SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from to
Commission File No. 1-13638
MARVEL ENTERPRISES, INC.
------------------------------------------
(Exact name of Registrant as specified in its charter)
(formerly known as Toy Biz, Inc.)
Delaware 13-3711775
- ----------------- ----------------------------
(State of incorporation) (I.R.S. employer identification number)
387 Park Avenue South
New York, New York 10016
----------------------------------------------
(Address of principal executive offices, including zip code)
(212) 696-0808
(Registrant's telephone number, including area code)
----------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
8% Cumulative Convertible Exchangeable Preferred Stock, par value $.01 per share
Plan Warrants for the purchase of Common Stock
Class A Warrants for the purchase of Common Stock
Class B Warrants for the purchase of 8% Cumulative Convertible Exchangeable
Preferred Stock
Class C Warrants for the purchase of Common Stock
12% Senior Notes due 2009
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant as of March 9, 2001 was
{$27,551,462} based on a price of {$1.85) per share, the closing sales price for
the Registrant's Common Stock as reported in the New York Stock Exchange
Composite Transaction Tape on that date.
As of March 9, 2001, there were 33,947,923 outstanding shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
This Annual Report on Form 10-K/A is being filed to amend the Annual Report
on Form 10-K dated March 30, 2001 to correct Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and Note 5 to Notes to the Consolidated Financial Statements
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.........................................................1
ITEM 2. PROPERTIES......................................................10
ITEM 3. LEGAL PROCEEDINGS...............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................12
ITEM 6. SELECTED FINANCIAL DATA.........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................13
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK...........................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.........................19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............20
ITEM 11. EXECUTIVE COMPENSATION..........................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..............................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.................................................32
SIGNATURES......................................................................36
i
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed herein
concerning the Company's business and operations could cause actual results to
differ materially from those contained in forward-looking statements made in
this Form 10-K Annual Report. When used in this Form 10-K, the words "intend",
"estimate", believe", "expect" and similar expressions are intended to identify
forward-looking statements. In addition, the following factors, among others,
could cause the Company's financial performance to differ materially from that
expressed in any forward-looking statements made by the Company:
Potential inability to successfully implement business strategy.
A decrease in the level of media exposure or popularity of our characters
resulting in declining revenues from products based on those characters. If
movies or television programs based upon Marvel characters which are
scheduled to be released are not successful, the ability to obtain new
licenses for motion pictures or televisions shows may be substantially
diminished.
The lack of commercial success of properties owned by major entertainment
companies that have granted us toy licenses.
The imposition of quotas or tariffs on toys manufactured in China as a
result of a deterioration in trade relations between the U.S. and China. A
large number of Marvel's toy products are manufactured in China, which
subjects us to risks of currency exchange fluctuations, transportation
delays and interruptions, and political and economic disruptions. Our
ability to obtain products from our Chinese manufacturers is dependent upon
the United States' trade relationship with China. The "most favored nation"
status of China, which is reviewed annually by the United States
government, is a regular topic of political controversy. The loss of
China's "most favored nation" status would increase the cost of importing
products from China significantly, which could have a material adverse
effect on us. The imposition of further trade sanctions on China could
result in significant supply disruptions or higher merchandise costs to us.
We might not be able to find alternate sources of manufacturing outside
China on acceptable terms even if we want or need to. Our inability to find
those alternate sources could have a material adverse effect on us.
Changing consumer preferences. Our new and existing toy products are
subject to changing consumer preferences. Most of our toy products can be
successfully marketed for only a limited period. In particular, toys based
on feature films are in general successfully marketed for only a year or
two following the film's release. Existing product lines might not retain
their current popularity or new products developed by us might not meet
with the same success as our current products. We might not accurately
anticipate future trends or be able to successfully develop, produce and
market products to take advantage of market opportunities presented by
those trends. Part of our strategy is to make toys based on the anticipated
success of feature film releases and TV show broadcasts. If these releases
and broadcasts are not successful, we may not be able to sell these toys
profitably, if at all.
Production delays or shortfalls, continued concentration of toy retailers
and pressure by certain of our major retail customers to significantly
reduce their toy inventory levels. The retail toy business is highly
concentrated. The five largest customers for our toy products accounted in
the aggregate for approximately 60% of our total toy sales in 2000. An
adverse change in, or termination of, our relationship with one or more of
our major customers could have a material adverse effect on us. Each of our
five top toy customers also uses, to some extent, inventory management
systems which shift a portion of retailers' inventory risk onto us. Our
production of excess products to meet anticipated retailer demand could
result in markdowns and increased inventory carrying costs for us on even
our most popular items. If we fail to anticipate a high demand for our
products, however, we face the risk that we may be unable to provide
adequate supplies of popular toys to retailers in a timely fashion,
particularly during the Christmas season, and may consequently lose sales.
The impact of competition and changes to the competitive environment on our
products and services.
Other factors detailed from time to time in our filings with the Securities
and Exchange Commission.
These forward-looking statements speak only as of the date of this report.
We do not intend to update or revise any forward-looking statements to reflect
events or circumstances after the date of this report, including changes in
business strategy or planned capital expenditures, or to reflect the occurrence
of unanticipated events.
ii
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires: (i) the term the "Company" and the
term "Marvel" each refer to Marvel Enterprises, Inc. (formerly Toy Biz, Inc.), a
Delaware corporation, and its subsidiaries; (ii) the term "MEG" refers to Marvel
Entertainment Group, Inc., a Delaware corporation, and its subsidiaries, prior
to the consummation of the Merger, as defined below, and its emergence from
bankruptcy; (iii) the term "Toy Biz, Inc." refers to the Company prior to the
consummation of the Merger; (iv) the term "Marvel Licensing" refers to the
Marvel Licensing business division of the Company; (v) the term "Marvel
Publishing" refers to the Marvel Publishing business division of the Company;
and (vi) the term "Toy Biz" refers to the Toy Biz business division of the
Company. Unless otherwise indicated, the statement of operations data and
statement of cash flows data included in this Report do not include (i) Fleer
Corp., Frank H. Fleer Corp. and SkyBox International Inc. (each a wholly-owned
subsidiary of the Company), substantially all of the assets of which the Company
sold on February 11, 1999 (the "Fleer Sale"), or (ii) Panini SpA("Panini"),
which the Company sold on October 5, 1999. Certain of the characters and
properties referred to in this Report are subject to copyright and/or trademark
protection.
Background
On October 1, 1998, the Company acquired MEG by means of a merger between
MEG and the Company's wholly-owned subsidiary MEG Acquisition Corp. (the
"Merger"). Upon consummation of the Merger, the Company changed its name from
"Toy Biz, Inc." to "Marvel Enterprises, Inc." The Merger was part of the Fourth
Amended Joint Plan of Reorganization for MEG that was confirmed by the United
States District Court for the District of Delaware, which had jurisdiction of
MEG's chapter 11 case. MEG's chapter 11 case had begun in December 1996 with
MEG's filing of a voluntary petition for bankruptcy protection. Prior to the
reorganization, MEG was a principal stockholder of Toy Biz, Inc. See "The
Reorganization."
In order to finance a portion of the consideration required to consummate
the Merger and certain other transactions contemplated by the plan of
reorganization, the Company borrowed $200 million (the "Bridge Loan") from UBS
AG, Stamford Branch ("UBS"). The Company used a portion of the proceeds from an
offering, completed on February 25, 1999 (the "Notes Offering"), of $250 million
of 12% senior notes due 2009 (the "Notes") to repay the Bridge Loan. UBS is an
affiliate of Warburg Dillon Read LLC, one of the placement agents in the Notes
Offering.
General
The Company is one of the world's most prominent character-based
entertainment companies, with a proprietary library of over 4,700 characters.
The Company operates in the licensing, comic book publishing and toy businesses
in both domestic and international markets. The Company's library of characters
includes Spider-Man, X-Men, Captain America, Fantastic Four and The Incredible
Hulk and is one of the oldest and most recognizable collections of characters in
the entertainment industry.
The Company's characters have been developed through a long history of
comic book plots and storylines which give each of them their own personality,
context and depth. In addition, the Company's characters exist in the "Marvel
1
Universe," a fictitious universe which provides a unifying historical and
contextual background for the characters and storylines. The "Marvel Universe"
concept permits the Company to use some of its more popular characters to
enhance the exposure of its lesser-known characters.
The Company's business is divided into three integrated and complementary
operating divisions: Marvel Licensing, Marvel Publishing and Toy Biz.
Marvel Licensing
Marvel Licensing licenses the Company's characters for use in a wide
variety of consumer products, including apparel, costumes, children's sleepwear,
party goods, snack foods, video games, collectibles, posters, footwear,
backpacks and linens. Marvel Licensing also receives fees from the sale of
licenses to a variety of media, including television, feature films and
destination-based entertainment.
The following are examples of media exposure and licensing opportunities
that Marvel Licensing has generated for the Company's characters:
Television Programs
Marvel Licensing licenses the Company's characters for use in popular
television programs, including Spider-Man, which has appeared on the Fox Kids
Television Network since 1994, and X-Men, which has appeared on the Fox Kids
Television Network since 1992. In addition, The Incredible Hulk, Fantastic Four,
Iron Man and Silver Surfer have aired on syndicated television from time to time
in the past. In 2000, Marvel began production of X-Men Evolution, a half hour
animated show. This is distributed by Warner Brothers and currently appears on
the Kids WB network.
Feature Films
Marvel Licensing has licensed the Company's characters for use in major
motion pictures. For example, the Company currently has licenses with Twentieth
Century Fox to produce motion pictures featuring X-Men, Fantastic Four and
Silver Surfer. The X-Men film was released during July 2000 and a sequel is
presently scheduled to be released in November 2002. The Company currently has
an outstanding license with Sony Pictures for a motion picture based upon
Spider-Man which is scheduled to be released in May 2002, and other outstanding
licenses with various other film studios for a number of its other characters
and additional discussions are ongoing. Under these licenses, the Company
generally retains control over merchandising rights and not less than 50% of
movie-based merchandising revenues.
Destination-Based Entertainment
Marvel Licensing licenses the Company's characters for use at theme parks,
shopping malls, special events and restaurants. For example, Marvel Licensing
has licensed the Company's characters for use as part of an attraction at the
Universal Studios Theme Park in Orlando, Florida. Universal Studios unveiled
"Marvel Super Hero Island" featuring Spider-Man, The Incredible Hulk and a
number of the Company's other characters in 1999.
On-line Media
Marvel Licensing has developed an on-line presence for the Company's
characters through the Company's "Marvel.com" and related websites, including
the introduction of electronic comics and access to the Company's top writers
and artists and plans to extend such presence in 2001.
Non-Toy Merchandise
Marvel Licensing licenses the Company's characters for use in a wide
variety of consumer products, including apparel, costumes, children's sleepwear,
party goods, snack foods, video games, collectibles, posters, footwear,
backpacks and linens.
2
Marvel Publishing
Since 1995, the comics publishing business has declined, along with the
number of retailers that carry comic books.
A significant number of comic specialty stores have left the business,
primarily due to a decrease in speculative purchases of both comics and related
collectibles (e.g. trading cards.) A significant number of outlets that carried
comics as a part of their magazine merchandise programs have dropped the product
due to an overall reduction in comics readership. Management believes that this
loss of readers was the direct result of a long-term, industry-wide decline in
the readability and quality of comic book stories. In 2000, the Company took
steps to improve our editorial processes and comic book content and management
believes that these were the first steps in the long-term rehabilitation of
Marvel publishing.
Comic Books
Marvel Publishing has been publishing comic books since 1939 and has
developed a roster of more than 4,700 characters, including the following
popular characters: Spider-Man; X-Men (including Wolverine, Nightcrawler,
Colossus, Storm, Cyclops, Rogue, Bishop and Gambit); Captain America; Fantastic
Four (including Mr. Fantastic, Human Torch, Invisible Woman and The Thing); The
Incredible Hulk; Thor; Silver Surfer; Daredevil; Iron Man; Dr. Strange; and
Ghost Rider. The Company's characters exist in the "Marvel Universe", a
fictitious universe which provides a unifying historical and contextual
background for the storylines. Marvel Publishing's titles feature classic Marvel
super heroes, newly developed Marvel characters, and characters created by other
entities and licensed to Marvel Publishing.
Marvel Publishing's approach to the Marvel characters is to present a
contemporary drama suggestive of real people with real problems. This enables
the characters to evolve, remain fresh, and, therefore, attract new and retain
old readers in each succeeding generation. The "Marvel Universe" concept permits
Marvel Publishing to use the popularity of its characters to introduce a new
character in an existing Marvel super heroes comic book or to develop more fully
an existing but lesser known character. In this manner, formerly lesser known
characters such as Thunderbolts and Wolverine have been developed and are now
popular characters in their own right and are featured in their own monthly
comic books. The "Marvel Universe" concept also allows Marvel Publishing to use
its more popular characters to make "guest appearances" in the comic books of
lesser-known or newer characters to attempt to increase the circulation of a
particular issue or issues.
Comic Book Editorial Process
Marvel Publishing's full-time editorial staff consists of an editor in
chief, managing editor and approximately 17 editors associate editors and
assistant editors who oversee the quality and consistency of the artwork and
editorial copy and manage the production schedule of each issue. The production
of each issue requires the editors to coordinate, over a six- to nine-month
period, the activities of a writer, a pencil artist, an inker, a colorist and a
printer. The majority of this work is performed by third parties outside of
Marvel Publishing's premises.
The artists and writers include freelancers who generally are paid on a
per-page basis. They are eligible to receive incentives or royalties based on
the number of copies sold (net of returns) of the comic books in which their
work appears. In 2000, Marvel cut back on the number of expensive, exclusive
agreements with writers and artists while establishing new relationships with
some of the industry's hottest creators.
The creative process is a team effort led by a Marvel editor. A writer
develops a story line; a pencil-artist works with the writer to translate the
story into a pictorial sequence of events; an inker enhances the pencil artist's
work; a letterer typesets balloons and captions; and a computer artist colors
the pages. In 2000, Marvel began to eliminate the costly and inefficient process
of hand-coloring books in favor of higher quality, less expensive, computer
coloring. These freelance creators and the printers/binders for Marvel comic
books are unaffiliated third parties.
3
Customers, Marketing and Distribution
Marvel Publishing's primary target market for its comic books has been
teenagers and young adults in the 13 to 23 year old age group. Established
readership of Marvel Publishing's comic books also extends to readers in their
mid-thirties. There are two primary types of purchasers of Marvel Publishing's
comic books. One is the traditional purchaser who buys comic books like any
other magazine. The other is the reader-saver who purchases comic books,
typically from a comic book specialty store, and maintains them as part of a
collection.
Marvel Publishing's comic book publications are distributed through three
channels: (i) to comic book specialty stores on a nonreturnable basis (the
"direct market"), (ii) to traditional retail outlets on a returnable basis (the
"retail returnable market"), and (iii) on a subscription sales basis.
In 2000, Marvel launched the Ultimate Marvel line, which recreates the
Spider-Man and X-Men mythos in a way that is thoroughly modern and accessible to
new readers. These books immediately rose to the top of the industry sales
charts and have been growing in monthly readership.
For the years ended December 31, 1998, 1999 and 2000, approximately 81%,
80%, and 77%, respectively, of Marvel Publishing's net publishing revenues were
derived from sales to the direct market. Marvel Publishing distributes its
publications through an unaffiliated entity which, in turn, services specialty
market retailers and direct market comic book shops.
In 2000, Marvel returned to its historical policy of printing to order for
the Direct Market, thus eliminated the cost of printing and marketing excess
inventory. Moreover, it seems to have helped revive collector interest in Marvel
comics, as sold out comics are now rising in after-market value. (It is worth
distinguishing back-issue collectibility - which had always been a healthy part
of the comic book business - from the bubble of mass speculation on over-printed
books that marked the early 1990s.)
For the years ended December 31, 1998, 1999 and 2000, approximately 10%, 9%
and 8%, respectively, of Marvel Publishing's net publishing revenues were
derived from sales to the retail returnable market. The retail returnable market
consists of traditional periodical retailers such as newsstands, convenience
stores, drug stores, supermarkets, mass merchandise and national bookstore
chains. The distributors sell Marvel Publishing's publications to wholesalers,
who in turn sell to the retail outlets. Management issues credit to these
distributors for unsold and returned copies. Distribution to national bookstore
chains is accomplished through a separate distributor.
For the years ended December 31, 1998, 1999 and 2000, approximately 3%, 2%
and 2%, respectively, of Marvel Publishing's net publishing revenues were
derived from subscription sales.
For the years ended December 31, 1998, 1999 and 2000, approximately 6%, 9%
and 13%, respectively, of Marvel Publishing's net publishing revenues were
derived from advertising sales and other publishing activities. In most of
Marvel Publishing's comic publications, ten pages (three glossy cover pages and
seven inside pages) are allocated for advertising. The products advertised
include sports and entertainment trading cards, video games, role playing games,
movies, candy, cereals, toys, models and other consumer packaged goods. Marvel
Publishing permits advertisers to advertise in a broad range of Marvel
Publishing's comic book publications which target specific groups of titles that
have a younger or older readership.
Toy Biz
Toy Biz designs, develops, markets and distributes both innovative and
traditional toys in the boys', girls', activities/games and electronic toy
categories based on popular entertainment properties, consumer brand names and
proprietary designs. Toy Biz's products are distributed to a number of general
and specialty merchandisers and distributors in the United States and
internationally.
The toy industry is a highly competitive environment in which large mass
market toy retailers dominate the industry and feature a large selection of
toys. In recent years, entertainment conglomerates, through films, television
shows, video games and the internet and print products, have emerged as
important content providers for toy manufacturers. In addition, continued
consolidation among discount-oriented retailers can be expected to require toy
companies to keep prices low and to implement and maintain production and
inventory control methods permitting them to respond quickly to changes in
demand. In addition to the competitive pressures placed on manufacturers and
distributors, the toy industry is subject to changing consumer preferences and
significant seasonal patterns in sales. Some products in the toy industry are
perennial favorites and others are successfully marketed only for a limited
period of time.
4
Due to the uncertainty of the toy industry and the fact that retailers
continue to work down excess inventories of declining brands, management has
taken several initiatives to restructure Toy Biz and position it for improved
financial and operating performance. These initiatives, which include previously
announced staffing reductions and the elimination of certain high risk product
categories and lines and shifting emphasis of its business to direct import,
will enable Toy Biz to re-deploy its resources on a more focused set of
opportunities. These include traditional Marvel-character franchises and the
Lord of the Rings Toy License. Accordingly, in the fourth quarter of 2000,
Marvel wrote down certain inventories, packaging, tooling and design and
development costs related to the Toy Biz division. The write-downs resulted in
$22.9 million of fourth quarter adjustments and relate primarily to discontinued
toy lines in the game and promotional doll categories.
Products
Toy Biz has historically marketed a variety of toy products designed for
children of different age groups. Toy Biz's current product strategy is to
increase sales of Marvel-based toys, which generate higher margins than the
Company's other toy product lines. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Overview." In 2000,
approximately 75 % of the Company's net toy sales were generated from products
not based on the Marvel characters. Toy Biz produces a portion of its products
under licenses which it has obtained from third parties. In carrying out its
business strategy, Toy Biz continuously monitors existing licensed properties
and pursues new licenses where it believes that the new licenses fit with Toy
Biz's core product lines, or where they may add to Toy Biz's core product mix.
