SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2001
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.
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(Exact name of Registrant as specified in its charter)
(formerly known as Toy Biz, Inc.)
Delaware 13-3711775
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(State of incorporation) I.R.S. employer identification number)
10 East 40th Street
New York, New York 10016
-----------------------------------------
(Address of principal executive offices, including zip code)
(212) 576-4000
(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 22, 2002 was
$142,779,467 based on a price of $8.35 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 22, 2002, there were
34,866,054 outstanding shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS.................................................. 1
ITEM 2. PROPERTIES................................................ 8
ITEM 3. LEGAL PROCEEDINGS......................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................. 10
ITEM 6. SELECTED FINANCIAL DATA.................................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............11
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................ 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............. 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 21
ITEM 11. EXECUTIVE COMPENSATION................................... 24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.......................................36
SIGNATURES............................................................... 40
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:
o Potential inability to successfully implement business strategy.
o 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 or the timing of releases and
the decisions to proceed with feature films and television series based
upon Marvel characters are delayed or cancelled, the ability to obtain new
licenses for motion pictures or televisions shows may be substantially
diminished.
o The continued financial stability of major licensees of the Company
o The lack of commercial success of properties owned by major entertainment
companies that have granted us toy licenses.
o 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 imposition of 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.
o 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.
o 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 56% of our total toy sales in 2001. 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,
ii
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.
o The impact of competition and changes to the competitive environment on our
products and services.
o A decrease in cash flow effecting the Company's ability to pay the
outstanding indebtedness.
o 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.
iii
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 (the "Plan") 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
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.
1
Marvel Licensing
Marvel Licensing licenses the Company's characters for use in a wide
variety of consumer products, including toy merchandise and non-toy merchandise.
Marvel Licensing also receives fees from the sale of licenses to a variety of
media, including television programs, feature films, destination-based
entertainment, and on-line media.
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 (now ABC Family Channel) since 1994, and X-Men, which has
also aired 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 Licensing 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 and foreign television stations. In 2001, the
live action show entitled Mutant X began airing on syndicated television. Mutant
X are new Marvel characters unrelated to X-Men.
Feature Films
Marvel Licensing has licensed the Company's characters for use in major
motion pictures. For example, the Company currently has licenses with Sony
Pictures to produce a motion picture featuring Spider-Man, Twentieth Century Fox
to produce motion pictures featuring X-Men and Fantastic Four, Universal to
produce a motion picture featuring The Incredible Hulk scheduled for release in
June 2003 and New Regency to produce a motion picture featuring Daredevil which
is scheduled for release in March 2003. The X-Men film was released during July
2000 and a sequel is presently scheduled to be released in May 2003 while
Spider-Man: The Movie is scheduled to be released in May 2002. Marvel has other
outstanding licenses with various other film studios for a number of its other
characters. Under these licenses, the Company generally retains control over
merchandising rights and revenue is not less than 50% of this movie-based
merchandising.
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. Expansion has just been
announced with a Spider-Man attraction at the Universal Park in Osaka, Japan.
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 2002.
Toy Merchandise
During 2001, the Company entered into a five and one-half year exclusive
licensing agreement with an unrelated Hong Kong company, Toy Biz Worldwide, Ltd
("TBW") for the sale and manufacture of toy action figures and accessories that
feature Marvel characters other than those based upon the upcoming Spider-Man
movie. TBW is using the Toy Biz name for marketing purposes but Marvel has
neither ownership interest in TBW nor any other financial obligations or
guarantees. The agreement represented a strategic decision which eliminates much
of the risk and investment previously associated with these lines of toys while
enabling Marvel to participate in their success through ongoing licensing fees.
Toy Biz does product design, marketing and sales for TBW and is reimbursed for
2
these expenses. Additionally, during 2001, the Company sold the rights and
inventory to a FCC approved toy component to a company controlled by TBW for
$3.5 million.
Non-Toy Merchandise
Marvel licenses the Company's characters for use in a wide variety of
consumer products, including apparel, interactive games, electronics,
stationery, back-to-school, seasonal gifts and novelties, footwear, collectibles
and advertising.
Marvel Publishing
Since 1995, the comic publishing business has declined, along with the
number of retailers that carry comic books. The last six months of 2001 have
seen a reversal of that trend.
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 part of their magazine merchandise programs have dropped the product
due to an overall reduction in comic book 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. Continuing the initiative
that began in 2000, the Company strives to improve our editorial process and
comic book content. Management believes these initiatives have contributed to an
increase of market share for 2001.
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 2001, 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, as well as recruiting from outside the
industry.
3
The creative process is a team effort led by a Marvel editor. A writer
develops the 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 2001, Marvel eliminated the costly and inefficient process of
hand-coloring books in favor of higher quality, less expensive, computer
coloring. These freelance creators and the printer/binders for Marvel comic
books are unaffiliated third parties
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 non-returnable 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 2001, Marvel launched the Max Imprint. Geared towards readers over the
age of 18 with more mature tastes, these books immediately rose to the top of
the Mature Readers Category and received critical acclaim.
For the years ended December 31, 1999, 2000 and 2001, approximately 80%,
77%, and 80%, 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 2001, Marvel continued its historical policy of printing to order for the
direct market, thus eliminated the cost of printing and marketing excess
inventory. The revived collector interest in Marvel has increased consumer
traffic in the direct market. The revived interest has been instrumental in not
only stimulating market growth but also increasing sales in Marvel's trade
paperback collections. Trade paperbacks are compilations of previously printed
material collected to tell a "complete" story. As monthly periodicals continued
to sell out in 2001, Marvel experienced an increase in demand for the
compilations permitting the Company to achieve a leadership role in the category
of trade.
For the years ended December 31, 1999, 2000 and 2001, approximately 9%, 8%
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. In 2001, distribution to national
bookstore chains was consolidated with direct market distribution resulting in a
significant cost savings.
For the years ended December 31, 1999, 2000 and 2001, approximately 2%, 2%
and 3%, respectively, of Marvel Publishing's net publishing revenues were
derived from subscription sales.
For the years ended December 31, 1999, 2000 and 2001, approximately 9%, 13%
and 9%, 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.
4
Toy Biz
Toy Biz designs, develops, markets and distributes a limited line of toys
to the worldwide marketplace. The Company's primary products are based upon
Spider-Man: The Movie and the movie trilogy Lord of the Rings. Toy Biz also does
the design, development, marketing and sales services for TBW for which it was
reimbursed by TBW for its direct costs. The Spectra Star division of Toy Biz
designs, produces and sells kites in both the mass market stores and specialty
hobby shops.
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, 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.
Due to an 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, the elimination of certain high risk product
categories and lines, shifting the emphasis of its business to direct import and
the licensing agreement with TBW.
Products
While Toy Biz has historically marketed a variety of toy products designed
for children of different age groups, its current product strategy is to focus
sales primarily on toys based on the characters in Spider-Man: The Movie and
Lord of the Rings, and continue with the Spectra Star kite business. In 2001,
approximately 75% of the Company's net toy sales were generated from products
not based on the Marvel characters.
Boys' Products. Toy Biz's products are primarily aimed for boys ages 4-12.
In 2001, Toy Biz developed a line of action figures, accessories and role play
items based upon the Lord of the Rings movie trilogy produced by New Line Cinema
(a division of AOL/Time Warner). The first picture was released in December 2001
with the second film scheduled for release during Holiday 2002 and the third
film released during Holiday 2003. In addition, Toy Biz developed a line of
action figures, accessories and role play items based on the characters in the
upcoming Spider-Man: The Movie which is scheduled to be released in May 2002.
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 twelve 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. 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.
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.
5
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 85%, 72% and 77% of the Company's net toy sales in 1999, 2000 and
2001, 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 70%, 60% and 56% of the Company's total toy sales in 1999, 2000
and 2001, 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 and are 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 Latin America, Asia including many Pacific Rim countries,
Middle East and 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
increases exposure and awareness. However, since dolls and games, two product
lines that required a substantial advertising commitment, were eliminated, the
Company has decided to reserve its advertising dollars for its core product
lines, action figures and accessories, which produce higher profit margins.
The Company currently engages Tangible Media, Inc. ("Tangible Media"), an
affiliate of Isaac Perlmutter, to purchase certain of its advertising. Mr.
Perlmutter is an employee, director and the Company's largest stockholder as
well as Vice-Chairman of the Board of Directors. 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 AOL 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 Toy
Max International 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, 2001, the Company employed approximately 500 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. 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, 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.
7
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"). During 1999, 2000 and 2001, the Company paid
approximately $10.4 million, $2.1 million and $0.5 million, respectively, of
additional Administration Expense Claims. The Company estimates that it may be
required to pay no more than $3.5 million of additional 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.
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.
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 64,300 Leased
Office/Showroom New York, New York 14,100 Leased
Office/Warehouse Yuma, Arizona 80,000 Owned
Warehouse Fife, Washington 125,000 Leased
Manufacturing San Luis, Mexico 190,000 Owned
Office Santa Monica, California 4,900 Leased
8
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.
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. In February 2002, the Court granted the Company's motion
for summary judgment. Simon has filed a Notice of Appeal but no date for the
appeal has been scheduled.
X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc. and
Fireworks Television (US), Inc. in the United States District Court, Southern
District of New York, seeking an injunction and damages for alleged breach of
the 1993 X-Men movie license, unfair competition, copyright infringement and
tortuous interference with the contract arising from the Mutant X television
show being produced by Tribune and Fireworks under license from Marvel which was
released in the fall of 2001. On the same day Fox filed the foregoing suit,
Marvel commenced an action against Fox in the same court seeking a declaratory
judgment that the license of the Mutant X title and certain Marvel characters
did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. On August 9, 2001, in response to Fox's motion for a preliminary
injunction and defendants' motion to dismiss Fox's claims, the Court (i) granted
the motion to dismiss all of Fox's claims except for its breach of contract and
copyright claims (ii) granted Fox's motion for a preliminary injunction but only
as to the defendants use of (a) video clips from the X-Men film and/or trailer
in order to promote the new Mutant X series and (b) a logo that is substantially
similar to the logo used by Fox in connection with the X-Men film. The
preliminary injunction will not have a significant effect on the Company's
operations. In January 2002, the United States Appeals Court for the Second
Circuit, in response to Fox's appeal, affirmed the District Court's denial of
Fox's motion for a preliminary injunction to prevent the airing of the Mutant X
series and remanded the case to the District Court for further proceedings
consistent with its opinion. At the present time, the parties are engaged in
pre-trial discovery with a trial on the merits scheduled for November 2002.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company filed and intends to vigorously prosecute an appeal. The
Company has provided for this judgment during the second quarter of 2001 in the
Consolidated Statement of Operations.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. As of December 31, 2001, the Company has
settled substantially all Administrative Expense Claims and believes the accrual
of $3.5 million is sufficient to provide for its remaining obligations.
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 2001.
9
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 2000 High Low
---------------- ------ ------
First Quarter $ 6.50 $ 5.31
Second Quarter $ 6.94 $ 4.19
Third Quarter $ 7.38 $ 3.12
Fourth Quarter $ 3.19 $ 1.44
Fiscal Year 2001
First Quarter $ 2.88 $ 1.44
Second Quarter $ 3.58 $ 1.79
Third Quarter $ 4.03 $ 1.90
Fourth Quarter $ 4.15 $ 2.24
As of March 21, 2002, there were 18,491 holders of record of the Company's
Common Stock.
The Company has not declared any dividends on the Common Stock. The HSBC
Credit 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, 2001. 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,
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
Statement of Operations
Data:
Net sales................. $ 150,812 $232,076 $319,645 $231,651 $181,224
Operating (loss) income... (49,288) (19,460) 256 (58,990) 1,618
Net (loss) income......... (29,465) (32,610) (33,791) (89,858) 5,265
Basic and diluted net loss
per common share........ (1.06) (1.23) (1.43) (3.13) (0.31)
Preferred dividend
requirement............. 71 3,380 14,220 15,395 16,034
At December 31:
Balance Sheet Data:
Working capital (deficit).. 74,047 (133,392) 91,919 43,067 28,926
Total assets............... 150,906 689,904 654,637 553,957 517,570
Borrowings................. 12,000 200,000 -- -- 37,000
Other non-current debt..... -- 27,000 250,000 250,000 150,962
Redeemable preferred stock. -- 172,380 186,790 202,185 207,975
Stockholders' equity....... 107,981 183,624 135,763 31,396 41,958
10
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, 2001.
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 on merchandise, toys, promotions, feature films, television
programs, theme parks and various other areas; (ii) publishing comic books and
trade paperbacks, including related advertising revenues; and (iii) marketing
and distributing toys primarily based upon characters from Spider-Man: The Movie
and characters from the movie trilogy based upon Lord of the Rings as well as
kites through its Spectra Star division. Licensing, publishing and toys have
accounted for 22%, 27% and 51%, respectively, of the Company's net sales for the
year ended December 31, 2001.
The Company's strategy is to increase 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.
During 2001, the Company entered into a 66 month exclusive licensing
agreement with an unrelated Hong Kong company, Toy Biz Worldwide, Ltd ("TBW")
for the sale and manufacture of toy action figures and accessories that feature
Marvel characters other than those based upon the upcoming Spider-Man movie. TBW
is using the Toy Biz name for marketing purposes but Marvel has neither
ownership interest in TBW nor any other financial obligations or guarantees
related to TBW. The agreement represents a strategic decision by the Company to
eliminate much of the risk and investment previously associated with these lines
of toys while enabling Marvel to participate in their success through ongoing
licensing fees. Toy Biz does product design, marketing and sales for TBW and is
reimbursed for these expenses.
