MARVEL ENTERPRISES INC, 10-Q, 1998-11-16

MARVEL ENTERPRISES INC
10-Q, 1998-11-16
DOLLS & STUFFED TOYS

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<PAGE>

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number 1-13638

MARVEL ENTERPRISES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 13-3711775
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

685 THIRD AVENUE, NEW YORK, NY 10017
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

212-588-5100
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)

TOY BIZ, INC.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---

At November 1, 1998, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 33,452,127 shares of common stock.
<PAGE>

MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 31,
1998/*/ 1997/**/
-----------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................................ $ 29,802 $ 7,596
Accounts receivable, net................................. 64,723 50,395
Inventories, net......................................... 42,750 22,685
Assets held for sale..................................... -- 4,136
Income tax receivable.................................... 1,065 17,542
Deferred income taxes.................................... 10,920 7,494
Deferred financing fees.................................. 10,375 --
Prepaid expenses and other............................... 4,824 6,584
-----------------------------
Total current assets................................ 164,459 116,432

Molds, tools and equipment, net............................... 19,686 17,013
Product and package design costs, net......................... 6,374 7,616
Goodwill and other intangibles, net........................... 543,919 9,305
Other assets.................................................. 5,924 --
-----------------------------
Total assets........................................ $740,362 $150,366
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 17,597 $ 5,354
Accrued expenses and other............................... 105,619 25,031
Borrowings under credit facility......................... -- 12,000
Note payable............................................. 200,000 --
-----------------------------
Total current liabilities........................... 323,216 42,385
-----------------------------
Long-term liabilities:
Panini liability......................................... 27,000 -
Other long-term liabilities.............................. 5,573 -
-----------------------------
Total long-term liabilities......................... 32,573 -
-----------------------------
Total liabilities............................................. 355,789 42,385

Redeemable cumulative convertible exchangeable
preferred stock............................................. 169,000 --

Stockholders' equity:
Common stock............................................. 408 277
Additional paid-in capital............................... 215,035 70,578
Retained earnings........................................ 33,085 37,126
-----------------------------
Total stockholders' equity before treasury stock.... 248,528 107,981
-----------------------------
Treasury stock........................................... (32,955) --
-----------------------------
Total stockholders' equity including
treasury stock.................................... 215,573 107,981
-----------------------------
Total liabilities, redeemable preferred stock,
stockholders' equity and treasury stock........... $740,362 $150,366
=============================
</TABLE>

/*/ Gives effect to the Company's acquisition on October 1, 1998 of Marvel
Entertainment Group, Inc. (See/ Notes 1&2).
/**/ Derived from the Company's audited Financial Statements for the year ended
December 31, 1997.

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

2
<PAGE>

MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------------------------
1998 1997 1998 1997
---------------------------------------------

<S> <C> <C> <C> <C>
Net sales..................................... $ 65,045 $ 40,765 $156,361 $ 109,631
Cost of sales................................. 38,745 30,520 87,758 72,678
---------------------------------------------
Gross profit.................................. 26,300 10,245 68,603 36,953

Operating expenses:

Selling, general and administrative.......... 32,234 22,454 60,925 50,284
Depreciation and amortization................ 6,035 6,296 14,158 13,085
---------------------------------------------
Total operating expenses................. 38,269 28,750 75,083 63,369
---------------------------------------------
Operating loss................................ (11,969) (18,505) (6,480) (26,416)
Interest expense, net......................... 212 194 335 267
---------------------------------------------
Loss before income taxes..................... (12,181) (18,699) (6,815) (26,683)
Income tax benefit........................... (4,958) (7,480) (2,774) (10,673)
---------------------------------------------
Net loss...................................... ($7,223) ($11,219) ($4,041) ($16,010)
=============================================
Basic and dilutive loss per share............. ($0.26) ($0.41) ($0.15) ($0.58)
=============================================
Weighted average number of basic and dilutive
shares outstanding, (in thousands)........... 27,746 27,746 27,746 27,746
=============================================
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.

3
<PAGE>

MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1998 1997
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ ($4,041) ($16,010)
-----------------------------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization........................................ 14,158 13,085
Benefit for deferred income taxes.................................... (1,847) (1,065)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net...................... (2,178) 17,691
Increase in inventories, net......................................... (10,914) (5,185)
Decrease (increase) in income tax receivable......................... 16,477 (9,340)
Decrease in prepaid expenses and other............................... 2,960 421
Decrease in accounts payable......................................... (1,245) (1,207)
(Decrease) increase in accrued expenses and other.................... (2,153) 8,943
-----------------------------
Total adjustments....................................................... 15,258 23,343
-----------------------------
Net cash provided by operating activities......................... 11,217 7,333
-----------------------------
Cash flows from investing activities:
Acquisition of Marvel Entertainment Group, net of cash acquired...... (255,812) --
Purchases of molds, tools and equipment.............................. (8,610) (11,473)
Expenditures for product and package design costs.................... (3,697) (3,403)
Sale (acquisition) of Colorforms..................................... 2,786 (3,982)
Other investments.................................................... (1,678) (103)
-----------------------------
Net cash used in investing activities............................. (267,011) (18,961)
-----------------------------
Cash flows from financing activities:
Proceeds from bridge facility........................................ 200,000 --
Proceeds from preferred stock offering............................... 90,000 --
Exercise of stock option............................................. -- 60
Net (repayments) borrowings under credit facility.................... (12,000) 12,000
-----------------------------
Net cash provided by financing activities......................... 278,000 12,060
-----------------------------
Net increase in cash and cash equivalents............................... 22,206 432
Cash and cash equivalents at beginning of period........................ 7,596 6,022
-----------------------------
Cash and cash equivalents at end of period.............................. $ 29,802 $ 6,454
=============================
Supplemental disclosures of cash flow information:
Interest paid during the period...................................... $ 729 $ 559
Income taxes (refunded) paid, during the period, net................. ($12,594) $ 265

Other non-cash transactions:
Accretion of preferred dividend...................................... -- $ 71
Issuance of securities in connection with the acquisition
of Marvel Entertainment Group and acquisition of
treasury stock..................................................... $ 189,133 --
</TABLE>

The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.

4
<PAGE>

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

1. BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements of
Marvel Enterprises, Inc. (formerly Toy Biz, Inc.) and its subsidiaries
(collectively, the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals as well as
the matters discussed in Note 4) considered necessary for a fair presentation
have been included. The Consolidated Balance Sheet reflects the acquisition of
Marvel Entertainment Group, Inc. and its subsidiaries (collectively, "Marvel")
which occurred on October 1, 1998 as if the transaction occurred on September
30, 1998. (See Note 2). The Consolidated Statements of Operations for the nine
months ended September 30, 1998 do not include Marvel. The Consolidated
Statements of Operations and the Consolidated Statements of Cash Flow for the
periods ended September 30, 1998 are not necessarily indicative of those for the
full year ending December 31, 1998. For further information on the Company's
historical financial results, refer to the consolidated financial statements and
footnotes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, as filed with the Securities and Exchange
Commission.

2. ACQUISITION OF MARVEL

On October 1, 1998, pursuant to the Fourth Amended Joint Plan of
Reorganization proposed by the senior secured lenders of Marvel and Toy Biz,
Inc. (the "Plan"), Marvel became a wholly-owned subsidiary of Toy Biz, Inc. The
acquisition of Marvel was accounted for using the purchase method of accounting.
The results of the acquired business will be included in the Company's
consolidated results of operations from October 1, 1998. Toy Biz, Inc. also
changed its name to Marvel Enterprises, Inc. on that date. The Plan was
confirmed on July 31, 1998 by the United States District Court for the District
of Delaware, which had been administering the Marvel bankruptcy cases, and was
approved by the Company's stockholders at a meeting on September 11, 1998.

