<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event) February 23, 1999
Marvel Enterprises, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-13638 13-3711775
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(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.)
<PAGE>
ITEM 5. Other Events.
On February 23, 1999, the Registrant issued a press release, a copy of which is
attached hereto as Exhibit 99.1, reporting its summary consolidated financial
results for the year ended December 31, 1998.
ITEM 7. Financial Statements and Exhibits.
(c) Exhibits.
99.1. Press release of the Registrant, dated February 23, 1999.
99.2 Management's Discussion and Analysis of Financial Condition and Results
of Operations.
99.3 Unaudited pro forma consolidated financial statements and the notes
thereto for the year ended December 31, 1998.
99.4 Audited consolidated financial statements and the notes thereto for the
three year period ended December 31, 1998.
<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: February 23, 1999
By: /s/ WILLIAM H. HARDIE, III
--------------------------
Name: William H. Hardie, III
Title: Executive Vice President,
Business Affairs
<PAGE>
EXHIBIT 99.1
MARVEL
ENTERPRISES, INC.
MARVEL ENTERPRISES, INC. ANNOUNCES
YEAR END RESULTS
New York, New York -- February 23, 1999 -- Marvel Enterprises, Inc. (NYSE:MVL)
today reported the following summary consolidated financial results for the year
ended December 31, 1998:
MARVEL ENTERPRISES, INC.
SUMMARY CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
1998 1997
<S> <C> <C>
Net sales $232.1 $150.8
Cost of sales 128.0 107.0
Selling, general and administrative expenses 97.1 72.1
Depreciation and amortization 26.4 21.1
Operating loss (19.5) (49.3)
Interest expense (9.4) (.8)
Other income, net .7 .4
Loss before income taxes (28.2) (49.7)
Income tax expense (benefit) 4.4 (20.2)
Net loss (32.6) (29.5)
Less: preferred dividend requirement 3.4 -
Net loss attributable to common stock (36.0) (29.5)
Basic and diluted loss per share applicable to
common stock (1.23) (1.06)
</TABLE>
On October 1, 1998, the Company acquired Marvel Entertainment Group, Inc. The
Company financed its acquisition of Marvel Entertainment Group, in part, through
borrowings under a bridge loan which must be repaid by September 27, 1999. The
report of the Company's auditors on the Company's 1998 consolidated financial
statements contains an explanatory paragraph regarding the ability of the
Company to continue as a going concern due to the short repayment schedule for,
and certain covenant defaults under, the bridge loan. As previously announced,
the Company intends to repay the bridge loan with the proceeds of a proposed
senior notes offering which the Company expects to be completed in late February
1999. The Company expects that its auditors will re-issue their audit report
without the going concern explanatory paragraph upon the completion of the
proposed senior notes offering and the application of the proceeds to repay the
bridge loan.
The senior notes have not been and will not be registered under the Securities
Act of 1933 and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
Marvel Enterprises, Inc. is one of the world's most prominent character-based
entertainment companies with operations in the licensing, comic book publishing
and toy businesses. Through its ownership of over 3,500 proprietary characters,
the Company has published comic books for over 60 years in the United States and
numerous foreign countries. The Company licenses the right to use its characters
in a wide range of products such as apparel, snack foods, video games and
collectibles, as well as for television series and feature films. For additional
company information, visit the Company's corporate website at www.marvel.com.
Except for historical information contained herein, the statements in this news
release regarding the Company's plans are forward-looking statements that are
dependent upon certain risks and uncertainties, including those relating to the
ability to integrate Toy Biz's operations with those of Marvel Entertainment
Group, the inability to refinance certain indebtedness incurred in connection
with the acquisition of Marvel Entertainment Group, the Company's potential need
for additional financing, pressure by certain of the Company's major retail
customers to significantly reduce their toy inventory levels, the levels of
media exposure or the popularity of the Company's characters and trademarks,
consumer acceptance of the Company's new product introductions, the Company's
dependence on Chinese toy manufacturers, U.S. trade relations with China,
changing consumer preferences, production delays or shortfalls and general
economic conditions. Those and other risks and uncertainties are described in
the Company's filings with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K.
For further information contact:
- --------------------------------
Ryan Barr or Chris Plunkett
Brainerd Communicators, Inc.
212.986.6667
<PAGE>
EXHIBIT 99.2
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 below could cause
actual results to differ materially from those contained in forward-looking
statements made herein and in oral statements made by authorized officers of
Marvel Enterprises, Inc. (the "Company" or "Marvel"). When used herein, the
words "intend," "estimate," "believe," "expect" and similar expressions are
intended to identify forward-looking statements.
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto which are filed as part
of this Current Report on Form 8-K.
Set forth below is a discussion of the financial condition and results of
operations of the Company for the two fiscal years ended December 31, 1998. On
October 1, 1998, the Company acquired Marvel Entertainment Group, Inc. ("MEG")
pursuant to the plan of reorganization for MEG that was confirmed by the United
States District Court for the District of Delaware in MEG's chapter 11 case (the
"Plan"). The transactions consummated on October 1, 1998 in connection with the
Plan are collectively referred to herein as "the Reorganization." Prior to
October 1, 1998, the Company's name was Toy Biz, Inc. The term "Toy Biz, Inc.,"
when used herein, refers to the Company prior to October 1, 1998. Because of the
significant effect of the Reorganization on the Company's results of operations,
the Company's historical results of operations and period-to-period comparisons
will not be indicative of future results.
Overview
Net Sales
The Company's net sales are generated from (i) licensing the Company's Marvel
characters for use in merchandise, promotions, feature films, television
programs, theme parks and various other areas; (ii) publishing comic books,
including related advertising revenues; and (iii) marketing and distributing
toys, including toys based on the Marvel characters, proprietary toy products
and toys based on properties licensed to the Company from third parties. On a
pro forma basis after giving effect to the Reorganization, the recently
completed sale of substantially all of the assets of the Company's Fleer Corp.,
Frank H. Fleer Corp. and SkyBox International Inc. subsidiaries (the "Fleer
Sale") and the intended disposition of the Panini S.p.A. ("Panini SpA") activity
stickers and adhesive paper business, licensing, publishing and toys would have
accounted for 4%, 19% and 77%, respectively, of the Company's net sales for the
year ended December 31, 1998. The Company's strategy is to increase the media
exposure of the Marvel characters through its media and promotional licensing
activities, which it believes will create revenue opportunities for the Company
through sales of toys and other licensed merchandise. In particular, the Company
plans to focus its future toy business on marketing and distributing toys based
on the Marvel characters, which provide the Company with higher EBITDA margins
because no license fees are required to be paid to third parties and, because of
media exposure, require less promotion and advertising support than the
Company's other toy categories. The Company intends to use comic book publishing
to support consumer awareness of the Marvel characters and to develop new
characters and storylines.
The Company records as revenue the present value of licensing fees from its
licensing activities at the time the Company's characters are available to the
licensee and the collection of licensing fees is reasonably assured. Licensing
fees booked as revenue but not yet realized are recorded as receivables.
Licensing receivables due more than one year beyond the balance sheet date are
discounted to their net present value.
Operating Expenses
Cost of Sales
There generally is no cost of sales associated with the licensing of the
Company's characters.
Cost of sales for comic book publishing consists of art and editorial costs
and distribution costs. Art and editorial and printing costs account for the
most significant portion of publishing cost of sales. Art and editorial
1
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costs consist of compensation to editors, writers and artists. The Company
generally hires writers and artists on a freelance basis but has exclusive
employment contracts with certain key writers and artists.
The Company out-sources the printing of its comic books to an unaffiliated
company. The Company's cost of printing is subject to fluctuations in
commodity-based products such as paper.
Cost of sales for the toy business consists of product and package
manufacturing, shipping and agents' commissions. The most significant portion
of cost of sales is product and package manufacturing. The Company, which
utilizes multiple manufacturers, solicits multiple bids for each project in
order to control its manufacturing costs. A substantial portion of the
Company's toy manufacturing takes place in China. A substantial portion of the
Company's toy manufacturing contracts are denominated in Hong Kong dollars.
Selling, General and Administrative
Selling, general and administrative costs consist primarily of advertising,
royalties, general and administrative, warehousing and store merchandising.
The most significant portion of selling, general and administrative costs is
advertising and royalties.
Advertising expense varies with the Company's product mix. In the near
term, those costs are likely to increase as the Company further promotes the
toys developed under its World Championship Wrestling (WCW/NWO) license. In
the longer term, the Company expects those costs to decrease as the Company
emphasizes toys based on the Marvel characters.
Royalties are payable on toys based on characters licensed from third
parties, such as World Championship Wrestling, Universal Studios and Sony
Pictures, as well as toys developed by outside inventors. Because the Company
expects that products based on its World Championship Wrestling license will
generate a significant portion of its operating income during the next several
years, the Company believes that royalty expense paid to World Championship
Wrestling will significantly increase. There are no royalty payments for
Marvel-character-based toy products.
General and administrative costs consists of salaries and corporate
overhead.
The Company expects warehousing and store merchandising costs to change
over time in line with the Company's toy sales.
Depreciation and Amortization
Depreciation and amortization expense consists of amortization of goodwill
and other intangibles, tooling, product design and development, packaging
design and depreciation expense. Amortization expense will increase
significantly as a result of the goodwill created pursuant to the combination
of Toy Biz, Inc. and MEG, which will be amortized over an assumed 20-year
life.
Tooling and product design and development and packaging design expense,
which are attributable to the toy business, are amortized over the life of the
respective product. The Company believes its tooling, product and packaging
design expense accounted for most of depreciation and amortization in 1998.
Results of Operations of the Company
Year ended December 31, 1998 compared with year ended December 31, 1997
The Company's net sales increased to $232.1 million for the year ended
December 31, 1998 from $150.8 million in the 1997 period. The increase in net
sales was partially due to the inclusion of $19.6 million in publishing and
licensing revenues in the fourth quarter of 1998 as a result of the
acquisition of MEG on October 1, 1998. Net sales in the toy division increased
$61.6 million to $212.4 million in 1998. Net sales in the domestic boys' toys
category increased $20.1 million to $63.2 million in 1998 due primarily to the
introduction of the WCW/NWO Bashin' Brawlers in the second half of 1998, which
accounted for $17.2 million in net sales. Net
2
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sales in the domestic girls' toys category increased $3.3 million in 1998 to
$42.0 million due primarily to the increased product line of new promotional
dolls in 1998. Net sales of domestic activity toys and other products
increased $3.7 million to $31.7 million in 1998 due primarily to shipments of
products related to the Godzilla feature film released in 1998. The Company
believes that its net sales in each of its domestic toy categories was
adversely affected by Toys 'R' Us' decision to eliminate excess inventory
through a one-time reduction in inventory that resulted in significant
declines in its purchases from toy manufacturers. Net sales of toy products
sold through the import division increased $16.7 million to $47.2 million in
1998, due primarily to shipments of Godzilla products in 1998. International
net toy sales increased $.7 million to $28.1 million in 1998. The Company
recorded sales allowances of $2.9 million in 1998 which were attributable to
the impact of the merger (the "Merger") between MEG and the Company's wholly-
owned subsidiary MEG Acquisition Corp. on the Company's relationship with
certain of its international distributors, compared to $18.0 million of sales
allowances in 1997 that the Company believes were related to the impact of MEG's
bankruptcy case (the "Bankruptcy Case") on Toy Biz, Inc.'s relationships with
its international distributors.
