recurring nature. These interim
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements on Form 10-K and amendments thereto for
the year ended December 31, 1997. Certain prior year amounts have been
reclassified to conform to current year presentation.
The Condensed Consolidated Balance Sheet, as of March 31, 1998
reflects Marvel's investment of approximately 7.4 million shares of Toy Biz
common stock at the historical cost adjusted for the equity method of accounting
through the date of deconsolidation. As of March 31, 1998 the Company's
investment in Toy Biz was $33.0. Had the Company reinstated accounting for its
investment in Toy Biz on the equity method, the carrying value would have been
$26.4 at March 31, 1998 based on Toy Biz's published results through December
31, 1997.
The accompanying unaudited condensed consolidated financial
statements have been prepared assuming the Company will continue as a going
concern. Continuation of the Company as a going concern is contingent upon,
among other things, the ability to formulate a plan of reorganization which will
gain approval of requisite parties under the Bankruptcy Code and confirmation of
the District Court, the ability to comply with its debtor-in-possession
financing agreement, resolution of various litigation against the Company, the
Company's ability to make its information systems Year 2000 compliant, and the
Company's ability to generate sufficient cash from operations and obtain
financing sources to meet its future obligations. In addition, the Company has
experienced recurring operating losses, working capital deficiencies, negative
operating cash flows and is currently in default under substantially all of its
debt agreements. These matters raise substantial doubt about the Company's
ability to continue as a going concern.
If a plan of reorganization regarding the Debtor Companies is
confirmed, the consolidated results of operations and the financial condition of
the Company may be materially affected.
2. CHAPTER 11 REORGANIZATION
(Refer to the Notes to Consolidated Financial Statements included in
the Company's Form 10-K and amendments thereto for more information.)
7
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Operating Companies
On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries, Fleer Corp. ("Fleer"), SkyBox International, Inc.
("SkyBox"), Marvel Characters, Inc., Heroes World Distribution, Inc. ("Heroes
World"), The Asher Candy Company, Malibu Comics Entertainment, Inc. ("Malibu"),
Frank H. Fleer Corp. and Marvel Direct Marketing Inc. (together with Marvel, the
"Debtor Companies") commenced the Marvel Cases in the Bankruptcy Court. Panini
S.p.A. ("Panini") and Marvel Restaurant Venture Corp. ("Marvel Restaurants") (a
general partner in the joint venture developing Marvel Mania restaurants), which
were then active subsidiaries of Marvel, and Toy Biz, Inc. ("Toy Biz"), an
affiliate of Marvel, as well as certain other inactive subsidiaries, did not
file petitions under the Bankruptcy Code.
As a result of the several failed attempts at a plan of reorganization,
the acrimony among the parties involved, the conflicts of interest between the
parties and the significant amount of professional fees and other bankruptcy
related costs incurred by the Company, on December 22, 1997, John J. Gibbons was
appointed as Chapter 11 Trustee (the "Chapter 11 Trustee") for the Company. The
order appointing the Chapter 11 Trustee was appealed by certain creditors of the
Company and was affirmed on March 25, 1998 by the United States Court of Appeals
for the Third Circuit (the "Court of Appeals").
The Chapter 11 Trustee has all of the powers of management and the
Board of Directors of the Debtor Companies to operate and manage the Debtor
Companies, but generally may not engage in transactions outside the ordinary
course of business without approval, after notice and hearing of the District
Court. Since the appointment of the Chapter 11 Trustee, the Board of Directors
of Marvel no longer controls the business of Marvel and as a result, the Board
of Directors resigned during 1998.
Plans of Reorganization
On March 13, 1998, the District Court approved the disclosure
statement for the unsolicited merger proposal by Toy Biz, (the "Toy Biz Plan").
The District Court had set May 4th and 5th 1998, as the dates for a confirmation
hearing for the proposed Toy Biz Plan. On April 13, 1998, the Court of Appeals
issued an order granting a motion to expedite the appeal of a March 30, 1998
decision by the District Court regarding the Company's voting control over Toy
Biz. Pending the expedited determination of this appeal, the order also stayed
the effectiveness of the District Court's decision and the hearing scheduled for
May 4th and 5th, 1998 for confirmation of the Toy Biz Plan.
On May 12, 1998 a settlement was reached among Toy Biz, the Chapter 11
Trustee, representatives of the Company's Secured Lenders and certain other
parties to settle litigation commenced by the Company against Toy Biz, the
Secured Lenders and those other parties (the "Governance Litigation"). As a part
of this settlement, the Chapter 11 Trustee agreed to attempt to have vacated the
appeal of the Governance Litigation concerning the Company's alledged right to
replace the Toy Biz board of directors currently pending in the Court of Appeals
and to support the Toy Biz Plan which will be amended to reflect the settlement
agreement. Under the terms of the proposed settlement, Marvel equity holders and
persons entitled to class securities litigation claims under the terms of the
amended Toy Biz Plan will receive three series of warrants upon consummation of
the amended Toy Biz Plan entitling them to purchase common and
convertible/exchangeable preferred stock to be issued by the combined company.
The first series of 4 million warrants will have a term of six months and will
allow the recipients to purchase common stock in the combined company at a price
of $12.00 per share (also subject to increase based on the issuance date of the
warrants). The second series of 3 million warrants will have a term of six
months and will allow the recipient to purchase convertible/exchangeable
preferred stock in the combined company at a price of $10.65 per share (also
subject to increase based on the issuance date of the warrants). The final
series of 5 million warrants will have a term of four years and will allow the
recipients to purchase common stock in the new company at a price of $18.50 per
share. Finally, the equity holders and class securities litigation claimants
will be entitled to receive future distributions from any recovery on certain
current and prospective litigation.