In accordance with the Plan, the Toy Biz, Inc. stockholders, other than
Marvel, continue to own approximately 40% of the outstanding common stock of the
Company (assuming the conversion of all of the shares of 8% Cumulative
Convertible Exchangeable Preferred Securities (the "8% Preferred Stock") issued
by the Company pursuant to the Plan but not assuming the exercise of any
warrants issued pursuant to the Plan) and the senior secured lenders of Marvel
received (i) approximately $231.8 million in cash and (ii) common and 8%
Preferred Stock issued by the Company which (assuming the conversion of all 8%
Preferred Stock) represent approximately 42% of the common stock of the
Company. Investors purchased 9.0 million shares of 8% Preferred Stock that,
when converted, represent approximately 18% of the common stock of the Company
(assuming the conversion of all 8% Preferred Stock). Under the Plan, holders of
allowed unsecured claims of Marvel ("Unsecured Creditors") will receive (i) up
to $8.0 million

5
<PAGE>

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

in cash and (ii) between 1.0 million and 1.75 million warrants having a term of
four years and entitling the holders to purchase common stock of the Company at
$17.25 per share. The exact amount of cash and warrants to be distributed to the
Unsecured Creditors will be determined by reference to the aggregate amount of
allowed unsecured claims. In addition, Unsecured Creditors will receive (i)
distributions from any future recovery on certain litigation and (ii) a portion
of the Stockholder Warrants as described below. Finally, the Plan provides that
three series of warrants (the "Stockholder Warrants") will be distributed to the
Unsecured Creditors, to former 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 LaSalle National Bank. The
Stockholder Warrants consist of (a) three-year warrants to purchase 4.0 million
shares of common stock of the Company at $12.00 per share, (b) six-month
warrants to purchase 3.0 million shares of 8% Preferred Stock for $10.65 per
share subject to increase based upon the date of issuance of the six-month
warrants and (c) four-year warrants to purchase 7.0 million shares of common
stock of the Company at $18.50 per share. The recipients of the Stockholder
Warrants will also be entitled to receive distributions from any future recovery
on certain litigation. Certain other cash distributions were also provided for
by the Plan in connection with settling certain of the disputes arising out of
Marvel's bankruptcy.

The preliminary purchase price, including related fees and expenses, was
approximately $446.9 million which included approximately $255.8 million in cash
and the remainder in securities of the Company as outlined above, net of shares
of the Company owned by Marvel and reacquired in these transactions. The
purchase resulted in the creation of approximately $533.5 million of goodwill
which will be amortized over 20 years.

Based on a preliminary allocation of purchase price, the fair value of the
assets and liabilities acquired is summarized below.

Current assets..... $ 28,877
Noncurrent assets.. 8,120
Intangible assets.. 533,522
Total liabilities.. (123,614)
---------
$ 446,905
=========

In the preliminary allocation of the purchase price, the Company has not
consolidated Panini SpA ("Panini"), Marvel's Italian subsidiary engaged in the
children's activity sticker and adhesive paper businesses. The Company does not
currently intend to continue operating this business. Panini has a deficit in
net tangible assets of approximately $130.7 million as of September 30, 1998;
however, the Panini deficit in net tangible assets reflected in the preliminary

6
<PAGE>

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

allocation of the purchase price and in the accompanying consolidated balance
sheet is $27.0 million as this is the maximum amount of such deficit that the
Company has guaranteed. The $27.0 million liability is presented as a long-term
liability on the Consolidated Balance Sheet as of September 30, 1998.

The following unaudited pro forma consolidated financial information gives
effect to the acquisition as if it occurred at the beginning of the period
presented. These pro forma results include certain adjustments, such as
increased amortization and interest expense, and do not reflect Marvel's debt
forgiveness and reorganization items and are not necessarily indicative of the
results that would have been achieved had the acquisition occurred at the
beginning of the period. This financial information includes the results of
Panini's operations during the nine months ended September 30, 1998.

Nine Months Ended
September 30, 1998
-------------------
Net sales........... $429,857
Net (loss).......... ($63,792)
Loss per basic and
dilutive share...... ($1.91)

3. DEBT FINANCING

To finance the acquisition of Marvel, the Company issued 9.0 million shares
of 8% Preferred Stock at $10.00 per share for an aggregate of $90.0 million and
obtained a $200.0 million loan (the "Bridge Facility") from UBS AG, Stamford
Branch ("UBS AG"). The Bridge Facility bears interest at either the bank's base
rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the
Federal Funds Rate) plus 5.50% or at the Eurodollar rate plus 6.50%. Both
margins increase by 0.50% on April 30, 1999 and by an additional 0.50% on the
last day of each three-month period thereafter. The Company incurred a
commitment fee for the Bridge Facility upon signing and is required to pay an
additional continuation fee of 2% if the Company has not refinanced the facility
on or prior to April 30, 1999. The Bridge Facility is required to be repaid by
September 27, 1999.

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

the facility. The Company had approximately $1.6 million in letters of credit
outstanding as of November 10, 1998, which reduce the available amount under the
UBS Credit Facility. There have been no borrowings under the UBS Credit
Facility. The UBS Credit Facility is scheduled to expire on September 27, 2001.

The Bridge Facility and the UBS Credit Facility are secured by all of the
Company's assets (other than Panini) and contain various financial covenants, as
well as restrictions on new indebtedness, acquisitions and similar investments,
the sale or transfer of assets, capital expenditures, restricted payments,
payment of dividends, issuing guarantees and creating liens. The UBS Credit
Facility also requires an annual reduction of outstanding borrowings to zero for
a period of at least thirty consecutive calendar days from October 1, 1998 to
December 31, 1999 and during each fiscal year thereafter.

4. RESTRUCTURING AND OTHER UNUSUAL COSTS

In connection with the consummation of the Plan, the Company reviewed the
relationships with its and Marvel's foreign distributors, as well as the
Company's relationship with certain suppliers, for business conflicts. As part
of integrating Marvel's operations with those of the Company, the Company plans
on rationalizing its international licensing and product distribution
relationships. In addition, certain products that were at various stages of
design and marketing are being discontinued and written-off because of business
conflicts that arose out of the acquisition of Marvel.

As a result of the above matters, the Company has recorded increased
allowances and unusual charges of approximately $14.9 million in the nine and
three months ended September 30, 1998, which relate to impairment of assets
recorded by the Company and which are reflected in the following captions in the
statement of operations.

Net sales (allowances).............. $ 2,925
Cost of sales....................... 1,193
Selling general and administrative.. 9,772
Depreciation and amortization....... 1,032
--------
$ 14,922
========

Additional costs, consisting principally of severance costs, to be recorded
during the fourth quarter to complete the restructuring plan are currently
estimated to be approximately $1.8 million.

8
<PAGE>

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------
Accounts receivable, net:
<S> <C> <C>
Accounts receivable.......................... $ 79,716 $ 80,212
Less allowances.............................. (14,993) (29,817)
------------------------------
Total................................... $ 64,723 $ 50,395
==============================
Inventories, net:
Finished goods............................... $ 32,392 $ 17,518
Component parts, raw materials
and work-in-process........................ 10,358 5,167
------------------------------
Total................................... $ 42,750 $ 22,685
==============================
Goodwill and other intangibles, net:
Goodwill..................................... $542,975 $ 9,453
Patents and other intangibles................ 2,496 818
Less accumulated amortization................ (1,552) (966)
------------------------------
Total................................... $543,919 $ 9,305
==============================
Accrued expenses and other:
Accrued inventory purchases.................. $ 9,696 $ 4,909
Accrued advertising costs.................... 5,586 11,544
Sales returns reserve........................ 25,654 --
Administrative claims payable related
to Marvel's bankruptcy..................... 23,988 --
Unsecured creditors payable related
to Marvel's bankruptcy..................... 8,000 --
Accrued Marvel acquisition costs............. 9,100 --
Other accrued expenses....................... 23,595 8,578
------------------------------
Total................................... $105,619 $ 25,031
==============================
</TABLE>

9
<PAGE>

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

6. EARNINGS PER SHARE AND SHARES OUTSTANDING

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Net income (loss) per common share is computed by dividing
net income (loss), less the amount applicable to preferred dividends in the case
of the first half of 1997, by the weighted average common shares outstanding
during the period. All income (loss) per share amounts for all periods have
been presented, and where appropriate, restated to conform to Statement 128
requirements.