Beginning in 2001, Toy Biz marketed and distributed toys associated with
the Lord of the Rings toy license which coincided with the release of the first
of the films in the trilogy in December of 2001. This product line will continue
in 2002 and 2003 and will coincide with the release of the other two films in
the trilogy during the Holiday 2002 and 2003 seasons. In addition, Toy Biz began
marketing and distributing toys associated with the Spider-Man: The Movie which
is expected to be released in May 2002. Spectra Star continues to sell kites to
both the mass market stores and specialty hobby shops.
The Company records as revenue the present value of any guaranteed
licensing fees from its licensing activities at the time the Company's
characters are available to the licensee and the collection of such licensing
fees is reasonably assured. Guaranteed licensing fees booked as revenue but not
yet realized are recorded as receivables. Licensing receivables due more than
one year beyond the balance sheet date are discounted to their net present
value.
Operating Expenses: Cost of Sales
There generally is no material cost of sales associated with the licensing
of the Company's characters.
11
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, tooling, 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.
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
payroll, 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 New Line Cinema, World Championship Wrestling, Universal
Studios, Sony Pictures, as well as toys developed by outside inventors. There
are no royalty payments for Marvel character based toy products except for those
characters related to Spider-Man: The Movie in which the Company will pay a
royalty to Sony Pictures as part of their joint venture arrangement. 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's warehousing and store merchandising costs have declined 71%
during 2001 as compared to 2000 due to the elimination of certain product
categories and lines as well as effective cost control.
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 related to the goodwill created
pursuant to the combination of Toy Biz, Inc. and MEG is amortized over an
assumed 20-year life. However, due to the adoption of FASB 142, the Company will
undergo a goodwill impairment test during the first six months of 2002. If
goodwill is deemed to have been impaired, the Company will then take a charge in
its Statement of Operations during the first six months of 2002, as a cumulative
effect of a change in accounting principle reflected in the quarter ending March
31, 2002. If no impairment exists, then the asset balance will remain at its
current level. Effective January 1, 2002, the Company will adopt SFAS No. 142,
"Goodwill and Other Intangible Assets", and accordingly will no longer amortize
goodwill but will be subject to annual impairment tests in accordance with the
statement. Amortization expense for the year ended December 31, 2001 relating to
goodwill was $23.5 million
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 a substantial portion of 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.
12
Results of Operations of the Company
Year ended December 31, 2001 compared with year ended December 31, 2000
The Company's net revenue decreased approximately $50.4 million to $181.2
million for the year ended December 31, 2001 from $231.6 million in the 2000
period. Toy Biz revenues were down $75.6 million or 45% primarily as a result of
the licensing of Marvel character based toys to TBW, an unrelated entity,
effective July 1, 2001. The decrease in Toy Biz revenues was also the result of
declining sales relating to X-Men motion picture toys, dolls, WCW products and
Pokemon marbles which were sold through close-out sales in order to dispose of
this inventory according to the Company's plan of restructuring for the Toy Biz
division. Licensing revenue increased by approximately $20.9 million in 2001
from 2000 as a result of a substantial number of licensing agreements signed
across a wide array of consumer products such as apparel, electronics,
interactive games, stationery and back to school, seasonal gifts and novelties,
footwear, and collectibles. Additional licensing revenues were also recognized
from first and second seasons of our television series " X-Men Evolution" as
well as from our licensing agreement with TBW effective July 1, 2001. Licensees
include such names as Buster Brown, Haddad, Encore Software, Universal, Burger
King and The Dairy Board. Publishing revenues increased by approximately $4.3
million primarily due to increased sales of comic books and trade paperbacks to
the direct market.
Gross profit decreased approximately $10.6 million to $92.5 million in 2001
from $103.1 million in 2000. The reduction in Toy Biz division gross profit
accounted for approximately $34.7 million of the decrease which was partially
offset by an increase in Licensing gross profit of $21.4 million and increase in
Publishing gross profit of $2.7 million. Gross Profit as a percentage of net
sales increased to approximately 51% in 2001 from approximately 45% in 2000. The
licensing and publishing divisions produced gross margins of 100% and 52%,
respectively. The gross profit margin for the Toy Biz division decreased to 29%
in 2001 from approximately 37% in 2000 due primarily to a higher percentage of
close out sales of Marvel products relating to the X-Men motion picture, Dolls,
WCW products and Pokemon marbles as well as other activity toys and games, then
estimated at the end of 2000.
Selling, general and administrative expenses decreased approximately $45.5
million to $62.0 million in 2001 from $107.5 million in 2000. Expense reductions
in the toy division accounted for approximately $48.9 million of the decrease
primarily due to lower advertising, royalty, other selling expenses and payroll.
Selling, general and administrative expense as a percentage of net sales
decreased to approximately 34% in 2001 from approximately 46% in 2000 mainly due
to cost reductions relating to the elimination of certain high risk and media
intensive product categories and lines from the toy division. Further, pursuant
to its agreement with TBW, the Company provides TBW certain administrative and
management support for which TBW reimburses the Company. Included as a reduction
of selling, general and administrative expenses are $1.7 million of
reimbursements received from TBW for services provided during the period July 1,
2001 through December 31, 2001.
A pre-acquisition litigation charge of $3.0 million in regards to the
matter of MacAndrews & Forbes v. Marvel was recorded during the second quarter
of 2001. On July 25, 2001, a jury verdict was entered in the Sedgwick County,
Kansas District Court in the amount of $3.0 million on a breach of contract
action based on a 1994 toy license between Toy Biz and The Coleman Company. The
complaint alleged that Toy Biz did not fulfill its obligation to spend certain
monies on the advertising and promotion of Coleman's products. The Company filed
and intends to vigorously prosecute an appeal. The Company was required to post
a letter of credit in the amount of the judgement plus interest.
During 2001, the Company determined that approximately $3.5 million of
liability related to Administrative Claims Payable included in the final
purchase price allocation during 1999 was no longer required. A reduction in the
liability, administrative claims payable, was included in operating results.
Depreciation and amortization expense decreased approximately $25.1 million
to $5.6 million in 2001 from $30.7 million in 2000 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. In addition, lower capital
expenditures of $7.2 million in 2001 as compared to $15.1 million in 2000
contributed to the decrease in depreciation and amortization.
13
Amortization of goodwill and other intangibles decreased slightly in 2001
as compared to 2000.
Interest expense decreased approximately $2.7 million to $29.2 million in
2001 from $31.9 million in 2000, primarily due to the repurchase of $99.0
million in principal of Senior Notes during the third and fourth quarters of
2001.
During 2001, the Company, through a series of transactions, reacquired an
aggregate $99.0 million principal amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The principal
amount includes $39.2 million with a fair value of $20 million received in
satisfaction of licensing fees from a third party. The principal amount also
includes $48.5 million purchased from Mr. Perlmutter for $26.8 million. The
Company recorded an extraordinary gain of $32.7 million, net of write-offs of
deferred financing fees of $3.2 million and income taxes of $11.3 million
As a result of the above, the Company reported net income of $5.3 million in
2001 compared to a net loss of $89.9 million in 2000, an increase of
approximately $95.2 million. The Company reported a loss per share after
preferred dividends of $0.31 in 2001 compared to a loss per share after
preferred dividends of $3.13 in 2000.
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 write
down of certain inventories added to a higher cost of sales component and a
lower gross margin in 2000.
Selling, general and administrative expenses 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.
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.
14
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 1999. 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.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand, cash flow from
operations and cash available from the $20.0 million HSBC letter of credit
facility. 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 1999,
2000 and 2001 was $0.8 million, ($24.2) million and $8.8 million, respectively.
At December 31, 2001, the Company had working capital of $28.9 million.
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 of Directors, in cash, in
additional shares of 8% Preferred Stock or in any combination thereof. The
Company is restricted under the Indenture and under the HSBC 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.
The Company estimates that it may be required to pay approximately $3.5
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, 2001 is approximately $5.2 million.
On February 25, 1999, the Company completed a $250.0 million offering of
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. 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 senior notes (the "Senior Notes").
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.
15
In February 1999, the Company recorded an extraordinary charge of
approximately $1.5 million, net of tax benefit for the write-off of deferred
financing costs in connection with the repayment of certain interim financing
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 Company did not borrow under the Citibank Credit Facility.
On October 5, 2001, the Company terminated the Citibank Credit Facility
and replaced $12.4 million of letters of credit outstanding under the facility
with letters of credit guaranteed by Object Trading Corp. (" Object Trading"), a
corporation wholly owned by Isaac Perlmutter, a director, employee and major
shareholder of the Company as well as Vice-Chairman of the Board of Directors.
The $3.4 million letter of credit issued in connection with the appeal in the
MacAndrews & Forbes litigation (See Item 3 - Legal Proceedings) was also
guaranteed by Object Trading. The Company granted to Object Trading a first
security interest in the same assets that were granted as security under the
Citibank Agreement.
On November 30, 2001, the Company and HSBC Bank USA ("HSBC") entered into
an agreement for an $80 million senior credit facility ("Credit Facility") . The
Credit Facility is comprised of a $20 million revolving letter of credit
facility renewable annually for up to three years and a $60 million multiple
draw three year amortizing term loan facility available until January 31, 2002.
Prior to January 31 ,2002, the Company drew down $37 million which was used to
finance the repurchase a portion of the Company's Senior Notes. The term loan
facility amortizes quarterly over three years with the outstanding principal due
and payable on December 31, 2004. At the option of the Company, the term loans
bears interest either at the lender's base rate plus a margin of 2.5% or the
lender's reserve adjusted LIBOR rate plus a margin of 3.5%. The Company may
prepay the term loans applying the base rate at any time without penalty, but
may only prepay the LIBOR rate loans without penalty at the end of the
applicable interest period. The letter of credit facility is a one-year facility
subject to annual renewal, expiring on the date which is five days prior to the
final maturity for the term loan facility. The $15.8 million of letters of
credit previously issued by Object Trading. were replaced by letters of credit
issued by HSBC. The Credit Facility contains customary mandatory prepayment
provisions for facilities of this nature, including an excess cash flow sweep.
It also contains customary event of default provisions and covenants restricting
the Company's operations and activities, including the amount of capital
expenditures, and also contains certain covenants relating to the maintenance of
minimum net worth and a minimum interest coverage and leverage ratio. The Credit
Facility is secured by a) a first priority perfected lien in all of the assets
of the Company; b) a first priority perfected lien in all of the capital stock
of each of the Company's domestic subsidiaries; c) a first priority perfected
lien in 65% of the capital stock of each of the Company's foreign subsidiaries;
and d) cash collateral to be placed in a cash reserve account in an amount equal
to at least $10 million at the end of each fiscal quarter.
In consideration for the Credit Facility, the Company issued a warrant to
HSBC to purchase up to 750,000 shares of the Company's common stock. These
warrants have an exercise price of $3.62, a life of five years. The fair value
for the warrants was estimated at the date of issuance using a Black-Scholes
pricing model with the following assumptions: risk free interest rate of 4.16%;
no dividend yield; expected volatility of 0.924; and expected life of five
years. The aggregate value of $1,980,000 included in deferred financing costs on
the Consolidated Balance Sheets and is being amortized over the term of the
Credit Facility using the effective interest method.
In connection with the Credit Facility, the Company and Isaac Perlmutter
entered into a Guaranty and Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
Credit Facility in an amount equal to 25% of all principal obligations relating
to the Credit Facility plus an amount, not to exceed $10 million, equal to the
difference between the amount required to be in the cash reserve account
maintained by the Company and the actual amount on deposit in such cash reserve
account at the end of each fiscal quarter; provided that the aggregate amount
guaranteed by Mr. Perlmutter will not exceed $30 million. Under the terms of the
Security Agreement, Mr. Perlmutter has provided the creditors under the Credit
Facility with a security interest in the following types of property, whether
currently owned or subsequently acquired by him: all promissory notes,
certificates of deposit, deposit accounts, checks and other instruments and all
insurance or similar payments or any indemnity payable by reason of loss or
damage to or otherwise with respect to any such property.
16
In consideration for the Guaranty and Security Agreement, the Company
issued Mr. Perlmutter a warrant to purchase up to five million shares of the
Company's common stock. These warrants have an exercise price of $3.11, a life
of five years and whose exercisability is determined by a calculation reflecting
the amounts guaranteed by Mr. Perlmutter. Based on the amount outstanding under
the Credit Facility, 3,867,708 warrants were exercisable by Mr. Perlmutter. The
fair value for the warrants was estimated at the date of issuance using a
Black-Scholes pricing model with the following assumptions: risk free interest
rate of 4.16%; no dividend yield; expected volatility of 0.924; and expected
life of five years. The aggregate value of $10,481,489 is included in the
Consolidated Balance Sheet as deferred financing costs and is being amortized as
interest expense over the three year term of the Credit Facility using the
effective interest method.
During 2001, the Company, through a series of transactions, reacquired an
aggregate $99.0 million principal amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The principal
amount includes $39.2 million with a fair value of $19.7 million received in
satisfaction of licensing fees from a third party, as described in Note 9 to the
Consolidated Financial Statements. The principal amount also includes $46.6
million purchased from Mr. Perlmutter for $24.9 million. The Company recorded an
extraordinary gain of $32.7 million, net of write-offs of deferred financing
fees of $3.2 million and income taxes of $11.3 million.
Capital expenditures (excluding acquisitions) by the Company during fiscal
1999, 2000 and 2001 were approximately $20.8 million, $15.1 million and $7.2
million, respectively.