Gross profit increased $60.2 million to $104.1 million for 1998 from $43.9
million in 1997 in part as a result of lower sales allowances in 1998
described above. Gross profit as a percentage of net sales increased to
approximately 45% in 1998 from approximately 29% in 1997. The inclusion of
MEG's publishing and licensing operations in the fourth quarter of 1998
resulted in $11.4 million of additional gross profit. The gross profit of the
publishing and licensing operations as a percentage of publishing and
licensing net sales was approximately 58% in the fourth quarter of 1998.
Selling, general and administrative expense increased $25.0 million to
$97.1 million in 1998 from $72.1 million in 1997. Selling, general and
administrative expense as a percentage of net sales decreased to approximately
42% in 1998 from approximately 48% in 1997. The increase in selling, general
and administrative expense was partially due to the inclusion of $5.7 million
of publishing and licensing selling, general and administrative expense for
the fourth quarter of 1998. The increase during 1998 was also due to $11.7
million of expenses relating to the termination of license agreements
resulting from the Company's integration of MEG's operations, as well as a
$9.8 million increase in royalty and advertising expense in 1998 primarily
related to the success of the WCW/NWO Bashin' Brawlers.
Depreciation and amortization expense decreased $1.2 million to $19.3
million in 1998 from $20.5 million in 1997 primarily due to additional
amortization expense recorded in 1997 related to early write-offs of
discontinued toy products based on Marvel characters as a result of the
Bankruptcy Case.
Amortization of goodwill and other intangibles increased $6.6 million to
$7.1 million in 1998 from $.5 million in 1997. The increase was due to the
amortization of goodwill created pursuant to the MEG acquisition completed on
October 1, 1998.
Interest expense increased $8.6 million to $9.4 million in 1998 from $.8
million in 1997, primarily due to $8.6 million in interest expense which the
Company incurred in the fourth quarter of 1998 on the $200.0 million (the
"Bridge Loan") the Company borrowed on October 1, 1998 from UBS AG, Stamford
Branch ("UBS"), to finance a portion of the cost of acquiring MEG.
As a result of the above, the Company reported a net loss of $32.6 million
in 1998 compared to a net loss of $29.5 million in 1997. The Company reported
a loss per share after preferred dividends of $1.23 in 1998 compared to a loss
per share after preferred dividends of $1.06 in 1997.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand, cash flow from
operations (other than the cash flow of Panini SpA, none of which is expected to
be available to the Company as a result of the Company's decision to dispose of
Panini SpA), the net proceeds of the Fleer Sale and the net proceeds (after
repayment of the Bridge Loan) expected to be received from the proposed offering
of $250.0 million of the Company's senior notes, which the Company anticipates
completing before the end of February 1999 (the "Offering").
3
<PAGE>
The Company is also seeking to obtain a new working capital facility. There can
be no assurance that the Offering will be consummated. The Company anticipates
that its primary needs for liquidity will be to: (i) conduct its business; (ii)
meet debt service requirements; (iii) make capital expenditures; and (iv) pay
administration expense claims incurred in connection with the Bankruptcy Case
(the "Administration Expense Claims").
Net cash (used in) provided by the Company's operations during fiscal 1996,
1997 and 1998 was ($.9) million, $12.8 million and $29.0 million,
respectively.
At December 31, 1998, the Company had a working capital deficiency of $133.4
million.
On October 1, 1998, the Company obtained the Bridge Loan from UBS. The
Company plans to use a portion of the net proceeds expected to be received from
the Offering to repay the Bridge Loan. There can be no assurance that the
Offering will be consummated. On October 1, 1998, the Company entered into a
revolving credit facility with UBS (the "Old Credit Facility"). There have been
no borrowings under the Old Credit Facility. UBS's commitment to advance funds
and issue letters of credit under the Old Credit Facility has been terminated
effective as of February 3, 1999. The Company has failed to comply with certain
covenants under the Bridge Loan and the Old Credit Facility. UBS has agreed to
waive the Company's failure to comply with these covenants through March 15,
1999.
The Company's auditors included an explanatory paragraph in their audit
report on the Company's 1998 consolidated financial statements regarding the
ability of the Company to continue as a going concern due to the short repayment
schedule for, and certain covenant defaults under, the Bridge Loan. The Company
expects that its auditors will re-issue their audit report without the going
concern explanatory paragraph upon the completion of the Offering and the
application of the proceeds to repay the Bridge Loan. There can be no assurance
that the Offering will be consummated.
The Company is seeking to obtain a new secured working capital facility which
will provide for borrowings of at least $50.0 million for seasonal working
capital requirements and general corporate purposes. The Company anticipates
that any new working capital facility will be subject to a borrowing base
comprised of eligible inventory and eligible accounts receivable. The Company
also expects that any new working capital facility will contain customary event
of default provisions and covenants, and may be secured by substantially all of
the assets of the Company and its domestic subsidiaries. Any new working capital
facility may also be subject to an annual clean-down period. If the Company
fails to obtain a new working capital facility from an institutional lender, the
Company expects to seek to obtain such a facility from one or more of its
stockholders. There can be no assurance that the Company will obtain a new
working capital facility on customary terms or at all. A failure to do so could
have a material adverse effect on the Company.
On October 1, 1998, the Company sold 9.0 million shares of the Company's 8%
cumulative convertible exchangeable preferred stock, par value $.01 per share
(the "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 of the Company, in cash, in additional shares of 8% Preferred Stock or
in any combination thereof. The Company will be restricted under the proposed
indenture pursuant to which the Notes will be issued, and expects to be
prohibited under any new working capital facility, from making dividend payments
on the 8% Preferred Stock except in additional shares of 8% Preferred Stock.
Each share of 8% Preferred Stock may be converted, at the option of its holder,
into 1.039 shares of the Company's common stock, par value $.01 per share (the
"Common Stock"). The Company must redeem all outstanding shares of 8% Preferred
Stock on October 1, 2011.
In accordance with the Plan, the Company paid approximately $256.4 million on
October 1, 1998 in connection with the consummation of the Plan.
On the consummation date of the Plan, the Company paid approximately $20.2
million of Administration Expense Claims. In December 1998, the Company paid
approximately $4.2 million of additional Administration Expense Claims. The
Company estimates that it may be required to pay between $10 million and $20
million of additional Administration Expense Claims, although there can be no
assurance as to the amount the Company will be required to pay.
In accordance with the Plan, the Company will be required to make a cash
payment to certain unsecured creditors of MEG in an amount equal to the lesser
of (i) $2.0 million plus fifteen percent (15%) of the amount of their allowed
claims and (ii) $8.0 million at such time as the amount thereof is determined.
The Company has deposited $8.0 million into a trust account to satisfy the
maximum amount of such payment.
4
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Capital expenditures (excluding acquisitions) by the Company during fiscal
1996, 1997 and 1998 were approximately $23.8 million, $17.7 million and $17.3
million, respectively. The Company anticipates capital expenditures of $21.0
million during fiscal 1999, primarily relating to the toy division.
The Company believes that cash flow from operations, together with the net
proceeds of the Fleer Sale, the net proceeds expected to be received from the
Offering (after repayment of the Bridge Loan), borrowings expected to be
available under a new secured working capital facility, if obtained, and other
sources of liquidity, will be sufficient for the Company to conduct its
business, meet debt service requirements, make capital expenditures and pay
Administration Expense Claims. However, there can be no assurance that the
Company's business will generate the level of cash flow from operations that it
expects or that future borrowings will be available to the Company. If the
Company's plans or assumptions change, if the Company's assumptions prove to be
inaccurate or if the Company experiences unanticipated costs or competitive
pressures, the Company may need to seek additional capital. The Company's
failure to consummate the Offering, generate sufficient cash flow from
operations or obtain a new working capital facility on customary terms or at all
could have a material adverse effect on its ability to conduct its business,
meet debt service requirements, make capital expenditures or pay Administration
Expense Claims.
Seasonality
The Company's annual operating performance depends, in large part, on its
sales of toys during the relatively brief Christmas selling season. During
1996, 1997 and 1998, 64%, 67% and 60%, respectively, of the Company's domestic
net toy sales were realized during the second half of the year. Management
expects that the Company's toy business will continue to experience a
significant seasonal pattern for the foreseeable future. This seasonal pattern
requires significant use of working capital mainly to build inventory during
the year, prior to the Christmas selling season, and requires accurate
forecasting of demand for the Company's products during the Christmas selling
season. The Company is seeking to obtain a new working capital facility;
however, that facility is not yet in place, and the Company might not obtain
such facility. The failure to obtain a working capital facility on customary
terms or at all could have a material adverse effect on the Company's business.
Year 2000
Through December 31, 1998, the Company incurred Year 2000 conversion costs
for its toy division ("Toy Biz") of approximately $1.3 million and expects to
incur an additional $1.0 million in 1999. The Company is utilizing both internal
and external sources to remediate, or replace, and test Toy Biz's software for
Year 2000 modifications. The Company anticipates completing the Year 2000
project for Toy Biz by June 30, 1999.
The Company is in the process of completing an assessment of Year 2000
compliance for the Company's licensing division ("Marvel Licensing") and the
Company's publishing division ("Marvel Publishing") operations. MEG did not
allocate resources to the Year 2000 project while it was in bankruptcy, and as
of December 31, 1998, the Company had incurred no Year 2000 conversion costs for
Marvel Licensing or Marvel Publishing. The Company believes that it can
successfully complete the Year 2000 compliance of Marvel Licensing and Marvel
Publishing by converting their financial system into the Toy Biz financial
system. The Company expects to complete the conversion by August 1999. The
Company will also make other systems used by Marvel Licensing and Marvel
Publishing Year 2000 compliant by converting them to the Toy Biz system.
Management estimates that the costs to conform Marvel Licensing and Marvel
Publishing will be approximately $500,000.