The Consolidated Statement of Operations presents operations of the Company
through September 30, 1998 and during that period the Company had 27,746,127
shares outstanding, including 7,394,000 shares owned by Marvel. After the
Marvel acquisition, the number of shares outstanding (assuming no conversion of
the 8% Preferred Stock and no exercise of any of the warrants) is 33,452,127
(excluding the shares owned by Marvel); assuming conversion of all the 8%
Preferred Stock, the number of shares outstanding is 51,011,227 (on the same
basis); assuming conversion of the 8% Preferred Stock and exercise of all
warrants, the number of shares outstanding is 66,878,227 (on the same basis).

7. CAPITAL STOCK

On September 11, 1998, the Company's stockholders approved changes in the
Company's capital structure in connection with the approval of the Plan. These
changes eliminated the Class B Common Stock, authorized an additional 150
million shares of common stock and authorized 100 million shares of preferred
stock. including 75 million shares of 8% Preferred Stock. The Company issued
the following securities in accordance with the Plan: (a) 7.9 million shares of
8% Preferred Stock to Marvel fixed senior secured lenders, (b) 9.0 million
shares of 8% Preferred Stock to new investors at $10.00 per share, (c) 13.1
million shares of common stock to the Marvel fixed senior secured lenders, (d)
four-year warrants to purchase up to 1.75 million shares of common stock at
$17.25 per share, (e) three-year warrants to purchase 4.0 million shares of
common stock at $12.00 per share, (f) six-month warrants to purchase 3.0 million
shares of preferred stock for $10.65 per share subject to increase based upon
the date of issuance of the six-month warrants, and (g) four-year warrants to
purchase 7.0 million shares of common stock at $18.50 per share. (See Note 2).

10
<PAGE>

MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

8. CONTINGENCIES

During 1995, the Company licensed the Apple name from Apple Computer, Inc.
to be used for electronic learning aids and certain other toys in consideration
for a minimum of $3,000,000 in royalty payments. Shortly after commencement of
the license term on January 1, 1996, Apple made public certain financial
difficulties that Apple was experiencing which effectively forestalled the
Company's exploitation of the Apple license. In July 1997 the Company commenced
an arbitration proceeding against Apple seeking the return of the $1,000,000
advance paid upon execution of the license and a declaration that no further
royalty payments were due. Apple asserted the right to receive the $2,000,000
balance of minimum royalty payments under the license. In early November 1998,
the dispute between the Company and Apple ended with the issuance of an
arbitration award pursuant to which the Company is obligated to pay
approximately $1.5 million to Apple, which was accrued in the September 30, 1998
Consolidated Financial Statements.

11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could cause actual results to differ materially from those contained
in forward-looking statements made in this Form 10-Q Quarterly Report and in
oral statements made by authorized officers of the Company. When used in this
Form 10-Q, the words "intend", "estimate", "believe", "expect" and similar
expressions are intended to identify forward-looking statements. In addition,
the following factors, among others, could cause the Company's financial
performance to differ materially from that expressed in any forward-looking
statements made by, or on behalf of, the Company: (i) difficulty in the
Company's ability to integrate the operations of Marvel with those of the
Company; (ii) the inability to refinance the Bridge Facility; (iii) a decrease
in the level of media exposure or popularity of Marvel characters resulting in
declining revenues from products based on such characters; (iv) the lack of
commercial success of properties owned by major entertainment companies that
have granted the Company toy licenses; (v) the lack of consumer acceptance of
new product introductions; (vi) the imposition of quotas or tariffs on toys
manufactured in China as a result of a deterioration in trade relations between
the U.S. and China; (vii) changing consumer preferences; (viii) production
delays or shortfalls; (ix) the timing and effectiveness of the Company's
programs designed to make the Company's operations Year 2000 compliant; and (x)
continued pressure by certain of the Company's major retail customers to
significantly reduce their toy inventory levels.

GENERAL

On October 1, 1998, pursuant to the Plan, Marvel became a wholly-owned
subsidiary of the Company and the Company subsequently changed its name to
Marvel Enterprises, Inc. The acquisition of Marvel was accounted for using the
purchase method of accounting. The results of the acquired business will be
included in the Company's consolidated results of operations from October 1,
1998.

The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool,
activity and electronic toy categories featuring major entertainment and
consumer brand name properties. The Company also designs, markets, and
distributes its own line of proprietary toys in certain of these categories.
The Company is a leading creator, publisher and distributor of youth
entertainment products for domestic and international markets based on fictional
action adventure characters owned by the Company, licenses from professional
athletes, sports teams and leagues and popular entertainment characters and
other properties owned by third parties. The Company also licenses the Marvel
characters and properties for consumer products, television and film projects,
on-line and interactive software, and advertising promotions. The Company's
products also include comic book and other children's publications, sports and
entertainment trading cards, activity stickers, and adhesive paper products.
The Company is considering whether to continue the activity stickers and
adhesive paper products businesses of Panini in light of Panini's deficit in net
tangible assets. See Note 2. The

<PAGE>

Company believes that the Marvel bankruptcy has had an adverse impact on the
Company in various ways, some of which will continue to affect the Company
following the consummation of the Plan, including but not limited to, concerns
among retailers about the future of the Marvel brand, potential impact on the
Company's relationship with its international distributors and licensing agents,
difficulty in obtaining new licenses and excess legal and administrative
expenses. In addition, during the third quarter of 1998, the Company's
operations began to be negatively impacted by the decision of certain major
retailers to significantly reduce their toy inventory levels.

The following discussion and analysis of the results of operations relates
to the Company prior to the acquisition of Marvel.

RESULTS OF OPERATIONS

Three months ended September 30, 1998 compared with the three months ended
- --------------------------------------------------------------------------
September 30, 1997
- ------------------

The Company's net sales increased approximately $24.3 million to
approximately $65.0 million for the three months ended September 30, 1998 from
approximately $40.8 million in the 1997 period. Net sales in the domestic boys'
toys category increased approximately $5.4 million to approximately $18.9
million in the third quarter of 1998 primarily due to the introduction of the
Company's WCW Bash 'n Brawler product in the third quarter of 1998. The Company
believes that the boys' toys category continued to be adversely affected due to
concerns among retailers as to the impact of the Marvel bankruptcy on the future
of the Marvel brand and the reduced level of media exposure of the Marvel
characters that resulted from Marvel's bankruptcy. Net sales in the domestic
girls' toys category increased approximately $1.9 million in the third quarter
of 1998 to approximately $18.3 million due primarily to the sale of four new
promotional dolls in 1998 while the corresponding period for 1997 had only three
new promotional dolls. Net sales of domestic activity toy and other products
decreased approximately $1.6 million to approximately $5.1 million due primarily
to a reduction in sales of ride-on and game table product, partially offset by
the introduction of the Company's Rotten Egg electronic game which was
introduced in the third quarter of 1998. Net sales of product sold through the
import division increased approximately $6.8 million to approximately $15.2
million in the third quarter of 1998 due primarily to shipments of product
related to the Godzilla feature film in the 1998 period. International net sales
increased approximately $3.8 million to approximately $7.6 million in the third
quarter of 1998, also due primarily to shipments of Godzilla product in the 1998
period. The Company recorded additional sales allowances of approximately $2.9
million due to the expected impact of the Marvel acquisition on the Company's
relationship with certain of its international distributors in the 1998 period.
The Company recorded an additional $8.0 million of sales allowances related to
the impact of the Marvel bankruptcy on the Company's relationships with its
domestic and international distributors in the 1997 period.