Some of Toy Biz's licenses confer rights to exploit original concepts
developed by toy inventors and designers. Other licenses, referred to as
trademark or brand name licenses, permit Toy Biz to produce toys bearing the
recognized consumer trademark or brand name owned by the licensor. In return for
these rights Toy Biz pays royalties to its licensors. Royalties paid by Toy Biz
to licensors and inventors are typically based on a percentage of net sales.
Most licenses have terms of one to three years and some are renewable at the
option of Toy Biz upon payment of minimum guaranteed payments or the attainment
of certain sales levels during the term of the license. In the future, royalty
rates and minimum guaranteed royalty payments may increase or decrease depending
upon various competitive forces in the toy industry.
Boys' Products. Toy Biz is a leading marketer of youth entertainment
products for domestic and international markets. These products are based on
fictional action adventure characters owned or licensed by the Company. Action
figures and accessories relating to the X-Men motion picture were the most
successfully developed of Toy Biz's action figures and accessory line during
2000. Toy Biz also produces and markets a line of toys under license from World
Championship Wrestling (WCW) and Pokemon. Toy Biz is currently developing a line
of action figures, accessories and role play items based upon J.R.R. Tolkien's
literary phenomenon "The Lord of the Rings." New Line Cinema (a division of
AOL/Time Warner) is producing the "The Lord of the Rings" for major theatrical
release beginning December 2001 and will release Part II during Holiday 2002 and
Part III for Holiday 2003.
Girls' Products. Toy Biz had a very successful product in the feature plush
category last year with "Puppy Magic." "Puppy Magic" is a soft stuffed mother
dog and three puppies that are electronically interactive. Toy Biz has extended
this technology and play pattern to kittens for 2001 with the introduction of
"Kitty Magic.".
Activity Toys. The Company believes that the Spectra Star brand name
accounts for a substantial share of the United States mass market kite business.
Toy Biz also utilizes license-driven products to expand the consumer appeal of
its kite products. Toy Biz's kite licenses have been granted by well-known
licensors such as Disney, Sony Pictures, Nickelodeon, Universal Studios and
Warner Bros. Toy Biz's activity toy products also include model rocketry
products.
Design and Development
Toy Biz maintains a product development staff and also obtains new product
ideas from third-party inventors. The time from concept to production of a new
toy can range from six to twenty-four months, depending on product complexity.
Toy Biz relies on independent parties in China to manufacture a substantial
portion of its products. The remainder of its products are manufactured in
Mexico or the United States. As a matter of policy, Toy Biz uses several
different manufacturers that compete for the Company's business. By
concentrating its manufacturing among certain manufacturers, Toy Biz pursues a
strategy of selecting manufacturers at which Toy Biz's product volume qualifies
Toy Biz as a significant customer. Toy Biz is not a party to any long-term
agreement with any manufacturer in the Far East.
5
Toy Biz's Spectra Star products are manufactured mainly in Mexico by the
Company's Mexican subsidiary.
Toy Biz maintains a Hong Kong office from which it regularly monitors the
progress and performance of its manufacturers and subcontractors. Toy Biz also
uses Acts Testing Labs (H.K.) Ltd., a leading independent quality-inspection
firm, to maintain close contact with its manufacturers and subcontractors in
China and to monitor quality control of Toy Biz's products. Toy Biz uses an
affiliate of Acts Testing Labs (H.K.) Ltd. to provide testing services for a
limited amount of product currently produced in the United States.
Customers, Marketing and Distribution
Toy Biz markets and distributes its products in the United States and
internationally, with sales to customers in the United States accounting for
approximately 84%, 85% and 72% of the Company's net toy sales in 1998, 1999 and
2000, respectively.
Outlets for Toy Biz's products in the United States include specialty toy
retailers, mass merchandisers, mail order companies and variety stores, as well
as independent distributors who purchase products directly from Toy Biz and ship
them to retail outlets. Toy Biz's five largest customers include Toys 'R' Us,
Inc., Wal-Mart Stores, Inc., Kmart Corporation, Target Stores, Inc., a division
of Target Corp., and Kay-Bee Toy Stores, which accounted in the aggregate for
approximately 66%, 70% and 60% of the Company's total toy sales in 1998, 1999
and 2000, respectively. Our customer base for toys is concentrated.
Toy Biz maintains a sales and marketing staff and retains various
independent manufacturers' sales representative organizations in the United
States. Toy Biz's management coordinates and supervises the efforts of its
salesmen and its other sales representatives. Toy Biz also directly introduces
and markets to customers new products and extensions to previously marketed
product lines by participating in the major toy trade shows in New York, Hong
Kong and Europe and through a showroom maintained by Toy Biz in New York.
Toy Biz's products are sold outside the United States through independent
distributors by the Company's Hong Kong subsidiary, under supervision of Toy
Biz's management. Toy Biz's international product line generally includes
products currently or previously offered in the United States, packaged to meet
local regulatory and marketing requirements.
Toy Biz utilizes an independent public warehouse in the Seattle, Washington
area, for storage of its products.
Intellectual Property
The Company believes that its library of proprietary characters as well as
its "Marvel" trade name represent its most valuable assets and that its library
could not be easily replicated. The Company currently conducts an active program
of maintaining and protecting its intellectual property rights in the United
States and in approximately 55 foreign countries. The Company's principal
trademarks have been registered in the United States, certain of the countries
in Western Europe and South America, Japan, Israel and South Africa. While the
Company has registered its intellectual property in these countries, and expects
that its rights will be protected in these countries, certain other countries do
not have intellectual property laws that protect United States holders of
intellectual property and there can be no assurance that the Company's rights
will not be violated or its characters "pirated" in these countries.
Advertising
Although a portion of the Company's advertising budget for its toy products
is expended for newspaper advertising, magazine advertising, catalogs and other
promotional materials, the Company allocates a majority of its advertising
budget for its toy products to television promotion. The Company advertises on
national television and purchases advertising spots on a local basis. Management
believes that television programs underlying the Company's toy product lines
increase exposure and awareness.
The Company currently engages Tangible Media, Inc. ("Tangible Media"), an
affiliate of Isaac Perlmutter, to purchase certain of its advertising. Mr.
Perlmutter is a director and a principal stockholder of the Company. The Company
retains the services of a media consulting agency for advice on matters of
advertising creativity.
6
Competition
The industries in which the Company competes are highly competitive.
Marvel Licensing competes with a diverse range of entities which own
intellectual property rights in characters. These include D.C. Comics (which is
owned by Time Warner, Inc.), The Walt Disney Company and other
entertainment-related entities. Many of these competitors have greater financial
and other resources than the Company.
Marvel Publishing competes with over 500 publishers in the United States.
Some of Marvel Publishing's competitors such as D.C. Comics are part of
integrated entertainment companies and may have greater financial and other
resources than the Company. Marvel Publishing also faces competition from other
entertainment media, such as movies and video games, but management believes
that it benefits from the low price of comic books in relation to those other
products.
Toy Biz competes with many larger toy companies in the design and
development of new toys, the procurement of licenses and for adequate retail
shelf space for its products. The larger toy companies include Hasbro, Inc.,
Mattel Inc., Playmates, Inc. and Bandai, Co., Ltd., and Toy Biz considers Just
Toys, Inc., Empire of Carolina, Inc. and Ohio Art Co. to be among its
competitors as well. Many of these competitors have greater financial and other
resources than the Company. The toy industry's highly competitive environment
continues to place cost pressures on manufacturers and distributors.
Discretionary spending among potential toy consumers is limited and the toy
industry competes for those dollars along with the makers of computers and video
games. Management believes that strong character and product licenses, the
industry reputation and ability of its senior management, the quality of its
products and its overhead and operational controls have enabled Toy Biz to
compete successfully.
Employees
As of December 31, 2000, the Company employed approximately 720 persons
(including operations in Hong Kong and Mexico). The Company also contracts for
creative work on an as-needed basis with approximately 500 active freelance
writers and artists. The Company's employees are not subject to any collective
bargaining agreements. Management believes that the Company's relationship with
its employees is good.
Government Regulations
The Company is subject to the provisions of, among other laws, the Federal
Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws
empower the Consumer Product Safety Commission (the "CPSC") to protect children
from hazardous toys and other articles. The CPSC has the authority to exclude
from the market articles which are found to be hazardous. Similar laws exist in
some states and cities in the United States, Canada and Europe. The Company
maintains a quality control program (including the inspection of goods at
factories and the retention of an independent quality-inspection firm) designed
to ensure compliance with applicable laws.
The Reorganization
On December 27, 1996, MEG and certain of its subsidiaries filed voluntary
petitions for relief under chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware (collectively,
the "Bankruptcy Case"). The Fourth Amended Plan of Reorganization (the "Plan")
proposed by Toy Biz, Inc. and certain secured creditors of MEG in the Bankruptcy
Case was confirmed by the United States District Court for the District of
Delaware (the "District Court"), which has assumed jurisdiction over the
Bankruptcy Case, and in connection with that confirmation, all appeals relating
to consummation of the Plan were withdrawn by all parties involved in the
Bankruptcy Case.
The Merger, the Equity Securities Issuances, the Secured Creditors Cash
Payment, the Unsecured Creditors Cash Payment, the Initial Administration
Expense Claims Payment, the Panini Payment, the Panini Guaranty, the Dispute
Settlement and Professional Fees Payments, the Capital Contribution, the
Refinancing, the Bridge Loan, the Standstill Agreements and the Litigation
Trusts, in each case as described below, are referred to in this Report
collectively as the "Reorganization."
7
Pursuant to the Plan, the Company used the proceeds from the Bridge Loan,
together with other funds, to consummate the following transactions on October
1, 1998, the date of the Plan's consummation:
Merger
Pursuant to an Agreement and Plan of Merger, dated as of August 12, 1998,
by and among MEG, MEG Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Toy Biz, Inc., and Toy Biz, Inc., MEG Acquisition
Corp. merged with and into MEG, with MEG surviving as a wholly-owned subsidiary
of Toy Biz, Inc.
Equity Securities Issuances
In connection with the consummation of the Plan, the Company issued
(collectively, the "Equity Securities Issuances"):
(1) 16.9 million shares of 8% Preferred Stock as follows: (a) 7.9
million shares to certain secured creditors of MEG (the "Secured Creditors")
and (b) 9.0 million shares to certain purchasers (the "Preferred Stock
Investors");
(2) 13.1 million shares of Common Stock to the Secured Creditors;
(3) warrants to purchase up to 1.75 million shares of Common Stock at
an exercise price of $17.25 per share (the "Plan Warrants") to certain unsecured
creditors of MEG (the "Unsecured Creditors"); and
(4) the following warrants to former stockholders of MEG and holders of
certain class securities litigation claims concerning MEG stock (collectively,
the "MEG Equity Holders"), the Unsecured Creditors and certain other creditors
of MEG: (a) three-year warrants to purchase 4 million shares of Common Stock at
an exercise price of $12.00 per share (the "Stockholder Series A Warrants"); (b)
six-month warrants to purchase 3 million shares of 8% Preferred Stock at an
exercise price of between $10.65 and $11.88, based on the date of warrant
issuance, per share (the "Stockholder Series B Warrants"); and (c) four-year
warrants to purchase 7 million shares of Common Stock at an exercise price of
$18.50 per share (the "Stockholder Series C Warrants," and together with the
Stockholder Series A Warrants and the Stockholder Series B Warrants, the
"Stockholder Warrants"; the Stockholder Warrants and the Plan Warrants,
collectively, the "Warrants"). The Stockholder Series B Warrants were issued in
three tranches on October 14, 1998, with an exercise price of $10.65 per share
(these warrants expired on April 14, 1999); on December 23 1998, with an
exercise price of $10.86 per share (these warrants expired on June 23, 1999);
and on October 17, 1999, with an exercise price of $11.88 per share (these
warrants expired on April 17, 2000). The completion of all distributions to the
Unsecured Creditors is pending (other than of Stockholder Series B Warrants)
until the District Court makes certain determinations concerning the amount of
the Unsecured Creditors' allowed claims.
Secured Creditors Cash Payment
The Company paid $221.8 million in cash (the "Secured Creditors Cash
Payment") to the Secured Creditors. An additional $10 million had been paid to
the Secured Creditors in the second quarter of 1998 in connection with the sale
of MEG's confectionery business.
Unsecured Creditors Cash Payment
The Company deposited money into a trust account that will be used to make
a cash payment to the Unsecured Creditors in an amount equal to the lesser of
(i) $2.0 million plus fifteen percent (15%) of the amount of their allowed
claims and (ii) $8.0 million (the "Unsecured Creditors Cash Payment"). The
Unsecured Creditors Cash Payment will equal $8.0 million plus accrued interest.
Initial Administration Expense Claims Payment
The Company agreed to pay in cash all administration expense claims
incurred in connection with the Bankruptcy Case (the "Administration Expense
Claims"). On the consummation date of the Plan, the Company paid approximately
$20.2 million of Administration Expense Claims (the "Initial Administration
Expense Claims Payment"). In December 1998 and during 1999 and 2000, the Company
paid approximately $4.2 million, $10.4 million and $2.1 million, respectively,
of additional Administration Expense Claims. The Company estimates that it may
be required to pay between $6.5 million and $8.5 million of additional
8
Administrative Expense Claims, although there can be no assurance as to the
amount the Company will be required to pay. If the aggregate amount of
Administration Expense Claims is in excess of $35 million, Zib Inc. ("Zib"), an
affiliate of Mr. Perlmutter, has agreed that Zib or one of its affiliates will
lend the Company the amount of the excess in exchange for a five-year promissory
note from the Company (the "Excess Administration Expense Claims Note") which
would bear interest at 2% above the interest rate on the Notes.
Panini Payment and Panini Guaranty
The Company paid $13 million in cash (the "Panini Payment") to certain
creditors (the "Panini Creditors") of Panini and issued to the Panini Creditors
a deficiency guaranty (the "Panini Guaranty") of up to $27 million of Panini`s
United States bank indebtedness. On October 5, 1999, the Company sold Panini to
ID4 Holding S.p.A. ("ID4"), a newly created company owned jointly by Fineldo
S.p.A., an Italian conglomerate engaged in various consumer product and
financing businesses and controlled by Vittorio Merloni, and the Senior
Management of Panini. In connection with ID4's purchase of the Panini equity,
for which the Company received a nominal price, ID4 also purchased all of
Panini's outstanding U.S. bank debt and the Company was released from the Panini
Guaranty. The Company made a cash payment of $11.2 million to Panini's bank
lenders to obtain its release from the Panini Guaranty. As part of the sale, the
Company also entered into an agreement whereby Panini would continue as the
Company's international publishing licensee under a five-year license.
Dispute Settlement and Professional Fees Payments
The Company paid $3.5 million in cash (the "Dispute Settlement Payment") to
certain claimants in the Bankruptcy Case in settlement of disputes. The Company
also paid $200,000 (the "Professional Fees Payment") to Dickstein Partners Inc.
in reimbursement of professional fees incurred in connection with the purchase
of shares of 8% Preferred Stock on October 1, 1998. Dickstein Partners Inc. is
an affiliate of Mark Dickstein, who was a director of the Company from October
1998 until October 1999.
Capital Contribution
The Company received a capital contribution totaling $1.5 million (the
"Capital Contribution") from an affiliate of Mr. Perlmutter and from Avi Arad.
Mr. Arad is a director, executive officer, and principal stockholder of the
Company.
Refinancing
The Company repaid all outstanding indebtedness (the "Refinancing") under
Toy Biz, Inc.'s then-existing working capital facility.
Bridge Loan
The Company obtained the Bridge Loan from UBS. A portion of the proceeds
from the Notes Offering were used to repay the Bridge Loan.
Standstill Agreements
Carl C. Icahn and High River Limited Partnership (the "High River Group")
and Vincent Intrieri and Westgate International L.P. (the "Westgate Group")
entered into standstill agreements (the "Standstill Agreements") on the
consummation date of the Plan. Pursuant to the Standstill Agreements, the High
River Group and the Westgate Group have each agreed that they will not, and will
not permit their affiliates or associates to, among other things, seek to
control the management of the Company. In addition, the Standstill Agreements
require that the High River Group and Westgate Group vote all securities
beneficially owned by them in connection with any action to be taken by the
Company's security holders with respect to which an abstention will have the
same effect as a vote against the matter, in proportion to the votes cast with
respect to that action by all other holders of securities. With respect to all
other matters to be voted upon at a meeting of the Company's security holders,
the High River Group and Westgate Group shall cause securities beneficially
owned by them to be present at the meeting for quorum purposes but to abstain
from voting on the matter. The Standstill Agreements will terminate on October
1, 2002, subject to earlier termination under certain circumstances.
9
Litigation Trusts
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
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.
ITEM 2. PROPERTIES
The Company has the following principal properties:
Facility Location Square Feet Owned/Leased
- -------- --------- ----------- ------------
Office New York, New York 69,000 Leased
Office New York, New York 15,000 Leased
Office/Showroom New York, New York 14,100 Leased
Office/Warehouse Yuma, Arizona 80,000 Owned
Warehouse Fife, Washington 210,000 Leased
Manufacturing San Luis, Mexico 190,000 Owned
Office Santa Monica, California 2,800 Leased
ITEM 3. LEGAL PROCEEDINGS
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.
Spider-Man Litigation. The Company's subsidiaries MEG and Marvel
Characters, Inc., (collectively, the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character which was completely settled in
March 2001.
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 related 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. The
relief sought by complaint includes a declaration that the defendants have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various other forms of equitable relief. The Company believes that each
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.
10
On February 24, 1999, Wolfman and the Company entered into a
stipulation pursuant to which the United States District Court for the District
of Delaware will determine the issue of whether Wolfman or Marvel Characters,
Inc. (which is now a wholly owned subsidiary of the Company) is the rightful
owner of Blade and Deacon Frost and a number of other characters. In the context
of this proceeding, the Company has sought a declaration that Marvel Characters,
Inc., not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial
on the merits was held in December 1999 and on November 6, 2000 the judge issued
an opinion and order finding in favor of the Company and holding that the
Company is the lawful owner of the rights claimed by Wolfman. As of this date,
Wolfman filed an appeal which has not been scheduled.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for each fiscal quarter indicated, the high
and low prices for the Company's Common Stock as reported in the New York Stock
Exchange Composite Transaction Tape.
Fiscal Year High Low
----------- ---- -----
1999
First Quarter $ 7 $ 5 3/8
Second Quarter $ 9 3/4 $ 6 5/8
Third Quarter $ 7 1/2 $ 5 1/8
Fourth Quarter $ 7 7/8 $ 4 11/16
2000
First Quarter $ 6 1/2 $ 5 5/16
Second Quarter $ 6 15/16 $ 4 3/16
Third Quarter $ 7 3/8 $ 3 1/8
Fourth Quarter $ 3 3/16 $ 1 7/16
As of March 21, 2001, there were 614 holders of record of the Company's
Common Stock.
The Company has not declared any dividends on the Common Stock. The working
capital facility restricts the Company's ability to pay dividends on the Common
Stock. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected combined or consolidated financial
data, derived from the Company's audited financial statements, for the five-year
period ended December 31, 2000. The selected financial data of the Company for
the years ended December 31, 1998 and 1999 are not comparable to prior periods
due to the Company's acquisition of MEG on October 1, 1998. The Company has not
paid dividends on its capital stock during any of the periods presented below.