The cost of the project and the date on which the Company believes that it
will complete the Year 2000 modifications are only estimates. The Company
currently 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 affect the ability of those companies'
computer systems to interface with the Company's systems or will otherwise
affect 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's worst-case scenarios would be manual
performance of all accounting functions and the loss of relationships with the
Company's major customers because of the inability of the Company's computers
to interface with theirs. The Company has not developed a contingency plan to
assess the likelihood of, and to address, its worst-case scenarios. The
Company assesses its Year 2000 status regularly and will begin to develop
comprehensive contingency plans if management believes that the Company 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 the Company's major
customers or suppliers fail to address all the Year 2000 issues, management
believes that it could have a material adverse impact on the Company's
operations.
5
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EXHIBIT 99.3
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
All capitalized terms not otherwise defined in this exhibit have the meanings
ascribed thereto in Exhibit 99.2 to this Current Report on Form 8-K, dated
February 23, 1999.
The Unaudited Pro Forma Consolidated Balance Sheet gives effect to the
Fleer Sale, the intended disposition of the Panini SpA activity sticker and
adhesive paper business and the Offering as if each had occurred on December
31, 1998. The Company has guaranteed $27.0 million of Panini SpA's
indebtedness, and the liability for that guarantee is reflected in the
Company's balance sheet. The Unaudited Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1998 gives effect to such
transactions and the Reorganization as if each had occurred on January 1,
1998.
The Unaudited Pro Forma Consolidated Financial Statements are presented for
illustrative purposes only and are not necessarily indicative of what the
actual financial condition or results of operations of the Company would have
been had these transactions been consummated on such dates. The Unaudited Pro
Forma Consolidated Financial Statements do not purport to be indicative of the
Company's results of operations for any future period.
The following Unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the historical financial statements of
the Company and the related notes thereto, which are filed as part of this
Current Report on Form 8-K.
1
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MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical (1) Adjustments Pro Forma
-------------- ----------- ----------
(in millions)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash.............................. $ 43.7 $ 19.0 (1) $102.7
(200.0)(2)
240.0 (3)
Accounts receivable, net.......... 50.3 50.3
Inventories, net.................. 32.6 32.6
Assets held for resale............ 26.0 (26.0)(1) --
Deferred income taxes............. .5 .5
Deferred financing fee............ 8.3 (8.3)(4) --
Income tax receivable............. 7.4 7.4
Prepaid expenses and other........ 3.8 3.8
------ ------- ------
Total current assets............ 172.6 24.7 197.3
Molds, tools and equipment, net.... 15.5 15.5
Product and package design costs,
net............................... 5.9 5.9
Goodwill and other intangibles,
net............................... 487.7 487.7
Deferred charges and other assets.. 5.1 10.0 (3) 15.1
Deferred income taxes, net......... 3.1 3.1
------ ------- ------
Total assets.................... $689.9 $ 34.7 $724.6
====== ======= ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.................. $ 7.3 $ $ 7.3
Accrued expenses and other........ 70.7 (7.0)(1) 59.7
(4.0)(4)
Bridge Loan ...................... 200.0 (200.0)(2) --
Administrative claims payable..... 19.9 19.9
Unsecured creditors payable....... 8.1 8.1
------ ------- ------
Total current liabilities....... 306.0 (211.0) 95.0
Long-term liabilities:
Panini Guaranty................... 27.0 27.0
Deferred income taxes............. .9 .9
Notes offered hereby.............. -- 250.0 (3) 250.0
------ ------- ------
Total liabilities............... 333.9 39.0 372.9
8% cumulative convertible
exchangeable preferred stock...... 172.4 172.4
Stockholders' equity:
Preferred stock.................. -- --
Common stock..................... .4 .4
Additional paid-in capital........ 215.0 215.0
Retained earnings (deficit)....... 1.2 (4.3)(4) (3.1)
------ ------- ------
Total stockholders' equity
before treasury stock.......... 216.6 (4.3) 212.3
------ ------- ------
Treasury stock.................... (33.0) (33.0)
Total stockholders' equity...... 183.6 (4.3) 179.3
------ ------- ------
Total liabilities, redeemable
preferred stock and
stockholders' equity .......... $689.9 $ 34.7 $724.6
====== ======= ======
</TABLE>
- --------
(1) Reflects the elimination of the assets and liabilities of the Company's
Fleer/SkyBox sports and entertainment trading card business with a
corresponding increase to cash for the net proceeds from the Fleer Sale.
(2) Reflects the $200 million repayment of the Bridge Loan.
(3) Reflects proceeds expected to be received from the Offering (net of $10
million of estimated debt issuance costs).
(4) Reflects the write-off of unamortized deferred financing fees ($8.3
million) and accrued but unpaid financing fees ($4.0 million) resulting in
an extraordinary loss of $4.3 million.
2
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MEG Adjustments
(January 1-September 30, 1998)
-------------------------------------
Marvel
Less Publishing
Historical MEG Panini Less Fleer and Pro Forma
(1) Actual (2) (3) Licensing Adjustments Pro Forma
---------- ------ ------ ---------- ---------- ----------- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $232.1 $273.5 $162.4 $ 68.7 $ 42.4 $ -- $274.5
Cost of sales........... 128.0 201.6 114.8 66.0 20.8 -- 148.8
Selling, general and
administrative
expenses............... 97.1 60.9 28.6 15.7 16.6 -- 113.7
Depreciation and
amortization........... 19.3 6.2 3.6 .8 1.8 (.1)(4) 21.0
Amortization of
goodwill, intangibles
and deferred charges
(10) .................. 7.1 7.1 2.1 3.1 1.9 (1.9)(5) 24.9
17.8 (6)
------ ------ ------ ------ ------ ------ ------
Operating income (loss)
....................... (19.4) (2.3) 13.3 (16.9) 1.3 (15.8) (33.9)
Interest expense, net... 8.8 20.5 13.3 .8 6.4 (6.4)(7) 39.8
31.0 (8)
Loss on sale of portion
of confectionery
business............... -- 3.9 -- 3.9 -- -- --
Foreign exchange loss,
net.................... -- 2.0 -- 2.0 -- -- --
Equity in net income of
unconsolidated
subsidiaries and other
expense (income), net.. -- 5.0 2.6 (.5) 2.9 -- 2.9
------ ------ ------ ------ ------ ------ ------
(Loss) income before
reorganization items,
income tax
expense/benefit and
extraordinary item..... (28.2) (33.7) (2.6) (23.1) (8.0) (40.4) (76.6)
Reorganization item..... 19.7 -- -- 19.7 (19.7)(9) --
------ ------ ------ ------ ------ ------ ------
(Loss) income before
income taxes and
extraordinary item..... (28.2) (53.4) (2.6) (23.1) (27.7) (20.7) (76.6)
Income tax expense
(benefit).............. 4.4 2.8 2.7 .1 -- -- 4.4
------ ------ ------ ------ ------ ------ ------
(Loss) income before
extraordinary
item (10).............. $(32.6) $(56.2) $ (5.3) $(23.2) $(27.7) $(20.7) $(81.0)
====== ====== ====== ====== ====== ====== ======
</TABLE>
- -------
(1) Includes the operations of Marvel Licensing and Marvel Publishing from
October 1, 1998, the date of the consummation of the Reorganization and
the Merger.
(2) Reflects the intended disposition of the Panini SpA activity sticker and
adhesive paper business.
(3) Reflects the elimination of the Company's Fleer/SkyBox sports and
entertainment trading card business sold in the Fleer Sale on February 11,
1999.
(4) Reflects the reduction of MEG's depreciation expense resulting from the
revaluation of property, plant and equipment as part of the allocation of
the purchase price of MEG.
(5) Reflects the elimination of MEG's historical amortization of goodwill,
intangibles and deferred charges.
(6) Reflects the amortization of preliminary goodwill created pursuant to the
combination of Toy Biz, Inc. and MEG based on an assumed twenty-year life.
(7) Reflects the elimination of historical interest expense on MEG debt.
(8) Reflects the interest expense on the $250.0 million principal amount of
Notes at an interest rate of 12.0% plus amortization of deferred debt
costs of $1.0 million annually.
(9) Reflects the elimination of non-recurring items related to MEG's
reorganization.
(10) Does not reflect the net write-off of $4.3 million of unamortized
deferred financing fees from the Bridge Loan and the Old Credit Facility
which is accounted for as an extraordinary item.
3
<PAGE>
EXHIBIT 99.4
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENTS SCHEDULE
<TABLE>
<CAPTION>
Marvel Enterprises, Inc. (f/k/a Toy Biz, Inc.)