Gross profit increased to approximately $26.3 million for the third quarter
of 1998 from approximately $10.2 million in the third quarter of 1997. Gross
profit as a percentage of net sales increased to approximately 40% in the third
quarter of 1998 from approximately 25% in the third quarter of 1997. In the
1998 period, the cost of sales was increased by approximately $1.2 million due
to certain restructuring and unusual costs associated with the Company's
acquisition of Marvel. The 1997 period includes approximately $3.0 million in
additional cost of sales relating

13
<PAGE>

to the Marvel bankruptcy. Without these additional allowances and restructuring
and unusual charges, gross profit and gross profit as a percentage of net sales
would be approximately $30.4 million and 45% for the 1998 period and
approximately $21.2 million and 44% for the 1997 period, respectively.

Selling, general and administrative expenses increased 44% to approximately
$32.2 million (approximately 50% of net sales) in the third quarter of 1998 from
approximately $22.5 million (approximately 55% of net sales) in the third
quarter of 1997. The increase during the 1998 period was primarily due to
approximately $9.8 million of expenses relating to terminating previous
contractual commitments that the Company believes it will not benefit from as a
result of the Company's restructuring from the Marvel acquisition. The 1997
period includes approximately $5.1 million in additional professional fees,
advertising and royalty expense due to the Marvel bankruptcy. Without the
additional sales allowances and unusual charges in 1998 and 1997, the Company
estimates that selling, general and administrative expenses would have been
approximately $22.5 million (approximately 33% of net sales) in 1998 vs.
approximately $17.4 million (approximately 36% of net sales) in 1997. After
eliminating unusual charges associated with the 1998 and 1997 periods, the net
$5.0 million increase in selling, general and administrative expenses is
primarily related to increased royalty and other selling expenses due to
increased sales in the 1998 period.

Depreciation and amortization expense decreased to approximately $6.0
million in the third quarter of 1998 from approximately $6.3 million in the
third quarter of 1997. The 1998 period includes approximately $1.0 million in
additional amortization expense related to early write-offs of product
discontinued as a result of the acquisition of Marvel while the 1997 period
includes approximately $1.5 million in additional amortization expense related
to early write-offs of discontinued Marvel products that were the result of the
Marvel bankruptcy on the Company.

The Company believes its sales and business continued to be adversely
affected in the third quarter of 1998 by concerns among retailers regarding the
Marvel bankruptcy and the Company believes that this adverse affect could
continue even though the Plan was consummated as of September 30, 1998. While
the Company is attempting to address these concerns, to the extent they are not
alleviated, it can be expected that they will continue to adversely affect
demand for certain of the Company's products. The Company also believes that
its operations in the third quarter of 1998 began to be negatively impacted by
the decision of Toys 'R' Us, a major customer of the Company, to significantly
reduce its toy inventory levels.

Nine months ended September 30, 1998 compared with the nine months ended
- ------------------------------------------------------------------------
September 30, 1997
- ------------------

The Company's net sales increased approximately $46.7 million to
approximately $156.4 million for the nine months ended September 30, 1998 from
approximately $109.6 million in the 1997 period. Net sales in the domestic
boys' toys category increased approximately $13.6 million to approximately $42.0
million in the first nine months of 1998 due primarily to the introduction of
the WCW Bash 'n Brawler in the third quarter of 1998 as well as continued
increased sales of boys' accessories in the 1998 period. The Company believes
that the boys' toys category continued to be adversely affected due to concerns
among retailers as to the impact of the Marvel bankruptcy on the future of the
Marvel brand and the reduced level of media exposure of the Marvel characters.
Net sales in the domestic girls' toys category increased approximately $9.1

14
<PAGE>

million in the nine months ended September 30, 1998 to approximately $29.9
million due primarily to the sale of four new promotional dolls in 1998 while
the corresponding period for 1997 had only three new promotional dolls. Net
sales of domestic activity toy and other products increased approximately $3.0
million to approximately $21.6 million in the 1998 period due primarily to
shipments of product related to the Godzilla feature film released in 1998. Net
sales of product sold through the import division increased approximately $17.6
million to approximately $41.0 million in the first nine months of 1998, also
due primarily to shipments of Godzilla product in the 1998 period. International
net sales, which includes international distribution and sub-licensing revenues,
decreased approximately $6.5 million to approximately $21.8 million in the first
nine months of 1998 as a result of reduced distribution of animated Marvel
television shows in international markets during the 1998 period. The Company
believes that the reduced distribution of these animated television shows was a
result of the Marvel bankruptcy. The Company increased 1998 sales allowances by
approximately $2.9 million due to the expected impact of the Marvel acquisition
on the Company's relationship with certain of its international distributors.
During the 1997 period, the Company recorded an additional $10.0 million of
sales allowances related to the impact of the Marvel bankruptcy on the Company's
relationships with its domestic and international distributors.

Gross profit increased 86% to approximately $68.6 million for the nine
months ended September 30, 1998 from approximately $37.0 million in the nine
months ended September 30, 1997. Gross profit as a percentage of net sales
increased to approximately 44% in the first nine months of 1998 from
approximately 34% in the first nine months of 1997. In the 1998 period, the
cost of sales was increased by approximately $1.2 million due to certain
restructuring and unusual costs associated with the Company's acquisition of
Marvel. The 1997 period includes approximately $3.0 in additional cost of sales
relating to the Marvel bankruptcy. Without these additional allowances and
restructuring and unusual charges, gross profit and gross profit as a percentage
of net sales would be approximately $72.7 million and 46% for the 1998 period
and approximately $50.0 million and 42% for the 1997 period, respectively.

Selling, general and administrative expenses increased 21% to approximately
$60.9 million (approximately 39% of net sales) in the nine months ended
September 30, 1998 from approximately $50.3 million (approximately 46% of net
sales) in the nine months ended September 30, 1997. The increase during the
1998 period was primarily due to approximately $9.8 million of expenses relating
to terminating previous contractual commitments that the Company believes it
will not benefit from as a result of the Company's restructuring from the Marvel
acquisition. The 1997 period includes approximately $9.7 million in additional
professional fees, advertising and royalty expense due to the Marvel bankruptcy.
Without the additional sales allowances and unusual charges in 1998 and 1997,
the Company estimates that selling, general and administrative expenses would
have been approximately $51.2 million (approximately 32% of net sales) in 1998
as compared to. approximately $40.6 million (approximately 34% of net sales) in
1997. After eliminating additional allowances and unusual charges associated
with the 1998 and 1997 periods, the net $10.5 million increase in selling,
general and administrative expenses is primarily related to increased royalty,
advertising and other selling expenses due to the increased sales in the 1998
period.

Depreciation and amortization expense increased to approximately $14.2
million in the first nine months of 1998 from approximately $13.1 million in the
first nine months of 1997. The 1998 period includes approximately $1.0 million
in additional amortization expense related to early write-offs

15
<PAGE>

of product discontinued as a result of the acquisition of Marvel while the 1997
period includes approximately $1.5 million in additional amortization expense
related to early write-offs of discontinued Marvel products that were the result
of the Marvel bankruptcy on the Company.

The Company's business is seasonal with higher sales and income during its
third and fourth quarters which coincide with the Christmas selling season.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was approximately $11.2 million
in the nine months ended September 30, 1998, while net cash provided by
operating activities was approximately $7.3 million in the nine months ended
September 30, 1997. The increase was due primarily to a decrease of
approximately $12.0 million in net loss when comparing the 1998 period to the
1997 period, the collection of a $16.5 million tax receivable in the 1998 period
as opposed to recording a $9.3 million tax receivable in the 1997 period. This
increase was partially offset by an increase in the change in accounts
receivable from the 1997 period to the 1998 period resulting from increased
sales in the 1998 period and a decrease in the accrued expenses in the 1998
period compared to an increase in the 1997 period.