Year Ended
-------------------------------------------------------------------------
Dec. 31, Dec. 31, Dec.31, Dec.31, Dec.31,
1996 1997 1998 1999 2000
--------- --------- -------- -------- --------
(in thousands, except per share amounts)
Statement of Operations
Data:
Net sales..................... $ 221,624 $ 150,812 $232,076 $319,645 $231,651
Operating income (loss)....... 27,215 (49,288) (19,460) 56 (58,990)
Net income (loss) ............ 16,687 (29,465) (32,610) (33,791) (89,858)
Basic and diluted net income
(loss) per common share... 0.61 (1.06) (1.23) (1.43) (3.13)
Preferred dividend requirement 105 71 3,380 14,220 15,395
At December 31:
Balance Sheet Data:
Working capital (deficit)..... 102,192 74,047 (133,392) 91,919 41,740
Total assets.................. 171,732 150,906 689,904 654,637 555,284
Borrowings.................... -- 12,000 200,000 -- --
Other non-current debt........ -- -- 27,000 250,000 250,000
Redeemable preferred stock.... 1,681 -- 172,380 186,790 202,185
Stockholders' equity.......... 137,455 107,981 183,624 135,763 31,396
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements of the Company and the related notes thereto, and the other financial
information included elsewhere in this Report.
Set forth below is a discussion of the financial condition and results of
operations of the Company for the three fiscal years ended December 31, 2000.
Because of the significant effect of the Reorganization on the Company's results
of operations, the Company's historical results of operations and
period-to-period comparisons will not be indicative of future results.
Overview
Net Sales
The Company's net sales are generated from (i) licensing the Marvel
characters for use in merchandise, promotions, feature films, television
programs, theme parks and various other areas; (ii) publishing comic books,
including related advertising revenues; and (iii) marketing and distributing
toys, including toys based on the Marvel characters, proprietary toy products
and toys based on properties licensed to the Company from third parties.
Licensing, publishing and toys have accounted for 8%, 20% and 72%, respectively,
of the Company's net sales for the year ended December 31, 2000.
The Company's strategy is to increase the media exposure of the Marvel
characters through its media and promotional licensing activities, which it
believes will create revenue opportunities for the Company through sales of toys
and other licensed merchandise. The Company intends to use comic book publishing
to support consumer awareness of the Marvel characters and to develop new
characters and storylines.
Due to the deteriorating financial performance of Toy Biz, the Company
has eliminated certain product categories and lines in an effort to focus its
future toy business on marketing and distributing toys based on the Marvel
characters, which provide the Company with higher margins because no license
fees are required to be paid to third parties and, because of media exposure,
require less promotion and advertising support than the Company's other toy
categories. In 2001, Toy Biz will substantially reduce its advertising and
promotion costs as compared to 1999 and 2000 when approximately $37.8 million
and approximately $35.3 million, respectively, were spent on these costs. In
addition, Toy Biz will market and distribute toys associated with Lord of the
Rings Toy License which will coincide with the releases of all three films in
the trilogy presently scheduled to be released in December of 2001, 2002 and
2003.
The Company records as revenue the present value of licensing fees from its
licensing activities at the time the Company's characters are available to the
licensee and the collection of licensing fees is reasonably assured. Licensing
fees booked as revenue but not yet realized are recorded as receivables.
Licensing receivables due more than one year beyond the balance sheet date are
discounted to their net present value and are recorded as deferred charges.
Operating Expenses: Cost of Sales
There generally is no material cost of sales associated with the licensing
of the Company's characters.
Cost of sales for comic book publishing consists of art and editorial,
printing and distribution costs. Art and editorial costs account for the most
significant portion of publishing cost of sales. Art and editorial costs consist
of compensation to editors, writers and artists. The Company generally hires
writers and artists on a freelance basis but has exclusive employment contracts
with certain key writers and artists.
The Company out-sources the printing of its comic books to an unaffiliated
company. The Company's cost of printing is subject to fluctuations in
commodity-based products such as paper.
Cost of sales for the toy business consists of product and package
manufacturing, shipping and agents' commissions. The most significant portion of
cost of sales is product and package manufacturing. The Company, which utilizes
multiple manufacturers, solicits multiple bids for each project in order to
control its manufacturing costs. A substantial portion of the Company's toy
manufacturing takes place in China. A substantial portion of the Company's toy
manufacturing contracts are denominated in Hong Kong dollars.
13
In connection with the restructuring of Toy Biz, the Company increased its
inventory reserve by an additional $3.8 million by writing down certain
inventories in the fourth quarter of 2000 related to discontinued toy lines in
the game and promotional dolls categories.
Operating Expenses: Selling, General and Administrative
Selling, general and administrative costs consist primarily of advertising,
royalties, general and administrative, warehousing and store merchandising. The
most significant portion of selling, general and administrative costs is
advertising and royalties.
Advertising expense varies with the Company's product mix.
Royalties are payable on toys based on characters licensed from third
parties, such as World Championship Wrestling, Universal Studios and Sony
Pictures, as well as toys developed by outside inventors. There are no royalty
payments for Marvel-character-based toy products. Reserves for unpaid guaranteed
royalties on discontinued toy lines were increased by an additional $0.8 million
during the fourth quarter of 2000.
General and administrative costs consist of salaries and corporate
overhead.
The Company expects warehousing and store merchandising costs to be reduced
over time with the elimination of certain product categories and lines.
Operating Expenses: Depreciation and Amortization
Depreciation and amortization expense consists of amortization of goodwill
and other intangibles, tooling, product design and development, packaging design
and depreciation expense. Amortization expense increased significantly as a
result of the goodwill created pursuant to the combination of Toy Biz, Inc. and
MEG, which is amortized over an assumed 20-year life.
Tooling and product design and development and packaging design expense,
which are attributable to the toy business, are normally amortized over the life
of the respective product. However, in the fourth quarter of 2000, the Company
wrote down its tooling, product design and development and packaging design
costs by an additional $16.8 million in excess of normal amortization in
connection with the discontinuance of certain product categories and lines.
Results of Operations of the Company
Year ended December 31, 2000 compared with year ended December 31, 1999
The Company's net revenue decreased approximately $88.0 million to $231.6
million for the year ended December 31, 2000 from $319.6 million in the 1999
period. The decrease in net revenue was mainly due to a reduction in toy sales,
specifically WCW products and Dolls such as Kindergarden Babies and Miss Party
Surprise which was partially offset by increased sales of Activity Toys and
Marvel products relating to the X-Men motion picture. Toy sales were further
reduced by $1.5 million for additional returns and allowances related to
discontinued product categories and lines. Licensing revenue decreased by
approximately $11.7 million in 2000 from 1999 primarily due to a substantial
license payment received in 1999 from Sony Pictures Entertainment in return for
the rights to produce a motion picture based on the Spider-Man character.
Publishing revenue increased by approximately $2.2 million primarily due to
increased advertising and custom comics relating to the X-Men motion picture.
Gross profit decreased approximately $65.7 million to $103.1 million in
2000 from $168.8 million in 1999. The reduction in toy and licensing gross
profit accounted for approximately $58.1 million and approximately $11.7
million, respectively, of the decrease which was partially offset by an increase
in Publishing gross profit of $4.1 million. Gross Profit as a percentage of net
sales decreased to approximately 45% in 2000 from approximately 53% in 1999. The
licensing and publishing divisions produced gross margins of 97% and 51%,
respectively. The gross profit margin for the Toy Biz division decreased to 37%
in 2000 from 49% in 1999 due primarily to a higher percentage of WCW and Girl
products sold during 1999 which generally have higher gross profit margins.
Fourth quarter adjustments totaling $3.8 million relating to the Company's
writedown of certain inventories added to a higher cost of sales component and a
lower gross margin in 2000.
Selling, general and administrative expense decreased approximately $17.1
million to $107.5 million in 2000 from $124.6 million in 1999. Expense
reductions in the toy and corporate divisions accounted for approximately $14.1
million and approximately $6.7 million, respectively, of the decrease primarily
due to lower advertising, royalty, payroll and professional fees. Selling,
general and administrative expense as a percentage of net sales increased to
approximately 46% in 2000 from approximately 39% in 1999 mainly due to a
reduction in toy sales, development costs for The Avengers and X-Men Evolution
animated television series in addition to one-time start-up costs for the
Marvel.com website.
14
Depreciation and amortization expense increased approximately $12.6 million
to $30.7 million in 2000 from $18.1 million in 1999 primarily due to additional
amortization expense of $16.8 million recorded in the fourth quarter of 2000 for
accelerated write-offs of tooling, product design and development and packaging
design related to discontinued toy products. This was partially offset by lower
amortization of $4.2 million due to reduced capital expenditures in 2000.
Amortization of goodwill and other intangibles decreased approximately $1.8
million to $24.0 million in 2000 from $25.9 million in 1999. The decrease was
mainly due to the completion of the purchase price allocation relating to the
acquisition of MEG which resulted in a net decrease in goodwill of $21.7
million in 1999.
Interest expense decreased approximately $0.2 million to $31.9 million in
2000 from $32.1 million in 1999, primarily due to a reduction in deferred
financing charges.
As a result of the above, the Company reported a net loss of $89.9 million
in 2000 compared to a net loss of $33.8 million in 1998. The Company reported a
loss per share after preferred dividends of $3.13 in 2000 compared to a loss per
share after preferred dividends of $1.43 in 1999.
Year ended December 31, 1999 compared with year ended December 31, 1998
The Company's net sales increased to $319.6 million for the year ended December
31, 1999 from $232.1 million in the 1998 period. The increase in net sales was
partially due to the inclusion of twelve months of licensing and publishing
revenues in 1999, while only three months of activity was included in 1998,
accounting for an increase of approximately $25.9 million and approximately
$28.3 million in licensing and publishing revenues, respectively. Toy Biz sales
increased by approximately $33.3 million in 1999 from 1998 primarily due to
sales of WCW action figures, a product line that was introduced in 1999 and
increased sales of large and small dolls, partially offset by a decline in the
sales of Marvel-related product.
Gross profit increased $64.7 million to $168.8 million for 1999 from $104.1
million in 1998. The inclusion of the licensing and publishing divisions for
twelve months in 1999, while included for only three months in 1998, accounted
for approximately $25.7 million and approximately $11.9 million, respectively,
of the increase while gross profit from the Toy Biz division increased
approximately $27.1 million. Gross Profit as a percentage of net sales increased
to approximately 53% in 1999 from approximately 45% in 1998. The licensing and
publishing divisions produced gross margins of 98% and 44%, respectively. The
gross profit margin for the Toy Biz division increased to 49% in 1999 from 44%
in 1998 due primarily to a higher percentage of promotional products, that
generally have higher gross profit margins, sold during 1999 and various
one-time sales adjustments relating to the Company's acquisition of MEG recorded
in 1998.
Selling, general and administrative expense increased $27.5 million to
$124.6 million in 1999 from $97.1 million in 1998. Selling, general and
administrative expense as a percentage of net sales decreased to approximately
39% in 1999 from approximately 42% in 1998. The selling, general and
administrative expenses for the licensing, publishing and corporate divisions
increased approximately $29.5 million to $35.1 million from $5.6 million in 1998
due to the inclusion of the full-year's activity in 1999.
The Toy Biz division produced a net decrease of approximately $2.0 million
to $89.5 million in 1999 from $91.5 million in 1998; however, the 1998 period
included $11.7 million of expenses relating to the termination of license
agreements resulting from the Company's integration of MEG's operations which
did not recur in 1999. Discounting the one-time charges from 1998, the Toy Biz
division accounted for an increase of approximately $9.7 million primarily due
to increased advertising and royalty expenses related to increased sales of
promotional items in 1999.
Depreciation and amortization expense decreased $1.2 million to $18.1
million in 1999 from $19.3 million in 1998 primarily due to additional
amortization expense recorded in 1998 related to early write-offs of
discontinued toy products based on Marvel characters as a result of the
Bankruptcy Case.
16
Amortization of goodwill and other intangibles increased $18.8 million to
$25.9 million in 1999 from $7.1 million in 1998. The increase was due to the
amortization of goodwill created pursuant to the MEG acquisition completed on
October 1, 1998.
Interest expense increased $22.7 million to $32.1 million in 1999 from $9.4
million in 1998, primarily due to $25.4 million in interest on the Senior Notes
in 1999, offset by a reduction in interest expense related to the Bridge Loan
from 1998 to 1999.
As a result of the above, the Company reported a net loss of $33.8 million
in 1999 compared to a net loss of $32.6 million in 1998. The Company reported a
loss per share after preferred dividends of $1.43 in 1999 compared to a loss per
share after preferred dividends of $1.23 in 1998
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand, cash flow from
operations and cash available from the $40.0 million Citibank working capital
facility, which was reduced $20.0 million in 2000 from $60.0 million in 1999.
The Company anticipates that its primary needs for liquidity will be to: (i)
conduct its business; (ii) meet debt service requirements; (iii) make capital
expenditures; and (iv) pay Administration Expense Claims.
Net cash provided by (used in) the Company's operations during fiscal 1998,
1999 and 2000 was $42.0 million, $0.8 million and ($24.2) million, respectively.
At December 31, 2000, the Company had working capital of $41.7 million.
On October 1, 1998, the Company obtained the Bridge Loan from UBS. The
Company used a portion of the proceeds from the Notes Offering to repay the
Bridge Loan on February 25, 1999.
On October 1, 1998, the Company and UBS entered into a $50 million credit
facility. There were no borrowings under that credit facility, and it was
terminated on February 25, 1999.
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes (the "Senior Notes") in a private placement exempt from
registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.0 million were used to pay all
outstanding balances under the Bridge Facility and for working capital. The
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. On August 20, 1999, the Company completed
an exchange offer under which it exchanged virtually all of the Senior Notes,
which contained restrictions on transfer, for an equal principal amount of
registered, transferable notes whose terms are identical in all other material
respects to the terms of the Senior Notes.
In February 1999, in connection with the repayment of the Bridge
Facility and the termination of the UBS Credit Facility, the Company recorded an
extraordinary charge of approximately $1.5 million, net of tax benefit for the
write-off of deferred financing costs associated with these two facilities.
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered an
agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit
Facility"). The Citibank Credit Facility bears interest at either the bank's
base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on
the Company's financial performance or at the Eurodollar rate plus a margin
ranging from 2.25% to 2.75% depending on the Company's financial performance.
The Citibank Credit Facility requires the Company to pay a commitment fee of
17
0.625% per annum on the average daily unused portion of the facility unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount outstanding above $20.0 million. In March 2000,
the parties agreed to an amendment whereby financial covenants would not be
tested as long as the total amount outstanding does not exceed $20.0 million and
the borrowing base less the total outstanding amount exceeds $20.0 million. In
April 2000, the parties agreed to reduce the Citibank Credit Facility to $40.0
million. In August 2000, the parties agreed to an amendment whereby financial
covenants would not be tested as long as the total amount outstanding does not
exceed $20.0 million and the borrowing base less the total outstanding amount
exceeds $10.0 million during June, July and August 2000 and $20.0 million at all
other times. In addition, the amendment requires the re-negotiation of the
financial covenants once financial projections are provided to the Lender. The
Company has not borrowed under the Citibank Credit Facility. At December 31,
2000, the Company has available $5,385,000 under this facility which has been
reduced by outstanding letters of credit of $14,615,000. The Citibank Credit
Facility is secured by a lien on all of the Company's inventory and receivables.
On October 1, 1998, the Company sold 9.0 million shares of 8% Preferred
Stock at $10 per share for an aggregate of $90.0 million. The 8% Preferred Stock
pays quarterly dividends on a cumulative basis on the first business day of
January, April, July and October in each year, commencing January 4, 1999.
Dividends are payable, at the option of the Board, in cash, in additional shares
of 8% Preferred Stock or in any combination thereof. The Company is restricted
under the Indenture and under the Citibank Credit Facility from making dividend
payments on the 8% Preferred Stock except in additional shares of 8% Preferred
Stock. Each share of 8% Preferred Stock may be converted, at the option of its
holder, into 1.039 shares of Common Stock. The Company must redeem all
outstanding shares of 8% Preferred Stock on October 1, 2011.
On the consummation date of the Plan, the Company made the Initial
Administration Expense Claims Payment of $20.2 million. In December 1998, the
Company paid approximately $4.2 million of additional Administration Expense
Claims and paid an additional $10.4 million and $2.1 million of Administration
Expense Claims during 1999 and 2000, respectively. The Company estimates that it
may be required to pay between $6.5 million and $8.5 million of additional
Administration Expense Claims, although there can be no assurance as to the
amount the Company will be required to pay.
The Company will be required to make the Unsecured Creditors Cash Payment
at such time as the amount thereof is determined. The Company deposited $8
million into a trust account to satisfy the maximum amount of such payment.
During 2000, the Company received approximately $1.9 million from the trust
account as a result of a settlement with the NBA. The balance in the trust
account as of December 31, 2000 is approximately $7.0 million.
Capital expenditures (excluding acquisitions) by the Company during fiscal
1998, 1999 and 2000 were approximately $17.3 million, $21.0 million and $15.1
million, respectively.
The Company believes that cash on hand, cash flow from operations,
borrowings available under the Citibank working capital facility and other
sources of liquidity, will be sufficient for the Company to conduct its
business, meet debt service requirements, make capital expenditures and pay
Administration Expense Claims.
Seasonality
The Company's annual operating performance depends, in large part, on its
sales of toys during the relatively brief Christmas selling season. During 1998,
1999 and 2000, 60%, 62% and 62%, respectively, of the Company's net toy sales
were realized during the second half of the year. Management expects that the
Company's toy business will continue to experience a significant seasonal
pattern for the foreseeable future. This seasonal pattern requires significant
use of working capital mainly to build inventory during the year, prior to the
Christmas selling season, and requires accurate forecasting of demand for the
Company's products during the Christmas selling season.
18
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in Hong Kong and Mexico. In the normal course of
business, the operations are exposed to fluctuations in currency values.
Management believes that the impact of currency fluctuations do not represent a
significant risk in the context of the Company's current international
operations. The Company does not generally enter into derivative financial
instruments in the normal course of business, nor are such instruments used for
speculative purposes.
Market risks related to the Company's operations result primarily from
changes in interest rates. At December 31, 2000, all of the Company's long-term
debt bore interest at a fixed rate, and all of the Company's outstanding
preferred stock earns dividends at a fixed rate. However, the fair market value
of the fixed rate debt and the outstanding preferred stock is sensitive to
changes in interest rates. The Company is subject to the risk that the market
interest rates will decline and the interest rates for the fixed rate debt and
the fixed dividend yield on the outstanding preferred stock will exceed the then
prevailing market rates. Under its current policies, the Company does not
utilize any interest rate derivative instruments to manage its exposure
to interest rate changes.