- ----------------------------------------------
<S> <C>
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1998.................................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1996, 1997, and 1998.................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997, and 1998....................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997, and 1998.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts............................ F-30
</TABLE>
All other schedules prescribed by the accounting regulations of the
Securities and Exchange Commission are not required or are inapplicable and
therefore have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Marvel Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Marvel
Enterprises, Inc. (formerly Toy Biz, Inc.) and subsidiaries (the "Company") as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Marvel
Enterprises, Inc. and subsidiaries at December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Marvel Enterprises, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has a substantial working capital deficiency
due to the required repayment of the Bridge Loan on September 27, 1999 and
operating losses in 1997 and 1998. In addition, the Company has not complied
with financial and other covenants of the Bridge Loan agreement and its credit
facility, which could require immediate payment of the outstanding debt balance
after March 15, 1999, if requested by the banks. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
New York, New York
February 5, 1999 except for Note 3,
as to which the date is February 11, 1999
F-2
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
---------------- ----------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 7,596 $ 43,691
Accounts receivable, net (Note 4)...... 50,395 50,312
Inventories, net (Note 4).............. 22,685 32,598
Assets held for resale (Note 3)........ 4,136 26,000
Income tax receivable (Note 10)........ 17,542 7,396
Deferred income taxes, net (Note 10)... 8,034 538
Deferred financing costs............... -- 8,281
Prepaid expenses and other............. 6,584 3,768
---------------- ----------------
Total current assets................. 116,972 172,584
Molds, tools and equipment, net (Note
4)..................................... 17,013 15,548
Product and package design costs, net
(Note 4)............................... 7,616 5,909
Goodwill and other intangibles, net
(Note 4)............................... 9,305 487,731
Other assets............................ -- 5,053
Deferred income taxes, net (Note 10).... -- 3,079
---------------- ----------------
Total assets......................... $ 150,906 $ 689,904
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 5,354 $ 7,294
Accrued expenses and other (Notes 4 and
10)................................... 25,571 70,672
Borrowings (Note 5).................... 12,000 200,000
Administrative claims payable (Note
13)................................... -- 19,914
Unsecured creditors payable (Note 1)... -- 8,096
---------------- ----------------
Total current liabilities............ 42,925 305,976
---------------- ----------------
Panini liability (Note 1)............... -- 27,000
Deferred income taxes (Note 10) ........ -- 924
---------------- ----------------
Total liabilities.................... 42,925 333,900
---------------- ----------------
Commitments and contingencies (Note 13)
8% cumulative convertible exchangable
preferred stock, $.01 par value,
75,000,000 shares authorized,
17,238,000 issued and outstanding,
liquidation preference $10 per share as
of December 31, 1998 .................. -- 172,380
---------------- ----------------
Stockholders' equity (Note 6)
Preferred stock, $.01 par value,
25,000,000 shares authorized, none
issued................................. -- --
Common stock, $.01 par value,
100,000,000 shares authorized,
27,746,127 issued and outstanding at
December 31, 1997 and 250,000,000
shares authorized, 40,846,127 issued
and 33,452,127 outstanding as of
December 31, 1998...................... 277 408
Additional paid-in capital.............. 70,578 215,035
Retained earnings....................... 37,126 1,136
---------------- ----------------
Total stockholders' equity before
treasury stock...................... 107,981 216,579
Treasury stock, 7,394,000 shares........ -- (32,955)
---------------- ----------------
Total stockholders' equity .......... 107,981 183,624
---------------- ----------------
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity ............... $ 150,906 $ 689,904
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
-------- --------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Net sales...................................... $221,624 $ 150,812 $232,076
Cost of sales.................................. 116,455 106,951 127,978
-------- --------- --------
Gross profit................................... 105,169 43,861 104,098
Operating expenses:
Selling, general and administrative.......... 61,876 72,081 97,135
Depreciation and amortization................ 15,674 20,548 19,332
Amortization of goodwill and other
intangibles................................. 404 520 7,091
-------- --------- --------
Total expenses............................. 77,954 93,149 123,558
-------- --------- --------
Operating income (loss)........................ 27,215 (49,288) (19,460)
Interest expense............................... (112) (776) (9,440)
Other income (expense), net.................... 708 414 676
-------- --------- --------
Income (loss) before income taxes............ 27,811 (49,650) (28,224)
Income tax expense (benefit) (Note 10)....... 11,124 (20,185) 4,386
-------- --------- --------
Net income (loss).......................... $ 16,687 $ (29,465) $(32,610)
-------- --------- --------
Less: preferred dividend requirement........... 105 71 3,380
-------- --------- --------
Net income (loss) attributable to Common
Stock....................................... $ 16,582 $ (29,536) $(35,990)
======== ========= ========
Basic and diluted net income (loss) per common
share......................................... $ 0.61 $ (1.06) $ (1.23)
Weighted average number of common and common
equivalent shares outstanding (in thousands).. 27,366 27,746 29,173
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------
Additional
Paid-In Retained Treasury
Shares Amount Capital Earnings Stock Total
------ ------ ---------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 27,020 $270 $ 61,158 $ 49,904 -- $111,332
Proceeds from secondary
offering............... 700 7 9,096 -- -- 9,103
Exercise of stock op-
tions.................. 23 -- 438 -- -- 438
Accretion of redeemable
preferred stock........ -- -- (105) -- -- (105)
Net income for 1996..... -- -- -- 16,687 -- 16,687
------ ---- -------- -------- -------- --------
Balance at December 31,
1996................... 27,743 277 70,587 66,591 -- 137,455
Exercise of stock op-
tions.................. 3 -- 62 -- -- 62
Accretion of redeemable
preferred stock........ -- -- (71) -- -- (71)
Net loss for 1997....... -- -- -- (29,465) -- (29,465)
------ ---- -------- -------- -------- --------
Balance at December 31,
1997................... 27,746 277 70,578 37,126 -- 107,981
Capital contribution
(Note 1)............... -- -- 1,500 -- -- 1,500
Capital transactions in
connection with
Acquisition--Note 1:
Issuance of common
stock................ 13,100 131 125,957 -- -- 126,088
Valuation of
warrants............. -- -- 17,000 -- -- 17,000
Acquisition of
treasury stock....... (7,394) -- -- -- (32,955) (32,955)
Preferred dividend de-
clared................. -- -- -- (3,380) -- (3,380)
Net loss for 1998....... -- -- -- (32,610) -- (32,610)
------ ---- -------- -------- -------- --------
Balance at December 31,
1998................... 33,452 $408 $215,035 $ 1,136 $(32,955) $183,624
====== ==== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Net income (loss)............................... $ 16,687 $(29,465) $ (32,610)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 16,078 21,068 26,423
Deferred financing charges.................... -- -- 2,596
Deferred income taxes......................... (2,032) (1,321) 7,494
Changes in operating assets and liabilities:
Accounts receivable......................... (20,843) 45,076 13,183
Inventories................................. (3,740) (2,452) (7,317)
Income tax receivable....................... -- (17,542) 10,146
Prepaid expenses and other.................. (1,591) (581) 2,953
Deferred charges and other assets........... -- -- (4,918)
Accounts payable, accrued expenses and other
........................................... 1,407 (4,883) 24,034
Administrative claims payable............... (6,838) 2,851 (12,985)
-------- -------- ---------
Net cash (used in) provided by operating
activities..................................... (872) 12,751 28,999
-------- -------- ---------
Cash flow used in investing activities:
Acquisition of Marvel Entertainment Group,
Inc., net of cash received (Note 1).......... -- -- (257,865)
Purchases of molds, tools and equipment....... (15,352) (12,448) (10,702)
Expenditures for product and package design
costs........................................ (8,213) (5,169) (4,955)
Patents....................................... (283) (127) (1,668)
(Purchase) sale of Colorforms assets.......... -- (4,556) 2,786
-------- -------- ---------
Net cash used in investing activities......... (23,848) (22,300) (272,404)
-------- -------- ---------
Cash flow from financing activities:
Proceeds from bridge facility................. -- -- 200,000
Exercise of stock option...................... 438 62 --
Net borrowings (repayments) under credit
agreement.................................... -- 12,000 (12,000)
Redemption of Preferred Stock................. (1,440) (939) --
Proceeds from capital contribution............ -- -- 1,500
Proceeds from Preferred Stock offering........ -- -- 90,000
Proceeds from additional public offering...... 9,260 -- --
-------- -------- ---------
Net cash provided by financing activities..... 8,258 11,123 279,500
-------- -------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (16,462) 1,574 36,095
Cash and cash equivalents at beginning of
year......................................... 22,484 6,022 7,596
-------- -------- ---------
Cash and cash equivalents at end of year...... $ 6,022 $ 7,596 $ 43,691
======== ======== =========
Supplemental disclosure of cash flow
information:
Interest paid during the period............... $ 149 $ 820 $ 5,302
Net income taxes paid (recovered) during the
year......................................... 16,156 (476) (12,594)
Other non-cash transactions:
Preferred stock dividends..................... 105 71 3,380
Issuance of securities in connection with the
acquisition of Marvel Entertainment Group,
Inc., and treasury stock
(Note 1)..................................... -- -- 189,133
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Description of Business and Basis of Presentation
The Company designs, markets and distributes boys', girls', preschool,
activity and electronic toys based on popular entertainment properties and
consumer brand names. The Company also designs, markets and distributes its
own line of proprietary toys. The Company's toy business is conducted both
domestically and internationally. Through its acquisition of MEG, one of the
world's most prominent character-based entertainment companies with a
proprietary library of over 3,500 characters, the Company has entered the
licensing and comic book publishing businesses domestically and
internationally.
The term the "Company" and the term "Marvel" each refer to Marvel
Enterprises, Inc., and its subsidiaries after the acquisition. The term "MEG"
refers to Marvel Entertainment Group, Inc., and its subsidiaries, prior to the
consummation of the acquisition, and its emergence from bankruptcy and the
term "Toy Biz, Inc." refers to the Company prior to the consummation of the
acquisition.
Toy Biz, Inc. was formed on April 30, 1993 pursuant to a Formation and
Contribution Agreement ("Formation Agreement"), entered into by a predecessor
company to Toy Biz, Inc. (the "Predecessor Company"), Mr. Isaac Perlmutter
(the sole stockholder of the Predecessor Company), MEG and Avi Arad ("Mr.
Arad"). The Predecessor Company had been MEG's largest toy licensee. The
Predecessor Company was incorporated in 1990, pursuant to an asset purchase
agreement with Charan Industries, Inc.
In accordance with the Formation Agreement, the Predecessor Company
contributed all of its and an affiliate's assets ($23,335,000) and certain
specified liabilities ($21,949,000) to Toy Biz, Inc. for 44% of Toy Biz,
Inc.'s capital stock. Such specified liabilities included approximately
$15,363,000 due to Mr. Perlmutter and other affiliated companies of the
Predecessor Company. A portion of the assumed liabilities due to Mr.
Perlmutter was paid in cash ($8,752,000) and the remainder of the assumed
liabilities due to Mr. Perlmutter was converted into a promissory note
($6,611,000). MEG made a capital contribution of $500,000 for 46% of Toy Biz,
Inc.'s capital stock and a loan, in the form of a note, of $8,507,000. In
addition, MEG granted Toy Biz, Inc. an exclusive, perpetual and paid up
license to design and distribute toys based on MEG characters. Pursuant to the
Formation Agreement, in exchange for the contribution to Toy Biz, Inc. of his
interests in certain license agreements with Toy Biz, Inc. and cash, Mr. Arad
received 10% of Toy Biz, Inc.'s capital stock. In addition, Toy Biz, Inc.
granted Mr. Arad the Arad Stock Option (the "Option") to acquire an additional
10% of Toy Biz, Inc.'s capital stock. Mr. Arad also agreed to enter into the
Arad Consulting Agreement and the Master License Agreement.
On October 1, 1998, pursuant to the Fourth Amended Joint Plan of
Reorganization proposed by the senior secured lenders of MEG and Toy Biz, Inc.
(the "Plan"), MEG became a wholly-owned subsidiary of Toy Biz, Inc. Toy Biz,
Inc. also changed its name to Marvel Enterprises, Inc. on that date. The
acquisition of MEG was accounted for using the purchase method of accounting.
The results of the acquired business have been included in the Company's
consolidated results of operations from October 1, 1998. The Plan was
confirmed on July 31, 1998 by the United States District Court for the
District of Delaware, which had been administering the MEG 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
MEG, immediately after the Reorganization continued 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 MEG received (i) approximately $231.8
F-7
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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, 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 MEG ("Unsecured
Creditors") will receive (i) up to $8.0 million 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
other series of warrants (the "Stockholder Warrants") will be distributed to
the Unsecured Creditors, to former holders of shares of MEG common stock, to
holders of certain class securities litigation claims arising in connection
with the purchase and sale of MEG 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 MEG's bankruptcy.