On September 28, 1998, the Company and UBS AG entered into a one-year
agreement for a $200.0 million loan (the "Bridge Facility") in order to fund a
portion of the consideration required to complete the acquisition of Marvel. The
Bridge Facility bears interest at either the bank's base rate (defined as the
higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate)
plus 5.50% or at the Eurodollar rate plus 6.50%. Both margins increase by 0.50%
on April 30, 1999 and by an additional 0.50% on the last day of each three-month
period thereafter. The Company incurred a commitment fee for the Bridge Facility
upon signing and is required to pay an additional continuation fee of 2% if the
Company has not refinanced the facility on or prior to April 30, 1999. The
Bridge Facility is required to be repaid no later than September 27, 1999.

On September 28, 1998, the Company and UBS AG entered an agreement for a
$50.0 million Revolving Credit Facility ("UBS Credit Facility"). The UBS Credit
Facility bears interest at either the bank's base rate (defined as the higher of
the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus a
margin ranging from 0.75% to 1.25% depending on the Company's financial
performance or at the Eurodollar rate plus a margin ranging from 1.75% to 2.25%
depending on the Company's financial performance. The UBS Credit Facility
requires the Company to pay a commitment fee of 0.50% per annum on the average
daily unused portion of the facility. The Company had approximately $1.6 million
in letters of credit outstanding as of November 10, 1998 which reduces the
available amount under the UBS Credit Facility. There have been no borrowings
under the UBS Credit Facility. The UBS Credit Facility is scheduled to expire on
September 27, 2001.

16
<PAGE>

thirty consecutive calendar days from October 1, 1998 to December 31, 1999 and
during each fiscal year thereafter.

In March, 1998, the Company and The Chase Manhattan Bank entered into an
amendment to the Company's revolving line of credit (the "Amended Credit
Facility") extending the duration of the credit facility and modifying its
terms. The Amended Credit Facility was paid-off in full and cancelled on
October 1, 1998 when the Company obtained financing through the Bridge Facility
and the UBS Credit Facility. The Company had $21.0 million in outstanding
borrowings under the Amended Credit Facility at the time the facility was
cancelled.

On October 1, 1998, the Company sold 9.0 million shares of 8% Preferred
Stock at $10.00 per share for an aggregate of $90.0 million. The 8% Preferred
Stock pays quarterly dividends on a cumulative basis on the first business day
of January, April, July and October in each year, commencing January 4, 1999.
Dividends are payable, at the option of the board of directors, in cash, in
additional shares of 8% Preferred Stock or in any combination thereof. The
Company is prohibited under the Bridge Facility from making dividend payments on
the 8% Preferred Stock except in additional shares of 8% Preferred Stock.

In accordance with the Plan, the Company paid approximately $255.8 million
on October 1, 1998 in connection with the acquisition of Marvel. This included
payments to Marvel's secured creditors, partial payments of administrative
claims, and a payment to reduce a guarantee of indebtedness to Panini. An $8.0
million escrow account has been set-up for payment to Marvel's unsecured
creditors and the Company estimates having to pay approximately $24.0 million in
administrative claims to Marvel's creditors. The funds in the escrow account
and the administrative claims are expected to be distributed and paid in early
1999.

The Company believes that it has sufficient funds available from cash and
cash equivalents, operating activities and borrowings under the UBS Credit
Facility to meet peak working capital needs and capital expenditure
requirements. The Company believes that it will be able to obtain financing to
replace the Bridge Facility before the expiration date of September 27, 1999,
although there can be no assurance that the Company will be able to do so. The
Company's inability to obtain alternate financing by September 27, 1999 would
have a material adverse affect on the Company.

Year 2000
- ---------

The Company has incurred approximately $1.0 million in expenses and has
acquired approximately $200,000 in new computer hardware and software during the
nine months ended September 30, 1998, in connection with making its computer
systems Year 2000 compliant. The Company expects to incur additional Year 2000
conversion costs of approximately $1.0 million throughout the balance of 1998
and 1999. The Company is utilizing both internal and external sources to
remediate, or replace, and test the software for Year 2000 modifications. The
Company anticipates completing the Year 2000 project by June 30, 1999.

The Company is in the process of completing an assessment of Year 2000
compliance for the Marvel operations. Marvel had not allocated resources to the
Year 2000 project while it was in bankruptcy. The Company believes that it can
successfully complete Marvel's Year 2000 compliance by converting Marvel's
financial system into the Company's financial system by August, 1999.

17
<PAGE>

Other systems used by Marvel will be made Year 2000 compliant in conformance
with the Company's systems. The Company estimates that the costs to conform
Marvel will be under $500,000.

The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's estimates. The
Company presently believes that the Year 2000 issue will not pose significant
operational problems for its computer systems. The Company has begun to
communicate with its customers and major suppliers in order to determine whether
the Year 2000 issue will impact the ability of those companies' computer systems
to interface with the Company's systems or will otherwise impact the ability of
those companies to transact business with the Company. The Company is not aware
of any such material issues with its customers and suppliers at this time. The
Company currently has not developed a detailed contingency plan. The Company
assesses its Year 2000 status regularly and will begin to develop comprehensive
contingency plans if the Company believes it will not complete the Year 2000
project in a timely manner. If the Company's Year 2000 project is not completed
on a timely basis, or if its major customers or suppliers fail to address all
the Year 2000 issues, the Company believes it could have a material adverse
impact on the Company's operations.

PART II. OTHER INFORMATION.

ITEM 1. LEGAL PROCEEDINGS.

Certain Bankruptcy Proceedings. As a result of the consummation of the
Plan on October 1, 1998, all appeals from orders with respect to the Plan issued
by the United States District Court for the District of Delaware (the "Delaware
District Court") will be dismissed, as will all claims by Marvel against the
Company and all claims against the Company concerning the effect of the June
1997 change of control of Marvel on the voting power of the stock in the Company
owned by Marvel. Those appeals and claims were described in the Company's
quarterly reports on Form 10-Q for the quarters ended March 31 and June 30,
1998.

Toy Biz, Inc. v. Apple Computer, Inc. During 1995, the Company licensed
the Apple name from Apple Computer, Inc. to be used for electronic learning aids
and certain other toys in consideration for a minimum of $3,000,000 in royalty
payments. Shortly after commencement of the license term on January 1, 1996,
Apple made public certain financial difficulties that Apple was experiencing
which effectively forestalled the Company's exploitation of the Apple license.
In July 1997 the Company commenced an arbitration proceeding against Apple
seeking the return of the $1,000,000 advance paid upon execution of the license
and a declaration that no further royalty payments were due. Apple asserted the
right to receive the $2,000,000 balance of minimum royalty payments under the
license. In early November 1998, the dispute between the Company and Apple ended
with the issuance of an arbitration award pursuant to which the Company is
obligated to pay approximately $1.5 million to Apple, which was accrued in the
September 30, 1998 Consolidated Financial Statements.

Spider-Man Litigation. The Company's subsidiaries Marvel and Marvel
Characters, Inc. (collectively, the "Marvel Parties") are parties to a
consolidated case pending in the Superior Court of the State of California for
the County of Los Angeles to which Metro-Goldwyn-Mayer Studios Inc. and two of
its affiliates ("MGM"), Columbia Tristar Home Video and related entities
("Sony"),

18
<PAGE>

Viacom International Inc. ("Viacom"), Menahem Golan and others are also parties.
Insofar as the Marvel Parties are concerned, the litigation involves, on one
hand, claims by each of MGM, Sony and Viacom of rights to produce or to
distribute in certain media a feature length, live action motion picture based
upon the Marvel Parties' "Spider-Man" character and on the other hand, the
Marvel Parties' assertion that none of these parties has any such rights. In
addition to declaratory relief and other equitable relief with respect to the
right to produce or distribute a live action Spider-Man movie, the Marvel
Parties and their adversaries have asserted unliquidated damage claims against
one another on a variety of legal theories. The rights being asserted by MGM,
Sony and Viacom are alleged to arise under a series of agreements, the first of
which dates back to 1985, under which certain rights to produce and distribute a
Spider-Man movie were granted by the Marvel Parties. Each of these agreements
contemplated the production or distribution of a Spider-Man movie before a
specified date after which the granted rights terminated or reverted to the
Marvel Parties. The Marvel Parties contend that all rights granted under these
agreements have expired or been terminated by agreement or that the claims
asserted are barred for a variety of other reasons. The Marvel Parties have
filed a motion to dismiss several of the claims asserted against them by MGM,
Sony and Viacom, which if granted would dispose of a significant aspect of the
case. This motion and several motions by the other parties to dismiss certain
subsidiary claims by the Marvel Parties are currently pending. The consolidated
case is currently in the discovery phase and no trial date has been set.