Additional information relating to the Company's outstanding financial
instruments is included in Item 7 - Management's Discussion and Anyalysis of
Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item, the report of the
independent auditors thereon and the related financial statement schedule
required by Item 14(a)(2) appear on pages F-2 to F-33. See the accompanying
Index to Financial Statements and Financial Statement Schedule on page F-1. The
supplementary financial data required by Item 302 of Regulation S-K appears in
Note 11 to the December 31, 2000 Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following table sets forth the name, age (as of March 1, 2001) and
position of each person who serves as an executive officer or director of the
Company:
Name Age Position
Morton E. Handel......... 65 Chairman of the Board of Directors
Avi Arad................. 53 Director and Chief Creative Officer; President
and Chief Executive Officer of Marvel Studios
F.. Peter Cuneo.......... 57 President, Chief Executive Officer and Director
Sid Ganis................ 61 Director
Shelley F.Greenhaus...... 47 Director
James F. Halpin.......... 50 Director
Lawrence Mittman......... 50 Director
Isaac Perlmutter......... 58 Director
Rod Perth................ 57 Director
Michael J. Petrick....... 39 Director
Alan Fine................ 50 President and Chief Executive Officer
of Toy Biz
William Jemas............ 43 President of Publishing and Consumer Products
Allen S. Lipson.......... 58 Executive Vice President, Business and
Legal Affairs and Secretary
Richard Ungar............ 50 President of Marvel Characters Group
Directors
The name, principal occupation for the last five years, selected
biographical information and period of service as a director of the Company of
each director are set forth below.
Morton E. Handel has been the Chairman of the Board of Directors of the
Company since October 1998 and was first appointed as a director of Toy Biz,
Inc. in June 1997. Mr. Handel is also the President of S&H Consulting Ltd., a
financial consulting group. Mr. Handel has held that position since 1990. Mr.
Handel has also held the position of Director and President of Ranger
Industries, Inc. from July 1997 until February 2001. Mr. Handel also serves as a
director of Concurrent Computer Corp., a director of Linens N Things since May
2000 and was previously Chairman of the Board of Directors and Chief Executive
Officer of Coleco Industries, Inc.
Avi Arad has been the Chief Creative Officer of the Company and the
President and Chief Executive Officer of the Company's Marvel Studios Division
(which is responsible for motion picture and television licensing and
development) since October 1998. Mr. Arad has been a Director of the Company
since April 1993. From April 1993 through September 1998, Mr. Arad served as a
consultant to Toy Biz, Inc. Mr. Arad was the President and Chief Executive
Officer of New World Animation, a media production company under common control
with MEG, from April 1993 until February 1997 and held the same position at the
Marvel Studios division of MEG from February 1997 until November 1997. At New
World Animation and MEG's Marvel Studios division, Mr. Arad served as the
Executive Producer of the X-Men and the Spider-Man animated TV series. Mr. Arad
has been a toy inventor and designer for more than 20 years for major toy
companies including Mattel Inc., Hasbro, Inc. and Tyco Toys, Inc. During his
career, Mr. Arad has designed or codesigned more than 160 toys. Mr. Arad is also
the owner of Avi Arad & Associates ("Arad Associates"), a firm engaged in the
design and development of toys and the production and distribution of television
programs.
20
F. Peter Cuneo has served as the Company's President and Chief Executive
Officer since July 1999. From September 1998 to July 1999, Mr. Cuneo served as
Managing Director of Cortec Group Inc., a private equity fund. From February
1997 to September 1998, Mr. Cuneo was Chairman of Cuneo & Co., L.L.C., a private
investment firm. From May 1996 to February 1997, Mr. Cuneo was President, Chief
Executive Officer and a Director of Remington Products Company, L.L.C., a
manufacturer and marketer of personal care appliances; from May 1993 to May
1996, he was President and Chief Operating Officer at Remington.
Sid Ganis has been a Director of the Company since October 1999. Mr. Ganis
is President of Out of the Blue Entertainment, a provider of motion pictures,
television and musical entertainment for Sony Pictures Entertainment and others
which he founded, since September 1996. From January 1991 until September 1996,
Mr Ganis held various executive positions with Sony Picutres, including Vice
Chairman of Columbia Pictures and President of Worldwide Marketing for
Columbia/TriStar Motion Picture Companies.
Shelley F. Greenhaus has been a Director of the Company since October 1998.
Mr. Greenhaus has been the President and Managing Director of Whippoorwill
Associates, Inc. ("Whippoorwill"), an investment advisor which he founded, since
1990. Whippoorwill manages investment accounts for a prominent group of
institutional and individual investors from around the world.
James F. Halpin has been a Director of the Company since March 1995. Mr.
Halpin retired in March 2000 as President, Chief Executive and Operating Officer
and a director of CompUSA Inc., a retailer of computer hardware, software,
accessories and related products, which he had been with since May 1993. Mr.
Halpin is also a director of both Interphase Corporation, a manufacturer of
high-performance networking equipment for computers, and Lowe's Companies, Inc.,
a chain of home improvement stores.
Lawrence Mittman has been a Director of the Company since October 1998. Mr.
Mittman has been a partner in the law firm of Paul, Hastings, Janofsy & Walker
LLP for more than the past five years.
Isaac Perlmutter has served as a Director of the Company since April 1993
and he served as Chairman of the Board until March 1995. Mr. Perlmutter
purchased Toy Biz, Inc.'s predecessor company from Charan Industries, Inc. in
January 1990. Mr. Perlmutter is actively involved in the management of the
affairs of Toy Biz, Inc. and has been an independent financial investor for more
than the past five years. Mr. Perlmutter is also a director of Ranger
Industries, Inc. As an independent investor, Mr. Perlmutter currently has, or
has had within the past five years, controlling ownership interests in Ranger
Industries, Inc., Remington Products Company, Westwood Industries, Inc., a
manufacturer and distributor of table and floor lamps, Job Lot Incorporated (and
its predecessor Job Lot Associates L.P.), a discount oriented retail chain, and
Tangible Media, Inc., a media buying and advertising agency.
Rod Perth has been a Director of the Company since October 1998. Mr.Perth
has been President of Television, for Moviewatch Network, a start-up
cable/satellite network founded by Hubbard Broadcasting since September 2000.
From May 1999 until August 2000, he was President, Jim Henson Television Group
Worldwide and from October 1994 until July 1998, Mr. Perth was the President of
USA Networks Entertainment at USA Network. At USA Network, Mr. Perth was
responsible for the development and production of programming, including
programming for the Sci-Fi Channel. Prior to joining USA Network, Mr. Perth
served as Senior Vice President, Late Night and Non-Network Programming at CBS
Entertainment, where he was instrumental in the resurgence of the CBS Late Night
Franchise and was a key member of the team that brought the "Late Show with
David Letterman" to CBS. Mr. Perth joined the CBS Entertainment division in 1989
as Vice President, Late Night Programs.
Michael J. Petrick has been a Director of the Company since October 1998.
Mr. Petrick is a Managing Director of Morgan Stanley & Co. Incorporated, and has
been with Morgan Stanley since 1989. Mr. Petrick also serves as a Director of
CHI Energy, Inc. and Premium Standard Farms, Inc.
All of the Company's Directors were selected pursuant to the Stockholders'
Agreement (as defined, along with other capitalized terms used in this
paragraph, in "Certain Relationships and Related Transactions-Stockholders'
Agreement"). Messrs. Handel, Arad, Cuneo, Halpin, Mittman and Perlmutter were
designated by the Investor Group and Messrs. Ganis, Greenhaus, Lynton, Perth and
Petrick were designated by the Lender Group.
21
Executive Officers
The following sets forth the positions held with the Company and selected
biographical information for the executive officers of the Company who are not
Directors.
Alan Fine served as a Director of the Company from June 1997 until October
1998. Mr. Fine has been the President and Chief Executive Officer of Toy Biz
since October 1998. Previously, he served as the Chief Operating Officer of the
Company, a position to which he was appointed in September 1996. From June 1996
to September 1996, Mr. Fine was the President and Chief Operating Officer of Toy
Biz International Ltd. From May 1995 to May 1996, Mr. Fine was the President and
Chief Operating Officer of Kay-Bee Toys, a national toy retailer, and from
December 1989 to May 1995, he was the Senior Vice President General Merchandise
Manager of Kay-Bee Toys.
William Jemas has been President, Publishing and Consumer Products since
February 2000. Previously he was Executive Vice President, Madison Square Garden
Sports from December 1998 until February 2000. From July 1996 until December
1998, he was founder and President of Blackbox, L.L.C. and worked and consulted
for several media companies, including Lancet Media, G-Vox Interactive and
Hearst Entertainment. From July 1993 until June 1996, Mr Jemas held various
executive positions with The Marvel Entertainment Group, including Executive
Vice President and President of Fleer Corporation.
Allen S. Lipson has been the Executive Vice President Business and Legal
Affairs and Secretary of the Company since November 1999. From May 1996 until
November 1999, Mr. Lipson was Vice President, Administration, General Counsel
and Secretary of Remington Products Company L.L.C. and from October 1988 until
May 1996 he was Vice President and General Counsel of Remington.
Richard Ungar has served as the President of Marvel Characters Group since
October 1999. From May 1999 until October 1999, he was a consultant for Marvel
and from October 1998 until May 1999, Mr. Ungar was Chairman of BKM, Inc., a
children's television network. From January 1997 until October 1998, Mr. Ungar
was an independent consultant/producer and from January 1992 until January 1997,
he held various postions with New World Entertainment, including President of
Prgramming and President and C.E.O. of New World Animation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the New York Stock Exchange. Officers, directors and ten-percent
stockholders are required by regulation of the Securities and Exchange
Commission to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of Forms 3, 4 and 5 available to the Company and
written representations from certain of the directors, officers and ten-percent
stockholders that no form is required to be filed, the Company believes that no
director, officer or beneficial owner of more than ten percent of the Common
Stock failed to file on a timely basis reports required pursuant to Section
16(a) of the Exchange Act with respect to 2000, with the exception of a Form 3
for Sid Ganis (to report his status as a director) which was filed late.
22
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated
concerning the compensation awarded to, earned by or paid to the Chief Executive
Officers of the Company during 2000 and the Company's four most highly
compensated executive officers, other than the Company's Chief Executive
Officers, who were serving as executive officers of the Company on December 31,
2000 (the "Named Executive Officers"), for services rendered in all capacities
to the Company and its subsidiaries during such periods.
Summary Compensation Table
Long-Term
Annual Compensation(1) Compensation
------------------------------------------------- ---------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary($) Bonus(2) Compensation Options(#)
- ---------------------------- ---- --------- ------- ------------ ---------------------
F. Peter Cuneo (3) 2000 $694,615 --- $ 78,678(4)
President and Chief Executive 1999 295,000 $490,000 750,000
Officer
Alan Fine 2000 525,000 --- 8,320(5)
President and Chief Executive Officer 1999 500,000 225,000 5,673(5) 200,000
of the Company's Toy Biz Division 1998 425,000 307,001 300,000
Avi Arad (6) 2000 375,000 --- 67,137(7)
Chief Creative Officer of 1999 375,000 201,563 109,774(7)
Company and President and Chief 1998 375,000 --- 1,000,000
Executive Officer of the Company's
Marvel Studios Division
William Jemas(8) 2000 267,307 237,500 175,000
President
Richard Ungar(9) 2000 404,808(10) ---
President of Marvel Characters Group 1999 46,479(10) 140,000 200,000
(1) Does not include value of perquisites and other personal benefits for any
Named Executive Officer (other than Mr. Cuneo and Mr. Arad) since the
aggregate amount of such compensation is the lesser of $50,000 or 10% of
the total of annual salary and bonus reported for the named executive.
(2) Bonus amounts shown are those accrued for and paid in or after the end of
the year.
(3) Mr. Cuneo's employment with the Company commenced in July 1999.
(4) Amounts shown include $50,700 for apartment provided by Company. $18,000
car allowance and $9,978 in Company matching contribution to the Company's
401(k) Plan.
(5) Amounts shown are the Company matching contributions to the Company's
401(k) Plan
(6) Mr. Arad's employment with the Company commenced in October 1998. Amounts
shown for periods prior to October 1, 1998 represent consulting fees
received by Mr. Arad.
(7) Amounts shown for company provided automobile and driver and in 2000,
reimbursement of moving expenses of $38,672 incurred arising from Mr. Arad
moving to the West Coast
(8) Mr. Jemas's employment with the Company commenced in February 2000.
(9) Mr. Ungar's employment with the Company commenced in October 1999.
(10) Amounts shown include payments to a personal service company owned by Mr.
Ungar.
23
Option Grants Table
The following table shows the Company's grants of stock options to the
Named Executive Officers in 2000. Each stock option grant was made under the
Stock Incentive Plan, which became unconditionally effective on January 20,
1999. No SARs (stock appreciation rights) were granted by the Company in 2000.
Number of Percent of
Shares of Total Potential Realizable
Common Stock Options Value at Assumed Annual
Underlying Granted to Exercise Rates of Stock Price
Options Granted Employees Price Expiration Appreciation
Name in 2000 in 2000 per share Date for Option Terms
- ------------ --------------- ----------- --------- ----------- ------------------------
5% 10%
----------- ---------
William Jemas (1)...... 125,000 20.3% 5.687 2/14/10 $447,140 $1,133,135
William Jemas (2)...... 50,000 8.1% 7.375 7/10/10 231,944 587,788
(1) Mr. Jemas' options become exercisable in three equal installments: options
to buy 41,667 shares of Common Stock become exercisable on each of February
14, 2001, February 14, 2002 and February 14, 2003.
(2) Mr. Jemas' options become exercisable in three equal installments: options
to buy 16,667 shares of Common Stock are exercisable on each of July 10,
2001, July 10, 2002 and July 10, 2003.
Year-End 2000 Option Value Table
The following table shows the number and value of exercisable and
unexercisable stock options held by the Named Executive Officers at December 31,
2000. No Named Executive Officers exercised stock options during 2000.
Number of Shares of Value of
Common Stock Underlying Unexercised
Unexercised Options at In-the-Money Options at
Name Year-End (1) Year-End
- -------------- ---------------------------- ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
F. Peter Cuneo........................... 375,000 375,000 ------ --------
Avi Arad................................. 750,000 250,000 ------ --------
Alan Fine................................ 291,667 208,333 ------ --------
Rick Ungar............................... 66,667 133,333
William Jemas .................. --------- 175,000 ------ --------
(1) Represents shares of Common Stock underlying stock options. None of the
Named Executive Officers holds SARs (stock appreciation rights).
Compensation of Directors
Non-employee directors currently receive an annual retainer of $25,000 and
an annual grant of 10,000 shares of Common Stock to be immediately vested.
Non-employee directors also receive a one-time grant of five-year options to
purchase 20,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of the grant. Those options expire
within 90 days following the date a director ceases to serve on the Board and
vest one-third on the date of the grant and one-third on each of the two
succeeding anniversaries of the grant. In addition, the chairmen of the
Compensation and Nominating Committee and the Audit Committee receive an annual
retainer of $5,000, and the non-executive Chairman of the Board receives an
annual payment of $100,000 and a one-time grant of options to purchase 30,000
shares of Common Stock on the same terms as those applicable to the options made
available to the other non-employee members of the Board.
24
Members of the Board who are officers or employees of the Company or any of
its subsidiaries do not receive compensation for serving in their capacity as
directors.
Employment Agreements
The Company has entered into employment agreements with each of the
following executive officers: Avi Arad, the Company's Chief Creative Officer and
the President and Chief Executive Officer of the Company's Marvel Studios
Division; F. Peter Cuneo, the President and Chief Executive Officer of the
Company; Alan Fine, the President and Chief Executive Officer of the Company's
Toy Biz Division; Bill Jemas, President of Publishing and New Media; Allen S.
Lipson, the Executive Vice President, Business and Legal Affairs of the Company
and Richard Ungar, President of Marvel Characters Group.
Employment and License Agreements with Mr. Arad. Pursuant to his employment
agreement, Mr. Arad has agreed to render his exclusive and full-time services to
the Company for a term of employment expiring on December 31, 2000. Under his
employment agreement, Mr. Arad receives a base salary, subject to discretionary
increases, of $375,000. Mr. Arad is entitled to discretionary bonuses and
participation in the Company's stock option plan as determined by the Board. Mr.
Arad also is entitled to the use of an automobile with driver and is entitled to
participate in employee benefit plans generally available to the Company's
employees. Mr. Arad's employment agreement provides that, in the event of
termination other than for cause, Mr. Arad is entitled to his salary earned
through the date of termination and thereafter for a period of up to twelve
months. Mr. Arad's employment agreement replaces his consulting agreement with
the Company, under which Mr. Arad also earned $375,000 per year.
In addition, the Company and Arad Associates, of which Mr. Arad is the sole
proprietor, are parties to a license agreement which provides that Arad
Associates is entitled to receive royalty payments on net sales of
Marvel-character-based toys and on net sales of non-Marvel-character-based toys
of which Mr. Arad is the inventor of record. In no event, however, may the total
royalties payable to Arad Associates during any calendar year exceed $7.5
million. The Company accrued royalties to Mr. Arad for toys he invented or
designed of approximately $4.3 million, $3.0 million and $1.6 million during the
years ended December 31, 1998, 1999 and 2000 respectively. In September 1998,
the license with Arad Associates was amended to provide that Arad Associates
will receive an annual royalty of $650,000 for products based on the Marvel
characters (the former royalty rate was 4%). The amendment leaves intact a
provision that Arad Associates is to receive a negotiated royalty not to exceed
5% of net sales of products not based on the Marvel characters.
Employment Agreement with Mr. Cuneo. Pursuant to his employment agreement,
Mr. Cuneo has agreed to render his exclusive and full-time services to the
Company for a term of employment expiring on July 21, 2002. Under his employment
agreement, Mr. Cuneo receives a base salary, subject to discretionary increases,
of $650,000. Starting in 2000, Mr. Cuneo will be eligible to earn an annual
bonus based on the attainment of certain performance goals. The target annual
bonus is equal to 60% of Mr. Cuneo's base salary. Mr. Cuneo also receives a
$1,500 monthly automobile allowance and is entitled to participate in employee
benefit plans available to similarly situated employees of the Company. The
Company has agreed to provide Mr. Cuneo with a suitable apartment in Manhattan
for up to one year, and the Company will pay Mr. Cuneo a $25,000 relocation
allowance if he relocates his primary residence to the New York City
metropolitan area during the term of his employment.
Pursuant to his employment agreement, Mr. Cuneo has been granted options to
purchase 750,000 shares of Common Stock. The options vest over a three-year
period. The options become exercisable in full upon a change in control of the
Company.
Employment Agreement with Mr. Fine. Pursuant to his employment agreement,
Mr. Fine has agreed to render his exclusive and full-time services to the
Company for a term of employment expiring on March 1, 2001, which was renewed
for an additional two years. Under his employment agreement, Mr. Fine receives a
base salary, subject to discretionary increases, of $500,000. Mr. Fine is
eligible to earn an annual bonus based on the attainment of certain performance
goals. The employment agreement further provides for participation in the
Company's stock option plan as determined by the Board and provides that Mr.
Fine shall be entitled to receive a grant of options to purchase 200,000 shares
of Common Stock (in addition to the options previously granted to Mr. Fine to
purchase 300,000 shares of Common Stock). Mr. Fine also receives a $1,000
monthly automobile allowance and is entitled to participate in employee benefit
plans generally available to the Company's employees.