8
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The agreement is subject to the approval of the District Court as well
as the approval of the Secured Lenders that have agreed to support the Toy Biz
Plan. Toy Biz expects to receive the Secured Lenders' approval shortly and is
expeditiously seeking court approval of the settlement together with the Chapter
11 Trustee. The settlement agreement is subject to confirmation of the Toy Biz
Plan by June 30, 1998, which will require the Court of Appeals to lift its stay,
and to consummation of the amended Toy Biz Plan by August 15, 1998. Such dates
are subject to extensions by Toy Biz and the Secured Lenders without the
approval of the Chapter 11 Trustee so long as such dates are not extended beyond
August 15, 1998 and September 30, 1998 respectively. There can be no assurance
that the District Court will approve the settlement or that other conditions of
the effectuations of the settlement will be satisfied. In addition, the Chapter
11 Trustee has the right to terminate the agreement in the event that the
Chapter 11 Trustee accepts an "Alternative Transaction" as defined. The
agreement specifically permits the Chapter 11 Trustee to dispose of Panini
S.p.A. and the Company's confections business.
In addition to the Toy Biz Plan, the Company had received preliminary
indications of interest from third parties to purchase the Company or all or
part of the Company's assets. As of this date, the Company cannot predict
whether any of these indications of interest will result in a more formal offer
to purchase any or all of the Company or its assets, nor can the Company
determine whether any such indications of interest will result in offers
superior to the Toy Biz Plan. Several third parties have conducted due diligence
reviews with respect to the Company. On May 8, 1998, the Company entered into an
asset purchase agreement which would allow for the sale of the remaining portion
of its confectionery business (see Note 4). The Chapter 11 Trustee has retained
the services of an investment banking firm to assist in this process.
There can be no assurance that any plan of reorganization, including
the Toy Biz Plan, will be confirmed under the Bankruptcy Code.
If the Company is unable to obtain confirmation of a plan of
reorganization, its creditors or equity security holders may seek other
alternatives for the Company, including bids for the Company or parts thereof
through an auction process, or possible liquidation.
Holding Companies
On March 3, 1998, the District Court entered an order permitting the
distribution to the holders of the Holding Companies debt obligations (the
"Noteholders") of up to 12.5 million outstanding shares of common stock of
Marvel which were pledged to secure the Holding Companies debt obligations (the
"Notes"). Further, the order authorized the sale by Marvel Holdings, Inc.
("Holdings"), for cash of an additional 2.5 million shares of common stock of
Marvel currently held by Holdings in escrow to pay certain administrative
expenses. The Indentures Trustee subsequently sought an order from the District
Court permitting the distribution to the Noteholders of additional shares of
common stock which were pledged to secure the Notes. By an order dated April 9,
1998, the District Court authorized the distribution to the Noteholders of an
additional 21.5 million shares of common stock and the sale of approximately
400,000 additional shares of common stock currently held by Holdings to pay
certain administrative expenses.
On April 17, 1998 trading of the Company's common stock was suspended
by the New York Stock Exchange and application will be made to the Securities
and Exchange Commission to delist the stock. The Company understands that the
New York Stock Exchange reached the decision in view of the fact that the
Company is below the Exchange's continued listing criteria.
Other
As part of the chapter 11 process, the Debtor Companies have received
a significant number of proofs of claims. The Company is currently in the
process of reviewing these claims and believes that a majority of these claims
may have been paid pursuant to first day orders of its bankruptcy proceedings or
are without merit. Although the Company believes that amounts recorded as of
March 31, 1998 are adequate to cover the ultimate liability under these claims,
there can be no assurance that these claims will not be settled for amounts in
excess of these amounts.
Financial accounting and reporting during a chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be subject to settlement, have been
classified as obligations, subject to chapter 11 settlement under reorganization
and consist of the following estimated amounts:
9
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Total accrued expenses................................................... $ 13.7 $ 13.7
Debt:
U. S. Term Loan Agreement......................................... $350.0 $350.0
Amended and Restated Credit Agreement............................. 120.0 120.0
Additional Revolving Credit Facility.............................. 15.0 15.0
----------- ------------
Total debt.................................................... 498.7 498.7
Other long-term liabilities.............................................. 3.5 3.5
----------- ------------
Total liabilities subject to settlement under reorganization............. $502.2 $502.2
=========== ============
</TABLE>
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
ACCOUNTS RECEIVABLE, NET:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable...................................................... $114.4 $109.6
Less: Allowances........................................................ (20.9) (22.8)
----------- ------------
$ 93.5 $ 86.8
=========== ============
INVENTORIES, NET:
Finished goods........................................................... $ 20.9 $ 26.0
Work in process.......................................................... 10.3 12.7
Raw materials............................................................ 9.7 13.9
Less: Reserve for obsolescence.......................................... (6.3) (8.7)
----------- ------------
$ 34.6 $ 43.9
=========== ============
</TABLE>
GOODWILL AND OTHER INTANGIBLES, NET:
<TABLE>
<S> <C> <C>
Goodwill and other intangibles........................................... $240.1 $243.9
Less: Accumulated amortization.......................................... (70.5) (69.2)
----------- ---------
$169.6 $174.7
=========== =========
</TABLE>
4. ASSETS HELD FOR SALE
In March 1998, the Company decided to sell the remaining portion of
the confectionery business and on May 8, 1998 it entered into an Asset Purchase
Agreement with Concord Confections Inc. ("the Buyer") The Asset Purchase
Agreement provides for the sale of the remaining portion of the confectionery
business for the purchase price of $13.0 in cash (subject to adjustment), plus
the assumption of certain assumed liabilities of the Company related to the
confections business. The Company agrees to transfer certain assets, rights and
properties free of all liens of its domestic operations as well as all capital
stock of its interests in foreign operations, as well as certain debt,
liabilities and obligations. The closing of the sale is scheduled to occur on
the next business day immediately following the entry of the sale order by the
District Court approving the Asset Purchase Agreement and certain contemplated
transactions with regard to the Asset Purchase Agreement.