The Spider-Man motion picture rights at issue in the California
consolidated case are also the subject of an adversary proceeding commenced by
the chapter 11 trustee of the Marvel Parties in the Delaware District Court for
a declaratory judgment that the Marvel Parties are the sole owners of the
unencumbered right to produce and distribute a Spider-Man movie. The adversary
proceeding was stayed by the Delaware District Court in August 1998, subject to
the right of the Marvel Parties to apply to lift the stay if the California case
is not adjudicated promptly. The Company believes that it will ultimately be
successful in establishing its rights with respect to a Spider-Man movie and
intends to litigate its claims vigorously.

Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the Central
District of California against New Line Cinema Corporation, Time Warner
Companies, Inc., the Company, Marvel and its wholly owned subsidiary, Marvel
Characters, Inc., and others. The complaint alleges that the motion picture
BLADE, produced and distributed by New Line pursuant to an agreement with
Marvel, as well as the Company's sale of action figure toys, infringes Wolfman's
claimed copyrights and trademarks as the author of the original stories
featuring the "Blade" and "Deacon Frost" characters (collectively, the "Work")
and that Wolfman created the Work as an independent contractor engaged by Marvel
and granted Marvel only the non-exclusive right to publish the Work in print for
Marvel Comics' Tomb of Dracula series and that Wolfman had relied upon Marvel to
apply for registration of copyrights covering the Work in Wolfman's name. The
complaint also charges the defendants in the action with unfair competition and
other tortious conduct based upon Wolfman's asserted rights in the Work. The
relief sought by the complaint includes a declaration that the defendants have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various other forms of equitable relief. The Company believes each and
every component of the Work was created for Marvel as a "work for hire" within
the meaning of the applicable copyright statute and believes that all of
Wolfman's claims are without merit and intends vigorously to defend the action
if it is allowed to proceed.

In August 1998, Marvel responded to the filing of Wolfman's California
complaint by filing a motion in the Delaware District Court to have Wolfman held
in contempt of court for violating the

19
<PAGE>

automatic stay of actions against debtors or their property imposed under the
bankruptcy laws. Shortly thereafter Wolfman agreed in writing not to take any
further action with respect to the California action without leave of the
Delaware District Court. On October 30, 1998 Wolfman filed a motion in the
Delaware District Court, which is scheduled to be heard on November 19, 1998,
seeking leave to prosecute his claims in the California action. The Company
plans to oppose that motion.

ITEM 4. SUBMISSION OF MATTERS TO a VOTE OF SECURITY HOLDERS.

The 1998 Annual Meeting of Stockholders of the Company was held on
September 11, 1998. There were 27,746,127 shares of Common Stock of the Company
eligible to vote at the Annual Meeting. As proposed in the proxy solicitation
issued pursuant to Regulation 14A of the Securities Exchange Act of 1934,
stockholders approved an amendment to the Company's certificate of incorporation
to (a) eliminate the Class B Common Stock and authorize one class of Common
Stock, consisting of 250,000,000 shares, par value $0.01, each share of which
has one vote, (b) change the name of the Company to "Marvel Enterprises, Inc.",
(c) authorize 100,000,000 shares of preferred stock including 75,000,000 shares
of 8% Preferred Stock, and (d) fix the number of directors at eleven.
Stockholders also approved securities issuances as follows: (a) 16,900,000
shares of 8% Preferred Stock of which 7,900,000 shares were issued to the Marvel
fixed senior secured lenders and 9,000,000 shares were sold to certain
investors, (b) 13,100,000 shares of Common Stock to Marvel fixed senior secured
lenders, (c) four-year warrants to purchase up to 1,750,000 shares of Common
Stock, (d) three-year warrants to purchase 4,000,000 shares of Common Stock, (e)
six-month warrants to purchase 3,000,000 shares of 8% Preferred Stock and (f)
four-year warrants to purchase 7,000,000 shares of Common Stock. The following
persons were elected to serve as directors until the earlier of the 1999 Annual
Meeting or the election and qualification of their respective successors: Joseph
M. Ahearn, Avi Arad, Isaac Perlmutter, Alan Fine, James F. Halpin, Alfred A.
Piergallini, Paul R. Verkuil, James S. Carluccio, Morton E. Handel and Donald E.
Rosenblum. Stockholders also ratified the selection of Ernst & Young LLP as the
Company's independent accountants for the year ending December 31, 1998.

The results of shares voted for approval of the amendment to the Company's
certificate of incorporation were 25,347,177 for, 15,530 against and 3,330
abstentions. There were 25,347,930 shares voted to approve the securities
issuance with 12,852 voted against and 5,255 abstentions. There were 27,721,244
votes for the election of all ten directors with 16,371 abstentions. There were
27,722,975 shares voted for the ratification of Ernst & Young LLP as the
Company's independent accountants for the year ending December 31, 1998 with
10,460 voted against and 4,180 abstentions.

ITEM 6. EXHIBITS AND REPORTS ON Form 8-K.

(a) Exhibits

Exhibit 10.1 Employment Agreement dated as of January 1, 1998 between
the Company and David Fremed.

Exhibit 27 Financial Data Schedule

20
<PAGE>

(b) Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K, dated as of July
31, 1998, announcing the court approval of the Plan.

21
<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, thereto duly authorized.

MARVEL ENTERPRISES, INC.
(Registrant)

Dated: November 16, 1998 By: /s/ David J. Fremed
-------------------
David J. Fremed
Chief Financial Officer
and Treasurer

<PAGE>

EMPLOYMENT AGREEMENT
--------------------

EMPLOYMENT AGREEMENT, dated as of January 1, 1998, between Toy Biz,
Inc., a Delaware corporation (the "Company") and David J. Fremed (the
"Executive").

The Company wishes to employ the Executive, and the Executive wishes
to accept such employment, on the terms and conditions set forth in this
Agreement.

Accordingly, the Company and the Executive hereby agree as follows:

1. Employment, Duties and Acceptance.
---------------------------------

1.1 Employment, Duties. The Company hereby employs the Executive for
------------------
the Term (as defined in Section 2.1), to render exclusive and full-time services
to the Company as Chief Financial Officer or in such other executive position as
may be mutually agreed upon by the Company and the Executive, and to perform
such other duties consistent with such position as may be assigned to the
Executive by the Board of Directors.

1.2 Acceptance. The Executive hereby accepts such employment and
----------
agrees to render the services described above. During the Term, the Executive
agrees to serve the Company faithfully and to the best of the Executive's
ability, to devote the Executive's entire business time, energy and skill to
such employment (subject to the final sentence of Section 1.1), and to use the
Executive's best efforts, skill and ability to promote the Company's interests.
The Executive further agrees to accept election, and to serve during all or any
part of the Term, as an officer or director of the Company and of any subsidiary
or affiliate of the Company, without any compensation therefor other than that
specified in this Agreement, if elected to any such position by the shareholders
or by the Board of Directors of the Company or of any subsidiary or affiliate,
as the case may be.

1.3 Location. The duties to be performed by the Executive hereunder
--------
shall be performed primarily at the office of the Company in New York City,
subject to reasonable travel requirements on behalf of the Company.