In accordance with the Plan, two litigation trusts were formed on the
consummation date of the Plan. Each litigation trust is now the legal owner of
litigation claims that formerly belonged to MEG and its subsidiaries. The
primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to
pursue bankruptcy avoidance claims. The primary purpose of the other trust
(the "MAFCO Litigation Trust") is to pursue certain litigation claims against
Ronald O. Perelman and various related entities and individuals. The Company
has agreed to lend up to $1.1 million to the Avoidance Litigation Trust and up
to $1.0 million to the MAFCO Litigation Trust, in each case on a revolving
basis to fund the trust's professional fees and expenses. Each litigation
trust is obligated to reimburse the Company for all sums advanced, with simple
interest at the rate of 10% per year. Net litigation proceeds of each trust
will be distributed to the trust's beneficiaries only after the trust has,
among other things, paid all sums owed to the Company, released the Company
from any further obligation to make loans to the trust, and established
reserves to satisfy indemnification claims. The Company is entitled to 65.1%
of net litigation proceeds from the Avoidance Litigation Trust. The Company is
not entitled to any net litigation proceeds from the MAFCO Litigation Trust.
The preliminary purchase price of MEG, including related fees and expenses,
net of liabilities assumed, was approximately $446.9 million which included
approximately $257.9 million in cash and the remainder in securities of the
Company as outlined above, net of shares of the Company owned by MEG and
reacquired in these transactions. Goodwill from the acquisition will be
amortized over 20 years.
F-8
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
Based on a preliminary allocation of purchase price, the fair value of the
assets and liabilities acquired is summarized below.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current assets............ $ 42,978
Noncurrent assets......... 4,971
Goodwill and other
intangible assets........ 483,874
Current liabilities....... (57,918)
Non-current liabilities... (27,000)
--------
$446,905
========
</TABLE>
In the preliminary allocation of the purchase price, Fleer/SkyBox
("Fleer"), MEG's subsidiaries engaged in the sale of sports and entertainment
trading cards, is presented as an asset held for sale. In January 1999, the
Company entered into an agreement to sell Fleer for $26.0 million in cash,
subject to post-closing adjustment, and the assumption of certain liabilities.
In addition, the Company does not currently intend to continue operating
Panini S.p.A. ("Panini"), MEG's Italian subsidiary engaged in the children's
activity sticker and adhesive paper business. Panini has a deficit in net
tangible assets of approximately $130.7 million as of December 31, 1998;
however, the Panini deficit in net tangible assets reflected in the
preliminary allocation of the purchase price ($27.0 million) is the maximum
amount of such deficit that the Company has guaranteed under the terms of the
Plan. The $27.0 million liability is presented as a long-term liability on the
Consolidated Balance Sheet as of December 31, 1998. The Company anticipates
disposing of Panini in 1999.
See Note 13 regarding contingencies related to, among other things, claims
by unsecured creditors of MEG and other matters.
Presented below are the unaudited pro forma results of the Company giving
effect to the acquisition of MEG as if it has occurred as of the beginning of
the periods presented:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------
1997 1998
--------------- ---------------
(in millions except per share)
<S> <C> <C>
Net sales............................... $220.3 $274.5
Operating loss.......................... (79.4) (33.9)
Net loss................................ (96.1) (81.0)
Basic and diluted loss per share........ (3.28) (2.82)
</TABLE>
The Company consummated the Plan and the Merger by utilizing interim
financing arrangements (the "Bridge Loan"). The Bridge Loan must be repaid by
September 27, 1999. The Company has a substantial working capital deficiency
due to the required repayment of a bridge loan on September 27, 1999 and
operating losses in 1997 and 1998. In addition, the Company has not complied
with financial and other covenants of the Bridge Loan agreement and its credit
facility, which could require immediate payment of the outstanding debt
balance after March 15, 1999, if requested by the banks. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company anticipates completing the issuance of a $250.0 million Senior
Notes ("Notes") offering (the "Notes Offering") in a private placement exempt
from registration under the Securities Act of 1933, as amended, before the end
of February 1999. The proceeds of the Notes Offering will be
F-9
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
used to repay the Bridge Loan and for working capital needs. There is no
certainty that the Company can complete the Notes Offering. The financial
statements do not include any adjustments to reflect the possible further
effects on the recoverability and classification of assets or the amount and
classification of liabilities that may result from the Company not completing
the Notes Offering due to the outcome of this uncertainty.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, except for Panini and Fleer (see Note 1). Upon
consolidation, all significant intercompany accounts and transactions are
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The principal areas of judgement relate to provisions for
returns, other sales allowances and doubtful accounts, the realizability of
inventories, goodwill and other intangible assets, and the impairment reserve
for minimum royalty guarantees and minimum advances, molds, tools and
equipment, and product and package design costs. Actual results could differ
from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or
market.
Molds, Tools, and Equipment
Molds, tools and equipment are stated at cost less accumulated depreciation
and amortization. The Company owns the molds and tools used in production of
the Company's products by third-party manufacturers. At December 31, 1998,
certain of these costs related to products that were not yet in production or
were not yet being sold by the Company. For financial reporting purposes,
depreciation and amortization is computed by the straight-line method
generally over a three-year period (the estimated selling life of related
products) for molds and tooling costs and over the useful life for furniture
and fixtures and office equipment. On an ongoing basis the Company reviews the
lives and carrying value of molds and tools based on the sales and operating
results of the related products. If the facts and circumstances suggest a
change in useful lives or an impairment in the carrying value, the useful
lives are adjusted and unamortized costs are written off accordingly. Write-
offs, in excess of normal amortization, which are included in depreciation and
amortization on the accompanying Consolidated Statements of Operations for the
years ended December 31, 1996, 1997 and 1998 were approximately $364,000,
$2,174,000 and $1,418,000 respectively.
Product and Package Design Costs
The Company capitalizes costs related to product and package design when
such products are determined to be commercially acceptable. Product design
costs include costs relating to the preparation of precise detailed
F-10
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
mechanical drawings and the production of sculptings and other handcrafted
models from which molds and dies are made. Package design costs include costs
relating to art work, modeling and printing separations used in the production
of packaging. At December 31, 1998, certain of these costs related to products
that were not yet in production or were not yet being sold by the Company. For
financial reporting purposes, depreciation and amortization of product and
package design is computed by the straight-line method generally over a three-
year period (the estimated selling life of related products). On an ongoing
basis the Company reviews the useful lives and carrying value of product and
package design costs based on the sales and operating results of the related
products. If the facts and circumstances suggest a change in useful lives or
an impairment in the carrying value, the useful lives are adjusted and
unamortized costs are written off accordingly. Write-offs, in excess of normal
amortization, which are included in depreciation and amortization on the
accompanying Consolidated Statements of Operations, for the years ended
December 31, 1996, 1997 and 1998 were approximately $1,164,000, $1,230,000 and
$1,425,000 respectively.
Goodwill and Other Intangibles
Goodwill and other intangibles are stated at cost less accumulated
amortization. Goodwill is principally amortized over 20 years and other
intangibles are amortized over 3 to 10 years. For the years ended December 31,
1996, 1997 and 1998, amortization of goodwill and other intangibles were
approximately $404,000, $520,000 and $7,091,000, respectively.
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of", the Company records impairment losses on
long-lived assets used in operations, including intangible assets, when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those assets.
Deferred Financing Costs
Deferred financing costs, which are mainly costs associated with the
Company's Bridge Facility, are amortized over the term of the related
agreements.
Research and Development
Research and development ("R&D") costs are charged to operations as
incurred. For the years ended December 31, 1996, 1997 and 1998, R&D expenses
were $5,298,000, $4,599,000 and $4,498,000, respectively.
Revenue Recognition
Sales are recorded upon shipment of merchandise and a provision for future
returns and other sales allowances is established based upon historical
experience and management estimates. In certain cases, 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 distribution fees, licensing and sub-licensing of characters
owned by the Company are recorded in accordance with the distribution
agreement and at the time characters are available to the licensee
F-11
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
and collection is reasonably assured. Receivables from licensees due more than
one year beyond the balance sheet date are discounted to their present value.
For the years ended December 31, 1996, 1997 and 1998, toy distribution fees
and sub-licensing revenues were $13,637,000, $3,265,000 and $1,250,000,
respectively.
Advertising Costs
Advertising production costs are expensed when the advertisement is first
run. Media advertising costs are expensed on the projected unit of sales
method during interim periods. For the years ended December 31, 1996, 1997 and
1998, advertising expenses were $25,471,000, $27,910,000 and $31,762,000,
respectively. At December 31, 1997 and 1998, the Company had incurred $420,000
and $469,000, respectively, of prepaid advertising costs, principally related
to production of advertisement that will be first run in fiscal 1998 and 1999,
respectively.
Royalties
Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are expensed based on sales of related products. The realizability
of advanced minimum guarantees paid is evaluated by the Company based on the
projected sales of the related products.
Income Taxes
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and the tax bases
of assets and liabilities and are measured using tax rates and laws that are
scheduled to be in effect when the differences are scheduled to reverse.
Income tax expense includes U.S. and foreign income taxes, including U.S.
Federal taxes on undistributed earnings of foreign subsidiaries to the extent
that such earnings are planned to be remitted.
Foreign Currency Translation
The financial position and results of operations of the Company's Hong Kong
and Mexican subsidiaries are measured using the U.S. dollar as the functional
currency. Assets and liabilities are translated at the exchange rate in effect
at year end. Income statement accounts and cash flows are translated at the
average rate of exchange prevailing during the period. Translation
adjustments, which were not material, arising from the use of differing
exchange rates are included in the results of operations.
Fair Value of Financial Instruments
The fair value of all debt instruments approximate their carry value due to
their short term maturity and variable interest rates.
Concentration of Risk
A large number of the Company's toy products are manufactured in China,
which subjects the Company to risks of currency exchange fluctuations,
transportation delays and interruptions, and political and economic
disruptions. The Company's ability to obtain products from its Chinese
manufacturers is dependant upon the United States' trade relationship with
China. The "most favored nation" status of China, which is reviewed annually
by the United States government, is a regular topic of political controversy.
The loss of China's "most
F-12
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
favored nation" status would increase the cost of importing products from
China significantly, which could have a material adverse effect on the
Company.
Marvel distributes its comic books to the direct market through the only major
comic book distributor. Termination of this distribution agreement could
significantly disrupt publishing operations.
See Note 8 regarding major toy customers.
Earnings Per Share
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, 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.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No.
130 ("SFAS 130") Reporting Comprehensive Income. The Company's adoption of
SFAS 130 had no effect on the Company as the Company does not have any
comprehensive income items.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted beginning in fiscal 2000. The statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. Management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
3. Assets Held for Resale
Shortly after the acquisition of MEG, the Company concluded that Fleer did
not fit the Company's long-term strategy and the Company decided to dispose of
this operation. On February 11, 1999, the Company sold substantially all of
Fleer's assets for approximately $26.0 million in cash, subject to post-
closing adjustments and assumptions of certain liabilities. $15.0 million of
the proceeds were utilized to repay the Bridge Facility (see Note 5). The
Company remains liable under certain contracts of the Fleer business and have
been indemnified against such liabilities by the purchase of such business.
The Company does not currently intend to continue operating the Panini
business. The Company has recorded a liability equal to its guarantee of
Panini's debt.