If a sale of the remaining portion of the confectionery business
occurs, the net proceeds of such sale would be due to the Company's lenders in
accordance with the terms of the DIP Agreement. The Company, however, intends to
negotiate with the DIP lenders to allow for the use of the net proceeds from the
sale to pay
10
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
down a portion of the principal balance of the DIP loan and to
maintain a portion of the net proceeds for working capital requirements. A
summary of the confectionery net assets to be disposed as of March 31, 1998 is
illustrated below:
March 31,
1998
-----------
Current Assets...................................... $11.2
Long Term Assets.................................... 9.4
-----------
Total Assets........................................ $20.6
-----------
Current Liabilities................................. $ 4.0
Long Term Liabilities............................... .3
-----------
Total Liabilities................................... $ 4.3
-----------
Net Assets.......................................... $16.3
===========
The sale of the confectionery business is subject to an auction
process with customary breakup fees and topping bids and approval of the
District Court. During the quarter ended March 31, 1998, the Company recognized
a loss of approximately $3.4 based on the estimated selling price. There can be
no assurance that the District Court will approve this transaction or that the
other conditions to closing will be satisfied.
Included in the Condensed Consolidated Statements of Operations for
the quarter ended March 31, 1998, are $4.4 of confectionery revenues. Operating
loss for the quarter ended March 31, 1998 was $1.0.
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
5. FINANCIAL STATEMENTS OF ENTITIES OPERATING UNDER CHAPTER 11
The combined condensed balance sheet as of March 31,1998 of the Debtor Companies
is as follows:
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash................................................................. $ 21.5
Accounts receivable, net............................................. 17.2
Inventories, net..................................................... 8.4
Assets held for sale................................................. 9.5
Deferred income taxes................................................ 1.6
Prepaid expenses and other........................................... 1.7
---------
Total current assets...................................... 59.9
Property, plant and equipment, net...................................... 3.5
Goodwill and other intangibles, net..................................... 103.4
Investment in Toy Biz................................................... 33.0
Deferred charges and other.............................................. 16.4
Investments in and advances to subsidiaries, at cost.................... (39.9)
---------
Total Assets.............................................. $ 176.3
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debtor-in-Possession Loan............................................ $ 91.2
Accounts payable..................................................... 20.7
Accrued expenses and other........................................... 88.2
---------
Total current liabilities................................. 200.1
Other long-term liabilities............................................. 6.4
Liabilities subject to settlement under reorganization.................. 502.2
---------
Total Liabilities......................................... 708.7
---------
Stockholders' deficit:
Common Stock......................................................... 1.0
Additional paid-in capital........................................... 93.1
Accumulated deficit.................................................. (623.7)
Comprehensive loss................................................... (2.8)
---------
Total Stockholders' Deficit............................... (532.4)
---------
Total Liabilities and Stockholders' Deficit............... $ 176.3
=========
</TABLE>
12
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
The combined condensed statement of operations for the three months ended March
31,1998 of the Debtor Companies is as follows:
<TABLE>
<S> <C>
Net revenues............................................................ $ 38.1
Cost of sales........................................................... 30.4
Selling, general & administrative expenses.............................. 13.6
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Depreciation and amortization........................................... 0.9
Amortization of goodwill, intangibles and deferred charges.............. 1.9
Interest expense, net (Contractual interest for the three
months ended March 31, 1998 was $15.3)............................... 2.5
Loss on sale of confectionery business.................................. 3.4
Equity in net income of unconsolidated subsidiaries and
other, net............................................................ 0.1
---------
Loss before reorganization items and provision for
income taxes.......................................................... (14.5)
Reorganization items.................................................... 5.1
---------
Loss before provision for income taxes.................................. (19.6)
Provision for income taxes.............................................. 0.1
---------
Net loss Debtor Companies............................................... (19.7)
Equity in net income of non-Debtor Companies............................ 0.6
---------
Net loss................................................................ $ 19.1
=========
</TABLE>
EXHIBIT 99.8
MARVEL ENTERTAINMENT GROUP, INC.