25
Employment Agreement with Mr. Jemas. Pursuant to his employment agreement,
Mr. Jemas has agreed to render his exclusive and full-time services to the
Company for a term of employment expiring on February 15, 2002. Under his
employment agreement, Mr. Jemas receives a base salary, subject to discretionary
increases, of $275,000. The employment agreement provides for a sign-on bonus of
$100,000 payable in two installments of $50,000 each and a bonus for 2000 equal
to at least 50% of his base salary for the year. Mr. Jemas also receives a
$1,100 monthly automobile allowance and is entitled to participate in employee
benefit plans generally available to the Company's employees. The employment
agreement further provides for participation in the Company's stock option plan
as determined by the Board and provides that Mr. Jemas shall be entitled to
receive a grant of options to purchase 125,000 shares of Common Stock
Employment and Agreement with Mr.Ungar. Pursuant to his employment
agreement, Mr. Ungar has agreed to render his services to the Company for a term
of employment expiring on October 25, 2002. Under his employment agreement,
Mr.Ungar receives a base salary, subject to discretionary increases, of
$325,000. Mr. Ungar is eligible to earn an annual bonus based on the attainment
of certain performance goals. Mr. Ungar also receives a $1,300 monthly
automobile allowance and is entitled to participate in employee benefit plans
available to similarly situated employees of the Company. Pursuant to his
employment agreement, Mr. Ungar has been granted options to purchase 200,000
shares of Common Stock. The options will vest over a three-year period.
In addition, the Company and Brentwood Television Funnies, Inc.
("Brentwood"), of which Mr. Ungar is the sole shareholder, are parties to a Loan
Out Agreement under which Brentwood agrees to provide the services of Mr. Ungar
as Executive Producer on all television programs involving Marvel characters for
a term expiring on October 25, 2002. Under the agreement, Brentwood receives a
producer fee of $175,000 per year, subject to discretionary increases.
Termination Provisions. The employment agreements of Messrs Cuneo, Fine,
Jemas and Ungar and the Loan Out Agreement with Brentwood, provide that, in the
event of termination, the executive is entitled to certain payments and benefits
depending on the circumstances of the termination. Upon a change in control of
the Company, the executive is entitled to a severance payment equal to two times
the sum of his then-current base salary and the average of the two most recent
annual bonuses paid. If any payments to the executive under his employment
agreement ("Parachute Payments") would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code, then the executive will be entitled
to receive an additional payment from the Company (a "Gross-Up Payment") in an
amount such that the executive retains, after the payment of all taxes, an
amount of the Gross-Up Payment equal to the excise tax imposed on the Parachute
Payments.
Confidential Information and Related Provisions. Each of the employment
agreements with Messrs. Arad, Cuneo, Fine, Jemas and Ungar prohibits disclosure
of proprietary and confidential information regarding the Company and its
business to anyone outside the Company both during and subsequent to employment
and otherwise provides that all inventions made by the employees during their
employment belong to the Company. In addition, those employees agree during
their employment, and for one year thereafter, not to engage in any competitive
business activity.
Compensation Committee Interlocks and Insider Participation
Messrs. Handel, Halpin, Perlmutter and Petrick serve now, and served during
2000, on the Company's Compensation and Nominating Committee. None of the
individuals mentioned above was an officer or employee of the Company, or any of
its subsidiaries, during 2000 or formerly. Mr. Handel is, and Mr. Perlmutter
once was, the Company's non-executive Chairman of the Board.
26
Stockholders' Agreement
The Company and the following stockholders are parties to a Stockholders'
Agreement (the "Stockholders' Agreement") dated as of October 1, 1998:
(1) (i) Avi Arad, (ii) Isaac Perlmutter, (iii) Isaac Perlmutter T.A., (iv)
The Laura and Isaac Perlmutter Foundation Inc., (v) Object Trading
Corp., and (vi) Zib Inc. (the "Perlmutter/Arad Group");
(2) (i) Mark Dickstein, (ii) Dickstein & Company, L.P., (iii) Dickstein
Focus Fund L.P., (iv) Dickstein International Limited, (v) Elyssa
Dickstein, Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D
12/27/88, Mark Dickstein, Grantor, (vi) Mark Dickstein and Elyssa
Dickstein, as Trustees of the Mark and Elyssa Dickstein Foundation,
and (vii) Elyssa Dickstein (the "Dickstein Entities" and, together
with the Perlmutter/Arad Group, the "Investor Group"); and
(3) (i) The Chase Manhattan Bank, (ii) Morgan Stanley & Co. Incorporated
("Morgan Stanley"), and (iii) Whippoorwill as agent of and/or general
partner for certain accounts and funds (the "Lender Group").
The Stockholders' Agreement provides that its parties will take such action
as may reasonably be in their power to cause the Board to include, subject to
certain conditions, six directors designated by the Investor Group and five
directors designated by the Lender Group. The number of directors that the
Investor Group and the Lender Group may designate will be reduced following June
30, 2000 in the event of decreases in beneficial ownership of capital stock of
the Company below certain pre-determined levels, as set forth in the
Stockholders' Agreement. The Stockholders' Agreement provides for the creation
of various committees of the Board as well as the composition of those
committees.
The parties to the Stockholders' Agreement have the power to vote, in the
aggregate, approximately 55.8% in combined voting power of the outstanding
shares of Common Stock and 8% Preferred Stock. The 55.8% figure does not include
shares beneficially owned by the Dickstein Entities. Those shares are covered by
the Stockholders' Agreement, but the Company does not know the number of those
shares. The Dickstein Entities beneficially own less than 5% of the Common Stock
and no longer file ownership reports on Schedules 13D or 13G with the Securities
and Exchange Commission.
Registration Rights Agreements
Mr. Dickstein and certain of his affiliates, Object Trading Corp. (an
affiliate of Mr. Perlmutter), Whippoorwill as agent for and/or general partner
for certain institutions and funds, the Company and certain other parties are
parties to a Registration Rights Agreement dated as of October 1, 1998 (the
"October Registration Rights Agreement"). Mr. Arad, Mr. Perlmutter, certain
affiliates of Mr. Perlmutter (other than Object Trading Corp.) and the Company
are parties to a Registration Rights Agreement dated as of December 8, 1998 (the
"December Registration Rights Agreement").
The terms of the December Registration Rights Agreement are substantially
identical to those of the October Registration Rights Agreement. Under the terms
of each of the Registration Rights Agreements, the Company has agreed to file a
shelf registration statement under the Securities Act registering the resale of
all shares of Common Stock and 8% Preferred Stock issued to the stockholder
parties thereto pursuant to the Plan, all shares of Common Stock issuable upon
conversion of those shares of 8% Preferred Stock, certain convertible debt
securities that the Company may exchange for the 8% Preferred Stock and the
Common Stock issuable upon conversion thereof and all shares of Common Stock
otherwise owned by the stockholder parties to the respective Registration Rights
Agreement as of the date thereof. The Registration Rights Agreements also give
the stockholder parties thereto piggyback registration rights with respect to
underwritten public offerings by the Company of its equity securities.
Agreements Relating to the Purchase of Preferred Shares
Zib (an entity owned entirely by Mr. Perlmutter), Dickstein Partners Inc.
(an affiliate of Mr. Dickstein) and Toy Biz, Inc. entered into a Commitment
Letter, dated November 19, 1997, in which Zib and Dickstein Partners Inc.
committed to purchase $60 million and $30 million in amount, respectively, of
the 8% Preferred Stock of the Company to be issued pursuant to the Plan.
Pursuant to the Plan and a Stock Purchase Agreement dated as of October 1, 1998,
(i) certain secured creditors of MEG purchased, pursuant to an option in the
Plan, $20,071,480 in amount of 8% Preferred Stock that would otherwise have been
purchased by Zib; (ii) Whippoorwill, as agent of and/or general partner for
certain institutions and funds, purchased, pursuant to an assignment from Zib,
$5 million in amount of 8% Preferred Stock that would otherwise have been
27
purchased by Zib; (iii) Zib purchased $34,928,520 in amount of 8% Preferred
Stock; and (iv) Dickstein Partners Inc. and its assignees purchased $30 million
in amount of 8% Preferred Stock.
Tangible Media Advertising Services
Tangible Media, a corporation which is wholly owned by Mr. Perlmutter, acts
as the Company's media consultant in placing certain of the Company's
advertising and, in connection therewith, receives certain fees and commissions
based on the cost of the placement of such advertising. Tangible Media received
payments of fees and commissions from the Company totaling approximately
$1,147,000, $1,170,000 and $966,000 in 1998, 1999, and 2000 respectively. The
Company retains the services of a non-affiliated media consulting agency on
matters of advertising creativity.
Employee, Office Space and Overhead Cost Sharing Arrangements
The Company and Tangible Media have shared certain space at the Company's
principal executive offices and related overhead expenses. Since 1994, Tangible
Media and the Company have been parties to an employee, office space and
overhead cost sharing agreement governing the Company's sharing of employees,
office space and overhead expenses (the "Cost Sharing Agreement"). Under the
Cost Sharing Agreement, any party thereto may through its employees provide
services to another party, upon request, whereupon the party receiving services
shall be obligated to reimburse the providing party for the cost of such
employees' salaries and benefits accrued for the time devoted by such employees
to providing services. Under the Cost Sharing Agreement, Tangible Media is
obligated to reimburse the Company for rent paid under the sublease, related
overhead expenses comprised of commercial rent tax, repair and maintenance costs
and telephone and facsimile services, in proportion to its percentage occupancy.
The Cost Sharing Agreement is coterminous with the term of the Company's
sublease for its executive offices. Under this Agreement, Tangible Media paid
approximately $147,000, $155,000 and $67,000 to the Company in 1998, 1999 and
2000 respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock and 8% Preferred Stock, as of March 9, 2001 (based on
33,947,923) shares of Common Stock outstanding on that date), by (i) each person
known by the Company to be the beneficial owner of 5% or more of the outstanding
Common Stock or 8% Preferred Stock (based, in part, upon copies of all Schedules
13D and 13G provided to the Company), (ii) each director of the Company, (iii)
each Named Executive Officer and (iv) all executive officers and directors of
the Company as a group. Because the voting or dispositive power of certain
shares listed in the table is shared, the same securities are sometimes listed
opposite more than one name in the table and the sharing of voting or
dispositive power is described in a footnote. The total number of shares of
Common Stock and 8% Preferred Stock listed below for directors and executive
officers as a group eliminates such duplication.
Each share of 8% Preferred Stock is convertible by its holder into
1.039 shares of Common Stock. The table assumes that no unexercised warrants for
the purchase of stock of the Company have been exercised. As far as the Company
is aware, none of the stockholders named in the table owns any warrants for the
purchase of stock of the Company.
Under the rules of the Securities and Exchange Commission, beneficial
ownership of a share of 8% Preferred Stock constitutes beneficial ownership of
1.039 shares of Common Stock (the amount into which the 8% Preferred Stock is
convertible). Beneficial ownership of Common Stock is shown in the main part of
the table and the portion of that beneficial ownership traceable to beneficial
ownership of 8% Preferred Stock is set forth in the footnotes.
The Schedules 13D and 13G that the Company used in compiling the table
take differing positions as to whether shares of stock covered by the
Stockholders' Agreement are held with "shared voting power." The table does not
attempt to reconcile those differences.
28
Shares of Common Stock Beneficially Owned
Sole Voting Shared Voting Sole Dispositive Shared Dispositive
Power Power Power Power
----------------- -------------------- ---------------- -------------------
Five Percent Stockholder,
Directors Percent Percent Percent Percent
and Executive Officers Number of Class Number of Class Number of Class Number of Class
- --------------------------- ------- -------- ------- -------- ------ -------- ------- --------
Avi Arad (1)(2)......................... -- * 31,706,096 68.0% 4,920,000 14.2% -- *
623 North Sierra Drive
Beverly Hills, CA 90210
Isaac Perlmutter(2)(3).................. -- * 31,706,096 68.0% 15,270,151 38.9% -- *
P.O. Box 1028
Lake Worth, Florida 33460
The Chase Manhattan Corporation (2)(4).. -- * 31,706,096 68.0% 2,253,826 6.5% -- *
270 Park Avenue
New York, New York 10017
Morgan Stanley & Co.
Incorporated(2)(5)...................... -- * 31,706,096 68.0% -- * 5,401,810 14.6%
1585 Broadway
New York, New York 10036
Whippoorwill Associates, Inc.
as agent of and/or general
partner for certain institutions
and funds (6).......................... -- * 3,941,037 10.8% -- * 3,941,037 10.8%
11 Martine Avenue
White Plains, NY 10606
Mark H. Rachesky, M.D. (7)............. -- * 2,282,709 6.3% -- * 2,282,709 6.3%
Morton E. Handel (8)................... 81,000 * -- * -- * -- *
F. Peter Cuneo (9)..................... 395,214 1.2% -- * -- * -- *
Sid Ganis(10).......................... 33,334 * -- * -- * -- *
Shelley F. Greenhaus (11).............. 50,000 * -- * -- * -- *
James F. Halpin (12)................... 55,000 * -- * -- * -- *
Lawrence Mittman (12).................. 50,000 * -- * -- * -- *
Rod Perth (12)......................... 50,000 * -- * -- * -- *
Michael J. Petrick..................... -- * -- * -- * -- *
Alan Fine (14)......................... 358,334 1.0% -- * -- * -- *
William Jemas.......................... 41,667 * -- * -- * -- *
Richard Ungar.......................... 66,667 * -- * -- * -- *
All current executive officers and
directors as a group
(16 persons)(2)(19)................. 1,237,216 3.5% 31,706,096 68.0% 20,190,151 50.5% -- *
* Less than 1%.
(1) Figures include 770,000 shares of Common Stock subject to stock options
granted to Mr. Arad pursuant to the Stock Incentive Plan which are
immediately exercisable. Mr. Arad is a party to the Stockholders'
Agreement. Except for the 4,920,000 shares over which Mr. Arad may be
deemed to have sole dispositive power, shares over which Mr. Arad may be
deemed to have shared voting power (which include shares of Common Stock
underlying 11,433,341 shares of 8% Preferred Stock) are beneficially owned
by other parties to the Stockholders' Agreement and it is only by reason of
Mr. Arad's position as a party to the Stockholders' Agreement that Mr. Arad
may be deemed to possess that shared voting power.
(2) Figures in the table and in the footnotes for the number of shares
beneficially owned by parties to the Stockholders' Agreement do not include
shares beneficially owned by Dickstein Partners Inc. and certain of its
affiliates that are signatories to the Stockholders' Agreement. Shares of
Common Stock beneficially owned by Dickstein Partners Inc. and those
29
affiliates are covered by the Stockholders' Agreement, but the Company does
not know the number of those shares. Dickstein Partners Inc. and its
affiliates beneficially own less than 5% of the Common Stock and no longer
file ownership reports on Schedules 13D or 13G with the Securities and
Exchange Commission.
(3) Mr. Perlmutter is a party to the Stockholders' Agreement.
(a) Figures include 30,000 shares of Common Stock subject to stock options
granted to Mr. Perlmutter pursuant to the Stock Incentive Plan which are
immediately exercisable. Other shares over which Mr. Perlmutter may be
deemed to have sole dispositive power are directly held as follows:
Holder Shares of Common Stock Shares of 8% Preferred Stock
------------------------------------------------------------ ---------------------- ----------------------------
Zib........................................................... 9,256,000 --
The Laura and Isaac Perlmutter Foundation Inc................. 250,000 --
Object Trading Corp........................................... 33,500 4,174,278
Classic Heroes, Inc........................................... -- 276,020
Biobright Corporation......................................... -- 276,020
Tangible Media, Inc........................................... 400,000 --
Isaac Perlmutter T.A.......................................... -- 347,456
Isaac Perlmutter.............................................. 29,000 --
The sole stockholder of Zib, a Delaware corporation, is Isaac Perlmutter
T.A., a Florida trust (the "Perlmutter Trust"). Mr. Perlmutter is a trustee
and the sole beneficiary of the Perlmutter Trust, and may revoke it at any
time. Mr. Perlmutter is a director and the president of the Laura and Isaac
Perlmutter Foundation Inc., a Florida not-for-profit corporation. Mr.
Perlmutter is the sole stockholder of (i) Object Trading Corp., a Delaware
corporation, (ii) Classic Heroes, Inc., a Delaware corporation and (iii)
Biobright Corporation, a Delaware corporation and (iv)Tangible Media, Inc.,
a Delaware Corporation. Mr. Perlmutter may be deemed to possess (i) the
power to vote and dispose of the shares of Common Stock directly held by
Zib, Object Trading Corp., Classic Heroes, Inc., Biobright Corporation,
Tangible Media, Inc. and the Perlmutter Trust and (ii) the power to direct
the vote and disposition of the shares of Common Stock directly held by the
Laura and Isaac Perlmutter Foundation Inc.
(b) Except for the 15,270,151 shares over which Mr. Perlmutter may be
deemed to have sole dispositive power (which include shares of Common Stock
underlying 5,073,774 shares of 8% Preferred Stock), shares over which Mr.
Perlmutter may be deemed to have shared voting power (which include shares
of Common Stock underlying 11,433,341 shares of 8% Preferred Stock) are
beneficially owned by parties to the Stockholders' Agreement which are
unaffiliated with Mr. Perlmutter and it is only by reason of Mr.
Perlmutter's position as a party to the Stockholders' Agreement that Mr.
Perlmutter may be deemed to possess that shared voting power.
(4) (a) Shares over which The Chase Manhattan Corporation, a Delaware
corporation, may be deemed to have sole dispositive power are held directly
by The Chase Manhattan Bank, a New York corporation that is wholly owned by
The Chase Manhattan Corporation. The Chase Manhattan Bank is a party to the
Stockholders' Agreement.
(b) Except for the 2,253,826 shares over which The Chase Manhattan
Corporation may be deemed to have sole dispositive power (which include
shares of Common Stock underlying 928,825 shares of 8% Preferred Stock),
shares over which The Chase Manhattan Corporation may be deemed to have
shared voting power (which include shares of Common Stock underlying
11,433,341 shares of 8% Preferred Stock) are beneficially owned by parties
to the Stockholders' Agreement which are unaffiliated with The Chase
Manhattan Corporation and it is only by reason of The Chase Manhattan Bank's
position as a party to the Stockholders' Agreement that The Chase Manhattan
Corporation may be deemed to possess that shared voting power.
(5) Morgan Stanley is a party to the Stockholders' Agreement. Morgan Stanley
shares dispositive power over 5,401,810 shares with its parent, Morgan
Stanley Dean Witter & Co. Except for those 5,401,810 shares (which include
shares of Common Stock underlying 3,015,049 shares of 8% Preferred Stock),
shares over which Morgan Stanley may be deemed to have shared voting power
(which include shares of Common Stock underlying 11,433,341 shares of 8%
Preferred Stock) are beneficially owned by parties to the Stockholders'
Agreement which are unaffiliated with Morgan Stanley and it is only by
reason of Morgan Stanley's position as a party to the Stockholders'
Agreement that Morgan Stanley may be deemed to possess that shared voting
power.
30
(6) Whippoorwill may be deemed to be the beneficial owner of these shares
(which include shares of Common Stock underlying 2,466,072 shares of 8%
Preferred Stock) because it has discretionary authority with respect to the
investments of, and acts as agent for, the direct holders of the shares.
Whippoorwill disclaims any beneficial ownership of Common Stock or 8%
Preferred Stock except to the extent of Whippoorwill's pecuniary interest
in that stock, if any. Whippoorwill, as agent of and/or general partner for
certain institutions and funds, is a party to the Stockholders' Agreement.
Figures include 80,730 shares of Common Stock (which include shares of
Common Stock underlying 50,379 shares of 8% Preferred Stock) that are not
subject to the Stockholders' Agreement.