On March 25, 1997, the Company acquired all of the assets of Colorforms
Inc. ("Colorforms"). The purchase price was approximately $5.0 million,
excluding fees and expenses, consisting of approximately $2.9 million in cash
paid at the closing and the assumption of approximately $2.1 million of
accounts payable and
F-13
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
accrued liabilities at the closing date. The Company utilized cash available
under its Chase Credit Facility (see note 5) to finance the acquisition. The
transaction was accounted for as a purchase. The results of Colorforms are
included in the Company's consolidated financial statements from the date of
acquisition.
During 1997, the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash with a promissory note
representing the remainder of $1.35 million due in August 1998 through May
1999. As of December 31, 1997, assets held for sale are $4.1 million.
F-14
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
4. Details of Certain Balance Sheet Accounts
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
(in thousands)
<S> <C> <C>
Accounts receivable, net, consists of the following:
Accounts receivable....................................... $80,212 $ 75,235
Less allowances for:
Doubtful accounts........................................ (430) (3,608)
Advertising, markdowns, returns, volume discounts and
other................................................... (29,387) (21,315)
------- --------
Total.................................................. $50,395 $ 50,312
======= ========
Inventories, net, consist of the following:
Toys:
Finished goods........................................... $17,518 $ 24,685
Component parts, raw materials and work-in-process....... 5,167 3,977
------- --------
Total Toys............................................. 22,685 28,662
Publishing:
Finished goods........................................... -- 754
Editorial and raw materials.............................. -- 3,182
------- --------
Total publishing....................................... 3,936
------- --------
Total.................................................. $22,685 $ 32,598
======= ========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment................................ $26,873 $ 21,465
Office equipment and other................................ 7,539 17,255
Less accumulated depreciation and amortization............ (17,399) (23,172)
------- --------
Total.................................................. $17,013 $ 15,548
======= ========
Product and package design costs, net, consists of the
following:
Product design costs...................................... $11,113 $ 8,125
Package design costs...................................... 4,404 3,567
Less accumulated amortization............................. (7,901) (5,783)
------- --------
Total.................................................. $ 7,616 $ 5,909
======= ========
Goodwill and other intangibles, net, consists of the
following:
Goodwill (Note 1)......................................... $ 9,453 $492,424
Patents and other intangibles............................. 818 3,726
Less accumulated amortization............................. (966) (8,419)
------- --------
Total.................................................. $ 9,305 $487,731
======= ========
Accrued expenses and other consists of the following:
Accrued advertising costs................................. $11,544 $ 8,183
Accrued royalties......................................... 2,228 9,584
Inventory purchases....................................... 4,909 7,389
Deferred financing costs.................................. -- 4,000
Income taxes payable...................................... 3,495 4,709
Deferred income taxes payable............................. 540 2,693
Litigation Trust accrual.................................. -- 2,100
Other accrued expenses.................................... 2,855 32,014
------- --------
Total.................................................. $25,571 $ 70,672
======= ========
</TABLE>
F-15
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
5. Debt Financing
To partially finance the acquisition of MEG, the Company 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.
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. There have been no
borrowings under the UBS Credit Facility. The Company had approximately $1.6
million in letters of credit outstanding as of December 31, 1998, which reduce
the available amount under the UBS Credit Facility. UBS's commitment to
advance funds and issue letters of credit under the UBS Credit Facility has
been terminated effective as of February 3, 1999.
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. In
addition, the Company cannot pay cash dividends as long as the Bridge Loan is
outstanding. 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.
The Company has not complied with certain of the financial and other
covenants of the Bridge Facility and UBS Credit Facility, which have been
waived through March 15, 1999. UBS AG could require repayment of the
outstanding debt balances upon the expiration of the waiver.
Prior to October 1, 1998, the Company had a revolving line of credit (the
"Chase Credit Facility") with a syndicate of banks for which The Chase
Manhattan Bank served as administrative agent. The Chase Credit Facility
provided that the Company could borrow an aggregate amount up to $29.0
million, subject to certain borrowing base limitations based upon the level of
the Company's receivables and inventory. This facility was terminated at the
closing of the MEG acquisition and replaced with the UBS Credit Facility.
The interest rate for borrowing as of December 31, 1997 and 1998 was 8.50%
and 12.10%, respectively and the weighted average interest rate for 1997 and
1998 was 8.44% and 11.31%, respectively. The maximum amounts outstanding
during 1997 and 1998 were $12.0 million and $200.0 million, respectively.
The interest expense, including amortization of Bridge Facility commitment
fees and other costs in 1998, for the years ended December 31, 1996, 1997 and
1998 were $112,000, $776,000 and $9,440,000, respectively.
F-16
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
6. Stockholders' Equity
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 150.0
million shares of common stock (for a maximum authorized amount of 250.0
million shares) and authorized 100.0 million shares of preferred stock,
including 75.0 million shares of 8% Preferred Stock and 25.0 million shares of
preferred stock with a $.01 par value.
The 8% Preferred Stock is convertible into 1.039 fully paid and non-
assessable shares of common stock of the Company. The Company is required to
redeem all outstanding shares of the 8% Preferred Stock on October 1, 2011 at
$10.00 per share plus all accrued and unpaid dividends. The 8% Preferred Stock
generally votes together with the common stock on all matters. The Company has
the option to pay the dividend in cash or additional 8% Preferred Stock, but
cannot pay cash dividends on its 8% Preferred Stock as long as the Bridge
Facility is outstanding. On January 4, 1999, the Company issued 338,000 shares
of 8% Preferred Stock in payment of dividends declared and payable to
stockholders of record at December 31, 1998. These shares are shown as
outstanding at December 31, 1998.
The Company issued the following securities in accordance with the Plan:
(a) 7.9 million shares of 8% Preferred Stock to MEG 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 MEG 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 1).
The Company has reserved 3.0 million shares of 8% Preferred Stock for
issuance upon exercise of warrants. In addition, the Company has reserved 39.4
million shares of common stock for issuance on conversion of the 8% Preferred
Stock, and exercise of warrants and stock options.
In connection with the Plan, the Company received a $1.5 million capital
contribution from an affiliate of Mr. Perlmutter and Mr. Arad. Mr. Perlmutter
and Mr. Arad received no additional equity for such contribution.
7. Stock Option Plans
Under the terms of the Company's 1998 Stock Incentive Plan (the "Stock
Incentive Plan"), incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance units and performance
shares may be granted to officers, employees, consultants and directors of the
Company and its subsidiaries from time to time. In November 1998, the Company
authorized a maximum aggregate number of shares of Common Stock as to which
options and rights may be granted under the Stock Incentive Plan of 6.0
million shares, including options described below. All options granted and
outstanding under the Company's previous stock incentive plan (the "1995 Stock
Option Plan") and all previous stock option plans of MEG were canceled at or
prior to the consummation of the Plan on October 1, 1998.
F-17
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
Information with respect to options under the stock option plans are as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Option Price per Share Price
--------- ---------------------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1995... 995,602 $15.00-$22.625
Exercised.......................... (22,664) $18.000
Canceled........................... (47,303) $18.119
Granted............................ 195,250 $17.111
---------
Outstanding at December 31, 1996... 1,120,885 $15.00-$22.625
Canceled........................... (484,666) $18.115
Exercised.......................... (3,333) $18.000
Granted............................ -- $ --
---------
Outstanding at December 31, 1997... 632,886 $15.00-$22.625
Canceled........................... (632,886) $17.916
Exercised.......................... -- --
Granted (under New Stock Incentive
Plan)............................. 3,946,000 $ 6.05
---------
Outstanding at December 31, 1998... 3,946,000 $ 5.875-$ 6.25
=========
</TABLE>
Options granted under the Stock Incentive Plan vest generally in four equal
installments beginning with the date of grant. Of the outstanding options at
December 31, 1998, options for 1,004,000 shares became exercisable on January
20, 1999 and 2,054,000 shares were available for future grants of options and
rights. At December 31, 1998, the weighted average remaining contractual life
of the options outstanding is 9.92 years.
The Company accounts for its stock options under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and related Interpretations. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on date of grant, no compensation expense is recognized. In 1996, the
Company elected to follow the disclosure-only provisions under FASB Statement
No. 123, "Accounting for Stock-Based Compensation," ("FAS 123"). For the
purposes of FAS 123 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1997 1998
------------------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss), as reported......... $ 16,687 $ (29,465) $ (32,610)
Pro forma net income (loss)............ 15,195 (29,816) (35,679)
Pro forma net income (loss) per share
attributable to Common Stock--basic
and diluted........................... $ 0.55 $ (1.08) $ (1.34)
=========== ============ ============
</TABLE>
The fair value for each option grant under the stock option plans 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 5.26% to 7.19%; no
dividend yield; expected volatility of .354; and expected lives of three years
to five years. The weighted average assumptions for the 1998 grants are: 6.0%
interest rate; no dividend yield; expected volatility of .567; and expected
life of 3 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
F-18
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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.
The effects of applying FAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net income in future
years.
8. Sales to Major Customers and International Operations
The Company primarily sells its merchandise to major retailers, principally
throughout the United States. Credit is extended based on an evaluation of the
customer's financial condition, and, generally, collateral is not required.
Credit losses are provided for in the financial statements and consistently
were within management's expectation. In 1996 and 1997, the Marvel bankruptcy
and concerns among retailers about the future of the Marvel brand caused
customers to claim higher than expected return and other sales allowances.
During the year ended December 31, 1996, two customers accounted for
approximately 23% and 18% of total net sales. During the year ended December
31, 1997, three customers accounted for approximately 22%, 15% and 12% of
total net sales. During the year ended December 31, 1998, three customers
accounted for approximately 23%, 15% and 10% of total net toy sales.
The Company's Hong Kong subsidiary supervises the manufacturing of the
Company's products in China and sells such products internationally. All sales
by the Company's Hong Kong subsidiary are made F.O.B. Hong Kong against
letters of credit. During the years ended December 31, 1996, 1997 and 1998,
international sales were approximately 20%, 22%, and 15%, respectively, of
total net sales. During the years ended December 31, 1996, 1997 and 1998, the
Hong Kong operations reported operating income of approximately $18,880,000,
$5,868,000 and $4,224,000 and income before income taxes of $19,079,000,
$6,102,000 and $4,574,000, respectively. At December 31, 1997 and 1998, the
Company had assets in Hong Kong of approximately $28,660,000 and $29,966,000,
respectively. The Hong Kong subsidiary represented $26,670,000 and
$30,489,000, respectively, of the Company's consolidated retained earnings
during the years ended December 31, 1997 and 1998.
9. Restructuring and Other Unusual Costs
In connection with the consummation of the Plan (See Note 1), the Company
reviewed its relationships with its foreign distributors, as well as the
Company's relationship with certain suppliers, for business conflicts. As part
of integrating MEG'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 MEG.