INDEX TO CONTENTS OF THE SECOND QUARTER 1998 FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997......................................3
Condensed Consolidated Statements of Operations for the six months and three months
ended June 30, 1998 and 1997.........................................................................................4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997......................5
Condensed Consolidated Statements of Comprehensive Loss for the six months ended June 30, 1998 and 1997..............6
Notes to Condensed Consolidated Financial Statements.................................................................7
Management's Discussion and Analysis of Financial Condition and Results of Operations...............................14
Other Information...................................................................................................23
Signatures..........................................................................................................25
</TABLE>
2
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
(See Note 1 of Notes to Condensed Consolidated Financial Statements)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 23.3 $ 21.7
Accounts receivable, net 95.4 86.8
Inventories, net 30.6 43.9
Prepaid expenses and other 34.6 36.1
-------------- ---------------
Total Current Assets 183.9 188.5
Property, plant and equipment, net 47.4 55.5
Goodwill and other intangibles, net 169.4 174.7
Investment in Toy Biz 33.0 33.0
Deferred charges and other 26.1 24.8
-------------- ---------------
Total Assets $459.8 $476.5
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Debtor-in-Possession Loan $ 81.4 $ 91.2
Accounts payable 82.3 78.3
Accrued expenses and other 153.7 127.3
Panini short term borrowings 34.7 39.5
Panini debt 115.3 121.9
-------------- ---------------
Total Current Liabilities 467.4 458.2
Long-term debt 7.4 8.5
Other long-term liabilities 24.5 19.6
Liabilities subject to settlement under reorganization 502.8 502.2
-------------- ---------------
Total Liabilities 1,002.1 988.5
Stockholders' deficit:
Common stock 1.0 1.0
Additional paid-in capital 93.1 93.1
Accumulated deficit (636.5) (604.6)
Comprehensive (loss)/gain 0.1 (1.5)
-------------- ---------------
Total Stockholders' Deficit (542.3) (512.0)
-------------- ---------------
Total Liabilities and Stockholders' Deficit $459.8 $476.5
============== ===============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(See Note 1 of Notes to Condensed Consolidated Financial Statements)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $ 106.1 $ 129.6 $ 203.2 $ 286.3
Cost of sales 76.2 96.4 148.9 200.9
Selling, general & administrative expenses 22.8 51.5 46.1 100.0
Depreciation and amortization 1.8 7.7 3.9 12.5
Amortization of goodwill, intangibles and deferred charges 2.6 4.1 5.2 8.4
Interest expense, net (contractual interest for the three months ended
June 30, 1998 and 1997 was $19.4 and $19.6, respectively, and
contractual interest for the six months ended June 30, 1998 and 1997
was $39.0 and $32.5, respectively) 6.4 13.2 13.3 28.8
Foreign exchange loss (gain) 0.9 (0.8) 0.6 (1.5)
Loss on sale of confectionery assets 2.5 -- 5.9 --
Equity in net (loss) income of unconsolidated subsidiaries
and other, net 0.3 (5.3) 0.4 (5.2
----------- ----------- ----------- -----------
Loss before reorganization items, provision for income taxes and
minority interest (6.8) (47.8) (20.3) (68.0)
Reorganization items 4.3 2.6 9.4 6.0
----------- ----------- ----------- -----------
Loss before provision for income taxes and minority interest (11.1) (50.4) (29.7) (74.0)
Provision (benefit) for income taxes 1.7 (4.6) 2.2 (0.8)
----------- ----------- ----------- -----------
Loss before minority interest (12.8) (45.8) (31.9) (73.2)
Minority interest in earnings of Toy Biz -- (3.9) -- (3.5)
----------- ----------- ----------- -----------
Net loss ($12.8) ($41.9) ($31.9) ($69.7)
=========== =========== =========== ===========
Loss per Common Share - Basic and Diluted ($ .13) ($ .41) ($ .31) ($ .68)
=========== =========== =========== ===========
Common shares outstanding - Basic and Diluted (in millions) 101.8 101.8 101.8 101.8
=========== =========== =========== ===========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
(See Note 1 of Notes to Condensed Consolidated Financial Statements)
(Unaudited)
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30,
-----------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 31.9) ($69.7)
--------------- --------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 9.1 20.9
Provision for deferred income taxes 0.2 --
Undistributed earnings of unconsolidated subsidiaries (0.4) 5.2
Minority interest in earnings of Toy Biz -- (3.5)
Loss on sale of confectionery asset 5.9 --
Changes in assets and liabilities, net of effects of sale of confectionery
business:
Decrease (increase) in accounts receivable, net (3.2) 43.3
Decrease (increase) in inventories 6.5 (1.3)
Decrease (increase) in prepaid expenses and other assets (2.7) (8.4)
(Decrease) increase in accounts payable 2.1 (7.5)
(Decrease) increase in accrued expenses and other 25.5 (41.0)
--------------- --------------
Total adjustments 43.0 7.7
--------------- --------------
Net cash provided by (used in) operating activities 11.1 (62.0)
--------------- --------------
Cash flows from investing activities:
Capital expenditures (1.8) (14.3)
Proceeds from sale of confectionery business, net of selling expenses
and cash of foreign subsidiary 12.4 --
Other investing activities, net (0.2) (11.0)
--------------- --------------
Net cash provided by (used in) investing activities 10.4 (25.3)
--------------- --------------
Cash flows from financing activities:
Net repayments under term portion of credit agreements -- (5.1)
Net borrowings under Toy Biz credit facility -- 12.0
Net (repayments) borrowings under Debtor-in-Possession Loan (9.8) 84.2
Net repayments under other debt (9.8) (1.7)
Other financing activities -- 0.1
--------------- --------------
Net cash provided by (used in) financing activities (19.6) 89.5
--------------- --------------
Effect of exchange rate changes on cash (0.3) (2.0)
--------------- --------------
Net increase in cash 1.6 0.2
Cash, at beginning of period 21.7 25.1