The Company believes that cash on hand, cash flow from operations,
borrowings available under the HSBC letter of credit 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 1999,
2000 and 2001, 62%, 62% and 45%, respectively, of the Company's net toy sales
were realized during the second half of the year. While management expects that
the Company's toy business will continue to experience significant activity
during the second half of each year, management also believes that toy sales and
toy licensing revenue surrounding the scheduled releases of Spider-Man: The
Movie (May 2002), X-Men II, The Sequel (Spring 2003) and The Incredible Hulk
(June 2003) will mitigate the seasonality in the foreseeable future. This
seasonal pattern would normally require significant use of working capital to
build inventory during the year and require accurate forecasting of demand for
the Company's products during the Christmas selling season. However, in order to
reduce the financial risk and uncertainty associated with its toy business, the
Company (i) licensed the sale and manufacture of Marvel toy action figures and
accessories to TBW with the exception of Spider-Man: The Movie, (ii) shifted the
emphasis of its business to direct import and (iii) eliminated certain high risk
product categories and lines.
Critical Accounting Policies and Estimates
General
Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. We review the accounting policies we use in
reporting our financial results on a regular basis. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, future revenues from our animated television series,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to, accounts receivable, inventories, goodwill and intangible assets,
prepaid royalties, molds, tools and equipment costs, product, package design
costs, future revenue from episodic television series, administrative claims
liabilities, income taxes, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Results may differ from these estimates due
to actual outcomes being different from those on which we based our assumptions.
These estimates and judgments are reviewed by management on an ongoing basis,
17
and by the Audit Committee at the end of each quarter prior to the public
release of our financial results. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition
Merchandise Sales, Sales Returns and Customer Allowances
Merchandise sales, including toys and all non-subscription related comic
book sales are recorded when title and risk of ownership have passed to the
buyer. Appropriate provisions for future returns and other sales allowances are
established based upon historical experience, adjusting for current economic and
other factors affecting the customer. The Company regularly reviews and revises
when considered necessary its estimates of sales returns based primarily upon
actual returns, planned product discontinuances, and estimate sell-through at
the retail level. No provision for sales returns is provided when the terms of
the underlying sales do not permit the customer to return product to the
Company. Historical return rates for comic book sales are typically higher that
those related to toy sales. However, sales to the Company's largest comic book
distributor are made principally on a no return basis.
Subscription Revenues
Subscription revenues related to our comic book business are generally
collected in advance for a one year subscription and are recognized as income on
a pro rata basis over the subscription period as the comic books are delivered.
License Revenues
Revenue from distribution fees, licensing and sub-licensing of characters
owned by the Company are recorded in accordance with guidance provided in SEC
Staff Accounting Bulletin No. 101 "Revenue Recognition." Under the guidelines,
revenue is recognized when the earnings process is complete. This is considered
to have occurred when persuasive evidence of an agreement between the customer
and the Company exists, when the characters are made available to the licensee,
the fee is fixed or determinable and collection is reasonably assured.
Receivables from licensees due more than one year beyond the balance sheet date
are discounted to their present value. Revenues related to the licensing of
animated television series are recorded in accordance with AICPA Statement of
Position 00-2 "Accounting by Producers or Distributors of Films." Under this
Statement of Position revenue is recognized when persuasive evidence of a sale
or licensing arrangement with a customer exists, when an episode is delivered in
accordance with the terms of the arrangement; the license period of the
arrangement has begun and the customer can begin its exhibition, the arrangement
fee is fixed or determinable, and collection of the arrangement fee is
reasonably assured.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
In evaluating the collectibility of accounts receivable, we consider a number of
factors, including the age of the accounts, changes in status of the customers'
financial condition and other relevant factors. Estimates of uncollectable
amounts are revised each period, and changes are recorded in the period they
become known. A significant change in the level of uncollectable amounts would
have a significant effect on the Company's results of operations.
Excess and Obsolete Inventory
We write down our excess and obsolete inventory equal to the difference
between the cost of inventory and the estimated market value based upon
assumptions about future product demand, consumer trends, the success of related
feature films, the availability of alternate distribution channels and overall
market conditions. If actual product demands, consumer trends and market
conditions are less favorable than those projected by management, additional
inventory write-downs could be required.
18
Molds and Tools
Molds and tools are stated at cost less accumulated depreciation. The
Company owns the molds and tools used in the production of the Company's
products by third-party manufacturers. For financial reporting purposes,
depreciation and amortization is computed by the straight-line method over the
estimated selling life of the related toys, which is generally three-years. On
an ongoing basis, the Company reviews the recoverability of the carrying value
of the molds and tools. The Company considers factors including actual sales,
sell through at the retail level, the overall retail environment and when
applicable, the overall commercial success of the related and comparable feature
length movies, television shows and comic books. If the facts and circumstances
suggest a change in useful lives of the molds and tools or impairment in the
carrying value, the useful lives are adjusted and the unamortized costs are
expensed.
Product and Package Design Costs
Product and package design costs are stated at cost less accumulated
depreciation and amortization. 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 artwork, modeling and printing separations used in the
production of packaging. For financial reporting purposes, depreciation and
amortization is computed by the straight-line method over the estimated selling
life of the related toys, which is generally three-years. On an ongoing basis,
the Company reviews the recoverability of the carrying value of product and
package design costs. The Company considers factors including actual sales, sell
through at the retail level, the overall retail environment and when applicable,
the overall commercial success of the related and comparable feature length
movies, television shows and comic books. If the facts and circumstances suggest
a change in useful lives of the product and package design costs or impairment
in the carrying value, the useful lives are adjusted and the unamortized costs
are expensed.
Goodwill and Other Intangibles
The Company has significant goodwill and other intangible assets on its
balance sheet, which results from the acquisitions of businesses. The valuation
and classification of these assets and the assignment of useful amortization
lives involves significant judgments and the use of estimates. We assess the
fair value and recoverability of our long-lived assets, including goodwill,
whenever events and circumstances indicate the carrying value of an asset may
not be recoverable from estimated future cash flows expected to result from its
use and eventual disposition. In doing so, we make assumptions and estimates
regarding future cash flows and other factors to make our determination. The
fair value of our long-lived assets and goodwill is dependent upon the
forecasted performance of our business, changes in the media and entertainment
industry and the overall economic environment. When we determine that the
carrying value of our intangibles and goodwill may not be recoverable, we
measure any impairment based upon a forecasted discounted cash flow method.
Effective January 1, 2002, the Company will adopt Statement of Financial
Standards No. 142, "Goodwill and Other Intangible Assets," and will be required
to analyze its goodwill for impairment issues during the first six months of
2002, and then on a periodic basis thereafter goodwill will no longer be
amortized but will be subject to an annual (or under certain circumstances more
frequent) impairment tests based on its estimated fair value. Other intangible
assets that meet certain criteria will continue to be amortized over their
useful lives and will also be subject to an impairment test based on estimated
fair value. Estimated fair value is typically less than values based on
undiscounted operating earnings because fair value estimates include a discount
factor in valuing future cash flows. There are many assumptions and estimates
underlying the determination of an impairment loss. Another estimate using
different, but still reasonable, assumptions could produce a significantly
different result. Therefore, impairment losses could be recorded in the future.
The first of such impairment tests is required to be performed during the first
six months of 2002
Royalties
The Company regularly reviews the recoverability of its prepaid royalties
and minimum guaranteed commitments. The Company considers factors including
actual sales, sell through at the retail level, the overall retail environment
and the overall commercial success of the related and comparable feature length
movies.
19
Accounting for Joint Venture
The Company has entered into a jointly owned limited partnership with Sony
Pictures to pursue licensing opportunities for motion picture and television
related merchandise relating to the Spider-Man character. The Company accounts
for the activity of this joint venture under the equity method. Through December
31, 2001, the joint venture has not recognized any revenues. Spider-Man: The
Movie is scheduled for release during 2002 at which time the joint venture will
begin recognizing revenues.
Commitments and Contingencies
The Company is a party to certain legal actions as described in Item 3 -
Legal Proceedings and 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 in Item 3 - Legal Proceedings, individually and in the
aggregate, are not likely to have a material adverse effect on its financial
condition, results of operations or cash flows.
The Company regularly evaluates its litigation claims and its
administrative claims payable to provide assurance that all losses and
disclosures are provided for in accordance with Statement of Financial
Accounting Standards No. 5 "Accounting for Contingencies". The Company's
evaluation of legal matters and administrative claims payable involves
considerable judgment of management. The Company engages internal and outside
legal counsel to assist in the evaluation of these matters. Accruals for
estimated losses, if any, are determined in accordance with the guidance
provided by SFAS No. 5.
Recent Accounting Pronouncements
SFAS No. 141 and No. 142, "Business Combinations and Goodwill and Other
Intangible Assets" - In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets (the
"Statements"), effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets with finite lives
will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The Company recorded
$23.5 million of goodwill amortization during the year ended December 31, 2001.
The Company will test goodwill for impairment using the two-step process
prescribed in Statement No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of impairment, if any. The
Company expects to perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets as of January 1, 2002 during the
first six months of 2002. Any impairment charge resulting from these
transitional impairment tests will be reflected as the cumulative effect of a
change in accounting principal in the first quarter of 2002. The Company has not
yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
SFAS No. 144, "Accounting for Impairment of Long Lived Assets" - On August
1, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Long Lived
Assets". The Company is required to adopt this pronouncement beginning January
1, 2002. SFAS No.144 prescribes the accounting for long-lived assets (excluding
goodwill) to be disposed of by sale. SFAS No. 144 retains the requirement of
SFAS No. 121 to measure long lived assets classified as held for sale at the
lower of its carrying value or fair market value less the cost to sell.
Therefore, discontinued operations are no longer measured on a net realizable
basis and future operating results are no longer recognized before they occur.
The impact of adopting SFAS No. 144 is not expected to be significant.
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.
20
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, 2001, the Company's Senior Notes debt
bore interest at a fixed rate, the Company's HSBC Credit Facility bore interest
either at the lender's base rate plus a margin of 2.5% or the lender's reserve
adjusted LIBOR rate plus a margin of 3.5% and all of the Company's outstanding
preferred stock earns dividends at a fixed rate. A 10% increase or decrease in
the interest rate on the Company's Credit Facility would not have a significant
impact on the Company's financial position or results of operation. 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
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 Discussion and Analysis 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 16 to the December 31, 2001 Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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, 2002) and
position of each person who serves as an executive officer or director of the
Company:
Name Age Position
Morton E. Handel....... 66 Chairman of the Board of Directors
Avi Arad............... 54 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.............. 62 Director
Shelley F.Greenhaus.... 48 Director
James F. Halpin........ 51 Director
Lawrence Mittman....... 51 Director
Isaac Perlmutter....... 59 Vice Chairman of the Board of Directors
and Director
Alan Fine.............. 51 President and Chief Executive Officer of
Toy Biz
William Jemas.......... 44 President of Publishing and Consumer
Products and Chief Operating Officer
Allen S. Lipson........ 59 Executive Vice President, Business and
Legal Affairs and Secretary
Richard Ungar.......... 51 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 (Class III), has been Chairman of the Board of Directors
of the Company since October 1998 and was first appointed as a director of Toy
21
Biz, Inc. in June 1997. Mr. Handel has been President of S&H Consulting Ltd., a
financial consulting group, 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 serves as a director of Concurrent Computer Corp. and Linens `N
Things, Inc.
Avi Arad (Class II), has been Chief Creative Officer of the Company and
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 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 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 co-designed 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.
F. Peter Cuneo (Class III), has been the Company's President and Chief
Executive Officer since July 1999. Mr. Cuneo has been a director of the Company
since July 1999. From September 1998 until July 1999, Mr. Cuneo served as
Managing Director of Cortec Group Inc., a private equity fund. From February
1997 until September 1998, Mr. Cuneo was Chairman of Cuneo & Co., L.L.C., a
private investment firm. From May 1996 until 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
until May 1996, Mr. Cuneo was President and Chief Operating Officer at Remington
Products Company, the predecessor to Remington Products Company, L.L.C. Mr.
Cuneo is also a director of Waterpik Technologies, Inc.
Sid Ganis (Class I), has been a director of the Company since October 1999.
Mr. Ganis has been President of Out of Blue...Entertainment, a provider of
motion pictures, television and musical entertainment for Sony Pictures
Entertainment and others that he founded, since September 1996. From January
1991 until September 1996, Mr. Ganis held various executive positions with Sony
Pictures, including Vice Chairman of Columbia Pictures and President of
Worldwide Marketing for Columbia/TriStar Motion Picture Companies.
Shelley F. Greenhaus (Class II), has been a director of the Company since
October 1998. Mr. Greenhaus has been President and Managing Director of
Whippoorwill Associates, Incorporated ("Whippoorwill"), an investment management
firm that he founded, since 1990. Whippoorwill manages investment accounts for a
prominent group of institutional and individual investors from around the world.
James F. Halpin (Class I), has been a director of the Company since March
1995. Mr. Halpin retired in March 2000 as President, Chief Executive Officer and
Chief 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 Interphase Corporation, a
manufacturer of high-performance networking equipment for computers, and Lowe's
Companies, Inc., a chain of home improvement stores.
Lawrence Mittman (Class II), has been a director of the Company since
October 1998. Mr. Mittman is a partner in the law firm of Paul, Hastings,
Janofsky & Walker LLP. For more than five years prior to June 2000, Mr. Mittman
was a partner in the law firm of Battle Fowler LLP which combined with Paul,
Hastings, Janofsky & Walker in June 2000.
Isaac Perlmutter (Class III), has been a director of the Company since
April 1993 and employed as Vice-Chairman of the Board since November 2001. Mr.
Perlmutter served as Chairman of the Board of Directors 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 the Company and has been an independent financial investor for
the past five years. 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, and Tangible Media, Inc.,
a media buying and advertising agency.