2. Term of Employment
------------------

2.1 The Term. The term of the Executive's employment under this
--------
Agreement (the "Term") shall commence on January 1, 1998 and shall end on
December 31, 2000 or such later date to which the Term is extended pursuant to
Section 2.2.
<PAGE>

2.2 Special Curtailment. The Term shall end earlier than the
-------------------
original December 31, 2000 termination date provided in Section 2.1, if sooner
terminated pursuant to Section 4. Non-extension of the Term shall not be deemed
to be a wrongful termination of the Term or this Agreement by the Company
pursuant to Section 4.

3. Compensation; Benefits.
----------------------

3.1 Salary. As compensation for all services to be rendered pursuant
------
to this Agreement, the Company agrees to pay the Executive during the Term a
base salary, payable bi-weekly in arrears, at the annual rate of not less than
$215,000.00, less such deductions or amounts to be withheld as required by
applicable law and regulations (the "Base Salary"). The Company shall, on an
annual basis at the end of each calendar year, review the Executive's Base
Salary and determine, in its discretion, whether to increase the Base Salary,
and if so determined, such increased amount shall, from and after the effective
date of the increase, constitute "Base Salary" for purposes of this Agreement.

3.2 Bonus. In addition to the amounts to be paid to the Executive
-----
pursuant to Section 3.1, the Executive shall be paid an annual bonus in a
minimum amount equal to $30,000. In addition, the Executive will be eligible,
upon the decision of the Board of Directors and in the Board's sole discretion,
to receive a discretionary bonus with respect to each year of the Term in such
amount as the Board in its sole discretion may determine.

3.3 Business Expenses. The Company shall pay or reimburse the
-----------------
Executive for all reasonable expenses actually incurred or paid by the Executive
during the Term in the performance of the Executive's services under this
Agreement, upon presentation of expense statements or vouchers or such other
supporting information as the Company customarily may require of its officers.

3.4 Vacation. During the Term, the Executive shall be entitled to a
--------
vacation period or periods taken in accordance with the vacation policy of the
Company during each year of the Term but in no event shall such period be less
than four weeks. Vacation time not used by the end of a year shall be forfeited.

3.5 Fringe Benefits. During the Term, the Executive shall be
---------------
entitled to all benefits for which the Executive shall be eligible under any
qualified pension plan, 401(k) plan, group insurance or other so-called "fringe"
benefit plan which the Company provides to its employees generally, together
with executive medical benefits for the Executive, as from time to time in
effect for officers of the Company generally.

-2-
<PAGE>

3.6 Additional Benefits. During the Term, the Executive shall be
-------------------
entitled to such other benefits as are specified in Appendix I to this
Agreement.

4. Termination.
-----------

4.1 Death; Disability. If the Executive shall die during the Term,
-----------------
of if during the Term the Executive shall become physically or mentally
disabled, whether totally or partially, such that the Executive is unable to
perform the Executive's services hereunder for a period aggregating six (6)
months, the Term shall terminate and no further amounts or benefits shall be
payable hereunder.

4.2 Cause. In the event of gross neglect by the Executive of the
-----
Executive's duties hereunder, conviction of the Executive of any felony,
conviction of the Executive of any lesser crime or offense involving the
property of the Company or any of its subsidiaries or affiliates, willful
misconduct by the Executive in connection with the performance of any material
portion of the Executive's duties hereunder, breach by the Executive of any
material provision of this Agreement or any other conduct on the part of the
Executive which would make the Executive's continued employment by the Company
materially prejudicial to the best interests of the Company, the Company may at
any time by written notice to the Executive terminate the Term and, upon such
termination, this Agreement shall terminate and the Executive shall be entitled
to receive no further amounts or benefits hereunder, except any as shall have
been earned to the date of such termination.

4.3 Severance. The Company may at any time give notice of
---------
termination of Executive's services hereunder as of a date (not earlier than ten
(10) days from such notice) to be specified in such notice, and this Agreement
shall terminate on the date so specified; provided that, unless such notice is
given pursuant to Section 4.2, the Executive shall be entitled to receive his
salary and automobile allowance at the rates provided in Sections 3.1 and 3.6
hereof to the date on which termination shall take effect; and his salary and
automobile allowance at the rates provided in Sections 3.1 and 3.6, paid in, at
the Company's option, biweekly or monthly installments, for the nine (9) months
following such date of termination. The nine (9) month period of severance,
unless sooner terminated as provided hereafter, shall be added to the actual
number of days the Executive was employed by the Company during the year of
termination for purposes of determining the achievement of the next vesting
threshold, if any, for the Executive in the Company's stock option plan. All
severance payments, automobile allowance and the addition of the severance
period to the number of days worked (as herein provided for purposes of stock
option vesting) shall cease upon Executive beginning work as an employee or
consultant for any other entity,

-3-
<PAGE>

regardless of whether the Executive is terminated for cause or otherwise.

5. Protection of Confidential Information; Non-Competition
-------------------------------------------------------

5.1 In view of the fact that the Executive's work for the Company
will bring the Executive into close contact with many confidential affairs of
the Company not readily available to the public, and plans for future
developments, the Executive agrees:

5.1.1 To keep and retain in the strictest confidence all
confidential matters of the Company, including, without limitation, "know how",
trade secrets, customer lists, pricing policies, operational methods, technical
processes, formulae, inventions and research projects, and other business
affairs of the Company, learned by the Executive heretofore or hereafter, and
not to disclose them to anyone outside of the Company, either during or after
the Executive's employment with the Company, except in the course of performing
the Executive's duties hereunder or with the Company's express written consent;
and

5.1.2 To deliver promptly to the Company on termination of the
Executive's employment by the Company, or at any time the Company may so
request, all memoranda, notes, records, reports, manuals, drawings, blueprints
and other documents (and all copies thereof) relating to the Company's business
and all property associated therewith, which the Executive may then possess or
have under the Executive's control.

5.2 During the Term, and for a period of one (1) year after he ceases
to be employed by the Company under this Agreement or otherwise, if such
cessation arises as a result of a circumstance described in Section 4.1 or 4.2,
and also for a period of one (1) year after the Executive resigns, the Executive
shall not, directly or indirectly, enter the employ of, or render any services
to, any person, firm or corporation engaged in any business competitive with the
business of the Company or of any of its subsidiaries or affiliates; the
Executive shall not engage in such business on the Executive's own account; and
the Executive shall not become interested in any such business, directly or
indirectly, as an individual, partner, shareholder, director, officer,
principal, agent, employee, trustee, consultant, or in any other relationship or
capacity; provided, however, that nothing contained in this Section 5.2 shall be
--------
deemed to prohibit the Executive from acquiring, solely as an investment, up to
five percent (5%) of the outstanding shares of capital stock of any public
corporation. Notwithstanding the foregoing, Executive may engage in, for up to
five (5) hours per month or sixty (60) hours per year, activities for both
affiliates and non-affiliates, provided such activities do not directly compete
with the business of the Company. The foregoing

-4-
<PAGE>

prohibitions, following expiration of the Term or early termination thereof,
shall not prohibit the Executive from engaging in a business which encompasses
exclusively distressed or liquidation merchandise.

5.3 If the Executive commits a breach, or threatens to commit a
breach, of any of the provisions of Sections 5.1 or 5.2 hereof, the Company
shall have the following rights and remedies:

5.3.1 The right and remedy to have the provisions of this
Agreement specifically enforced by any court having equity jurisdiction, it
being acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not provide
an adequate remedy to the Company; and

5.3.2 The right and remedy to require the Executive to account
for and pay over to the Company all compensation, profits, monies, accruals,
increments or other benefits (collectively "Benefits") derived or received by
the Executive as the result of any transactions constituting a breach of any of
the provisions of Section 5.2, and the Executive hereby agrees to account for
and pay over such Benefits to the Company. Each of the rights and remedies
enumerated above shall be independent of the other, and shall be severally
enforceable, and all of such rights and remedies shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or in equity.