--------------- --------------
Cash, at end of period $ 23.3 $ 25.3
=============== ==============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 7.1 $ 32.5
Income taxes (refunded) paid, net during the period ($ 0.1) $ 0.8
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in millions, except per share data)
(See Note 1 of Notes to Condensed Consolidated Financial Statements)
(Unaudited)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss ($ 12.8) ($ 41.9) ($ 31.9) ($ 69.7)
Foreign currency translation adjustments 0.9 0.8 (0.4) (0.1)
------------ ------------ ------------ ------------
Comprehensive loss ($ 11.9) ($ 41.1) ($ 32.3) ($ 69.8)
============ ============ ============ ============
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
Marvel Entertainment Group, Inc. ("Marvel" and together with its
subsidiaries, the "Company") was incorporated on December 2, 1986, in the State
of Delaware. On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries (together with Marvel, the "Debtor Companies") commenced
cases (the "Marvel Cases") under chapter 11, Title 11 of the United States Code
(the "Bankruptcy Code") by filing voluntary petitions for relief in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). In
November 1997, the United States District Court for the District of Delaware
(the "District Court") withdrew the order referring the Marvel Cases to the
Bankruptcy Court. As more fully described in Note 2, on July 30, 1998 Marvel,
Toy Biz, the secured creditors, the official committee of unsecured creditors,
the official committee of equity holders and other interested parties reached a
global settlement and on July 31, 1998, the District Court approved the
settlement and confirmed the Fourth Amended Plan of Reorganization (the "Toy Biz
Plan"). The Company anticipates that the consummation of the Toy Biz Plan should
occur on or about September 30, 1998, subject to certain conditions being
satisfied. There can be no assurance however, that the consummation of the Toy
Biz Plan will occur as anticipated.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Marvel Entertainment Group, Inc. and its subsidiaries.
The unaudited condensed consolidated financial statements of the Company include
the consolidation of Toy Biz, Inc. and its subsidiaries (collectively "Toy Biz")
since its initial public offering on March 2, 1995 (the "Toy Biz IPO") through
June 30, 1997. Since July 1, 1997, due to the dispute over Marvel's ability to
control or influence Toy Biz and because Toy Biz ceased reporting its financial
information to the Company, the Company deconsolidated Toy Biz (see Note 2). The
Company's operations currently consist of (i) the publication and sale of comic
books and children's magazines, (ii) the manufacture and distribution of sports
and entertainment trading cards and children's activity sticker collections,
(iii) licensing of the various characters owned by the Company for consumer
products, media and advertising-promotion and (iv) the manufacture and
distribution of adhesive paper products. In the opinion of management, all
adjustments and intercompany eliminations necessary for a fair presentation of
the results of operations, financial position and cash flows have been made and
were of a normal recurring nature. These interim condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements on Marvel's Form 10-K and amendment thereto for the year
ended December 31, 1997. Certain prior year amounts have been reclassified to
conform to current year presentation.
The Condensed Consolidated Balance Sheet, as of June 30, 1998, reflects
Marvel's investment of approximately 7.4 million shares of Toy Biz common stock
at the historical cost adjusted for the equity method of accounting through the
date of deconsolidation. As of June 30, 1998 the Company's investment in Toy Biz
was $33.0. Had the Company reinstated accounting for its investment in Toy Biz
on the equity method, the carrying value would have been $27.3 at June 30, 1998
based on Toy Biz's published results through June 30, 1998.
The accompanying unaudited condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern.
Continuation of the Company as a going concern is contingent upon, among other
things, the consummation of the Toy Biz Plan (as defined below), the Company's
ability to comply with its debtor-in-possession financing agreement, resolution
of various litigation against the Company, the Company's ability to make its
information systems Year 2000 compliant, the Company's ability to generate
sufficient cash from operations and obtain financing sources to meet its future
obligations and the Company's ability to retain key employees and customers. In
addition, the Company has experienced recurring operating losses, working
capital deficiencies, negative operating cash flows and is currently in default
under substantially all of its debt agreements. In the absence of the
consummation of the Toy Biz Plan or any other plan of reorganization, these
matters raise substantial doubt about the Company's ability to continue as a
going concern.
If the Toy Biz Plan or any other plan of reorganization is consummated,
the consolidated results of operations and the financial position of the Company
may be materially affected.
7
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
2. CHAPTER 11 REORGANIZATION
(Refer to the Notes to Consolidated Financial Statements included in
Marvel's Form 10-K and amendments thereto for more information.)
Operating Companies
On December 27, 1996, Marvel along with eight of its operating and
inactive subsidiaries, Fleer Corp. ("Fleer"), SkyBox International, Inc.
("SkyBox"), Marvel Characters, Inc., Heroes World Distribution, Inc. ("Heroes
World"), The Asher Candy Company, Malibu Comics Entertainment, Inc. ("Malibu"),
Frank H. Fleer Corp. and Marvel Direct Marketing Inc. (together with Marvel, the
"Debtor Companies") commenced the Marvel Cases in the Bankruptcy Court. Panini
S.p.A. ("Panini") and Marvel Restaurant Venture Corp. ("Marvel Restaurants") (a
general partner in the joint venture developing Marvel Mania restaurants), which
were then active subsidiaries of Marvel, and Toy Biz, as well as certain other
inactive subsidiaries, did not file petitions under the Bankruptcy Code.