22
All of the Company's directors were designated for election pursuant to the
Stockholders' Agreement. Messrs. Handel, Arad, Cuneo, Halpin, Mittman and
Perlmutter were designated by the Investor Group. Messrs. Ganis and Greenhaus
were designated by the Lender Group.
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 (51) served as a director of the Company from June 1997 until
October 1998. Mr. Fine has been President and Chief Executive Officer of Toy
Biz, Inc. since August 2001 and served in that capacity from October 1998 to
April 2001. From April 2001 until August 2001, Mr. Fine was an independent
consultant. Previously, he served as Chief Operating Officer of the Company, a
position to which he was appointed in September 1996. From June 1996 until
September 1996, Mr. Fine was President and Chief Operating Officer of Toy Biz
International Ltd. From May 1995 until May 1996, Mr. Fine was President and
Chief Operating Officer of Kay-Bee Toys, a national toy retailer, and from
December 1989 until May 1995, Mr. Fine was Senior Vice President, General
Merchandise Manager of Kay-Bee Toys.
William Jemas, Jr. (43) has been President of Publishing and Consumer
Products since February 2000 and Chief Operating Officer since January 2002.
Previously, Mr. Jemas was Executive Vice President, Madison Square Garden Sports
from December 1998 until February 2000. From July 1996 until December 1998, Mr.
Jemas was founder and President of Blackbox, L.L.C. and worked and consulted for
several media companies, including Lancit Media, G-Vox Interactive and Hearst
Entertainment. From July 1993 until June 1996, Mr. Jemas held various executive
positions with MEG, including Executive Vice President and President of Fleer
Corporation.
Allen S. Lipson (59) has been 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. From October 1988 until May
1996, Mr. Lipson was Vice President and General Counsel of Remington Products
Company.
Richard E. Ungar (51) has served as President of Marvel Characters, Inc.
("Marvel Characters") since October 1999. From May 1999 until October 1999, Mr.
Ungar was a consultant for the Company, 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 and
producer. From January 1992 until January 1997, Mr. Ungar held various positions
with New World Entertainment, including President of Programming and President
and Chief Executive Officer 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 2001.
23
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 2001 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,
2001 (the "Named Executive Officers"), for services rendered in all capacities
to the Company and its subsidiaries during such periods.
Summary Compensation Table
Annual Compensation(1) Long-Term Compensation
----------------------------------------- --------------------------------------
Other Annual Securities Underlying
Name and Principal Position Year Salary($) Bonus(2) Compensation Options
- --------------------------- ---- --------- --------- ------------- --------------------
F. Peter Cuneo (3) 2001 $750,000, -- $171,504(4) 350,000
President and Chief Executive 2000 694,615 -- 78,678(4)
and Financial Officer 1999 295,000 $490,000 750,000
Alan Fine 2001 500,192 -- 54,256(5) 15,000
President and Chief Executive 2000 525,000 -- 8,320(5)
Officer of the Company's Toy 1999 500,000 225,000 200,000
Biz Division
Avi Arad 2001 450,000 -- -- 100,000
Chief Creative Officer of the 2000 375,000 -- 67,137(6)
Company and President and 1999 375,000 201,563 109,774(6)
Chief Executive Officer of the
Company's Marvel Studios
Division
William Jemas (7) 2001 325,000 -- 145,000
President 2000 267,307 237,500 175,000
Richard Ungar (8)
President, Marvel Characters 2001 418,269(9)
2000 404,808(9) -------- 50,000
1999 46,479(9) 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 for 2001 include $152,320 for apartment and taxes associated
therewith provided by Company, $18,000 car allowance and $1,184 in Company
matching contribution to the Company's 401(k) Plan. Amounts shown for 2000
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 for 2001 include $44,101 for apartment and taxes associated
therewith provided by Company, $8,500 car allowance and $1,655 in Company
matching contribution to the Company's 401(k) Plan, Amounts shown for 2000
are the Company's matching contribution to the Company's 401(k) Plan.
(6) 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 in 1999.
(7) Mr. Jemas's employment with the Company commenced in February 2000.
24
(8) Mr. Ungar's employment with the Company commenced in October 1999
(9) Amounts shown include payments to a personal service company owned by Mr.
Ungar.
Option Grants Table
The following table shows the Company's grants of stock options to the
Named Executive Officers in 2001. 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 2001.
Number of Percent of Potential Realizable
Shares of Total Options Value at Assumed Annual Rates
Underlying Granted to Exercise Expiration of Stock Price Appreciation
Options Employees Price per Date for Option Terms
Name in 2001 in 2001 Share
- --------------- ---------- ------------- --------- ---------- -----------------------------
5% 10%
--------- --------
Peter Cuneo (1) 250,000 4.4% 2.500 1/15/11 $393,125 $996,250
Peter Cuneo (2) 100,000 1.8% 3.270 1/15/11 205,683 521,238
Alan Fine (1) 15,000 0.2% 2.500 1/15/11 23,587 59,775
Avi Arad (1) 100,000 1.8% 3.270 1/15/11 205,683 521,238
William Jemas (1) 75,000 1.3% 2.500 1/15/11 117,937 298,875
William Jemas (2) 70,000 1.2% 3.270 1/15/11 143,978 364,867
Rick Ungar (1) 50,000 0.8% 2.500 1/15/11 78,625 199,250
(1) Options become exercisable in three installments: options to buy 20% of
the total became exercisable on the grant date of January 15, 2001 and
options to buy 40% of the total shares of Common Stock become exercisable
on January 15, 2002 and January 15, 2003.
(2) Options became exercisable on the grant date of December 28, 2001
Year-End 2001 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,
2001. No Named Executive Officers exercised stock options during 2001.
Number of Shares of Value of Unexercised
Common Stock Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Year-End (1) Year-End
----------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------- ----------- ------------- ----------- -------------
F. Peter Cuneo....... 712,500 387,500 $452,000 $500,000
Alan Fine............ 436,334 78,666 7,500 30,000
Avi Arad ............ 1,020,000 80,000 50,000 200,000
William Jemas........ 143,333 176,667 266,400 150,000
Rick Ungar........... 143,334 106,666 25,000 100,000
(1) Represents shares of Common Stock underlying stock options. None of the
Named Executive Officers holds SARs (stock appreciation rights).
25
Compensation of Directors
Non-employee directors currently receive an annual retainer of $25,000.
They also received an annual grant of 10,000 shares of Common Stock to be
immediately vested during 2000 and 2001. In addition, in December 2001, the
following options were granted which were immediately vested: 35,000 to Mr.
Halpin, 30,000 to Mr. Handel and 15,000 each to Messers. Greenhaus, Ganis and
Mittman. 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 $215,000.
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 Chief Creative Officer of the
Company 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; William Jemas, Chief Operating Officer and President
of Publishing and Consumer Products; and Richard Ungar, President of Marvel
Characters Group.
Employment and License Agreements with Mr. Arad. Pursuant to the amendment
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, 2002. Under his employment agreement, as amended, Mr. Arad receives a base
salary, subject to discretionary increases, of $375,000 and an annual bonus of
$75,000. With respect to each media project for which Mr. Arad performs
significant services, Mr. Arad is entitled to certain customary executive
producer and/or producer fees including $350,000 per motion picture project,
$10,000 per episode for animated network television projects, $7,500 per episode
for animated syndicated television projects and $20,000 per episode for one hour
live action television projects. Mr. Arad is entitled to discretionary bonuses
and participation in the Company's stock option plan as determined by the Board
of Directors. Mr. Arad also is entitled to the use of an automobile 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 replaced 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 $7,500,000.
The Company accrued royalties to Mr. Arad for toys he invented or designed of
approximately $3,000,000, $1,600,000 and $900,000 during the years ended
December 31, 1999, 2000 and 2001, 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.
26
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 and a sign-on bonus of $100,000. Starting in 2000, Mr. Cuneo was
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 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 August 12, 2003. Under his
employment agreement, Mr. Fine receives a base salary of $450,000. Mr. Fine is
eligible to earn an annual bonus equal to 50% of Mr. Fine's base salary, subject
to the attainment of certain performance goals. 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. The Company reimburses Mr.
Fine for the rent of a suitable apartment in Manhattan, monthly parking garage
fees and other related utility charges up to a maximum of $4,000 per month,
until the earlier of the expiration of his employment or the relocation of his
primary residence to the New York City metropolitan area. The employment
agreement further provides for the effectiveness and the continual vesting of
all options previously granted to Mr. Fine as if no break in employment service
had occurred. From April 2001 to August 2001, the Company paid Mr. Fine his
monthly salary.
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 of Directors and provides that Mr. Jemas shall be
entitled to receive a grant of options to purchase 125,000 shares of Common
Stock.
Employment Agreement with Mr. Ungar. Pursuant to his employment agreement,
Mr. Ungar has agreed to render his exclusive and full-time 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. The employment agreement provides for 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 generally available to the Company's employees. 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.
27
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 (with the
exception of Mr. Fine) 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 and Ganis serve now, and served during 2001, on the
Company's Compensation and Nominating Committee. Mr. Perlmutter served on the
Company's Compensation and Nomination Committee until November 2001. None of the
individuals mentioned above (other than Mr. Perlmutter) was an officer or
employee of the Company, or any of its subsidiaries, during 2001. Mr. Handel is,
and Mr. Perlmutter once was, the Company's non-executive Chairman of the Board
of Directors.
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"). Each of the members of the
Lender Group is one of the "Secured Lenders" referred to in the Fourth
Amended Joint Plan of Reorganization proposed by those "Secured Lenders"
and the Company in the bankruptcy matter of In Re: Marvel Entertainment
Group, Inc. et al. (the "Plan"); and all of the "Secured Lenders" as that
term is defined more broadly in the Plan are members of the "Plan Secured
Lender Group".
Under the Stockholders' Agreement, its parties initially agreed to take such
action as may reasonably be in their power to cause the Board of Directors to
include, subject to certain conditions, six directors designated by the Investor
Group and five directors designated by the Lender Group. After July 1, 2000,
decreases in beneficial ownership of Capital Stock by either the Investor Group
or the Lender Group below certain pre-determined levels, including decreased
that occurred prior to July 1, 2000, result in a decreased right to
28
designate directors and a forfeiture of seats on the Board of Directors. The
Investor Group, the Lender Group and the Company have agreed that decreases in
the beneficial ownership of Capital Stock by the Plan Secured Lender Group since
October 1, 1998 have resulted in the number of directors which the Lender Group
has the right to nominate to decrease from five directors to three directors.
The Stockholders' Agreement also provides for the creation of various committees
of the Board of Directors as well as the composition of those committees. The
decreases in the Plan Secured Lender Group's beneficial ownership of Capital
Stock have also caused the number of members of the Audit Committee and the
Compensation and Nominating Committee who may be designated by the Lender Group
to decrease by one director.
As of December 28, 2001, the parties to the Stockholders' Agreement have
the power to vote, in the aggregate, approximately 52.6% in combined voting
power of the outstanding shares of Capital Stock. The 52.6% 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 (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 ) 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 of 1933, as amended,
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 Inc. ("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
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.
29
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 receives certain fees and commissions based on the cost of the
placement of such advertising. In conjunction with the actual placement of
advertising, Tangible Media also provides the Company with the planned research,
advertising plans, competitive spending analysis and services related to the
delivery of commercials and instructions to broadcast outlets at no additional
cost to the Company. Tangible Media received payments of fees and commissions
from the Company totaling approximately $1,170,000, $966,000 and $159,000 in
1999, 2000 and 2001, 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 for the
space, any 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 $155,000, $67,000 and $80,000 to the Company in 1999,
2000 and 2001, respectively.
Agreement Relating to the Issuance and Delivery of Letters of Credit
In August 2001, the Company entered into an agreement (the
"Substitution Agreement") with Object Trading Corp., a corporation wholly owned
by Mr. Perlmutter, pursuant to which Object Trading Corp. agreed to have new
letters of credit issued to replace approximately $12.4 million of the $17.5
million of letters of credit outstanding under the Citibank Credit Agreement,
along with an additional letter of credit for $3.4 million in connection with
the appeal of an adverse litigation decision. The replacement letters of credit
were required to be delivered by the Company to licensors of intellectual
property which the Company uses in the manufacture of various toys and in
connection with certain advertising commitments relating to the toy business. In
accordance with the Substitution Agreement, Object Trading Corp. obtained the
replacement letters of credit from HSBC which, pursuant to the terms of the
Substitution Agreement, would remain in effect until the earlier of the date the
Company was able to close a new bank financing on terms approved by the Board of
Directors or November 30, 2001. No fee was payable by the Company to Object
Trading Corp. under the Substitution Agreement, but the Company agreed
thereunder to reimburse Object Trading Corp. for all out-of-pocket costs and
expenses incurred by it in connection with opening and maintaining the
replacement letters of credit, and for the amount of any payments made by Object
Trading Corp. to reimburse HSBC in the event any of the replacement letters of
credit were drawn upon. The Company also granted Object Trading Corp. a first
security interest in the same assets that were granted as security under the
Citibank Credit Agreement.
Payment Guarantee Agreement
Mr. Perlmutter and Diamond Comic Distributors, Inc, ("Diamond") are
parties to an agreement whereby Mr. Perlmutter has agreed to guarantee payment
of certain amounts, up to a maximum of $2.5 million, that the Company owes
Diamond Select Toys and Collectibles, LLC ("Diamond Toys") under a Distributor
Agreement dated August 24, 2001 between the Company (acting through Toy Biz,
Inc.) and Diamond Toys (the "Distributor Agreement") and that Marvel Characters
owes Diamond toys under a License Agreement dated April 24, 2001 between Marvel
Characters and Diamond Toys. Mr. Perlmutter is obligated to pay these amounts
owed by the Company and Marvel Characters in the event that these amounts do not
offset the amounts Diamond owes the Company pursuant to an Agency Agreement
dated April 24, 2001 between the Company and Diamond. Mr. Perlmutter's
obligation to pay any portion of these amounts automatically terminates once the
Up-Front Payment Balance (as defined in the Distributor Agreement) is reduced to
zero.