(7) Based on a Schedule 13G filed with the Securities and Exchange Commission
on November 12, 1999 by (i) MHR Institutional Partners LP, a Delaware
limited partnership ("Institutional Partners"); (ii) MHRM Partners LP, a
Delaware limited partnership ("MHRM"); (iii) MHR Capital Partners LP, a
Delaware limited partnership ("Capital Partners"); (iv) MHR Institutional
Advisors LLC, a Delaware limited liability company ("Institutional
Advisors") and the general partner of Institutional Partners and MHRM; (v)
MHR Advisors LLC, a Delaware limited liability company ("Advisors") and the
general partner of Capital Partners; and (vi) Mark H. Rachesky, M.D., the
managing member of Institutional Advisors and Advisors. Each party named in
this footnote has an office at 40 West 57th Street, 33rd Floor, New York,
NY 10019. Figures include shares of Common Stock underlying 2,119,036
shares of 8% Preferred Stock.
(8) Figures include 60,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(9) Figures include 375,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable and 214 shares of Common Stock, of which Mr. Cuneo disclaims
beneficial ownership, owned by Mr. Cuneo's son.
(10) Figures include 23,334 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(11) Figures include 30,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable. Does not include shares held by various institutions and funds
with respect to whose investments Whippoorwill has discretionary authority
and for which Whippoorwill acts as agent. Mr. Greenhaus is the president
and managing director of Whippoorwill. Mr. Greenhaus disclaims beneficial
ownership of the shares of Common Stock and 8% Preferred Stock owned by
discretionary accounts managed by Whippoorwill as set forth above except to
the extent of his pecuniary interest in that stock, if any.
(12) Figures include 30,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(13) Figures include 358,334 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(14) Figures include 41,667 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(15) Figures include 66,667 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(16) Figures in the "Sole Voting Power" column, the "Shared Voting Power"
column, include, respectively, 1,095,002, 800,000 and 800,000 shares of
Common Stock granted pursuant to the Stock Incentive Plan which are
immediately exercisable.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain relationships and related transactions
involving individuals who served during 2000 on the Board's Compensation and
Nominating Committee (or its predecessor), see "Item 11. Executive
Compensation-Compensation Committee Interlocks and Insider Participation."
Notes Offering
Morgan Stanley, a beneficial owner of more than 5% of the Company's
Common Stock, acted as a placement agent in the previously described Notes
Offering, which the Company completed on February 25, 1999. The Notes were
offered only (i) to qualified institutional buyers under Rule 144A of the
Securities Act and (ii) outside the United States in compliance with Regulation
S. As a placement agent, Morgan Stanley purchased the Notes from the Company at
a discount. The Company and certain of its subsidiaries, on the one hand, and
the placement agents (including Morgan Stanley), on the other hand, agreed to
indemnify each other against certain liabilities in connection with the Notes
Offering, including liabilities under the Securities Act.
Other Agreements with Affiliates
On March 5, 1999, the Company engaged Morgan Stanley to provide financial
advice and assistance. In exchange for those services, the Company has agreed to
pay Morgan Stanley a fee of $1,750,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed with this Report
1. Financial Statements
See the accompanying Index to Financial Statements and
Financial Statement Schedule on page F-1.
2. Financial Statement Schedule
See the accompanying Index to Financial Statements and
Financial Statement Schedule on page F-1.
3. Exhibits
See the accompanying Exhibit Index appearing on page 46.
(b) Reports on Form 8-K. During the last quarter of 1999, the Company
filed the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated October 14, 1999, reporting
Items 5 and 7.
(c) Exhibits. See the Exhibit Index immediately below.
32
EXHIBIT INDEX
Exhibit No.
2.1 Fourth Amended Joint Plan of Reorganization for Marvel Entertainment
Group, Inc. dated July 31, 1998 and filed with the United States
District Court for the District of Delaware on July 31, 1998, with
attached exhibits. (Incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K dated October 13, 1998 and filed
with the Securities and Exchange Commission on October 14, 1998.)
2.2 Asset Purchase Agreement by and among Fleer Corp., Frank H. Fleer
Corp. and SkyBox International Inc. and Golden Cycle, LLC, dated as of
January 29, 1999. (Incorporated by reference to Exhibit 2.2 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1998.)
3.1 Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K dated October
13, 1998 and filed with the Securities and Exchange Commission on
October 14, 1998.)
3.2 Bylaws (as restated and amended). (Incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.)
4.1 Article V of the Restated Certificate of Incorporation (see Exhibit
31, above), defining the rights of holders of Common Stock.
4.2 Article VI of the Restated Certificate of Incorporation (see Exhibit
31, above), defining the rights of holders of 8% Preferred Stock.
4.3 Indenture, dated as of February 25, 1999, defining the rights of
holders of 12% senior notes due 2009. (Incorporated by reference to
Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.)
4.4 Plan Warrant Agreement, dated as of October 1, 1998, between the
Registrant and American Stock Transfer & Trust Company, as warrant
agent. (Incorporated by reference to Exhibit 4.2 to the Company's
Current Report on Form 8-K dated October 13, 1998 and filed with the
Securities and Exchange Commission on October 14, 1998.)
4.5 Class A Warrant Agreement, dated as of October 1, 1998, between the
Registrant and American Stock Transfer & Trust Company, as warrant
agent. (Incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K dated October 13, 1998 and filed with the
Securities and Exchange Commission on October 14, 1998.)
4.6 Class B Warrant Agreement, dated as of October 1, 1998, between the
Registrant and American Stock Transfer & Trust Company, as warrant
agent. (Incorporated by reference to Exhibit 4.4 to the Company's
Current Report on Form 8-K dated October 13, 1998 and filed with the
Securities and Exchange Commission on October 14, 1998.)
4.7 Class C Warrant Agreement, dated as of October 1, 1998, between the
Registrant and American Stock Transfer & Trust Company, as warrant
agent. (Incorporated by reference to Exhibit 4.5 to the Company's
Current Report on Form 8-K dated October 13, 1998 and filed with the
Securities and Exchange Commission on October 14, 1998.)
10.1 Revolving Credit Facility between the Company and Citibank N.A. dated
as of April 1, 1999. (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999.)
10.2 Security Agreement, dated as of April 1, 1999, among the Company, the
subsidiary guarantors party thereto and Citibank N.A., as collateral
agent. (Incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.)
33
10.3 Stockholders' Agreement, dated as of October 1, 1998, by and among the
Registrant, Avi Arad, the Dickstein Entities (as defined therein), the
Perlmutter Entities (as defined therein), The Chase Manhattan Bank,
Morgan Stanley & Co. Incorporated, and Whippoorwill Associates,
Incorporated, as agent of and/or general partner for certain accounts.
(Incorporated by reference to Exhibit 99.4 to the Company's Current
Report on Form 8-K/A dated and filed with the Securities and Exchange
Commission on October 16, 1998.)
10.4 Stock Purchase Agreement, dated as of October 1, 1998, by and among
the Registrant and Dickstein & Co., L.P., Dickstein Focus Fund L.P.,
Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and
Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor,
Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark and
Elyssa Dickstein Foundation, Elyssa Dickstein, Object Trading Corp.,
and Whippoorwill Associates, Incorporated. (Incorporated by reference
to Exhibit 99.3 to the Company's Current Report on Form 8-K/A dated
and filed with the Securities and Exchange Commission on October 16,
1998.)
10.5 Registration Rights Agreement, dated as of October 1, 1998, by and
among the Registrant, Dickstein & Co., L.P., Dickstein Focus Fund
L.P., Dickstein International Limited, Elyssa Dickstein, Jeffrey
Schwarz and Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein,
Grantor, Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark
and Elyssa Dickstein Foundation, Elyssa Dickstein, Object Trading
Corp., Whippoorwill/Marvel Obligations Trust - 1997, and Whippoorwill
Associates, Incorporated. (Incorporated by reference to Exhibit 99.5
to the Registrant's Current Report on Form 8-K/A dated and filed with
the Securities and Exchange Commission on October 16, 1998.)
10.6 Registration Rights Agreement, dated as of December 8, 1998, by and
among the Registrant, Marvel Entertainment Group, Inc., Avi Arad,
Isaac Perlmutter, Isaac Perlmutter T.A., The Laura & Isaac Perlmutter
Foundation Inc., and Zib Inc. (Incorporated by reference to Exhibit
10.4 of the Registrants Annual Report on Form 10-K for the year ended
December 31, 1998.)
10.7 Registration Rights Agreement, dated February 25, 1999, by and among
the Registrant, certain subsidiaries of the Registrant, Morgan Stanley
& Co. Incorporated and Warburg Dillon Read LLC. (Incorporated by
reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.)
10.8 Lease dated as of July 1, 1986, between 387 P.A.S. Enterprises and
Cadence Industries Corporation (9th Floor). (Incorporated by reference
to Exhibit 10.7 to the Registration Statement of Marvel Entertainment
Group, Inc. on Form S-1, File No. 33-40574, dated May 14, 1991.)
10.9 Lease Modification and Extension Agreement dated as of July 1, 1991,
between 387 P.A.S. Enterprises and the Marvel Entertainment Group,
Inc. (9th, 10th, 11th and 12th Floors). (Incorporated by reference to
Exhibit 10.9 to the Annual Report on Form 10-K of Marvel Entertainment
Group, Inc. for the fiscal year ended December 31, 1991.)
10.10 Sublease, dated as of June 9, 2000 betrween HSBC Bank USA and the
Registrant, as amended by First Amendment to Sublease dated December
1, 2000.
10.11 License Agreement, dated March 1, 1993, by and between the Registrant
and Gerber Products Company as amended by Amendment thereto, dated
April 5, 1995. (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, File No. 33-87268 and
Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.) (Confidential treatment has been
requested for a portion of this exhibit.)
10.12 Master License Agreement, dated as of April 30, 1993, between Avi Arad
& Associates and the Registrant. (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1, File No
33-87268.)
10.13 Separation Agreement made on July 16, 1999 by and between Eric
Ellenbogen and the Company.(Incorporated by reference to Exhibit 10.3
of the Company's Quartely Report on Form 10-Q for the quarter ended
June 30, 1999)*
34
10.14 Employment Agreement between the Company and F. Peter Cuneo, dated as
of July 19, 1999. (Incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.)*
10.15 Employment Agreement, dated as of September 30, 1998, by and between
Avi Arad and the Company. (Incorporated by reference to Exhibit 10.14
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)*
10.16 Employment Agreement by and between the Company and Alan Fine, dated
as of March 1, 1999. (Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.)*
10.17 Employment Agreement, dated as of October 29, 1999, between the
Company and Richard Ungar.(Incorporated by reference to Exhibit 10.19
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)*
10.18 Loan Out Agreement, dated as of October 29, 1999, between the Company
and Brentwood Television Funnies, Inc..(Incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)*
10.19 Employment Agreement, dated as of October 29, 1999, between the
Company and Allen S. Lipson.(Incorporated by reference to Exhibit
10.21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)*
10.20 Employment Agreement, dated as of January 26, 2000, between the
Company and Bill Jemas.(Incorporated by reference to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1999)*
10.21 1998 Stock Incentive Plan. (Incorporated by reference to Annex A of
the Company's Information Statement on Schedule 14C, filed with the
Securities and Exchange Commission on December 30, 1998.)*
10.22 Amended and Restated Master Agreement, dated as of November 19, 1997,
by and among the Registrant, certain secured creditors of Marvel and
certain secured creditors of Panini SpA and Amendments 1 and 2
thereto. (Incorporated by reference to Exhibit 10.26 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.)
10.23 Amended and Restated Proxy and Stock Option Agreement, dated as of
November 19, 1997, between the Company and Avi Arad (Incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
dated November 24, 1997).
10.24 Amended and Restated Proxy of Stock Option Agreement, dated as of
November 19, 1997 among the Company, Isaac Perlmutter, Isaac
Perlmutter T.A. and Zib Inc. (Incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K dated November 24,
1997).
10.25 Commitment Letter, dated as of November 19, 1997, by and between the
Registrant, Dickstein Partners Inc., and Zib Inc. (Incorporated by
reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
dated November 24, 1997).
10.26 Agreement, dated as of November 19, 1997, by and among Dickstein
Partners, Inc., Isaac Perlmutter, Avi Arad and Joseph M. Ahearn
(Incorporated by reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K dated November 24, 1997).
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
23.1 Consent of Independent Auditors.
24 Power of attorney (included on signature page hereto).
* Management contract or compensatory plan or arrangement.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MARVEL ENTERPRISES, INC.
By: *
- -----------------------
F. Peter Cuneo
President, Chief Executive Officer
and Acting Chief Financial Officer
Date: April 2, 2001
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Allen S. Lipson his true and lawful attorney-in-fact with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Report and to
cause the same to be filed, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing whatsoever requisite or desirable to be
done in and about the premises, as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said attorney-in-fact and agent, or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- ----------------- ---------------------------------- --------------
President, Chief Executive Officer
* Acting Chief Financial Officer April 2, 2001
- ----------------- and Director (principal executive officer)
F. Peter Cuneo
* Chairman of the Board of Directors April 2, 2001
- --------------------
Morton E. Handel
* Director April 2, 2001
- ------------
Avi Arad
Director April 2, 2001
- ------------
Sid Ganis
Director April 2, 2001
- ---------------------
Shelley F. Greenhaus
*
- ------------------- Director April 2, 2001
James F. Halpin
* Director April 2, 2001
- --------------------
Lawrence Mittman
36
* Director April 2, 2001
- --------------------
Isaac Perlmutter
* Director April 2, 2001
- -------------
Rod Perth
Director April 2, 2001
- ----------------------
Michael J. Petrick
*By/s/ Allen S. Lipson
-------------------
Allen S. Lipson
Attorney-in-fact
37
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENTS SCHEDULE
Marvel Enterprises, Inc. Page
- -------------------------- ----
Report of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and December 31, 2000............................... F-3
Consolidated Statements of Operations for the years ended December 31, 1998, 1999, and 2000............. F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1999, and
2000................................................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999, and 2000............. F-6
Notes to Consolidated Financial Statements.............................................................. F-7
Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts........................................................... F-33
All other schedules prescribed by the accounting regulations of the
Commission are not required or are inapplicable and therefore have been omitted.
F-1
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. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Marvel
Enterprises, Inc. and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/S/ ERNST & YOUNG LLP
New York, New York
February 9, 2001
F-2
MARVEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
---------------------------
1999 2000
----------- --------
(in thousands, except
share data)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 64,814 $ 22,803
Accounts receivable, net....................................................... 55,841 39,236
Inventories, net .............................................................. 39,385 42,780
Income tax receivable.......................................................... -- 334
Deferred income taxes, net .................................................... 7,042 --
Deferred financing costs....................................................... 1,384 1,372
Prepaid expenses and other..................................................... 4,443 6,918
----------- --------
Total current assets..................................................... 172,909 $113,443
Molds, tools and equipment, net.................................................. 17,226 7,005
Product and package design costs, net ........................................... 6,949 1,603
Goodwill and other intangibles, net ............................................. 440,361 415,582
Income tax receivable ........................................................... 1,327 1,327
Deferred charges and other assets................................................ 6,512 8,343
Deferred financing costs......................................................... 9,353 7,981
Deferred income taxes, net ...................................................... -- --
----------- --------
Total assets............................................................. $ 654,637 $555,284
=========== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 9,613 $ 18,586
Accrued expenses and other .................................................... 53,380 38,673
Administrative claims payable.................................................. 9,507 7,444
Unsecured creditors payable ................................................... 8,490 7,000
------------ --------
Total current liabilities................................................ 80,990 71,703
Senior notes..................................................................... 250,000 250,000
Deferred income taxes .......................................................... 1,094 --
------------ --------
Total liabilities........................................................ 332,084 321,703
------------ --------
8% cumulative convertible exchangeable redeemable preferred stock, $.01 par
value, 75,000,000 shares authorized, 18,677,460 issued and outstanding
in 1999 and 20,216,941 issued and outstanding in 2000, liquidation
preference $10 per share.................................................... 186,790 202,185
----------- -------
Stockholders' equity
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued....... -- --
Common stock, $.01 par value, 250,000,000 shares authorized, 40,951,241 issued
and 33,557,241, outstanding in 1999 and 41,096,278 issued and 33,702,278
outstanding in 2000.......................................................... 409 411
Additional paid-in capital....................................................... 215,184 216,068
Deficit.......................................................................... (46,875) (152,128)
------------ ---------
Total stockholders' equity before treasury stock......................... 168,718 64,351
Treasury stock, 7,394,000 shares................................................. (32,955) (32,955)
------------ --------
Total stockholders' equity .............................................. 135,763 31,396
------------ --------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity.................................................. $ 654,637 $555,284
============ ========
.
See Notes to Consolidated Financial Statements.
F-3
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------
1998 1999 2000
--------- --------- --------
(in thousands, except per share data)
Net sales......................................................... $232,076 $319,645 $231,651
Cost of sales..................................................... 127,978 150,858 128,531
--------- -------- ---------
Gross profit...................................................... 104,098 168,787 103,120
Operating expenses: --------- -------- ---------
Selling, general and administrative.......................... 97,135 124,596 107,447
Depreciation and amortization................................ 19,332 18,078 30,651
Amortization of goodwill and other intangibles............... 7,091 25,857 24,012
--------- -------- ---------
Total expenses............................................ 123,558 168,531 162,110
--------- -------- ---------
Operating (loss) income........................................... (19,460) 256 (58,990)
Interest expense.................................................. 9,440 32,077 31,901
Other income, net................................................. 676 4,043 4,223
--------- --------- ----------
Loss before income taxes..................................... (28,224) (27,778) (86,668)
Income tax expense .......................................... 4,386 4,482 2,927
Equity in net loss of joint venture....................... -- -- (263)
--------- --------- ----------
Net loss before extraordinary item........................ $ (32,610) $(32,260) $(89,858)
Extraordinary item, net of tax benefit of $1,021.................. -- 1,531 --
--------- --------- ----------
Net loss.................................................. $ (32,610) $(33,791) $(89,858)
--------- --------- ----------
Less: preferred dividend requirement.............................. 3,380 14,220 15,395
--------- --------- ----------
Net loss attributable to Common Stock.................... $ (35,990) $(48,011) $(105,253)
========= ========= ==========
Basic and diluted net loss per common share:......................
Net loss before extraordinary item............................. $ (1.23) $ (1.39) $ (3.13)
Extraordinary item............................................. -- $ (0.04) $ --
--------- ---------- ----------
Net loss....................................................... $ (1.23) $ (1.43) $ (3.13)
========= ========== ==========
Weighted average number of common shares outstanding......... 29,173 33,533 33,667
See Notes to Consolidated Financial Statements.
F-4
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Additional Retained
Stock Stock Paid-In Earnings Treasury
Shares Amount Capital (Deficit) Stock Total
-------- ------ -------- ---------- --------- -----
(in thousands)
Balance at December 31, 1997................ 27,746 277 70,578 37,126 -- 107,981
Capital contribution........................ -- -- 1,500 -- -- 1,500
Capital transactions in connection with
Acquisition..............................