As a result of the several failed attempts at a plan of reorganization,
the acrimony among the parties involved, the conflicts of interest between the
parties and the significant amount of professional fees and other bankruptcy
related costs incurred by the Company, on December 22, 1997, John J. Gibbons was
appointed as Chapter 11 Trustee (the "Chapter 11 Trustee") for the Company. The
order appointing the Chapter 11 Trustee was appealed by certain creditors of the
Company and was affirmed on March 25, 1998 by the United States Court of Appeals
for the Third Circuit ("Court of Appeals").
The Chapter 11 Trustee has all of the powers of the Board of Directors
and management of the Debtor Companies to operate and manage the Debtor
Companies, but generally may not engage in transactions outside the ordinary
course of business without approval, after notice and hearing of the District
Court. Since the appointment of the Chapter 11 Trustee, the Board of Directors
of Marvel no longer controls the business of Marvel and as a result, the Board
of Directors resigned during 1998.
Plans of Reorganization
On October 8, 1997, Toy Biz and the senior secured lenders of the
Debtor Companies proposed an unsolicited merger plan to purchase Marvel. On July
30, 1998, Toy Biz, Marvel, the senior secured creditors of the Debtor Companies,
the official committee of unsecured creditors, the official committee of equity
holders of Marvel and other interested parties reached a global settlement, and
on July 31, 1998, the District Court approved the settlement and confirmed the
Toy Biz Plan. The Toy Biz Plan contemplates the combination of the Company with
a wholly owned subsidiary of Toy Biz. Following this combination, Toy Biz
intends to change its name ("NEWCO"). In connection with the Toy Biz Plan, the
Toy Biz stockholders, other than the Company, would receive approximately 40% of
the outstanding common stock of NEWCO (assuming the conversion of all preferred
stock to be issued by NEWCO pursuant to the Toy Biz Plan but not assuming any
exercise of warrants to be issued pursuant to the Toy Biz Plan) and the senior
secured lenders would receive a combination of cash and common and preferred
securities issued by NEWCO which (under the same assumptions) would represent
approximately 42% of the common stock of NEWCO. Investors, including Mr.
Perlmutter, the controlling shareholder of Toy Biz, would purchase securities
that (under the same assumptions) would represent approximately 18% of the
common stock of NEWCO. Under the Toy Biz Plan, the unsecured creditors will
receive (i) up to $8.0 in cash and (ii) between 1.0 million and 1.75 million
warrants having a term of four years and entitling the holders to purchase
common stock of NEWCO at $17.25 per share. The exact amount of cash and warrants
to be distributed to the unsecured creditors will be determined by reference to
the aggregate amount of allowed unsecured claims. In addition, unsecured
creditors will be entitled to receive distributions from any future recovery on
certain litigation. Finally, the Toy Biz Plan provides that three series of
warrants (the "Stockholder Warrants") will be distributed to holders of shares
of Marvel common stock, to holders of certain class securities litigation claims
arising in connection with the purchase and sale of Marvel common stock and to
La Salle National Bank. The Stockholder Warrants consist of (a) three-year
warrants to purchase 4.0 million shares of common stock in NEWCO at $12.00 per
share, (b) six-month warrants to purchase 3.0 million shares of preferred stock
to be issued by NEWCO for $10.65 per share and (c) four-year warrants to
purchase 7.0 million shares of common stock in NEWCO at $18.50
8
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
per share. The recipients of the Stockholder Warrants will also be entitled to
receive distributions from any future recovery on certain litigation. Certain
other cash distributions are also provided for by the Toy Biz Plan in connection
with settling the disputes arising out of the bankruptcy proceedings. The Toy
Biz Plan was proposed by in excess of two-thirds in amount of senior secured
lenders and is supported by the Chapter 11 Trustee, the unsecured creditors
committee and the equity committee. The Toy Biz Plan was confirmed by the
District Court on July 31, 1998. Consummation of the Toy Biz Plan is subject to
a number of conditions including approval of the Toy Biz stockholders. Toy Biz
has called a meeting of its stockholders for September 11, 1998 for the purpose,
among other things, of considering and voting upon approval of the transactions
contemplated by the Toy Biz Plan.
Consummation of the Toy Biz Plan will provide for the restructuring of
the Company's existing liabilities and will result in the elimination of
substantially all of the Company's existing domestic senior debt obligations and
certain other pre-petition obligations of the Debtor Companies. In addition to
the Toy Biz securities issuance previously discussed, the Toy Biz Plan provides
for (i) the delivery of approximately $231.8 in cash to the fixed senior secured
lenders and up to $8.0 in cash to the unsecured creditors; (ii) the creation of
two litigation trusts for the benefit of NEWCO, the unsecured creditors, the
fixed senior secured lenders and the equity holders; (iii) the payment in cash
of all administration expense claims incurred in connection with Marvel Cases
(in the event that the aggregate amount of such administrative claims is in
excess of $35.0, the receipt by NEWCO of cash in an amount equal to such excess
from an affiliate of Mr. Perlmutter in exchange for a note from NEWCO for an
equal amount); and (iv) subject to certain limitations, a guaranty from NEWCO to
the senior secured lenders of up to $40.0 of deficiency in respect of
restructured Panini debt obligations. In addition, the Toy Biz Plan provides for
the payment by NEWCO of $3.5 to certain claimants in the Marvel Cases in
settlement of disputes.