30
Warrant Agreement, Warrant Registration Rights Agreement and Guaranty
In November 2001, in consideration of Mr. Perlmutter's guaranty of a
portion of the Company's obligations under the HSBC Credit Facility and any
credit support that he may provide for the Company's obligation under its lease
for its executive offices, the Company and Mr. Perlmutter entered into (i) a
warrant agreement (the "Warrant Agreement"), pursuant to which the Company
granted Mr. Perlmutter warrants to purchase up to a maximum of five million
shares of Common Stock on or before November 30, 2006, at an initial exercise
price per share equal to $3.11 (the "Warrants"), and (ii) a registration rights
agreement, pursuant to which the Company gave Mr. Perlmutter certain
registration rights with respect to the shares of Common Stock issuable to him
under the Warrant Agreement. The Company also agreed to purchase a total of
approximately $43 million in principal amount of the Company's Senior Notes at
an average price of 53% of the face amount of the Notes held by Mr. Perlmutter
pursuant to a Notes Purchase Agreement. Mr. Perlmutter purchased those Notes
with personal fund. In December, the Company purchased the Notes from Mr.
Perlmutter and in January 2002, the shareholders of the Company approved the
issuance of the Warrants to Mr. Perlmutter.
In connection with the Warrant Agreement, the Company and Mr. Perlmutter
entered into a Warrant Shares Registration Rights Agreement, dated as of
November 30, 2001, (the "Warrant Registration Rights Agreement"). Under the
terms of the Warrant Registration Rights Agreement, the Company has agreed to
file a shelf registration statement under the Securities Act of 1933, as
amended, registering the resale of all shares of Common Stock underlying the
Warrants and to keep such registration statement continuously effective until
such time as all Warrants have been exercised or have expired. The Warrant
Registration Rights Agreement also gives Mr. Perlmutter piggyback registration
rights with respect to underwritten public offerings by the Company of its
equity securities.
Under the terms of the Guaranty, Mr. Perlmutter has guarantied the payment
of the Company's obligations under the HSBC Credit Facility in an amount equal
to 25% of all principal obligations relating to the New Facility plus an amount,
not to exceed $10 million, equal to the difference between the amount required
to be in the cash reserve account maintained by the Company and the actual
amount on deposit in such cash reserve account at the end of each fiscal
quarter; provided that the aggregate amount guarantied by Mr. Perlmutter will
not exceed $30 million.
Employment Agreement and Stock Options
On November 30, 2001, the Company entered into an employment agreement with
Mr. Perlmutter pursuant to which Mr. Perlmutter is employed for a six-year term
as the Company's Vice Chairman of the Board of Directors. In connection with
such agreement, Mr. Perlmutter was to receive, subject to shareholder approval,
options to purchase 3,950,000 shares of Common Stock at an exercise price per
share equal to $3.30 pursuant to a nonqualified stock option agreement under the
1998 Plan. In January 2002, the shareholder's approved the issuance of the
options to Mr. Perlmutter. Under the terms of Mr. Perlmutter's employment
agreement, he will report to the Board of Directors and Chairman of the Company.
Mr. Perlmutter's duties shall relate to formulation of long-term business
strategy and near term operations, including licensing activities; the Company's
assistance with negotiations with motion picture and television producers,
amusement and theme parks, and video game and toy manufacturers; toy business
marketing; sale of distressed products and relationships with major retailers
including Toys R Us, K-B Toys, Wal-Mart and K-Mart; litigation strategy and
tactics; and cost control. Mr. Perlmutter's duties shall be performed at the
direction and under the supervision of the Board of Directors and Chairman and
may include additional or different duties assigned to him by the Board of
Directors and Chairman consistent with the foregoing and his position as
Vice-Chairman of the Board of Directors. As compensation for his services, Mr.
Perlmutter will be entitled to a salary of $1 per year, fringe benefits
generally offered to the Company's executive officers, and the possibility of an
annual bonus at the discretion of the Company. The employment agreement with Mr.
Perlmutter prohibits disclosure of proprietary and confidential information
regarding the the Company and its business to anyone outside the Company both
during and subsequent to his employment and otherwise provides that all
inventions made by Mr. Perlmutter during his employment belong to the Company.
In addition, Mr. Perlmutter agreed during his employment, and for 18 months
thereafter, not to engage in any competitive business activity. The employment
agreement also provides that, in the event of termination, Mr. Perlmutter will
be entitled to certain payments and benefits depending on the circumstances of
the termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 11, 2002
31
(based on 34,766,858 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 of the Company, 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 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.
32
Shares of Common Stock Beneficially Owned
Sole Voting Shared Voting Sole Dispositive Shared Dispositive
Power Power Power Power
------------------ ------------------- ------------------ ---------------------
Five Percent Stockholders, Percent Percent Percent Percent
Directors and Executive Officers Number of Class Number of Class Number of Class Number of Class
- -------------------------------------- -------- -------- ---------- -------- ---------- -------- --------- --------
Avi Arad (1) (2)........................ -- * 39,254,858 69.6% 5,210,000 14.5% -- *
1698 Post Road East
Westport, Connecticut 06880
Isaac Perlmutter (2) (3)................ -- * 39,254,858 69.6% 24,403,819 49.6% -- *
P.O. Box 1028
Lake Worth, Florida 33460
Morgan Stanley & Co. Incorporated (2)(4) -- * 39,254,858 69.6% -- * 5,516,061 14.5%
1585 Broadway
New York, New York 10036
Whippoorwill Associates, Incorporated
as agent of and/or general partner of -- * 4,208,909 11.2% -- * 4,208,909 11.2%
certain institutions and funds (5)......
11 Martine Avenue
White Plains, New York 10606
Mark H. Rachesky, M.D. (6)................ -- * 2,417,467 6.5% -- * 2,417,467 6.5%
c/o MHR Fund Management LLC
40 West 57th Street, 33rd Floor
New York, New York 10019
Morton E. Handel (7)...................... 91,000 * -- * -- * -- *
F. Peter Cuneo (8)........................ 732,714 2.1% -- * -- * -- *
Sid Ganis (9) ............................ 50,000 * -- * -- * -- *
Shelley F. Greenhaus (10) ................ 60,000 * -- * -- * -- *
James F. Halpin (9)....................... 65,000 * -- * -- * -- *
Lawrence Mittman (9)...................... 60,000 * -- * -- * -- *
Rod Perth................................. 50,000 * -- * -- * -- *
Michael J. Petrick........................ -- * -- * -- * -- *
Alan Fine (11)............................ 442,334 1.3% -- * -- * -- *
William Jemas, Jr. (12)................... 145,001 * -- * -- * -- *
Richard E. Ungar (13)..................... 163,334 * -- * -- * -- *
All current executive officers and
directors as a group (14 persons)
(2) (14).......................... 1,983,717 5.4% 39,254,858 69.6% 29,613,819 59.0% -- *
- --------
* Less than 1%.
(1) Figures include 1,060,000 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 5,210,000 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 11,535,852 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.
33
(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 aresignatories to the Stockholders' Agreement. Shares of
Common Stock beneficially owned by Dickstein Partners Inc. and those
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 (i) 30,000 shares of Common Stock subject to stock
options granted to Mr. Perlmutter pursuant to the Stock Incentive Plan
which are immediately exercisable; (ii) options to purchase 3,950,000
shares of the Company's common stock pursuant to the Employment
Agreement between the Company and Mr. Perlmutter dated as of November
30, 2001; and (iii) warrants to purchase 4,595,000 shares of the
Company's common stock pursuant to the Warrant Agreement between the
Company and Mr. Perlmutter dated as of November 30, 2001. Other shares
over which Mr. Perlmutter may be deemed to have sole dispositive power
are directly held as follows:
Shares of 8%
Holder Shares of Common Stock Preferred Stock
------------------------ ---------------------- ----------------
Zib 9,256,000 --
The Laura and Isaac Perlmutter
Foundation Inc. 250,000 --
Object Trading Corp. 33,500 4,788,479
Classic Heroes, Inc. -- 316,631
Biobright Corporation -- 316,631
Tangible Media, Inc. 400,000 --
Isaac Perlmutter T.A. 49,000 398,578
Isaac Perlmutter 20,000 --
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, (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 Capital 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 Capital Stock directly held by
the Laura and Isaac Perlmutter Foundation Inc.
(b) Except for the 24,403,819 shares over which Mr. Perlmutter may be
deemed to have sole dispositive power (which include shares of Common
Stock underlying 5,820,319 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 11,535,852 shares of 8%
34
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) Morgan Stanley is a party to the Stockholders' Agreement. Morgan Stanley
shares dispositive power over 5,516,061 shares with its parent, Morgan
Stanley Dean Witter & Co. Except for those 5,516,061 shares (which include
shares of Common Stock underlying 3,263,582 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 11,535,852 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.
(5) Whippoorwill may be deemed to be the beneficial owner of these shares
(which include shares of Common Stock underlying 2,723,884 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 83,932 shares of Common Stock (which include shares of
Common Stock underlying 53,461 shares of 8% Preferred Stock) that are not
subject to the Stockholders' Agreement.
(6) 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 2,248,736
shares of 8% Preferred Stock.
(7) Figures include 70,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(8) Figures include 712,500 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan that are immediately
exercisable and 214 shares of Common Stock, of which Mr. Cuneo disclaims
beneficial ownership, owned by Mr. Cuneo's son.
(9) Figures include 40,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan that are immediately
exercisable.
(10) Figures include 40,000 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan that 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.
(11) Figures include 442,334 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
35
(12) Figures include 145,001 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(13) Figures include 163,334 shares of Common Stock subject to stock options
granted pursuant to the Stock Incentive Plan which are immediately
exercisable.
(14) Figures in the "Sole Voting Power" column, the "Shared Voting Power"
column, and the "Sole Dispositive Power" column include, respectively,
1,891,503, 9,635,000 and 9,635,000 shares of Common Stock subject to stock
options granted pursuant to the Stock Incentive Plan or warrants, both of
which are immediately exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain relationships and related transactions
involving individuals who served during 2001 on the Board's Compensation and
Nominating Committee (or its predecessor), see "Item 11. Executive
Compensation-Compensation Committee Interlocks and Insider Participation."
Loan Out Agreement
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 October 25, 2002. Under the agreement, Brentwood receives a producer
fee of $175,000 per year, subject to discretionary increases.
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 2001, the Company
filed the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated December 4, 2001, reporting
Items 5 and 7.
(c) Exhibits. See the Exhibit Index immediately below.
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.)
36
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 Certificate of Amendment of the Restated Certificate of Incorporation.
3.3 Bylaws (as restated and amended).
4.1 Article V of the Restated Certificate of Incorporation (see Exhibit 3.1,
above), defining the rights of holders of Common Stock.
4.2 Article VI of the Restated Certificate of Incorporation (see Exhibit
3.1, 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.)
4.8 Warrant Agreement, dated as of November 30, 2001, by and between the
Registrant and HSBC Securities (USA), Inc. (Incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated and filed
with the Securities and Exchange Commission on December 4, 2001.)
4.9 Warrant Agreement, dated as of November 30, 2001, by and between the
Registrant and Isaac Perlmutter. (Incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)
10.1 Credit Agreement, dated as of November 30, 2001, by and between the
Registrant and HSBC Bank USA. (Incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)
10.2 Pledge and Security Agreement, dated as of November 30, 2001, from the
grantor referred to herein, as Grantors, to HSBC Bank USA, as
administrative agent. (Incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K dated and filed with the Securities
and Exchange Commission on December 4, 2001.)
37
10.3 Subsidiary Guaranty, dated as of November 30, 2001, in favor of HSBC
Bank USA, as administrative agent. (Incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K dated and filed with
the Securities and Exchange Commission on December 4, 2001.)
10.4 Personal Guaranty by Isaac Perlmutter in favor of HSBC Bank USA, dated
as of November 30, 2001. (Incorporated by reference to Exhibit 10.4 to
the Company's Current Report on Form 8-K dated and filed with the
Securities and Exchange Commission on December 4, 2001.)
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 Warrant Shares Registration Rights Agreement, dated as of November 30,
2001, by and between the Registrant and Isaac Perlmutter. ((Incorporated
by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K
dated and filed with the Securities and Exchange Commission on December
4, 2001.)
10.9 Lease, dated as of June 9, 2000 between HSBC Bank USA and the
Registrant, as amended by First Amendment to Sublease dated December 1,
2000.
10.10 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.)
10.11 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 Quarterly Report on Form 10-Q for the quarter ended June
30, 1999)*
10.12 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.)*
38
10.13 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.)*
10.14 Amendment to Arad Employment Agreement dated January 2001.*
10.15 Employment Agreement by and between the Company and Alan Fine, dated as
of August 13, 2001*
10.16 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)*
10.17 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)*
10.18 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)*
10.19 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)*
10.20 Employment Agreement, dated as of November 30, 2001, by and between the
Registrant and Isaac Perlmutter. (Incorporated by reference to Exhibit
10.3 to the Company's Current Report on Form 8-K dated and filed with
the Securities and Exchange Commission on December 4, 2001.)*
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 Amendment No. 1 to the 1998 Stock Incentive Plan.*
10.23 Nonqualified Stock Option Agreement, dated as of November 30, 2001, by
and between the Registrant and Isaac Perlmutter. (Incorporated by
reference to Exhibit 10.7 to the Company's Current Report on Form 8-K
dated and filed with the Securities and Exchange Commission on December
4, 2001.)*
10.24 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.