F-19
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
As a result of the above matters, the Company has recorded allowances and
unusual charges of approximately $16.8 million for the year ended December 31,
1998, which relate to impairment of assets, severance costs and the settlement
of litigation that arose in prior years regarding a licensing agreement. These
costs are reflected in the following captions in the statement of operations.
(in thousands)
Net sales
(allowances)... $ 2,925
Cost of sales... 1,193
Selling general
and
administrative.. 11,676
Depreciation and
amortization... 1,032
--------------
$ 16,826
==============
Cash charges.... $ 3,400
Non-cash
charges........ $ 13,426
--------------
$ 16,826
==============
Of these costs, approximately $14.9 million and $1.9 million were charged
to the third and fourth quarters, respectively, of fiscal 1998. At December
31, 1998, $1.4 million of the cash charges remain unpaid. The Company expects
to pay the remaining cash charges under contractual obligations extending to
2000.
10. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
Years Ended December 31,
--------------------------
1996 1997 1998
------- -------- -------
(in thousands)
Current:
Federal.......................................... $ 8,474 $(19,196) $(6,189)
State............................................ 1,943 (191) 410
Foreign.......................................... 2,739 523 824
------- -------- -------
$13,156 $(18,864) $(4,955)
Deferred:
Federal.......................................... $(1,586) $ 1,287 $ 6,025
State............................................ (446) (2,608) 3,316
------- -------- -------
(2,032) (1,321) 9,341
------- -------- -------
Income tax expense (benefit) ...................... $11,124 $(20,185) $ 4,386
======= ======== =======
F-20
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The differences between statutory Federal income tax rate and the effective
tax rate are attributable to the following:
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1996 1997 1998
---- ----- ------
<S> <C> <C> <C>
Federal income tax provision computed at the statutory
rate................................................... 35.0% (35.0)% (35.0%)
State taxes, net of Federal income tax effect........... 5.0% (5.7)% (4.7%)
Non-deductible amortization expense..................... -- -- 7.9%
Increase in valuation allowance......................... -- -- 48.6%
Other................................................... -- -- (1.3%)
---- ----- ------
Total provision for income taxes........................ 40.0% (40.7)% 15.5%
==== ===== ======
</TABLE>
For financial statement purposes, the Company records income taxes in
accordance with FAS109 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.
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 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 were as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable ..................................... $1,762 $ 4,573
Inventory................................................ 2,447 6,623
Sales returns reserves................................... 955 4,505
Employment reserves...................................... (80) 3,999
Restructuring reserves................................... -- 589
Reserve related to foreign investments................... -- 2,373
Other reserves........................................... -- 1,038
Net operating loss carryforwards......................... 2,820 26,847
Tax credit carryforwards................................. -- 657
Other.................................................... 130 3,759
------ -------
Total gross deferred tax assets.......................... 8,034 54,963
Less valuation allowance................................. -- (51,346)
------ -------
Net deferred tax assets.................................. 8,034 3,617
------ -------
Deferred tax liabilities:
Depreciation/amortization ............................... 540 636
Licensing, net........................................... -- 2,981
------ -------
Total gross deferred tax liabilities..................... 540 3,617
------ -------
Net deferred tax asset (liability)......................... $7,494 $ --
====== =======
</TABLE>
F-21
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
During 1998, the Company recorded a valuation allowance against its
deferred tax assets as it was not assured that such assets would be realized
in the future. The total valuation allowance for 1998 includes $38,141,000
which, if realized, will be accounted for as a reduction of goodwill.
At December 31, 1998, the Company expects to have a Federal net operating
loss carryforward of approximately $40,000,000. This loss carryforward will
expire in years 2008 through 2018. This $40,000,000 loss is subject to the
separate return years limitation (commonly referred to as "SRLY") and a
Section 382 limitation. Any loss realized will be accounted for as a reduction
of goodwill. Additionally, the Company expects to have a state and local net
operating loss carryforward of approximately $103,000,000. The state and local
loss carryforward will expire in various jurisdictions in years 1999 through
2018. This loss carryforward is generally subject to the Section 382
limitation but not the SRLY limitation. Benefit was not provided for either
the Federal or state and local net operating loss carryforwards at December
31, 1998.
11. Quarterly Financial Data (unaudited)
Summarized quarterly financial information for the years ended December 31,
1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------------------ -----------------------------------------
Quarter Ended March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
------------- -------- ------- ------------ ----------- -------- ------- ------------ -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $34,414 $34,452 $ 40,765 $ 41,181 $42,641 $48,675 $ 65,045 $ 75,715
Gross profit............ 14,513 12,195 10,245 6,908 19,408 22,895 26,300 35,495
Operating income
(loss)................. 765 (8,676) (18,505) (22,872) 1,882 3,607 (11,969) (12,980)
Net income (loss)....... 475 (5,266) (11,219) (13,455) 1,076 2,106 (7,223) (28,569)
Preferred divided
requirement............ 23 24 24 -- -- -- -- 3,380
Basic and dilutive net
income (loss) per
common share........... $ 0.02 $ (0.19) $ (0.41) $ (0.48) $ 0.04 $ 0.08 ($ 0.26) $ (0.96)
</TABLE>
The income (loss) per common share computation for each quarter and the
year are separate calculations. Accordingly, the sum of the quarterly income
(loss) per common share amounts may not equal the income (loss) per common
share for the year.
The fourth quarter of 1997 includes pretax adjustments of $7,762,000
related to year end adjustments which were not previously estimable. The
Company believes most of these adjustments relate to the MEG bankruptcy and
concerns among retailers about the future of the Marvel brand. See Note 9 for
unusual charges in the third and fourth quarters of 1998.
12. Related Party Transactions
Mr. Perlmutter indirectly purchased approximately $34.9 million of the 8%
Preferred Stock in connection with the Plan. See Note 1.
Prior to the Company's acquisition of MEG on October 1, 1998 (see Note 1),
MEG provided support to the Company relating to licensing agreements,
promotion, legal and financial matters. The cost for these support services
has been included in selling, general and administrative expenses, and
amounted to $262,000 and $141,000 for the years ended December 31, 1996 and
1997. The Company did not receive any services from MEG in 1998. At December
31, 1997, the Company had a receivable from MEG of $94,000.
The Company entered into an exclusive license agreement pursuant to which
MEG could use the Toy Biz trademark on online services and electronic
networks, including the Internet. The license was limited to Marvel-
F-22
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
related products of the Company. MEG paid the Company $500,000 in 1996 for
such license. The Company sold merchandise totaling $324,000 to a subsidiary
of MEG during the year ended December 31, 1996. Related receivables of
$207,000 at December 31, 1996 were subsequently collected.
An affiliate of the Company, which is wholly-owned by Mr. Perlmutter, acts
as the Company's media consultant in placing the Company's advertising and, in
connection therewith, receives certain fees and commissions based on the cost
of the placement of such advertising. During the years ended December 31,
1996, 1997 and 1998, the Company paid fees and commissions to the affiliate
totaling approximately $965,000, $1,274,000 and $1,147,000, respectively,
relating to such advertisements.
The Company accrued royalties to Mr. Arad for toys he invented or designed
of $1,848,000, $3,624,000 and $4,254,000 during the years ended December 31,
1996, 1997 and 1998, respectively. At December 31, 1996, the Company had a
receivable from Mr. Arad for $505,000 related to reimbursement of expenses
which was subsequently collected. At December 31, 1997 and 1998, the Company
had an accrual to Mr. Arad of $197,000 and $396,000, respectively, for unpaid
royalties.
The Company shares office space and certain general and administrative
costs with affiliated entities. Rent received from affiliates for the years
ended December 31, 1996, 1997 and 1998 was $109,000, $116,000 and $105,000,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.
13. Commitments and Contingencies
Leases: The Company is a party to various noncancellable operating leases
involving office and warehouse space expiring on various dates from November
18, 1999 through April 30, 2004. The leases are subject to escalations based
on cost of living adjustments and tax allocations. Minimum future obligations
on these leases are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999.......................................................... $ 2,530
2000.......................................................... 2,284
2001.......................................................... 1,218
2002.......................................................... 283
2003.......................................................... 151
Thereafter.................................................... 50
-------
$ 6,516
=======
</TABLE>
Rent expense amounted to approximately $788,000, $1,220,000, and $1,060,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company is a party to various royalty agreements with future guaranteed
royalty payments through 2001. Such minimum future obligations are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999.......................................................... $1,822
2000.......................................................... 1,570
2001.......................................................... 1,190
------
$4,582
======
</TABLE>
F-23
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The Company has recorded approximately $8,124,000 as a net receivable for
minimum guaranteed royalties as of December 31, 1998. The portion receivable
after one year from the balance sheet date is included in other assets. The
minimum guaranteed royalties receivable are due as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999.......................................................... $ 5,660
2000.......................................................... 2,670
2001.......................................................... 609
2002 and thereafter........................................... 3,500
Allowances and discounting.................................... (4,315)
-------
$ 8,124
=======
</TABLE>
Legal Matters
The Company is a party to certain legal actions described below. In
addition, 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 its legal proceedings and claims (including those
described below), individually and in the aggregate, are not likely to have a
material adverse effect on its financial condition, results of operations or
cash flows.
Certain Bankruptcy Proceedings. As a result of the consummation of the Plan
on October 1, 1998, all claims against MEG with respect to orders issued by
the District Court in connection with the Plan have been released, as have all
claims by MEG against the Company and all claims against the Company
concerning the effect of the June 1997 change of control of MEG on the voting
power of the stock in the Company owned by MEG.
Spider-Man Litigation. The Company's subsidiaries, Marvel Entertainment
Group, Inc. 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"), 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. On February 3, 1999, the court granted the
Marvel Parties' motion for summary judgment dismissing certain of MGM's
claims. Additional motions by the Marvel Parties for summary judgment
dismissing other MGM claims and certain Viacom claims are scheduled for
hearing in late February 1999. A trial is currently scheduled to begin in
March 1999. The Spider-Man motion picture rights at issue in
F-24
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
the California consolidated case are also the subject of an adversary
proceeding commenced by the chapter 11 trustee of the Marvel Parties in the
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 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, MEG 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 MEG, 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 MEG and granted MEG only the non-exclusive right to publish the Work in
print for MEG's Tomb of Dracula series and that Wolfman had relied upon MEG 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
that each and every component of the Work was created for MEG 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 to defend the action
vigorously if the action is allowed to proceed.