As part of the Toy Biz Plan two litigation trusts will be formed on the
consummation date. The purpose of the Avoidance Litigation Trust (the "Avoidance
Trust") is to pursue bankruptcy avoidance claims. The purpose of the Mafco
Litigation Trust (the "Mafco Trust") is to pursue certain litigation claims
against Ronald O. Perelman and various related entities and individuals. The
District Court will have jurisdiction over both of these trusts, their trustees,
the claims, and any other assets of the trusts. NEWCO will agree to loan up to
$1.1, on a revolving basis to the Avoidance Trust and up to $1.0 on a revolving
basis to the Mafco Trust to cover professional fees and expenses.
The Avoidance Trust will have one trustee designated, subject to the
consent of NEWCO, by the committee of unsecured creditors. The beneficiaries of
the Avoidance Trust will be NEWCO, the unsecured creditors committee, and the
fixed senior secured lenders. Pursuant to the agreement governing the Avoidance
Trust, the Debtor Companies will, on the consummation date, contribute to the
Avoidance Trust all of their interests in any causes of action under certain
avoidance sections of the Bankruptcy Code, but excluding those (i) relating to
any claims under any tax-sharing or other similar agreement to which Marvel has
been a party; or (ii) against any person or entity released or exculpated under
the Toy Biz Plan. The Avoidance Litigation Trustee agrees to enforce these
claims for the benefit of the Avoidance Trust's beneficiaries and to hold any
proceeds from these claims in trust for those beneficiaries. The Avoidance
Litigation Trustee may be directed by NEWCO to choose not to pursue any
litigation claim that threatens to adversely affect NEWCO's business. The
existence of the Avoidance Trust will terminate five years after the
consummation date of the Toy Biz Plan unless the District Court approves an
extension of the term of the Avoidance Trust for good cause.
The Mafco Trust will have three trustees, one of which will be
designated by the equity committee, one designated by the unsecured creditors'
committee, and one designated by the Chapter 11 Trustee. The beneficiaries of
the Mafco Trust will be the Debtor Companies, unsecured creditors and the Marvel
equity holders. Pursuant to the agreement governing the Mafco Trust, the Debtor
Companies will, on the consummation date, contribute to the Mafco Trust all
interests in any cause of action based upon claims against Ronald O. Perelman,
certain of his affiliates, and certain other former directors of Marvel relating
to the action filed by the Company on October 30, 1997, but excluding those (i)
relating to any claims under any tax-sharing or other similar agreements to
which Marvel has been a party; or (ii) against any person or entity released or
exculpated under the Toy Biz Plan. The Mafco Litigation trustees agree to
enforce these claims for the benefit of the Mafco Trust and hold any proceeds
from these claims in trust for those
9
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
beneficiaries. The existence of the Mafco Trust will terminate five years after
the consummation date of the Toy Biz Plan unless the District Court approves an
extension of the term of the Mafco Trust for good cause.
On May 12, 1998, a settlement was reached among Toy Biz, Chapter 11
Trustee, representatives of the Company's secured lenders, and certain other
parties to settle litigation commenced by the Company against Toy Biz, the
secured lenders and those other parties (the "Governance Litigation"). As a part
of this settlement, the Chapter 11 Trustee agreed to attempt to have vacated the
appeal of the Governance Litigation concerning the Company's alleged right to
replace the Toy Biz board of directors currently pending in the Court of Appeals
and to support the Toy Biz Plan, which was amended to reflect the settlement
agreement. The Governance Litigation will, pursuant to the Toy Biz Plan, be
settled upon consummation of the Toy Biz Plan.
If the Toy Biz Plan is unable to be consummated, the Company's
creditors or equity security holders may seek other alternatives for the
Company, including bids for the Company or parts thereof through an auction
process, or possible liquidation.
Holding Companies
On March 3, 1998, the District Court entered an order permitting the
distribution to the holders of the Holding Companies' debt obligations (the
"Noteholders") of up to 12.5 million outstanding shares of common stock of
Marvel which were pledged to secure the Holding Companies' debt obligations (the
"Notes"). Further, the order authorized the sale by Marvel Holdings, Inc.
("Holdings"), for cash of an additional 2.5 million shares of common stock of
Marvel currently held by Holdings in escrow to pay certain administrative
expenses. The Indenture Trustee subsequently sought an order from the District
Court permitting the distribution to the Noteholders of additional shares of
common stock which were pledged to secure the Notes. By an order dated April 9,
1998, the District Court authorized the distribution to the Noteholders of an
additional 21.5 million shares of common stock and the sale of approximately
400,000 additional shares of common stock currently held by Holdings to pay
certain administrative expenses.
On April 17, 1998, trading of Marvel's common stock was suspended by
the New York Stock Exchange and application will be made to the Securities and
Exchange Commission to delist the stock. The Company understands that the New
York Stock Exchange reached the decision in view of the fact that Marvel is
below the Exchange's continued listing criteria. All issued and outstanding
shares of Marvel common stock will be canceled as of the consummation date of
the Toy Biz Plan.
Other
As part of the chapter 11 process, the Debtor Companies have received a
significant number of proofs of claims. The Company has commenced the process of
rejecting certain of these claims and further believes that a majority of these
claims may have been paid pursuant to first day orders of its bankruptcy
proceedings or are without merit. Although the Company believes that amounts
recorded as of June 30, 1998 are adequate to cover the ultimate liability under
these claims, there can be no assurance that these claims will not be settled
for amounts in excess of these amounts. The Toy Biz Plan provides for, among
other things, the delivery of $8.0 in cash to the unsecured creditors, the
creation of the Avoidance Trust and the Mafco Trust, both of which are, in part,
for the benefit of the unsecured creditors, and the issuance of 1,750,000 plan
warrants which will entitle an unsecured creditor to purchase one share of NEWCO
stock for $17.25 within four years of the Toy Biz Plan's consummation. In
addition, three series of stockholder warrants will be issued to, among other
parties, the unsecured creditors which entitle the holder to purchase shares of
NEWCO common stock at various prices over certain periods of time.