39
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:/s/---------------
F. Peter Cuneo
President,Chief Executive Officer, Chief
Financial Officer
Date: April 1, 2002
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
- -------------------- --------------------------------------- -------------
/s/ F. Peter Cuneo
- ------------------- President, Chief Executive and Chief
F. Peter Cuneo Financial Officer and Director March 27, 2002
(principal executive officer)
/s/ Morton E. Handel
- -------------------- Chairman of the Board of Directors March 27, 2002
Morton E. Handel
- -------------------- Director March 27, 2002
Avi Arad
s/s Sid Ganis
- -------------------- Director March 27, 2002
Sid Ganis
s/sShelley F. Greenhaus
- ------------------------ Director March 27, 2002
Shelley F. Greenhaus
- --------------------- Director
James F. Halpin
/s/ Lawrence Mittman
- -------------------- Director March 28, 2002
Lawrence Mittman
/s/ Isaac Perlmutter
- --------------------- Director March 27, 2002
Isaac Perlmutter
40
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, 2000 and 2001......... F-3
Consolidated Statements of Operations for the years
ended December 31, 1999, 2000, and 2001....................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 2000, and 2001....................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000, and 2001............................. F-6
Notes to Consolidated Financial Statements............................ F-7
Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts......................... F-31
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, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, 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
March 8, 2002
F-2
MARVEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 2001
------------ -------------
(in thousands, except
hare data)
ASSETS
Current assets:
Cash and cash equivalents..................... $ 22,803 $ 21,591
Accounts receivable, net...................... 39,236 35,648
Inventories, net ............................. 42,780 20,916
Income tax receivable....................... 334 334
Deferred financing costs...................... 1,372 9,144
Prepaid expenses and other current assets..... 6,918 12,594
-------- --------
Total current assets....................... 113,443 $100,227
Molds, tools and equipment, net................. 7,005 8,076
Product and package design costs, net .......... 1,603 2,218
Goodwill and other intangibles, net ............ 415,582 381,663
Accounts receivable, non-current portion........ 8,229 11,890
Deferred charges and other assets............... 114 139
Deferred financing costs........................ 7,981 13,357
-------- --------
Total assets............................... $553,957 $517,570
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 18,586 $ 13,052
Accrued expenses and other ................... 35,879 36,210
Current portion of credit facility............ -- 6,172
Administrative claims payable................. 7,444 3,500
Unsecured creditors payable .................. 7,000 5,239
Deferred revenue.............................. 1,467 7,128
-------- --------
Total current liabilities............... 70,376 71,301
Senior notes.................................... 250,000 150,962
Long term portion of credit facility........... -- 30,828
Deferred revenue, non-current portion........... -- 14,546
Total liabilities....................... 320,376 267,637
--------- --------
8% cumulative convertible exchangeable
redeemable preferred stock, $.01 par value,
75,000,000 shares authorized, 20,216,941
issued and outstanding in 2000 and 20,795,936
issued and outstanding in 2001, liquidation
preference $10 per share........................ 202,185 207,975
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000
shares authorized, none issued........ -- --
Common stock, $.01 par value, 250,000,000
shares authorized, 41,096,278 issued and
33,702,278, outstanding in 2000 and 42,160,858
issued and 34,766,858 outstanding in 2001....... 411 421
Additional paid-in capital...................... 216,068 238,769
Deficit......................................... (152,128) (162,897)
Accumulated other comprehensive loss............ -- (1,380)
--------- ---------
Total stockholders' equity before
treasury stock.......................... 64,351 74,913
Treasury stock, 7,394,000 shares................ (32,955) (32,955)
--------- ---------
Total stockholders' equity ............. 31,396 41,958
--------- ---------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity $553,957 $517,570
========= =========
See Notes to Consolidated Financial Statements.
F-3
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------
1999 2000 2001
---------- -------- ----------
(in thousands, except
per share data)
Net sales..................................... $319,645 $231,651 $181,224
Cost of sales................................. 150,858 128,531 88,709
--------- --------- ---------
Gross profit.................................. 168,787 103,120 92,515
Operating expenses:
Selling, general and administrative...... 124,596 107,447 62,048
Pre-acquisition litigation charge..... -- -- 3,000
Administrative claims payable no
longer required....................... -- -- (3,474)
Depreciation and amortization............ 18,078 30,651 5,559
Amortization of goodwill and other
intangibles........................... 25,857 24,012 23,764
--------- --------- ---------
Total expenses........................ 168,531 162,110 90,897
--------- --------- ---------
Operating income (loss)....................... 256 (58,990) 1,618
Interest expense.............................. 32,077 31,901 29,174
Other income, net............................. 4,043 4,223 1,055
--------- ---------- ---------
Loss before income taxes................. (27,778) (86,668) (26,501)
Income tax expense ...................... 4,482 2,927 647
Equity in net loss of joint venture...... -- (263) (325)
--------- ---------- ---------
Loss before extraordinary items.......... (32,260) (89,858) (27,473)
Extraordinary (loss) gain, net of income
tax benefit in 1999 of $1,021 and
income tax expense of $11,273 in 2001 (1,531) -- 32,738
Net (loss) income..................... (33,791) (89,858) 5,265
--------- ---------- ---------
Less: preferred dividend requirement.......... 14,220 15,395 16,034
--------- ---------- ---------
Net loss attributable to Common
Stock................................. $(48,011) $(105,253) $(10,769)
========= ========== =========
Basic and diluted net loss per common
share.................................
Loss before extraordinary item............. $ (1.39) $ (3.13) $ (1.27)
Extraordinary (loss) gain.................. (0.04) -- 0.96
--------- ---------- ---------
Net loss................................... $ (1.43) $ (3.13) $ (0.31)
--------- ---------- ---------
Weighted average number of common shares... 33,533 33,667 34,322
========= ========== =========
See Notes to Consolidated Financial Statements.
F-4
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Add'l Accumulated
Common Common Paid-in Retained Other
Stock Stock Capital Earnings Comprehensive Treasury Total
--------- -------- ---------- --------- ------------- ---------- --------
(in thousands)
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
Conversion of preferred to common stock........ 1,065 10 10,234 -- -- -- 10,244
Stock warrants exercised by stockholders....... -- -- 5 -- -- -- 5
Stock warrants issued to third parties......... -- -- 12,462 -- -- -- 12,462
Preferred dividend declared.................... -- -- -- (16,034) -- -- (16,034)
Net income..................................... -- -- -- 5,265 -- -- 5,265
Other Comprehensive loss....................... -- -- -- -- (1,380) (1,380)
--------- --------- --------- --------- ---------- ---------- ----------
Comprehensive income........................... -- -- -- -- -- -- 3,885
--------- --------- --------- --------- ---------- ---------- ----------
Balance at December 31, 2001................... 34,767 $ 421 $238,769 ($162,897) ($1,380) $ 32,955 ($41,958)
========= ========= ========= ========= ========== ========== ==========
See Notes to Consolidated Financial Statements.
F-5
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
---------------------------------
1999 2000 2001
--------- --------- ---------
(in thousands)
Net (loss) income............................ ($33,791) ($89,858) $ 5,265
Adjustments to reconcile net loss (income)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............ 43,935 54,663 29,323
Provision for doubtful accounts.......... 1,721 81 3,470
Amortization of deferred financing
charges............................... 2,888 1,384 2,136
Deferred income taxes.................... 2,922 -- --
Pre-acquisition litigation charge........ -- -- 3,000
Administrative claims no longer
required............................. -- -- (3,474)
Extraordinary item, net.................. 1,531 -- (32,738)
Changes in operating assets and
liabilities:
Accounts receivable.................... (7,544) 16,524 (3,543)
Inventories............................ (6,798) (3,395) 21,864
Goodwill............................... -- 798 --
Income tax receivable.................. 6,069 (334) --
Prepaid expenses and other............. (774) (2,475) (5,676)
Deferred charges and other assets...... (2,315) (1,831) (25)
Equity in net loss of joint venture.... -- 263 325
Accounts payable, accrued expenses
and other ........................... (7,029) (49) (11,114)
--------- --------- ---------
Net cash provided by (used in)
operating activities................. 815 (24,229) 8,813
--------- --------- ---------
Cash flow used in investing activities:
Payment of administrative claims, net.. (10,013) (3,553) (2,231)
Net proceeds from sale of Fleer and
settlement of Panini................. 11,980 -- --
Purchases of molds, tools and
equipment............................ (13,660) (8,483) (4,311)
Expenditures for product and package
design costs......................... (7,136) (6,601) (2,934)
Other intangibles....................... (181) (31) (516)
Distributions from joint venture........ -- -- 1,081
--------- --------- ---------
Net cash used in investing activities. (19,010) (18,668) (8,911)
--------- --------- ---------
Cash flow from financing activities:
Payments of bridge facility............. (200,000) -- --
Proceeds from senior notes offering,
net of offering costs of $11,022..... 238,978 -- --
Repurchase of Senior Notes.............. -- -- (32,108)
Proceeds from credit facility........... -- -- 37,000
Deferred financing costs................ -- -- (6,011)
Exercise of stock options............... 147 381 --
Issuance of common stock................ 1 500 --
Proceeds from exercise of
stock warrants....................... 192 5 5
--------- --------- ---------
Net cash provided by (used in)
financing activities................. 39,318 886 (1,114)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents................. 21,123 (42,011) (1,212)
Cash and cash equivalents at
beginning of year.................... 43,691 64,814 22,803
--------- --------- ---------
Cash and cash equivalents at
end of year.......................... $ 64,814 $ 22,803 $ 21,591
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid during the year........... $ 29,768 $ 30,348 $ 15,362
Net income taxes (recovered) paid
during the year...................... (4,172) 1,333 2,494
Other non-cash transactions:
Preferred stock dividends............... 14,220 15,395 16,034
Warrants issued in connection with
credit facility...................... -- -- 12,462
Value of Senior Notes received in
satisfaction of licensing fees from
a third party......................... -- -- 20,000
See Notes to Consolidated Financial Statements.
F-6
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. Description of Business and Basis of Presentation
The Company designs, markets and distributes a limited line of toys to the
worldwide marketplace. The Company's products are primarily based upon
Spider-Man: The Movie and the movie trilogy based upon Lord of the Rings.
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.
On October 1, 1998, pursuant to the Plan 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, 2001
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.
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.
F-8
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
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 a 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.
During 1999, the Company finalized certain preliminary portions of the
purchase price allocation relating to its acquisition of MEG. The completion of
the purchase price allocation in 1999 resulted in a net decrease in goodwill of
$21,694,000. The Company's results of operations for 1999 do not include the
results of operations of Fleer and Panini.
During 2001, the Company concluded that $3,474,000 of the liability related
to administrative expense claims included in the final purchase price allocation
was no longer required. A reduction in the liability Administrative Claims
Payable was included in the accompanying Consolidated Statement of Operations.
In addition, during 2001 the Company realized an income tax benefit of
approximately $10,670,000 related to the pre-acquisition net operating losses.
This amount was recorded as a reduction of goodwill attributable to the
acquisition of MEG.
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 judgment relate to provisions for
returns, other sales allowances and doubtful accounts, future revenues from
episodic television series, the realizability of inventories, goodwill and other
intangible assets, and the 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-9
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
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, 2001, 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, 1999, 2000 and 2001 were approximately $146,000, $9,205,000 and $1,295,0000,
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, 2001, 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, 1999, 2000 and 2001 were
approximately $486,000, $7,585,000 and $1,540,000 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,
1999, 2000 and 2001, amortization of goodwill and other intangibles was
approximately $25,857,000, $24,012,000 and $23,764,000, respectively.
F-10
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
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. See "Recent Accounting Pronouncements, SFAS No. 144".
Deferred Financing Costs
Deferred financing costs, which are mainly costs associated with the
Company's Senior Notes and the Company's Credit Facility, are amortized over the
term of the related agreements.
Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income" which established standards for reporting and display of
comprehensive income or loss and its components. Comprehensive income or loss
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income represents net income adjusted for the
unrecognized loss related to the minimum pension liability of a former
subsidiary. In accordance with SFAS No.130, the Company has chosen to disclose
comprehensive loss in the consolidated statements of stockholders' equity.
Research and Development
Research and development ("R&D") costs are charged to operations as
incurred. For the years ended December 31, 1999, 2000 and 2001, R&D expenses
were $6,366,000, $13,157,000 and $8,834,000, 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. Income related to the
licensing of animated television series are recorded in accordance with AICPA
Statement of Position 00-2 "Accounting by Producers or Distributors of Films."
Under these guidelines, revenue is recognized when the animated television
series is available to the licensee and collection is reasonably assured.
F-11
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
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, 1999, 2000 and 2001,
advertising expenses were $39,267,000, $36,211,000 and $6,637,000, respectively.
At December 31, 2000 and 2001 the Company had incurred $9,000 and $148,000
respectively, of prepaid advertising costs, principally related to production of
advertisement that will be first run in fiscal 2001 and 2002, 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 minimum guarantees committed are 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 carrying amount of borrowings under the credit facility are
estimated to approximate their fair value as the stated interest rates
approximate current rates
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:
F-12
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
December 31, 2000 December 31, 2001
------------------------ --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ---------- --------- ----------
(in thousands)
Senior Notes......... $250,000 $ 92,250 $150,962 $ 80,010
8% Preferred Stock... $202,185 $ 35,380 $207,975 $ 72,786
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 loss attributable to common stock 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.
Recent Accounting Pronouncements
SFAS No, 141 and No. 142, Business Combinations and Goodwill and Other
Intangible Assets - In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets (the
"Statements"), effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the Statements. Other intangible assets with finite lives
will continue to be amortized over their useful lives.