In August 1998, MEG responded to the filing of Wolfman's California
complaint by filing a motion in the District Court for an order imposing
monetary sanctions against Wolfman for violating the automatic stay of actions
against debtors or their property imposed under the bankruptcy laws. Shortly
thereafter, Wolfman voluntarily dismissed the complaint against MEG, Marvel
Characters, Inc., Marvel Studios and Marvel Comics and agreed in writing not
to take any further action with respect to the California action without leave
of the District Court. On October 30, 1998, Wolfman filed a motion in the
District Court seeking leave to prosecute his claims in the California action,
which motion was denied on January 7, 1999.
Prior to commencing his action in California, on January 24, 1997,
Wolfman filed a proof of claim in the bankruptcy cases of MEG and Marvel
Characters, Inc., asserting ownership rights to the Blade and Deacon Frost
characters, among others. The Company intends to object vigorously to this
claim and to seek a declaration that Marvel Characters, Inc. (which is now a
wholly-owned subsidiary of the Company), not Wolfman, is the lawful owner of
the rights claimed by Wolfman.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material
to the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows.
14. Benefits Plans
The Company has a 401(k) Plan for its employees. In addition, in connection
with the sale of Fleer (see Note 3), the Company retained certain liabilities
related to a noncontributory defined benefit pension plan for
F-25
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
salaried employees. In prior years, this plan was amended to prohibit
participation by new participants. The accumulated benefit obligation is
approximately $18.9 million. The funded value of plan assets is approximately
$15.9 million and the pension liability at December 31, 1998 is approximately
$3.0 million. Plan expenses for the years ended December 31, 1996, 1997, and
1998 were not significant.
15. Segment Information
Following the Company's acquisition of MEG (see Note 1), the Company
realigned its businesses into three segments: Toy Merchandising and
Distributing, Publishing and Licensing Segments.
Toy Merchandising and Distributing Segment
The toy merchandising and distributing segment designs, develops, markets
and distributes both innovative and traditional toys in the United States and
internationally. The Company's toy products fall into three categories: toys
based on its characters, proprietary toys designed and developed by the
Company, and toys based on properties licensed to the Company by third
parties. This segment derives revenues from products based on characters
licensed from the licensing segment. In addition, the Company has diversified
its product line by developing a proprietary line of toys, as well as by
developing toys under licensing agreements with non-affiliated licensors.
Publishing Segment
The Company acquired its publishing segment of operations on October 1,
1998 (see Note 1).
The publishing segment is a creator and publisher of comic books
principally in North America. The acquired company has been publishing comic
books since 1939 and has developed a roster of more than 3,500 Marvel
Characters. The Company's titles feature classic Marvel Super Heroes and X-
Men, newly developed Marvel Characters, and characters created by other
entities and licensed to the Company.
F-26
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
Licensing Segment
The Company acquired its licensing segment on October 1, 1998 (see Note 1).
The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use with (i) merchandise, (ii) promotions,
(iii) publishing, (iv) television and film, (v) on-line and interactive
software and (vi) restaurants, theme parks and site-based entertainment.
<TABLE>
<CAPTION>
Toys Publishing Licensing Total
-------- ---------- --------- --------
(in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Net sales............................ $221,624 -- -- $221,624
Gross profit......................... 105,169 -- -- 105,169
Operating income..................... 27,215 -- -- 27,215
EBITDA(1)............................ 43,293 -- -- 43,293
Total capital expenditures........... 23,848 -- -- 23,848
<CAPTION>
Toys Publishing Licensing Total
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Net sales............................ $150,812 -- -- $150,812
Gross profit......................... 43,861 -- -- 43,861
Operating (loss)..................... (49,288) -- -- (49,288)
EBITDA(1)............................ (28,220) -- -- (28,220)
Total capital expenditures........... 17,744 -- -- 17,744
Identifiable assets for continuing
operations.......................... $146,770 -- -- $146,770
Net assets held for disposition...... 4,136 -- -- 4,136
-------- --- --- --------
Total identifiable assets............ $150,906 -- -- $150,906
</TABLE>
<TABLE>
<CAPTION>
Toys Publishing Licensing Corporate Total
-------- ---------- --------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1998
Net sales................. $212,436 $ 14,707 $ 4,933 -- $232,076
Gross profit.............. 92,743 6,820 4,535 -- 104,098
Operating (loss).......... (18,742) 258 (976) -- (19,460)
EBITDA(1)................. 1,259 1,409 4,295 -- 6,963
Total capital
expenditures.............. 17,325 -- -- -- 17,325
Identifiable assets for
continuing operations.... $149,842 $101,697 $401,098 $11,267 $663,904
Net assets held for
disposition.............. -- 26,000 -- -- 26,000
-------- -------- -------- ------- --------
Total identifiable
assets................... $149,842 $127,697 $401,098 $11,267 $689,904
</TABLE>
- --------
(1) "EBITDA" is defined as earnings before extraordinary items, interest
expense, taxes, depreciation and amortization. EBITDA does not represent
net income or cash flow from operations as those terms are defined by
generally accepted accounting principles and does not necessarily indicate
whether cash flows will be sufficient to fund cash needs.
See Note 8 regarding sales to major customers and international operations of
the Company's toy business.
F-27
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
16.Supplemental Financial Information
The following represents the supplemental consolidating condensed financial
statements of Marvel Enterprises, Inc., which will be the issuer of the Notes,
and its subsidiaries that will guarantee the Notes and the non-guarantor
subsidiaries as of December 31, 1997 and 1998 and for each of the three years
in the period ended December 31, 1998.
<TABLE>
<CAPTION>
Issuer
and Non-
Guarantors Guarantors Total
---------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
For The Year Ended December 31, 1996
Net sales............................. $176,641 $44,983 $221,624
Gross profit.......................... 82,815 22,354 105,169
Operating income...................... 12,116 15,099 27,215
Net income............................ 3,526 13,161 16,687
For The Year Ended December 31, 1997
Net sales............................. $117,571 $33,241 $150,812
Gross profit.......................... 33,542 10,319 43,861
Operating (loss) income............... (55,205) 5,917 (49,288)
Net (loss) income..................... (34,613) 5,148 (29,465)
For The Year Ended December 31, 1998
Net sales............................. $198,358 $33,718 $232,076
Gross profit.......................... 91,293 12,805 104,098
Operating (loss) income............... (23,784) 4,324 (19,460)
Net (loss) income..................... (36,529) 3,919 (32,610)
<CAPTION>
Issuer
and Non- Inter-
Guarantors Guarantors company Total
---------- ---------- -------- --------
December 31, 1997
<S> <C> <C> <C> <C>
Current assets ....................... $107,430 $28,346 $(18,804) $116,972
Non-current assets.................... 28,990 4,944 -- 33,934
-------- ------- -------- --------
Total assets.......................... $136,420 $33,290 $(18,804) $150,906
======== ======= ======== ========
Current and total liabilities......... 53,430 8,299 (18,804) 42,925
Stockholders' equity.................. 82,990 24,991 -- 107,981
-------- ------- -------- --------
$136,420 $33,290 $(18,804) $150,906
======== ======= ======== ========
December 31, 1998
Current assets........................ $167,921 $29,571 $(24,908) $172,584
Non-current assets.................... 485,667 31,653 -- 517,320
-------- ------- -------- --------
Total assets.......................... $653,588 $61,224 $(24,908) $689,904
======== ======= ======== ========
Current liabilities................... 325,471 5,413 (24,908) 305,976
Non-current liabilities............... 27,924 -- -- 27,924
8% Preferred Stock.................... 172,380 -- -- 172,380
Stockholders' equity.................. 154,813 28,811 -- 183,624
-------- ------- -------- --------
$680,588 $34,224 $(24,908) $689,904
======== ======= ======== ========
</TABLE>
F-28
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
<TABLE>
<CAPTION>
Issuer
and Non-
Guarantors Guarantors Total
---------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
Year Ended December 31, 1996
Cash Flows From Operating Activities:
Net Income..................................... $ 3,526 $13,161 $ 16,687
========= ======= =========
Net cash provided by (used in) operating
activities.................................. (191) (681) (872)
Net cash provided by (used in) investing
activities.................................. (24,024) 176 (23,848)
Net cash provided by (used in) financing
activities.................................. 8,258 -- 8,258
--------- ------- ---------
Net increase (decrease) in cash................ (15,957) (505) (16,462)
Cash, at beginning of period................... 21,108 1,376 22,484
--------- ------- ---------
Cash, at end of period......................... $ 5,151 $ 871 $ 6,022
========= ======= =========
Year Ended December 31, 1997
Cash Flows From Operating Activities:
Net Income..................................... $ (34,563) $ 5,098 $ (29,465)
========= ======= =========
Net cash provided by (used in) operating
activities.................................. 13,191 (440) 12,751
Net cash provided by (used in) investing
activities.................................. (22,503) 203 (22,300)
Net cash provided by (used in) financing
activities.................................. 11,123 -- 11,123
--------- ------- ---------
Net increase (decrease) in cash................ 1,811 (237) 1,574
Cash, at beginning of period................... 5,151 871 6,022
--------- ------- ---------
Cash, at end of period......................... $ 6,962 $ 634 $ 7,596
========= ======= =========
Year Ended December 31, 1998
Cash Flows From Operating Activities:
Net Income..................................... $ (36,429) $ 3,819 $ (32,610)
========= ======= =========
Net cash provided by (used in) operating
activities.................................. 28,454 545 28,999
Net cash provided by (used in) investing
activities.................................. (272,634) 230 (272,404)
Net cash provided by (used in) financing
activities.................................. 279,500 -- 279,500
--------- ------- ---------
Net increase (decrease) in cash................ 35,320 775 36,095
Cash, at beginning of period................... 6,962 634 7,596
--------- ------- ---------
Cash, at end of period......................... $ 42,282 $ 1,409 $ 43,691
========= ======= =========
</TABLE>
F-29
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
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Allowances
Balance Acquired in Charged to Sales Charged to Balance
at Beginning MEG or Costs and Other at End
Description of Period Acquisition Expenses Accounts Deductions of Period
----------- ------------ ----------- ---------------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1996
Allowances included in
Accounts Receivable.
Net:
Doubtful accounts--
current................ $ 516 -- -- -- 31 $ 485
Advertising, markdowns,
returns, volume
discounts and other.... 10,755 -- 39,317(2) -- 35,216 14,856
Year Ended December 31,
1997
Allowances included in
Accounts Receivable.
Net:
Doubtful accounts--
current................ 485 -- -- -- 55 430
Advertising, markdowns,
returns, volume
discounts, and other... 14,856 -- 55,746(2) -- 41,215 29,387
Year Ended December 31,
1998
Allowances included in
Accounts Receivable.
Net:
Doubtful accounts--
current................ 430 3,112 409(1) -- 343 3,608
Doubtful accounts--non-
current................ -- 521 -- -- -- 521
Advertising, markdowns,
returns, volume
discounts and other.... 29,387 6,255 33,998(2) -- 48,325 21,315
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(1) Charged to costs and expenses.
(2) Charged to sales.
F-30