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 declared................. -- -- -- (3,380) -- (3,380)
Net loss.................................... -- -- -- (32,610) -- (32,610)
-------- ------ --------- ---------- --------- --------
Balance at December 31, 1998................ 33,452 $408 $215,035 $1,136 $(32,955) $183,624
Issuance of common stock.................... 80 1 -- -- -- 1
Exercise of stock purchase warrants......... 25 -- 147 -- -- 147
Stock warrants exercised by stockholders.... -- -- 2 -- -- 2
Preferred dividend declared................. -- -- -- (14,220) -- (14,220)
Net loss.................................... -- -- -- (33,791) -- (33,791)
-------- ------ --------- ---------- --------- ---------
Balance at December 31, 1999................ 33,557 $ 409 $215,184 $(46,875) $(32,955) $135,763
======== ====== ========= ========== ========= ========
Issuance of common stock..................... 80 1 499 -- -- 500
Stock warrants exercised by stockholders..... -- -- 5 -- -- 5
Employees' Stock Options Exercised......... 65 1 380 -- -- 381
Preferred dividend declared................. -- -- -- (15,395) -- (15,395)
Net loss.................................... -- -- -- (89,858) -- (89,858)
-------- ------- --------- ---------- --------- ---------
Balance at December 31, 2000................ 33,702 $ 411 $216,068 $(152,128) $(32,955) $31,396
======== ======= ========= ========== ========= =========
See Notes to Consolidated Financial Statements.
F-5
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------
1998 1999 2000
--------- ---------- --------
(in thousands)
Net loss............................................................ $ (32,610) $(33,791) $(89,858)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization.................................. 26,423 43,935 54,663
Provision for doubtful accounts................................ 409 1,721 81
Deferred financing charges..................................... 2,596 2,888 1,384
Deferred income taxes.......................................... 7,494 2,922 --
Extraordinary item, net........................................ -- 1,531 --
Changes in operating assets and liabilities:
Accounts receivable....................................... 12,774 (7,544) 16,524
Inventories............................................... (7,317) (6,798) (3,395)
Goodwill.................................................. -- -- 798
Income tax receivable..................................... 10,146 6,069 (334)
Prepaid expenses and other................................ 2,953 (774) (2,475)
Deferred charges and other assets......................... (4,918) (2,315) (1,831)
Equity in net loss of joint venture....................... -- -- 263
Accounts payable, accrued expenses and other ............. 24,034 (7,029) (49)
--------- ----------- --------
Net cash provided by (used in) operating activities................. 41,984 815 (24,229)
--------- ----------- --------
Cash flow used in investing activities:
Acquisition of Marvel Entertainment Group, net of cash received (257,865) -- --
Payment of administrative claims, net.......................... (12,985) (10,013) (3,553)
Net proceeds from sale of Fleer and settlement of Panini....... -- 11,980 0
Purchases of molds, tools and equipment........................ (10,702) (13,660) (8,483)
Expenditures for product and package design costs.............. (4,955) (7,136) (6,601)
Patents........................................................ ( 1,668) (181) (31)
Sale of Colorforms assets...................................... 2,786 -- --
--------- ----------- --------
Net cash used in investing activities.......................... (285,389) (19,010) (18,668)
--------- ----------- --------
Cash flow from financing activities:
Proceeds from (payment of) bridge facility..................... 200,000 (200,000) --
Proceeds from senior notes offering, net of offering costs
of $11,022................................................ -- 238,978 --
Exercise of stock options...................................... -- 147 381
Issuance of common stock....................................... -- 1 500
Net repayments under credit agreement.......................... (12,000) -- --
Proceeds from capital contribution............................. 1,500 -- --
Proceeds from preferred stock offering......................... 90,000 -- --
Proceeds from exercise of stock warrants....................... -- 192 5
--------- ----------- --------
Net cash provided by financing activities...................... 279,500 39,318 886
--------- ----------- --------
Net increase (decrease) in cash and cash equivalents........... 36,095 21,123 (42,011)
Cash and cash equivalents at beginning of year................. 7,596 43,691 64,814
--------- ----------- --------
Cash and cash equivalents at end of year....................... $ 43,691 $64,814 $22,803
========= =========== ========
Supplemental disclosure of cash flow information:
Interest paid during the period................................ $ 5,302 $29,768 $30,348
Net income taxes (recovered) paid during the year.............. (12,594) (4,172) 1,333
Other non-cash transactions:
Preferred stock dividends...................................... 3,380 14,220 15,395
Issuance of securities in connection with the acquisition of
Marvel Entertainment Group, Inc., and treasury stock........ 189,133 -- --
See Notes to Consolidated Financial Statements.
F-6
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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 in 1998, one of
the world's most prominent character-based entertainment companies with a
proprietary library of over 4,700 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.
F-7
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
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 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.
F-8
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
The preliminary purchase price of MEG, including related fees, 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.
During 1999, the Company finalized certain preliminary portions of the
purchase price allocation relating to its acquisition of MEG. The final fair
value of the assets and liabilities acquired is summarized below.
(in thousands)
Current assets................... $ 42,851
Non-current assets............... 4,971
Goodwill and other intangible
Assets......................... 462,180
Current liabilities.............. (55,952)
Non-current liabilities.......... (11,180)
---------
$ 442,870
In the preliminary allocation of the purchase price as of December 31,
1998, Fleer/SkyBox ("Fleer"), MEG's subsidiaries engaged in the sale of sports
and entertainment trading cards, was presented as an asset held for sale and the
Company's maximum liability relating to Panini S.p.A.("Panini"), MEG's Italian
subsidiary engaged in the children's activity sticker and adhesive paper
business, was presented as a long-term liability on the consolidated balance
sheet as of December 31, 1998. In February 1999, the Company sold substantially
all of the assets of Fleer for approximately $23.2 million, in cash, after
adjustments and assumption of certain liabilities. Proceeds from this
transaction were partially used to repay the bridge facility with the remainder
used for working capital purposes. On October 8, 1999, the Company received
nominal consideration for its equity interest in Panini. In connection with the
sale, the Company made a payment to Panini's secured lenders of $11.2 million
and obtained a release from the maximum liability, a $27.0 million guarantee of
Panini's debt in favor of such secured lenders.
The completion of the purchase price allocation in 1999 resulted in a net
decrease in goodwill of $21,694. The Company's results of operations for the
periods presented do not include the results of operations of Fleer and Panini.
Presented below are the unaudited pro forma results of the Company giving
effect to the acquisition of MEG as if it had occurred as of January 1, 1997:
F-9
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
For the Year Ended
December 31,
--------------------
1997 1998
-------- -------
(in millions, except
per share)
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)
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 . 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.
F-10
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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, 2000, 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 for the years ended December
31, 1998, 1999 and 2000 were approximately $1,418,000, $146,000 and $9,205,000,
respectively.
Product and Package Design Costs
The Company capitalizes costs related to product and package design when
such products are determined to be commercially acceptable. Product design costs
include costs relating to the preparation of precise detailed mechanical
drawings and the production of sculptings and other handcrafted models from
which molds and dies are made. Package design costs include costs relating to
art work, modeling and printing separations used in the production of packaging.
At December 31, 2000, 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, 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
amortization for the years ended December 31, 1998, 1999 and 2000 was
approximately $1,425,000, $486,000 and $7,585,000 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,
1998, 1999 and 2000, amortization of goodwill and other intangibles was
approximately $7,091,000, $25,857,000 and $24,012,000, respectively.
F-11
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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 Senior Notes, 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, 1998, 1999 and 2000, R&D expenses
were $4,498,000, $6,366,000 and $13,157,000 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 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, 1998, 1999 and 2000, toy distribution fees and sub-licensing
revenues were $1,250,000, $337,000 and $0 respectively.
F-12
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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, 1998, 1999 and 2000,
advertising expenses were $31,762,000, $39,267,000 and $36,211,000,
respectively. At December 31, 1999 and 2000 the Company had incurred $1,307,000
and $9,000, respectively, of prepaid advertising costs, principally related to
production of advertisement that will be first run in fiscal 2000 and 2001,
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. 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 estimated fair value of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate their carrying amounts due to their short-term
maturities.
The estimated fair values of the Company's Senior Notes and outstanding 8%
Preferred Stock is based on market prices, where available or dealer quotes. The
carrying amounts and estimated fair values of these financial instruments were
as follows:
December 31, 1999 December 31, 2000
------------------- -------------------
Carrying Estimated Carrying Estimated
Amounts Fair Value Amounts Fair Value
-------- ---------- -------- ----------
Senior Notes......... $250,000 $226,000 $250,000 $ 92,250
8% Preferred Stock... 186,790 149,420 202,185 35,380
F-13
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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
dependent upon the United States' trade relationship with China. The "most
favored nation" status of China, which is reviewed annually by the United States
government, is a regular topic of political dialogue. The loss of China's "most
favored nation" 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.
Loss Per Share
In accordance with SFAS No. 128 "Earnings Per Share", basic earnings per
share is computed by dividing net income (loss) available to common stockholders
by the weighted average number of shares of common stock outstanding during the
year. The computation of diluted earnings per share is similar to the
computation of basic loss per share, except the number of shares is increased
assuming the exercise of dilutive stock options and warrants and other dilutive
securities using the treasury stock method, unless the effect is anti-dilutive.
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.
Recent Accounting Pronouncements
SFAS No. 133, 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.
F-14
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE is required to be adopted by the Company as of January 1, 2000.
The Company's current policy falls within guidelines of SOP 98-1. Also, SOP
98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES is required to be adopted by
the Company as of January 1, 1999. Management believes that the adoption of SOP
98-5 will not have a material impact on the Company's financial statements.
SAB NO.101, Revenue Recognition in Financial Statements
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, in December 1999
and updated the bulletin in 2000. The new standard was effective January 1,
2000, with implementation required by the fourth quarter of 2000. This
pronouncement summarizes the SEC's views of revenmue recognition practices in
financial statements and how they apply to generally accepted accounting
principles. Adoption of SAB101 did not have a material impact on the Company's
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
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 $23.2 million in cash, after adjustments and
assumptions of certain liabilities. $15.0 million of the proceeds were utilized
to repay the Bridge Facility. The Company remains liable under certain contracts
of the Fleer business and has been indemnified against such liabilities by the
purchaser of such business. In its preliminary purchase price allocation, the
Company estimated the fair value of Fleer's net assets to be $26.0 million. The
difference between this amount and the actual proceeds was accounted for as an
adjustment to goodwill.
F-15
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
4. Details of Certain Balance Sheet Accounts
December 31,
----------------------
1999 2000
----------- ---------
(in thousands)
Accounts receivable, net, consists of the following:
Accounts receivable................................................ $ 84,353 $ 63,171
Less allowances for:
Doubtful accounts................................................ (3,951) (4,542)
Advertising, markdowns, returns, volume discounts and other...... (24,561) (19,393)
---------- ---------
Total....................................................... $ 55,841 $ 39,236
========== =========
Inventories, net, consist of the following:
Toys:
Finished goods................................................... $ 31,397 $ 31,026
Component parts, raw materials and work-in-process............... 4,787 8,001
---------- ---------
Total Toys.................................................. 36,184 39,027
Publishing:
Finished goods................................................... -- 298
Editorial and raw materials...................................... 3,201 3,455
---------- ---------
Total publishing............................................ 3,201 3,753
---------- ---------
Total....................................................... $ 39,385 $ 42,780
========== =========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment......................................... $ 23,047 $ 31,060
Office equipment and other......................................... 10,189 10,163
Less accumulated depreciation and amortization..................... (16,010) (34,218)
---------- ---------
Total....................................................... $ 17,226 $ 7,005
========== =========
Product and package design costs, net, consists of the following:
Product design costs............................................... $ 8,856 $ 13,065
Package design costs............................................... 3,868 6,248
Less accumulated amortization...................................... (5,775) (17,710)
---------- ---------
Total....................................................... $ 6,949 $ 1,603
========== =========
Goodwill and other intangibles, net, consists of the following:
Goodwill........................................................... $470,729 $469,683
Patents and other intangibles...................................... 3,902 3,933
Less accumulated amortization...................................... (34,270) (58,034)
---------- ---------
Total....................................................... $440,361 $415,582
========== =========
Accrued expenses and other consists of the following:
Accrued advertising costs.......................................... $ 6,787 $ 6,802
Accrued royalties.................................................. 8,197 6,064
Inventory purchases................................................ 5,547 3,630
Income taxes payable............................................... 4,366 5,070
Deferred income taxes ............................................. 5,948 --
Litigation Trust accrual........................................... 675 --
Other accrued expenses............................................. 21,860 17,107
----------- ---------
Total....................................................... $ 53,380 $ 38,673
=========== =========
F-16
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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%. On September 28, 1998, the
Company and UBS AG entered an agreement for a $50.0 million Revolving Credit
Facility ("UBS Credit Facility"). The Company incurred a commitment fee for the
Bridge Facility and the 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. UBS's commitment to advance funds and issue
letters of credit under the UBS Credit Facility was terminated effective as of
February 3, 1999.
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.
On February 25, 1999, the Company completed a $250.0 million offering
of senior notes (the "Senior Notes") in a private placement exempt from
registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.0 million were used to pay all
outstanding balances under the Bridge Facility and for working capital. The
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. On August 20, 1999, the Company completed
an exchange offer under which it exchanged virtually all of the Senior Notes,
which contained restrictions on transfer, for an equal principal amount of
registered, transferable notes whose terms are identical in all other material
respects to the terms of the Senior Notes.
In February 1999, in connection with the repayment of the Bridge
Facility and the termination of the UBS Credit Facility, the Company recorded an
extraordinary charge of approximately $1.5 million, net of tax benefit for the
write-off of deferred financing costs associated with these two facilities.
F-17
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered an
agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit
Facility"). The Citibank Credit Facility bears interest at either the bank's
base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on
the Company's financial performance or at the Eurodollar rate plus a margin
ranging from 2.25% to 2.75% depending on the Company's financial performance.
The Citibank Credit Facility requires the Company to pay a commitment fee of
0.625% per annum on the average daily unused portion of the facility unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount outstanding above $20.0 million. In March 2000,
the parties agreed to an amendment whereby financial covenants would not be
tested as long as the total amount outstanding does not exceed $20.0 million and
the borrowing base less the total outstanding amount exceeds $20.0 million. In
April 2000, the parties agreed to reduce the Citibank Credit Facility to $40.0
million. In August 2000, the parties agreed to an amendment whereby financial
covenants would not be tested as long as the total amount outstanding does not
exceed $20.0 million and the borrowing base less the total outstanding amount
exceeds $10.0 million during June, July and August 2000 and $20.0 million at all
other times. In addition, the amendment requires the re-negotiation of the
financial covenants once financial projections are provided to the Lender. The
Company has not borrowed under the Citibank Credit Facility. At December 31,
2000, the Company has available $5,385,000 under this facility which has been
reduced by outstanding letters of credit of $14,615,000. The Citibank Credit
Facility is secured by a lien on all of the Company's inventory and receivables.
The interest rates for borrowings as of December 31, 1999 and 2000 was
12.00% and 12.00%, respectively and the weighted average interest rates for 1999
and 2000 were 12.02% and 12.00%, respectively. The maximum amounts outstanding
during 1998, 1999 and 2000 were $200.0 million, $250.0 million and $250.0
million, respectively.
The interest expense, including amortization of Bridge Facility commitment
fees and other costs in 1998 and 1999, for the years ended December 31, 1998,
1999 and 2000 were $9,440,000, $32,077,000 and $31,901,000 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. On
March 31, June 30, September 30 and December 31, 2000, the Company issued
373,528, 380,982, 388,603 and 396,372 shares, respectively, of 8% Preferred
Stock in payment of dividends declared and payable to stockholders of record on
those dates.
F-18
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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.
As of December 31, 2000, the Company had reserved shares of common stock
for issuance as follows:
Conversion of 8% preferred stock......................................................... 21,005
Exercise of common stock purchase warrants............................................... 12,750
Exercise of common stock options......................................................... 5,073
-------
Total 38,828
In connection with the Plan, the Company received a $1.5 million capital
contribution from an affiliate of Mr. Perlmutter and Mr. Arad. Mr. Perlmutter
and Mr. Arad received no additional equity for such contribution.
7. Stock Option Plans
Under the terms of the Company's 1998 Stock Incentive Plan (the "1998 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. In November 1998, the Company authorized a maximum
aggregate number of shares of Common Stock as to which options and rights may be
granted under the Stock Incentive Plan of 6.0 million shares, including options
described below. All options granted and outstanding under the Company's
previous stock incentive plan (the "1995 Stock Option Plan") and all previous
stock option plans of MEG were canceled at or prior to the consummation of the
Plan on October 1, 1998.
F-19
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Information with respect to options under the stock option plans are as
follows:
Weighted
Average
Option Price per Exercise
Shares Share Price
--------- ------------------ ---------
Outstanding at December 31, 1997............... 632,886 $15.00-$22.63
Canceled....................................... (632,886) $17.92
Exercised...................................... -- --
Granted (under 1998 Stock Incentive Plan)... 3,551,000 $6.05
---------
Outstanding at December 31, 1998............... 3,551,000 $5.88-$ 6.25
Canceled....................................... (379,250) $6.06
Exercised...................................... (25,000) $5.88
Granted........................................ 2,138,000 $6.47
---------
Outstanding at December 31, 1999............... 5,284,750 $5.00-$ 7.25
Canceled....................................... (763,250) $6.13
Exercised...................................... (64,750) $5.88
Granted........................................ 616,000 $5.63
---------
Outstanding at December 31, 2000............... 5,072,750 $4.19-$ 7.38 $6.21
=========
Exercisable at December 31, 2000 2,598,167 $5.00-$ 7.25 $6.18
=========
Options granted under the Stock Incentive Plan in 1999 and 2000 vest
generally in three equal installments beginning 12 months after the date of
grant. Options granted in 1998 vest generally in four equal installments
beginning with the date of the grant. At December 31, 2000, 1,884,750 shares
were available for future grants of options and rights. At December 31, 2000,
the weighted average remaining contractual life of the options outstanding is
7.02 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. The Company has 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:
F-20
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Years Ended December 31,
-----------------------------------
1998 1999 2000
-------- -------- -----------
(in thousands, except per share data)
Net loss, as reported........................................................ $(32,610) $(33,791) $ (89,858)
Pro forma net loss........................................................... (35,679) (39,214) (94,972)
Pro forma net loss per share attributable to Common Stock--basic
And diluted............................................................... (1.34) ( 1.59) (2.82)
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 0.354; 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 0.567; and expected life of
three years. The weighted average assumptions for the 1999 grants are: risk free
interest rates ranging from 5.19% to 6.36%; no dividend yield; expected
volatility of 0.553; and expected life of three years. The weighted average
assumptions for the 2000 grants are risk free interest rates ranging from 6.12%
to 6.72%: no dividend yield: expected volatility of 0.550: and expected life of
three years. The option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, the option valuation model requires the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate in management's
opinion, the existing model does not necessarily provide a reliable single
measure of the fair value of its employee stock options.
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. Joint Venture
The Company has entered into a jointly owned limited partnership with Sony
Pictures in order to pursue licensing opportunities for motion picture and
television related merchandise relating to the Spider-Man character. The
Company's share of marketing and promotional expenses for the twelve months
ended December 31, 2000 totals approximately $263,000.
9. 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 have been consistently
within management's expectations. In 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, 1998, three customers accounted
for approximately 23%, 15% and 10%
F-21
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
of total net toy sales. During the year ended December 31, 1999, three
customers accounted for approximately 29%, 18% and 11% of total net toy sales.