F-13
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
The Company will apply the new rules on accounting for goodwill and
other intangible assets during the first six months of 2002. The Company
recorded approximately $23.5 million of goodwill amortization during the year
ended December 31, 2001. The Company will test goodwill for impairment using the
two-step process prescribed in Statement No. 142. The first step is a screen for
potential impairment, while the second step measures the amount of impairment,
if any. The Company expects to perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of January 1, 2002.
Any impairment charge resulting from these transitional impairment tests will be
reflected as the cumulative effect of a change in accounting principal in the
first quarter of 2002. The Company has not yet determined what the effect of
these tests will be on the earnings and financial position of the Company.
SFAS No. 144, Accounting For Impairment of Long Lived Assets - On August
1, 2001, the FASB issued SFAS No. 144, "Accounting for Impairment of Long Lived
Assets". The Company is required to adopt this pronouncement beginning January
1, 2002. SFAS No.144 prescribes the accounting for long lived assets (excluding
goodwill) to be disposed of by sale. SFAS No. 144 retains the requirement of
SFAS No. 121 to measure long lived assets classified as held for sale at the
lower of its carrying value or fair market value less the cost to sell.
Therefore, discontinued operations are no longer measured on a net realizable
basis and future operating results are no longer recognized before they occur.
The impact of adopting SFAS No. 144 is not expected to be significant.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
F-14
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
3. Details of Certain Balance Sheet Accounts
December 31,
------------------
2000 2001
-------- --------
(in thousands)
Accounts receivable, net, consists of the following:
Accounts receivable.................................. $ 63,171 $ 52,761
Less allowances for:
Doubtful accounts.................................. (4,542) (5,275)
Advertising, markdowns, returns, volume
discounts and................................... (19,393) (11,838)
--------- ---------
Total......................................... $ 39,236 $ 35,648
========= =========
Inventories, net, consist of the following:
Toys:
Finished goods..................................... $ 31,026 $ 12,039
Component parts, raw materials and
work-in-process................................. 8,001 3,849
--------- ---------
Total Toys.................................... 39,027 15,888
--------- ---------
Publishing:
Finished goods..................................... 298 1,411
Editorial and raw materials........................ 3,455 3,617
--------- ---------
Total publishing............................... 3,753 5,028
--------- ---------
Total.......................................... $ 42,780 $ 20,916
========= =========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment........................... $ 31,060 $ 3,410
Office equipment and other........................... 10,163 12,096
Less accumulated depreciation and amortization....... (34,218) (7,430)
--------- ---------
Total......................................... $ 7,005 $ 8,076
========= =========
Product and package design costs, net,
consists of the following:
Product design costs................................. $ 13,065 $ 2,255
Package design costs................................. 6,248 864
Less accumulated amortization........................ (17,710) (901)
--------- ---------
Total......................................... $ 1,603 $ 2,218
========= =========
Goodwill and other intangibles, net,
consists of the following:
Goodwill............................................. $469,683 $459,012
Patents and other intangibles........................ 3,933 4,448
Less accumulated amortization........................ (58,034) (81,797)
--------- ---------
Total......................................... $415,582 $381,663
========= =========
Accounts receivable, non -current portion are due as follows:
2002................................................. $ 5,485 $ --
2003................................................. 1,771 7,927
2004................................................. 575 3,050
2005 and thereafter.................................. 2,000 2,850
Allowances and discounting........................... (1,602) (1,937)
--------- ---------
Total......................................... $ 8,229 $ 11,890
========= =========
Accrued expenses and other consists of the following:
Accrued advertising costs............................ $ 6,802 $ 1,817
Accrued royalties.................................... 6,064 2,737
Inventory purchases.................................. 3,630 1,443
Income taxes payable................................. 5,070 2,051
MEG acquisition accruals............................. 4,135 1,857
Accrued expenses - Fleer sale including
pension benefits................................ 2,653 3,946
Pre-acquisition litigation charge.................... -- 3,000
Accrued interest expense............................. 1,408 9,971
Other accrued expenses............................... 6,117 9,388
--------- ---------
Total....................................... $35,879 $36,210
========= =========
F-15
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
4. Debt Financing
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 ("the Act") pursuant to Rule 144A under the Act. 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 senior notes
("Senior Notes"). The Senior Notes are due June 15, 2009 and bear interest at
12% per annum payable semi-annually on June 15th and December 15th. 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.
In February 1999, the Company recorded an extraordinary charge of
approximately $1.5 million, net of tax benefit for the write-off of deferred
financing costs in connection with the repayment of certain interim financing
facilities.
On October 5, 2001, the Company terminated its Revolving Credit Facility
with Citibank N.A., and replaced $12.4 million of letters of credit outstanding
under the Citibank Facility with letters of credit guaranteed by Object Trading
Corp. ("Object Trading"), a corporation wholly-owned by Isaac Perlmutter, a
director, employee and major stockholder of the Company as well as Vice-Chairman
of the Board of Directors. The $3.4 million letter of credit issued in
connection with the appeal in the MacAndrews & Forbes litigation (See Note 13)
was also guaranteed by Object Trading. The Company granted to Object Trading a
first security interest in the same assets that were granted as security under
the Citibank agreement.
On November 30, 2001, the Company and HSBC Bank USA entered into an
agreement for an $80 million senior credit facility (the "Credit Facility") .
The Credit Facility is comprised of a $20 million revolving letter of credit
facility renewable annually for up to three years and a $60 million multiple
draw three year amortizing term loan facility available until January 31, 2002.
Prior to January 31 ,2002, the Company drew down $37 million which was used to
finance the repurchase a portion of the Company's Senior Notes. The term loan
facility amortizes quarterly over three years with the outstanding principal due
and payable on December 31, 2004. At the option of the Company, the term loans
bear interest either at the lender's base rate plus a margin of 2.5% or the
lender's reserve adjusted LIBOR rate plus a margin of 3.5% (5.4% at December 31,
2001). The Company may prepay the term loans applying the base rate at any time
without penalty, but may only prepay the LIBOR rate loans without penalty at the
end of the applicable interest period. The letter of credit facility is a
one-year facility subject to annual renewal, expiring on the date which is five
days prior to the final maturity for the term loan facility. The $15.8 million
of letters of credit previously issued by Object Trading were replaced by
letters of credit issued by HSBC Bank USA. The Credit Facility contains
customary mandatory prepayment provisions for facilities of this nature,
including an excess cash flow sweep. It also contains customary event of default
provisions and covenants restricting the Company's operations and activities,
including the amount of capital expenditures, and also contains certain
covenants relating to the maintenance of minimum net worth and a minimum
interest coverage and leverage ratio and restrictions on paying cash dividends.
The Credit Facility is secured by (a) a first priority perfected lien in all of
the assets of the Company; (b) a first priority perfected lien in all of the
capital stock of each of the Company's domestic subsidiaries; (c) a first
priority perfected lien in 65% of the capital stock of each of the Company's
F-16
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, 2001
foreign subsidiaries; and (d) cash collateral to be placed in a cash reserve
account in an amount equal to at least $10 million at the end of each fiscal
quarter.
In consideration for the Credit Facility, the Company issued a warrant to
HSBC to purchase up to 750,000 shares of the Company's common stock. These
warrants have an exercise price of $3.62, a life of five years. The fair value
for the warrants was estimated at the date of issuance using the Black-Scholes
pricing model with the following assumptions: risk free interest rate of 4.16%;
no dividend yield; expected volatility of 0.924; and expected life of five
years. The aggregate value of $1,980,000 included in deferred financing costs on
the Consolidated Balance Sheet and is being amortized over the term of the
Credit Facility using the effective interest method.
In connection with the Credit Facility, the Company and Isaac Perlmutter
entered into a Guaranty and Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
Credit Facility in an amount equal to 25% of all principal obligations relating
to the Credit Facility plus an amount, not to exceed $10 million, equal to the
difference between the amount required to be in the cash reserve account
maintained by the Company and the actual amount on deposit in such cash reserve
account at the end of each fiscal quarter; provided that the aggregate amount
guaranteed by Mr. Perlmutter will not exceed $30 million. Under the terms of the
Security Agreement, Mr. Perlmutter has provided the creditors under the Credit
Facility with a security interest in the following types of property, whether
currently owned or subsequently acquired by him: all promissory notes,
certificates of deposit, deposit accounts, checks and other instruments and all
insurance or similar payments or any indemnity payable by reason of loss or
damage to or otherwise with respect to any such property.
In consideration for the Guaranty and Security Agreement, the Company
issued Mr. Perlmutter a warrant to purchase up to five million shares of the
Company's common stock. These warrants have an exercise price of $3.11, a life
of five years and whose exercisability is determined by a calculation reflecting
the amounts guaranteed by Mr. Perlmutter. Based on the amount outstanding under
the Credit Facility, 3,867,708 warrants were exercisable by Mr. Perlmutter at
December 31, 2001. The fair value for the warrants was estimated at the date of
issuance using the Black-Scholes pricing model with the following assumptions:
risk free interest rate of 4.16%; no dividend yield; expected volatility of
0.924; and expected life of five years. The aggregate value of the excercisable
warrants was $10,481,489 and is included in the Consolidated Balance Sheet as
deferred financing costs and is being amortized as interest expense over the
three year term of the Credit Facility using the effective interest method.
During 2001, the Company, through a series of transactions, reacquired
an aggregate $99.0 million principal amount of its Senior Notes at an aggregate
cost of $54.4 million, including $2.5 million of accrued interest. The principal
amount includes $39.2 million with a fair value of $19.7 million received in
satisfaction of licensing fees from a third party, as described in Note 9. The
principal amount also includes $46.6 million purchased from Mr. Perlmutter for
$24.9 million. The Company recorded an extraordinary gain of $32.7 million, net
of write-offs of deferred financing fees of $3.2 million and income taxes of
$11.3 million.
5. Stockholders' Equity
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
F-17
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
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, 2001, the Company issued
396,748, 398,286, 400,567 and 407,725 shares, respectively, of 8% Preferred
Stock in payment of dividends declared and payable to stockholders of record on
those dates. During the year ended December 31, 2001, 1,024,282 preferred shares
were converted to common stock.
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, 2001, the Company had reserved shares
of common stock for issuance as follows:
Conversion of 8% preferred stock......................... 21,606,978
Exercise of common stock purchase warrants............... 14,499,708
Exercise of common stock options......................... 9,717,541
------------
Total 45,824,227
============
6. 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, provided that the number of shares of Common Stock that may be
the subject of awards granted to any individual during any calendar year may not
exceed one million shares.
In 2001, the Company determined that the number of shares remaining under
the 1998 Plan is insufficient to continue to meet the Company's needs of
attracting and retaining executive officers, directors and other key employees.
The Company also determined that the limit on the number of shares of Common
Stock that may be the subject of awards granted to an individual during a
calendar year should also be increased to allow the Company to attract and
retain individuals of exceptional talent and importance to the Company. As a
result, on November 28, 2001, the Company adopted an amendment to the 1998 Plan
increasing the number of shares of Common Stock that may be issued upon exercise
of awards under the 1998 Plan by an additional 10.0 million shares and
increasing the number of such shares that may be the subject of awards granted
to any individual during any calendar year to four million shares.
F-18
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
Information with respect to options under the stock option plans are as follows:
Option Weighted
Price per Average
Shares Share Exercise
---------- ----------- ----------
Outstanding at December 31, 1998............. 3,551,000 $5.88-$6.25
Canceled..................................... (379,250) $6.06
Exercised.................................... (25,000) $5.88
Granted (under 1998 Stock Incentive Plan).... 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 $4.31-$7.38 $6.21
Canceled..................................... (1,035,209) $5.63
Exercised.................................... -- $ --
Granted...................................... 5,680,000 $3.37
Outstanding at December 31, 2001............. 9,717,541 $2.38-$7.38 $4.61
Exercisable at December 31, 2001............. 8,205,040 $2.50-$7.38 $4.67
Options granted in 1998 under the Stock Incentive Plan vest generally in
four equal installments beginning with the date of the grant. Options granted
subsequent to 1998 vest generally in three equal installments beginning 12
months after the date of grant. At December 31, 2001, 6,032,709 shares were
available for future grants of options and rights. At December 31, 2001, the
weighted average remaining contractual life of the options outstanding
is 8.50 years.
On November 30 2001, the Company entered into a six year employment
agreement with Mr. Perlmutter. The agreement, among other things provides for a
minimal salary and a six year warrant to purchase 3,950,000 common shares at a
price of $3.30 per share. The warrant may be exercised at any time. Shares
obtained under the warrant are restricted shares until they fully vest. The
vesting period for the shares is one third on the fourth, fifth and sixth
anniversary of the agreement. At December 31, 2001, this warrant was not
exercised in whole or in part.
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-19
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
Years Ended December 31,
---------------------------------
1999 2000 2001
---------- --------- ---------
(in thousands, except
per share data)
Net (loss) income, as reported............. ($33,791) ($89,858) $ 5,265
Pro forma net (loss) income................ (39,214) (94,972) 885
Pro forma net (loss) per share
attributable to Common Stock -- basic
and diluted............................. ( 1.59) ( 3.28) (.44)
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
1999 of: 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 weighted average assumptions for the 2001
grants are: risk free interest rates ranging from 2.91% to 4.90%: no dividend
yield; expected volatility of 0.920: 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.
7. Joint Venture
The Company has entered into a jointly owned limited partnership with
Sony Pictures to pursue licensing opportunities for motion picture and
television related merchandise relating to the Spider-Man character. The Company
accounts for the activity of this joint venture under the equity method and has
recognized losses of approximately $263,000 and $325,000 for the years ended
December 31, 2000 and 2001, respectively. Through December 31, 2001, the joint
venture has not recorded any revenues.