Financial accounting and reporting during a chapter 11 proceeding is
prescribed in Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under Bankruptcy Code" ("SOP 90-7"). Accordingly, certain
pre-petition obligations, which may be subject to settlement, have been
classified as obligations, subject to chapter 11 settlement under reorganization
and consist of the following estimated amounts:
10
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Total accrued expenses $ 13.7 $ 13.7
Debt:
U.S. Term Loan Agreement $ 350.7 $ 350.0
Amended and Restated Credit Agreement 120.0 120.0
Additional Revolving Credit Facility 15.0 15.0
Other debt 0.6 --
--------------- ---------------
Total debt 485.6 485.0
--------------- ---------------
Other long-term liabilities 3.5 3.5
--------------- ---------------
Total liabilities subject to settlement under reorganization $ 502.8 $ 502.2
--------------- ---------------
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable, net:
June 30, December 31,
1998 1997
--------------- ---------------
Accounts receivable $ 107.7 $ 109.6
Less: Allowances (12.3) (22.8)
--------------- ---------------
$ 95.4 $ 86.8
=============== ===============
Inventories, net:
Finished goods $ 16.5 $ 26.0
Work in process 10.1 12.7
Raw materials 9.5 13.9
Less: Reserve for obsolescence (5.5) (8.7)
--------------- ---------------
$ 30.6 $ 43.9
=============== ===============
Goodwill and other intangibles, net:
Goodwill and other intangibles $ 241.6 $ 243.9
Less: Accumulated amortization (72.2) (69.2)
--------------- ---------------
$ 169.4 $ 174.7
=============== ===============
</TABLE>
4. SALE OF ASSETS
On June 15, 1998, the Company sold the remaining portion of its
confectionery business for $13.0 in cash, plus certain assumed liabilities. The
Company transferred certain assets, rights and properties free of all liens of
its domestic operations as well as all capital stock of its interests in foreign
operations, as well as certain debt, liabilities and obligations.
The Company used $9.8 of the net proceeds from the sale to pay down a
portion of the principal balance of the DIP loan, and the balance was primarily
used to prepay DIP interest. A summary of the confectionery net assets sold is
illustrated below:
11
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Current Assets $ 12.0
Long Term Assets 9.5
------------
Total Assets $ 21.5
------------
Current Liabilities $ 4.4
Long Term Liabilities 0.2
------------
Total Liabilities $ 4.6
------------
Net Assets $ 16.9
============
During the six months ended June 30, 1998, the Company recognized a
loss on sale of approximately $5.9, which included $2.0 related to the
cumulative translation adjustment of the foreign confectionery business sold.
Included in the Condensed Consolidated Statements of Operations for the
six months ended June 30, 1998, are $8.4 of confectionery revenues. Operating
loss for the six months ended June 30, 1998 was $2.2.
12
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
(Unaudited)
5. FINANCIAL STATEMENTS OF ENTITIES OPERATING UNDER CHAPTER 11
The combined condensed balance sheet as of June 30, 1998 of the Debtor Companies
is as follows:
ASSETS
Current assets:
Cash $ 16.6
Accounts receivable, net 14.5
Inventories, net 8.8
Prepaid expenses and other 5.4
---------------
Total Current Assets 45.3
Property, plan and equipment, net 3.1
Goodwill and other intangibles, net 108.3
Investment in Toy Biz 33.0
Deferred charges and other 14.1
Investments in and advances to subsidiaries, at cost (38.7)
---------------
Total Assets $ 165.1
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debtor-in-Possession Loan $ 81.4
Accounts payable 20.5
Accrued expenses and other 92.5
---------------
Total Current Liabilities 194.4
Other long-term liabilities 10.2
Liabilities subject to settlement under reorganization 502.8
---------------
Total Liabilities 707.4
---------------
Stockholders' deficit:
Common stock 1.0
Additional paid-in-capital 93.1
Accumulated deficit (636.5)
Comprehensive loss 0.1
---------------
Total Stockholders' Deficit (542.3)
---------------
Total Liabilities and Stockholder's Deficit $ 165.1
===============
13
<PAGE>
MARVEL ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
(Unaudited)
The combined condensed statement of operations for the six months ended June 30,
1998 of the Debtor Companies is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net revenues $75.2
Cost of sales 59.3
Selling, general & administrative expenses 26.1
Depreciation and amortization 1.4
Amortization of goodwill, intangibles and deferred charges 3.4
Interest expense, net (Contractual interest for the six months ended June 30,
1998 1 was $30.5) 5.1
Loss on sale of confectionery business 5.9
Equity in net income of unconsolidated subsidiaries and other, net 0.4
---------------
Loss before reorganization items and provision for income taxes (25.6)
Reorganization items 9.4
---------------
Loss before provision for income taxes (35.0)
Provision for income taxes 0.2
---------------
Net loss Debtor Companies (35.2)
Equity in net income of non-Debtor Companies 3.3
---------------
Net loss ($31.9)
===============
</TABLE>
14
