<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 25, 1999
Marvel Enterprises, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 1-13638 13-3711775
- --------------------------------------------------------------------------------
(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification
Incorporation) No.)
387 Park Avenue South, New York, New York 10016
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(212) 696-0808
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
685 Third Avenue, New York, New York 10017
________________________________________________________________________________
(Former Name or Former Address, If Changed Since Last Report.)
<PAGE>
ITEM 5. Other Events.
This Current Report on Form 8-K contains the Registrant's consolidated financial
statements for the year ended December 31, 1998 with certain revised footnotes
that reflect the Registrant's completion, as previously disclosed, of a $250
million senior notes offering and the Registrant's repayment, on February 25,
1999, of all outstanding balances under its bridge loan. This Current Report on
Form 8-K also contains a re-issued report by the Registrant's independent
auditors on the Registrant's consolidated financial statements for the year
ended December 31, 1998. The independent auditors' original report, included in
Exhibit 99.4 to the Registrant's Current Report on Form 8-K dated February 23,
1999, explained that certain conditions raised substantial doubt about the
Registrant's ability to continue as a going concern. The re-issued report,
included in Exhibit 99.1 hereto, explains that the conditions that raised
substantial doubt about the Registrant's ability to continue as a going concern
no longer exist.
ITEM 7. Financial Statements and Exhibits.
(c) Exhibits.
99.1 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: March 10, 1999
By: /s/ William H. Hardie, III
--------------------------
Name: William H. Hardie, III
Title: Executive Vice President,
Business Affairs
<PAGE>
Exhibit 99.1
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
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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 5, 1999,
except for Note 3, as to which the date is February 11, 1999, which report
contained an explanatory paragraph regarding the Company's ability to continue
as a going concern, the Company, as discussed in Note 1, has completed the
issuance of a $250 million notes offering and repaid all outstanding balances
under its Bridge Loan. Therefore, the conditions that raised substantial doubt
about whether the Company will continue as a going concern no longer exist.
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.
/s/ Ernst & Young LLP
New York, New York
February 5, 1999, except for Note 3,
as to which the date is February 11, 1999
and Notes 1 and 5, as to which the date is
February 25, 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 had a repayment
schedule of less than one year, causing a significant working capital
deficiency. In addition, the Company was not in compliance with certain
financial and other covenants of the Bridge Loan agreement. These conditions
raised substantial doubt about the Company's ability to continue as a going
concern. On February 25, 1999, the Company completed the issuance of a $250.0
million notes
F-9
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
offering ("Senior Notes") in a private placement exempt from registration
under the Securities Act of 1933, as amended ("the Act"). Net proceeds of
approximately $240 million were used to pay all outstanding balances under the
Bridge Loan and for working capital needs. Therefore, the conditions that
raised substantial doubt about whether the Company would continue as a going
concern no longer exist.
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 bore 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 increased
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 was required to pay an additional
continuation fee of 2% if the Company had not refinanced the facility on or
prior to April 30, 1999. The Bridge Facility was 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 bore 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 required the Company to pay a commitment fee of 0.50% per annum on
the average daily unused portion of the facility. There were 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 reduced the
available amount under the UBS Credit Facility.
The Bridge Facility and the UBS Credit Facility were secured by all of the
Company's assets (other than Panini) and contained 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 could not pay cash dividends as long as the
Bridge Loan was outstanding. The UBS Credit Facility also required 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 was not in compliance with certain of the financial and other
covenants of the Bridge Facility and UBS Credit Facility. On February 25,
1999, the Company completed the issuance of a $250.0 million notes ("Senior
Notes") offering in a private placement exempt from registration under the
Act. Net proceeds of approximately $240 million were used to pay all
outstanding balances under the Bridge Loan and for working capital needs. The
$250 million Senior Notes are due June 15, 2009 and bear interest at 12% per
annum. The Senior Notes may be redeemed beginning June 15, 2004 for a
redemption price of 106% of the principal amount, plus accrued interest. The
redemption price decreases 2% each year after 2004 and will be 100% of the
principal amount, plus accrued interest, beginning on June 15, 2007. In
addition, 35% of the Senior Notes may, under certain circumstances, be
redeemed before June 15, 2002 at 112% of the principal amount, plus accrued
interest. Principal and interest on the Senior Notes are guaranteed on a
senior basis jointly and severally by each of the Company's domestic
subsidiaries. The Company will offer to exchange the Senior Notes which are
not registered under the Act for registered notes having substantially the
same terms. If the Company fails to comply with this requirement, the interest
rate on the Senior Notes will increase .5% per annum until such time as the
Senior Notes are generally freely transferable.
In the first quarter of 1999, in connection with the repayment of the
Bridge Facility, the Company will record an extraordinary charge of
approximately $1.8 million for the write-off of Bridge Facility deferred
financing costs.
F-16
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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.
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.
F-17
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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.
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>
F-18
<PAGE>
MARVEL ENTERPRISES, INC.
(formerly Toy Biz, Inc).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998
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
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.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
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
==============
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- -------- -------
(in thousands)
<S> <C> <C> <C>
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
======= ======== =======
</TABLE>
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 and
there can be no assurances, 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. Although there can be no
assurances, 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. Although there can be
no assurances, 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, although there can be no
assurances.
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>
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
<TABLE>
<CAPTION>
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
</TABLE>
- --------
(1) Charged to costs and expenses.
(2) Charged to sales.
F-30