During the year ended December 31, 2000, three customers accounted for
approximately 26%, 15 % and 8% 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, 1998, 1999 and 2000,
international sales were approximately 16%, 15%, and 28 %, respectively, of
total net toy sales. During the years ended December 31, 1998, 1999 and 2000,
the Hong Kong operations reported operating income of approximately $1,534,000,
$5,055,000 and $7,198,000 and income before income taxes of $1,884,000,
$5,472,000 and $7,410,000, respectively. At December 31, 1999 and 2000, the
Company had assets in Hong Kong of approximately $35,997,000 and $40,356,000,
respectively. The Hong Kong subsidiary represented $31,926,000 and $38,057,000,
respectively, of the Company's consolidated retained earnings during the years
ended December 31, 1999 and 2000.
10. Restructuring and Other Unusual Costs
2000 Product Discontinuance
In connection with the discontinuance of certain categories of its toy
business, in an effort to position it for improved financial and operating
performance, the Company recorded approximately $22.9 million in charges in the
fourth quarter of 2000. These charges related primarily to reductions of
inventory to net realizable value, write-offs of moulds, tools and product and
package design costs. These costs are reflected in the following captions in the
statement of operations.
(in thousands)
Net sales (allowances)................ $ 1,500
Cost of sales......................... 3,800
Selling general and administrative.... 775
Depreciation and amortization......... 16,790
---------
$ 22,865
1998 Restructuring
In connection with the consummation of the Plan in 1998, 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
reevaluated its international licensing and product distribution relationships.
In addition, certain products that were at various stages of design and
marketing were discontinued and written-off because of business conflicts that
arose out of the acquisition of MEG.
As a result of the above matters, the Company 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.
F-22
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
(in thousands)
Net sales (allowances)................ $ 2,925
Cost of sales......................... 1,193
Selling general and administrative.... 11,676
Depreciation and amortization......... 1,032
----------
$ 16,826
Cash charges.......................... $ 3,400
Non-cash charges...................... 13,426
----------
$ 16,826
Of these costs, approximately $14.9 million and $1.9 million were charged
to the third and fourth quarters, respectively, of fiscal 1998. At December 31,
1999, $600,000 of the cash charges remain unpaid. At December 31, 2000, all
charges were fully paid for.
11. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
Years Ended December 31,
1998 1999 2000
------- ------- -------
(in thousands)
Current:
Federal . $ (6,189) $ (146) $ -----
State.................... 410 534 431
Foreign . 824 1,172 1,698
-------- ------ -------
$ (4,955) $ 1,560 $ 2,129
--------- ------- -------
Deferred:
Federal . $ 6,025 $ 2,794 $ 642
State.................... 3,316 128 156
-------- ------- -------
9,341 2,922 798
-------- ------- -------
Income tax (benefit) expense ..... $ 4,386 $ 4,482 $ 2,927
======== ======= =======
F-23
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
The differences the between statutory Federal income tax rate and the
effective tax rate are attributable to the following:
Years Ended December 31,
1998 1999 2000
---------- ------- -------
Federal income tax provision computed at the statutory rate..... (35.0)% (35.0)% (35.0)%
State taxes, net of Federal income tax effect................... (4.7)% 1.9% 0.4%
Non-deductible amortization expense............................. 7.9% 30.0% 9.2%
Foreign taxes................................................... -- 2.9% 1.5%
Purchase accounting............................................. -- 17.1% (2.1)%
Increase in valuation allowance................................. 48.6% -- 29.7%
Other........................................................... (1.3)% (0.8)% (0.3)%
----------- ------- -------
Total provision for income taxes................................ 15.5% 16.1% 3.4%
=========== ======= =======
For financial statement purposes, the Company records income taxes using a
liability approach 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 of assets acquired in business combinations
accounted for as purchases and their tax bases. The significant components of
the Company's deferred tax assets and liabilities are as follows:
December 31,
1999 2000
------- --------
(in thousands)
Deferred tax assets:
Accounts receivable ...................... $ 5,159 $ 4,933
Inventory................................. 6,192 9,029
Sales returns reserves.................... 2,014 1,736
Employment reserves....................... 4,017 4,091
Restructuring and other reserves.......... 1,433 1,505
Reserve related to foreign investments.... 3,546 3,546
Net operating loss carryforwards.......... 43,849 85,704
Tax credit carryforwards.................. 4,019 3,145
Other..................................... 3,932 274
------- --------
Total gross deferred tax assets........... 74,161 113,963
Less valuation allowance.................. (67,119) (106,594)
------- --------
Net deferred tax assets................... 7,042 7,369
------- --------
Deferred tax liabilities:
Depreciation/amortization ................ 477 438
Licensing, net............................ 5,948 6,931
Other..................................... 617 --
------- --------
Total gross deferred tax liabilities...... 7,042 7,369
------- --------
Net deferred tax asset (liability)........
F-24
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
During 1999 and 2000, 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 valuation allowance at December 31, 2000 includes $35.4
million which, if realized, will be accounted for as a reduction of goodwill.
At December 31, 2000, the Company expects to have Federal net operating
loss carryforwards of approximately $175.9 million. These loss carryforward will
expire in years 2007 through 2020. Of the total Federal loss carryforward,
approximately $95.6 million is subject to a Section 382 limitation. Any
realization of the amount of loss subject to this limitation will be accounted
for as a reduction of goodwill. Additionally, the Company expects to have state
and local net operating loss carryforwards of approximately $230.3 million. The
state and local loss carryforwards will expire in various jurisdictions in years
2002 through 2020. The state and local loss carryforwards are generally subject
to the Section 382 limitation. Benefit was not provided for either the Federal
or state and local net operating loss carryforwards at December 31, 2000.
12. Quarterly Financial Data
Summarized quarterly financial information for the years ended December 31,
1999 and 2000 is as follows:
1999 2000
--------------------------------------------- ------------------------------------------
Quarter Ended
March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
(in thousands, except per share data)
Net sales.................. $75,258 $61,510 $ 89,882 $ 92,995 $43,187 $51,041 $ 73,461$ $ 63,962
Gross profit............... 42,608 30,679 47,531 47,969 20,838 26,713 34,546 21,023
Operating income (loss).... 9,068 (4,044) 3,172 (7,940) (9,277) (2,384) (520) (46,809)
Net income (loss).......... (2,927) (9,070) (4,644) (17,150) (16,646) (10,587) (9,196) (53,429)
Preferred divided
Requirement.............. 3,443 3,525 3,590 3,662 3,735 3,810 3,886 3,964
Basic and dilutive net income
(loss) per common share. $ (0.19) $ (0.38) $ (0.25) $ (0.62) $ (0.61) $ (0.43) $ (0.39) $ (1.70)
The quarterly period ended December 31, 2000, includes charges totalling
$22.9 million related to the discontinuance of certain of the Company's toy
catagories.
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.
13. Related Party Transactions
Mr. Perlmutter indirectly purchased approximately $34.9 million of the 8%
Preferred Stock in connection with the Plan.
Prior to the Company's acquisition of MEG on October 1, 1998, 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 $141,000 for the
year ended December 31, 1997. The Company did not receive any services from MEG
subsequent to the acquisition.
F-25
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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, 1998,
1999 and 2000, the Company paid fees and commissions to the affiliate totaling
approximately $1,147,000, $1,170,000 and $966,000, respectively, relating to
such advertisements.
The Company accrued royalties to Mr. Arad for toys he invented or designed
of $4,254,000, $2,981,000 and $1,551,000 during the years ended December 31,
1998, 1999 and 2000, respectively. At December 31, 1999 and 2000, the Company
had an accrual to Mr. Arad of $1,028,000 and $378,000, respectively, for unpaid
royalties.
The Company shares office space and certain general and administrative
costs with affiliated entities. Rent allocated to affiliates for the years ended
December 31, 1998, 1999 and 2000 was $105,000, $106,000 and $67,000,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.
14. Commitments and Contingencies
In June 2000, the Company entered into a lease agreement for a corporate
office facility. The lease term, which is approximately 5 1/2 years, commences
on or about April 1, 2001 and terminates on July 31, 2006. Annual rental rate is
approximately $2.8 million for 2001 and 2002, approximately $2.9 million for
2003 and 2004 and approximately $3.0 million for 2005 and 2006. In connection
with the lease, the Company was required to provide the landlord with a Standby
Letter of Credit in the amount of $4.4 million that is outstanding at December
31, 2000.
The Company is a party to various non-cancelable operating leases
involving office and warehouse space expiring on various dates from June 30,
2000 through April 30, 2010. The leases are subject to escalations based on cost
of living adjustments and tax allocations. Minimum future obligations on these
leases are as follows:
(in thousands)
2001.......... $ 2,381
2002.......... 3,311
2003.......... 3,383
2004.......... 3,404
2005.......... 3,406
Thereafter.... 3,545
------- -----
$ 19,430
Rent expense amounted to approximately $1,060,000, $2,691,000, and
$2,514,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
In June 2000, the Company entered into a merchandise licensing agreement to
manufacture and distribute a line of toys associated with motion pictures that
are expected to be released at the end of 2001, 2002 and 2003. In connection
with this licensing agreement and future minimum royalty obligations, the
Company was required to provide the licensor with a $5.0 million cash payment
and a Standby Letter of Credit in the amount of $10.0 million that is
outstanding at December 31, 2000
F-26
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
The Company is a party to various royalty agreements with future guaranteed
royalty payments through 2001. Such minimum future obligations are as follows:
(in thousands)
2001..... $ 1,705
2002..... 5,223
2003..... 5,000
--------------
$ 11,928
The Company has recorded approximately $14,370,000 as a net receivable for
minimum guaranteed royalties as of December 31, 2000. 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:
(in thousands)
2001............................ $9,328
2002............................ 5,485
2003............................ 1,771
2004 and thereafter............. 2,575
Allowances and discounting...... (4,789)
---------
$14,370
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.
Spider-Man Litigation. The Company's subsidiaries MEG and Marvel
Characters, Inc., (collectively, the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character which was settled in March
2001.
F-27
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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 related 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. The
relief sought by complaint includes a declaration that the defendants have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various other forms of equitable relief. The Company believes that each
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.
On February 24, 1999, Wolfman and the Company entered into a
stipulation pursuant to which the United States District Court for the District
of Delaware will determine the issue of whether Wolfman or Marvel Characters,
Inc. (which is now a wholly owned subsidiary of the Company) is the rightful
owner of Blade and Deacon Frost and a number of other characters. In the context
of this proceeding, the Company has sought a declaration that Marvel Characters,
Inc., not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial
on the merits was held in December 1999 and on November 6, 2000 the judge issued
an opinion and order finding in favor of the Company and holding that the
Company is the lawful owner of the rights claimed by Wolfman. As of this date,
Wolfman filed on appeal which has not been scheduled.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character.
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.
F-28
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
15. 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 salaried
employees. In prior years, this plan was amended to prohibit participation by
new participants. The accumulated benefit obligation is approximately $17.0
million. The funded value of plan assets is approximately $17.5 million and the
pension liability at December 31, 2000 is approximately $2.0 million. Plan
expenses for the years ended December 31, 1998, 1999 and 2000 were not
significant.
16. Segment Information
Following the Company's acquisition of MEG, 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. Prior to
October 1, 1998, the Company operated solely within the toy and merchandising
and distributing segment.
Publishing Segment
The publishing segment creates and publishes comic books principally in
North America. The acquired company has been publishing comic books since 1939
and has developed a roster of more than 4,700 Marvel Characters. The Company's
titles feature classic Marvel Super Heroes, Spider-Man, X-Men, newly developed
Marvel Characters and characters created by other entities and licensed to the
Company.
F-29
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Licensing Segment
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.
Toys Publishing Licensing Corporate Total
------- ---------- --------- --------- ----------
(in thousands)
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 (income)......................... (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
Toys Publishing Licensing Corporate Total
-------- ----------- --------- --------- ----------
(in thousands)
Year ended December 31, 1999
Net sales....................................... $245,775 $43,007 $30,863 -- $319,645
Gross profit.................................... 119,788 18,725 30,274 -- 168,787
Operating income (loss)......................... 10,932 3,707 (100) (14,283) 256
EBITDA(1)....................................... 30,282 8,341 19,851 (14,283) 44,191
Total capital expenditures...................... 20,977 -- -- -- 20,977
Identifiable assets for continuing operations... $184,973 $86,263 $383,401 $ - $654,637
Total identifiable assets....................... $184,973 $86,263 $383,401 $ - $654,637
Toys Publishing Licensing Corporate Total
--------- ---------- --------- ---------- ---------
(in thousands)
Year ended December 31, 2000
Net sales....................................... $167,309 $45,183 $19,159 -- $231,651
Gross profit.................................... 61,651 22,857 18,612 -- 103,120
Operating (loss)income ......................... (45,296) 9,099 (15,222) (7,571) (58,990)
EBITDA(1)....................................... (13,762) 12,282 4,724 (7,571) (4,327)
Total capital expenditures...................... 15,069 41 5 -- 15,115
Identifiable assets for continuing operations... $111,266 $76,808 $367,210 $ - $555,284
Total identifiable assets....................... $111,266 $76,808 $367,210 $ - $555,284
(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.
F-30
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
17. Supplemental Financial Information
The following represents the supplemental consolidating condensed financial
statements of Marvel Enterprises, Inc., which is the issuer of the Senior Notes,
and its subsidiaries that guarantee the Notes and the non-guarantor subsidiaries
as of December 31, 1999 and 2000 and for each of the three years ended December
31, 2000 .
Issuer
And Non-
Guarantors Guarantors Total
---------- ---------- ----------
(in thousands)
For The Year Ended December 31, 1998
Net sales................................... $ 196,106 $35,970 $ 232,076
Gross profit................................ 91,281 12,817 104,098
Operating (loss) income..................... (21,106) 1,646 (19,460)
Net (loss) income........................... (33,806) 1,196 (32,610)
For The Year Ended December 31, 1999
Net sales................................... $ 280,355 $39,290 $ 319,645
Gross profit................................ 154,759 14,028 168,787
Operating (loss) income..................... (4,925) 5,181 256
Net (loss) income........................... (37,994) 4,203 (33,791)
For The Year Ended December 31, 2000
Net sales................................... $ 181,554 $50,097 $ 231,651
Gross profit................................ 85,213 17,907 103,120
Operating (loss) income..................... (66,463) 7,473 (58,990)
Net (loss) income........................... (96,154) 6,296 (89,858)
Issuer
And Non- Inter-
Guarantors Guarantors company Total
---------- ---------- -------- --------
December 31, 1999
Current assets ............................. $ 165,580 $ 7,329 $ -- $ 172,909
Non-current assets.......................... 481,302 32,427 (32,001) 481,728
------- ------ -------- ---------
Total assets................................ $ 646,882 $39,756 $(32,001) $ 654,637
========== ======= ======== =========
Current liabilities......................... 103,877 9,114 (32,001) 80,990
Non-current liabilities..................... 251,094 -- -- 251,094
8% Preferred Stock.......................... 186,790 -- -- 186,790
Stockholders' equity........................ 105,121 30,642 -- 135,763
---------- -------------------- ---------
$ 646,882 $39,756 $(32,001) $ 654,637
========== ======= ======== =========
December 31, 2000
Current assets.............................. $ 109,870 $3,573 $ -- $ 113,443
Non-current assets.......................... 440,831 40,347 (39,337) 441,841
---------- ------- -------- ---------
Total assets................................ $ 550,701 $43,920 $(39,337) $ 555,284
=========== ======== ========= =========
Current liabilities......................... 104,560 6,480 (39,337) 71,703
Non-current liabilities..................... 250,000 -- 0 250,000
8% Preferred Stock.......................... 202,185 -- 0 202,185
Stockholders' equity........................ (6,044) 37,440 0 31,396
---------- -------- --------- ---------
$ 550,701 $43,920 $(39,337) $ 555,284
========== ======== ========= =========
F-31
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Issuer
and Non-
Guarantors Guarantors Total
---------- ---------- --------
(in thousands)
Year Ended December 31, 1998
Cash flows from operating activities:
Net (loss) income.......................................... $ (33,806) $1,196 $(32,610)
========= ====== ========
Net cash provided by operating activities............. 40,959 1,025 41,984
Net cash used in investing activities................. (285,164) (225) (285,389)
Net cash provided by financing activities............. 279,500 279,500
--------- ------- ---------
Net increase in cash....................................... 35,295 800 36,095
Cash, at beginning of year................................. 6,962 634 7,596
--------- ------- ---------
Cash, at end of year....................................... $ 42,257 $1,434 $ 43,691
========= ====== ========
Year Ended December 31, 1999
Cash flows from operating activities:
Net (loss) income.......................................... $ (37,994) $4,203 $(33,791)
=========== ====== ========
Net cash provided by operating activities............. 57 758 815
Net cash used in investing activities................. (18,981) (29) (19,010)
Net cash provided by financing activities............. 39,318 -- 39,318
------------ ------- ---------
Net increase in cash....................................... 20,394 729 21,123
Cash, at beginning of year................................. 42,257 1,434 43,691
------------ -------- ---------
Cash, at end of year....................................... $ 62,651 $2,163 $ 64,814
=========== ====== ========
Year Ended December 31, 2000
Cash flows from operating activities:
Net (loss) income.......................................... $ ((96,154) $6,296 $(89,858)
============ ====== =========
Net cash used in operating activities................. (22,599) (1,630) (24,229)
Net cash used in investing activities................. (18,647) (21) (18,668)
Net cash provided by financing activities............. 886 -- 886
------------ ------ ---------
Net decrease in cash....................................... (40,360) (1,651) (42,011)
Cash, at beginning of year................................. 62,651 2,163 64,814
------------ ------ ---------
Cash, at end of year....................................... $22,291 $ 512 $ 22,803
============ ====== =========
F-32
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
VALUATION AND QUALIFYING ACCOUNTS
Allowances
Balance Acquired in Charged to Sales Charged to Balance
At Beginning MEG or Costs and Other at End
of Period Acquisition Expenses Accounts Deductions of Period
Description
- ---------------------------------- ----------- ------------- ---------------- --------- ----------- ---------
(in thousands)
Year Ended December 31, 1998
Allowances included in Accounts
Receivable. Net:
Doubtful accounts--current............ 430 3,112 409(2) -- 343 3,608
Doubtful accounts--non-current........ -- 521 -- -- 521
Advertising, markdowns, returns,
Volume discounts and other........ 29,387 6,255 33,998(1) -- 48,325 21,315
Year Ended December 31, 1999
Allowances included in Accounts
Receivable. Net:
Doubtful accounts--current............ 3,608 -- 1,141(3) -- 798 3,951
Doubtful accounts--non-current........ 521 -- 580(2) -- 121 980
Advertising, markdowns, returns,
Volume discounts, and other....... 21,315 (380) 47,728(1) -- 44,102 24,561
Year Ended December 31, 2000
Allowances included in Accounts
Receivable. Net:
Doubtful accounts--current............ 3,951 -- 899 (4) -- 308 4,542
Doubtful accounts--non-current........ 980 -- (980)(2) -- -- --
Advertising, markdowns, returns,
Volume discounts and other........ 24,561 -- 32,779(1) -- 37,947 19,393
(1) Charged to sales
(2) Charged to costs and expenses.
(3) 1,228 charged to costs and expenses and (87) charged to sales.
(4) 962 charged to costs and expenses and (63) charged to sales
F-33