5.4 If any of the covenants contained in Sections 5.1 or 5.2, or any
part thereof, hereafter are construed to be invalid or unenforceable, the same
shall not affect the remainder of the covenant or covenants, which shall be
given full effect, without regard to the invalid portions.

5.5 If any of the covenants contained in Sections 5.1 or 5.2, or any
part thereof, are held to be unenforceable because of the duration of such
provision or the area covered thereby, the parties agree that the court making
such determination shall have the power to reduce the duration and/or area of
such provision and, in its reduced form, said provision shall then be
enforceable.

5.6 The parties hereto intend to and hereby confer jurisdiction to
enforce the covenants contained in Sections 5.1 and 5.2 upon the courts of any
state within the geographical scope of such covenants. In the event that the
courts of any one or more of such states shall hold such covenants wholly
unenforceable by reason of the breadth of such covenants or otherwise, it is the
intention of the parties hereto that such determination not bar or in any way
affect the Company's right to the relief provided above in the courts of any
other states

-5-
<PAGE>

within the geographical scope of such covenants as to breaches of such covenants
in such other respective jurisdictions, the above covenants as they relate to
each state being for this purpose severable into diverse and independent
covenants.

5.7 In the event that any action, suit or other proceeding in law or
in equity is brought to enforce the covenants contained in Sections 5.1 and 5.2
or to obtain money damages for the breach thereof, and such action results in
the award of a judgment for money damages or in the granting of any injunction
in favor of the Company, all expenses (including reasonable attorneys' fees) of
the Company in such action, suit or other proceeding shall (on demand of the
Company) be paid by the Executive. In the event the Company fails to obtain a
judgment for money damages or an injunction in favor of the Company, all
expenses (including reasonable attorneys' fees) of the Executive in such action,
suit or other proceeding shall (on demand of the Executive) be paid by the
Company.

6. Inventions and Patents.
----------------------

6.1 The Executive agrees that all processes, technologies and
inventions (collectively, "Inventions"), including new contributions,
improvements, ideas and discoveries, whether patentable or not, conceived,
developed, invented or made by him during the Term shall belong to the Company,
provided that such Inventions grew out of the Executive's work with the Company
or any of its subsidiaries or affiliates, are related in any manner to the
business (commercial or experimental) of the Company or any of its subsidiaries
or affiliates or are conceived or made on the Company's time or with the use of
the company's facilities or materials. The Executive shall further: (a)
promptly disclose such Inventions to the Company; (b) assign to the Company,
without additional compensation, all patent and other rights to such Inventions
for the United States and foreign countries; (c) sign all papers necessary to
carry out the foregoing; and (d) give testimony in support of the Executive's
inventorship.

6.2 If any Invention is described in a patent application or is
disclosed to third parties, directly or indirectly, by the Executive within two
years after the termination of the Executive's employment by the Company, it is
to be presumed that the Invention was conceived or made during the Term.

6.3 The Executive agrees that the Executive will not assert any
rights to any Invention as having been made or acquired by the Executive prior
to the date of this Agreement, except for Inventions, if any, disclosed to the
company in writing prior to the date hereof.

-6-
<PAGE>

7. Intellectual Property.
---------------------

The Company shall be the sole owner of all the products and proceeds
of the Executive's services hereunder, including, but not limited to, all
materials, ideas, concepts, formats, suggestions, developments, arrangements,
packages, programs and other intellectual properties that the Executive may
acquire, obtain, develop or create in connection with and during the Term, free
and clear of any claims by the Executive (or anyone claiming under the
Executive) of any kind or character whatsoever (other than the Executive's right
to receive payments hereunder). The Executive shall, at the request of the
Company, execute such assignments, certificates or other instruments as the
Company may from time to time deem necessary or desirable to evidence,
establish, maintain, perfect, protect, enforce or defend its right, title or
interest in or to any such properties.

8. Indemnification.
---------------

The Company will indemnify the Executive, to the maximum extent
permitted by applicable law, against all costs, charges and expenses incurred or
sustained by the Executive in connection with any action, suit or proceeding to
which the Executive may be made a party by reason of the Executive being an
officer, director or employee of the Company or of any subsidiary or affiliate
of the Company.

9. Notices.
-------

All notices, requests, consents and other communica tions required or
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if delivered personally, sent by overnight courier or mailed
first class, postage prepaid, by registered or certified mail (notices mailed
shall be deemed to have been given on the date mailed), as follows (or to such
other address as either party shall designate by notice in writing to the other
in accordance herewith):

If to the Company, to:

Toy Biz, Inc.
685 Third Avenue
New York, New York 10017
Attention: Board of Directors

-7-
<PAGE>

If to the Executive, to:

David J. Fremed
849 Longview Avenue
North Woodmere, NY 11581

10. General.
-------

10.1 This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely in New York.

10.2 The section headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.

10.3 This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter hereof and supersedes all prior
agreements, arrangements and understandings, written or oral, relating to the
subject matter hereof. No representation, promise or inducement has been made
by either party that is not embodied in this Agreement, and neither party shall
be bound by or liable for any alleged representation, promise or inducement not
so set forth.

10.4 This Agreement, and the Executive's rights and obligations
hereunder, may not be assigned by the Executive. The Company may assign its
rights, together with its obligations, hereunder (i) to any affiliate or (ii) to
third parties in connection with any sale, transfer or other disposition of all
or substantially all of its business or assets; in any event the obligations of
the Company hereunder shall be binding on its successors or assigns, whether by
merger, consolidation or acquisition of all or substantially all of its business
or assets.

10.5 This Agreement may be amended, modified, superseded, canceled,
renewed or extended and the terms or covenants hereof may be waived, only by a
written instrument executed by both of the parties hereto, or in the case of a
waiver, by the party waiving compliance. The failure of either party at any
time or times to require performance of any provision hereof shall in no manner
affect the right at a later time to enforce the same. No waiver by either party
of the breach of any term or covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such breach, or a waiver of
the breach of any other term or covenant contained in this Agreement.

-8-
<PAGE>

11. Subsidiaries and Affiliates.
---------------------------

11.1 As used herein, the term "subsidiary" shall mean any corporation
or other business entity controlled directly or indirectly by the Company or
other business entity in question, and the term "affiliate" shall mean and
include any corporation or other business entity directly or indirectly
controlling, controlled by or under common control with the Company or other
business entity in question.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

TOY BIZ, INC.

By:
----------------------------------------

Executive

-------------------------------------------
David J. Fremed

-9-
<PAGE>

APPENDIX I
----------

Additional Benefits:
- --------------------

1. The Executive shall be entitled to an automobile allowance of
seven hundred and fifty dollars ($750) per month, payable in accordance with the
Company's regular policy.

2. The Executive shall be entitled to participate in the Company's
stock option plan at a level commensurate with Executive's salary level, title
and responsibilities, as determined by the Compensation Committee of the Board
of Directors of the Company.

David J. Fremed

-10-

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Marvel
Enterprises, Inc. Condensed Consolidated Balance Sheets and Statements of Income
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000933730
<NAME> MARVEL ENTERPRISES, INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,802
<SECURITIES> 0
<RECEIVABLES> 79,716
<ALLOWANCES> 14,993
<INVENTORY> 42,750
<CURRENT-ASSETS> 164,459
<PP&E> 45,699
<DEPRECIATION> 26,013
<TOTAL-ASSETS> 773,317
<CURRENT-LIABILITIES> 323,216
<BONDS> 0
0
169,000
<COMMON> 408
<OTHER-SE> 248,120
<TOTAL-LIABILITY-AND-EQUITY> 773,317
<SALES> 156,361
<TOTAL-REVENUES> 156,361
<CGS> 87,758
<TOTAL-COSTS> 87,758
<OTHER-EXPENSES> 75,083
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 703
<INCOME-PRETAX> (6,815)
<INCOME-TAX> (2,774)
<INCOME-CONTINUING> (4,041)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,041)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)

</TABLE>