8. Sales to Major Customers and International Operations
The Company primarily sells its merchandise to major retailers, principally
throughout the United States. Credit is extended based on an evaluation of the
customer's financial condition and generally, collateral is not required. Credit
losses are provided for in the financial statements and have been consistently
within management's expectations.
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. During the year ended December 31, 2001, three customers
accounted for approximately 18%, 18 % 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, 1999, 2000 and 2001,
international sales were approximately 15%, 28%, and 23 %, respectively, of
total net toy sales. During the years ended December 31, 1999, 2000 and 2001,
the Hong Kong operations reported operating income of approximately $5,055,000,
$7,198,000 and $519,000 and income before income taxes of $5,472,000, $7,410,000
and $888,000, respectively. At December 31, 2000 and 2001, the Company had
assets in Hong Kong of approximately $4,583,000 and $4,317,000, respectively
F-20
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
excluding amounts due from the Company. The Hong Kong subsidiary represented
$38,057,000 and $39,315,000, respectively, of the Company's consolidated
retained earnings during the years ended December 31, 2000 and 2001.
9. Restructuring of Toy Biz Operations
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
inventories to net realizable value, write-offs of molds, 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.... 800
Depreciation and amortization......... 16,800
--------
$ 22,900
========
During 2001, the Company entered into a license agreement with Toy Biz
Worldwide, Ltd ("TBW"), an unrelated entity, covering the manufacture and sale
of toy action figures and accessories of all Marvel characters other than those
based upon the upcoming Spider-Man movie. TBW opted to use the Toy Biz name for
marketing purposes, but Marvel has no ownership in TBW nor any other obligations
or guarantees. The license agreement has a term of 66 months and included the
payment to Marvel of a minimum guaranteed royalty of $20.0 million. In addition,
the Company and TBW have entered into other agreements which requires Marvel to
provide TBW with certain administrative and management support for which TBW is
to reimburse Marvel. For the six months ended December 31, 2001 the Company was
reimbursed approximately $1.7 million for administrative and management support.
The company is recognizing the revenue related to this license over the term of
the agreement. As of December 31, 2001, the Company has deferred a total of
$17.8 million of the minimum guaranteed royalty, of which $3.2 million is
classified as current liabilities.
During 2001, the Company sold the rights and inventory to a FCC approved
toy component to a company controlled by TBW for $3.5 million.
In addition to toys related to Spider-Man: The Movie characters, the
Company continues to distribute toys based on certain other non-Marvel
characters. These operations are not effected by the license and other
arrangements with TBW.
10. Income Taxes
Income tax expense is summarized as follows:
Years Ended December 31,
--------- --------- --------
1999 2000 2001
--------- --------- --------
(in thousands)
Current:
Federal........................... $ (146) $ -- $ --
State............................. 534 431 384
Foreign........................... 1,172 1,698 263
--------- -------- ---------
1,560 2,129 647
Deferred:
Federal........................... 2,794 642 --
State............................. 128 156 --
--------- -------- ---------
2,922 798 --
--------- -------- ---------
Income tax expense .................... $4,482 $2,927 $647
========= ======== =========
F-21
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
The differences the between statutory Federal income tax rate and the
effective tax rate are attributable to the following:
Years Ended December 31,
-----------------------------
1999 2000 2001
--------- -------- --------
Federal income tax provision computed at the
statutory rate......................... (35.0%) (35.0%) (35.0%)
State taxes, net of Federal income tax effect... 1.9% 0.4% 1.0%
Non-deductible amortization expense............. 30.0% 9.2% 31.5%
Foreign taxes................................... 2.9% 1.5% 1.0%
Purchase accounting............................. 17.1% (2.1%) (12.2%)
Increase in valuation allowance................. -- 29.7% 16.7%
Other........................................... (0.8%) (0.3%) (0.5%)
Total provision for income taxes................ 16.1% 3.4% 2.5%
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,
---------------------
2000 2001
--------- ---------
(in thousands)
Deferred tax assets:
Accounts receivable ...................... $ 4,933 $ 5,599
Inventory................................. 9,029 2,973
Sales returns reserves.................... 1,736 2,443
Employment reserves....................... 4,091 4,073
Restructuring and other reserves.......... 1,505 2,866
Reserve related to foreign investments.... 3,546 4,293
Net operating loss carryforwards.......... 85,704 75,928
Tax credit carryforwards.................. 3,145 3,145
Other..................................... 274 222
--------- ---------
Total gross deferred tax assets........... 113,963 101,542
Less valuation allowance.................. (106,594) (92,851)
Net deferred tax assets................... 7,369 8,691
--------- ---------
Deferred tax liabilities:
Depreciation/amortization ................ 438 3,620
Licensing, net............................ 6,931 5,071
--------- ---------
Total gross deferred tax liabilities...... 7,369 8,691
--------- ---------
Net deferred tax asset (liability)........ $ -- $ --
========= =========
F-22
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
During 2000 and 2001, 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, 2001 includes $24.8
million which, if realized, will be accounted for as a reduction of goodwill.
At December 31, 2001, the Company expects to have Federal net operating
loss carryforwards of approximately $157.7 million. These loss carryforwards
will expire in years 2007 through 2021. Of the total Federal loss carryforwards,
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 $330.8 million. The
state and local loss carryforwards will expire in various jurisdictions in years
2002 through 2021. 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, 2001.
11. Quarterly Financial Data (Unaudited)
Summarized quarterly financial information for the years ended December 31,
2000 and 2001 is as follows:
2000 2001
---------------------------------- -------------------------------------------
Quarter Ended Mar. 31 June 30 Sept.30 Dec. 31 March 31 June 30 Sept. 30 Dec 31
-------- -------- -------- ------- ---------- -------- --------- -------
(in thousands, except per share data)
Net sales............ $43,187 $51,041 $73,461 $63,962 $42,672 $45,932 $43,026 $49,594
Gross profit......... 20,838 26,713 34,546 21,023 18,349 23,529 19,838 30,799
(Loss) income before
extraordinary gain.. (9,277) (2,384) (520) (46,809) (570) 90 (910) 3,008
Extraordinary gain... -- -- -- -- -- -- 13,645 19,093
Net (loss) income.... (16,646) (10,587) (9,196) (53,429) (8,687) (7,404) (1,104) 22,460
Preferred dividend
Requirement......... 3,735 3,810 3,886 3,964 3,968 3,983 4,006 4,077
Net(loss) income
attributable to common
shares............... (20,381) (14,397)(13,082) (57,393) (12,655) (11,387) (5,110) 18,383
Basic and dilutive
net loss before
extraordinary gain
per common share..... ($0.61) ($0.43) ($0.39) ($1.70) ($0.37) ($0.33) ($0.54) ($0.02)
The quarterly period ended December 31, 2000 includes charges totaling
$22.9 million related to the discontinuance of certain of the Company's toy
categories.
The quarterly period ended December 31, 2001 includes the reversal of
$3,474,000 of Administrative Claims Payable no longer required and a gross
profit effect of $1,713,000 related to inventory reserves provided in previous
periods.
The loss per common share computation for each quarter and the year are
separate calculations. Accordingly, the sum of the quarterly loss per common
share amounts may not equal the loss per common share for the year.
F-23
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
12. Related Party Transactions
Mr. Perlmutter indirectly owns approximately $34.9 million of the
Company's 8% Preferred Stock obtained in connection with the Plan.
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, 1999,
2000 and 2001, the Company paid fees and commissions to the affiliate totaling
approximately $1,170,000, $966,000 and $159,000, respectively, relating to such
advertisements.
The Company accrued royalties to Mr. Arad for toys he invented or designed
of $2,981,000, $1,551,000 and $866,000 during the years ended December 31, 1999,
2000 and 2001, respectively. An affiliate of the Company, which is wholly-owned
by Mr. Arad, provides production services in connection with the Company's
animated television series. During the years ended December 31, 2000 and 2001,
the Company paid production fees to this affiliate of $70,000 and $150,000
respectively. At December 31, 2000 and 2001, the Company had an accrual to Mr.
Arad of $378,000 and $182,000, 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, 1999, 2000 and 2001 was $106,000, $67,000 and $80,000,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.
The Company has entered into an agreement granting the exclusive
distribution rights to an unrelated entity to sell Marvel character based toys
to specialty stores in the U.S. Included in deferred revenues is a $2.5 million
prepayment received by the Company for future toy purchases. Any unused portion
of this prepayment has been guaranteed by Mr. Perlmutter.
The Company paid producer fees in regards to its television series to a
Company wholly owned by a Director and employee of approximately $46,000,
$155,000 and $168,000 during the years ended December 31, 1999, 2000 and 2001,
respectively.
The Company reimbursed Mr. Perlmutter for $7,927 in legal fees in
connection with his Guaranty of the Credit Facility.
13. 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, commenced
on or about April 1, 2001 and terminates on July 31, 2006. At December 31, 2001,
the Company has a rent deposit with the landlord in the amount of $4.4 million.
The Company is a party to various other non-cancelable operating leases
involving office and warehouse space expiring on various dates from May 2005
through April 2010. The leases are subject to escalations based on cost of
living adjustments and tax allocations. Minimum future obligations under all
operating leases are as follows:
F-24
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
(in thousands)
2002.............. $ 4,726
2003.............. 4,829
2004.............. 4,850
2005.............. 4,885
2006.............. 2,995
Thereafter........ 1,414
--------
$ 23,699
Rent expense amounted to approximately $2,691,000, $2,514,000, and
$3,639,000 for the years ended December 31, 1999, 2000 and 2001, respectively.
In June 2000, the Company entered into a merchandise licensing agreement to
manufacture and distribute a line of toys associated with a motion picture
trilogy. The first motion picture in the trilogy was released on December 19,
2001 and the remaining two are expected to be released during the fourth
quarters of 2002 and 2003, respectively. 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 which is outstanding at December 31, 2001.
The Company is a party to various other royalty agreements with future
guaranteed royalty payments through 2001. Minimum future obligations under all
royalty agreements are as follows:
(in thousands)
2002.............. $ 5,165
2003.............. 5,235
2004.............. 50
--------
$ 10,450
The Company remains liable in connection with businesses previously
sold and has been indemnified against such liabilities by the purchaser of such
business.
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.
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
F-25
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
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. In February 2002, the Court granted the Company's motion for
summary judgment. Simon has filed a Notice of Appeal but no date for the appeal
has been scheduled.
X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc. and
Fireworks Television (US), Inc. in the United States District Court, Southern
District of New York, seeking an injunction and damages for alleged breach of
the 1993 X-Men movie license, unfair competition, copyright infringement and
tortuous interference with the contract arising from the Mutant X television
show being produced by Tribune and Fireworks under license from Marvel which was
released in the fall of 2001. On the same day Fox filed the foregoing suit,
Marvel commenced an action against Fox in the same court seeking a declaratory
judgment that the license of the Mutant X title and certain Marvel characters
did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. On August 9, 2001, in response to Fox's motion for a preliminary
injunction and defendants' motion to dismiss Fox's claims, the Court (i) granted
the motion to dismiss all of Fox's claims except for its breach of contract and
copyright claims (ii) granted Fox's motion for a preliminary injunction but only
as to the defendants use of (a) video clips from the X-Men film and/or trailer
in order to promote the new Mutant X series and (b) a logo that is substantially
similar to the logo used by Fox in connection with the X-Men film. The
preliminary injunction will not have a significant effect on the Company's
operations. In January 2002, the United States Appeals Court for the Second
Circuit, in response to Fox's appeal, affirmed the District Court's denial of
Fox's motion for a preliminary injunction to prevent the airing of the Mutant X
series and remanded the case to the District Court for further proceedings
consistent with its opinion. At the present time, the parties are engaged in
pre-trial discovery with a trial on the merits scheduled for November 2002.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company filed and intends to vigorously prosecute an appeal. The
Company was required to post a letter of credit in the amount of the judgement
plus interest. The Company has provided for this judgment during the second
quarter of 2001 in the Consolidated Statement of Operations.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. As of December 31, 2001, the Company has
settled substantially all Administrative Expense Claims and believes the accrual
of $3.5 million is sufficient to provide for its remaining obligations.
F-26
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
14. Benefits Plans
The Company has a 401(k) Plan covering substantially all of its employees.
In addition, in connection with the sale of Fleer, the Company retained certain
liabilities related to a defined benefit pension plan for certain Fleer
employees. In prior years, this plan was amended to freeze the accumulation of
benefits and to prohibit participation by new participants. The accumulated
benefit obligation is approximately $17.0 million of which approximately $1.4
million is unfunded at December 31, 2001. This amount is recorded as a component
of accumulated other comprehensive loss and is being amortized over the
remaining lives of the participants. Plan expenses for the years ended December
31, 1999, 2000 and 2001 were not significant.
15. 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 a limited line of toys to the worldwide marketplace. The
Company's toy products are based upon Spider-Man: The Movie as well as
properties that the Company licenses in from other studios such as the Lord of
the Rings (New Line Cinema). The Spectra Star division of Toy Biz designs,
produces & sells kites in both the mass market stores & specialty hobby shops.
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-27
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
Licensing Segment
The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use with (i) merchandise and toys, (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 Corp 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.... 20,796 -- -- -- 20,796
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 Corp 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.... 15,038 41 5 -- 15,084
Identifiable assets for
continuing operations... $109,939 $76,808 $367,210 $ -- $553,957
Total identifiable assets..... $109,939 $76,808 $367,210 $ -- $553,957
Toys Publishing Licensing Corp Total
-------- ---------- --------- ------- --------
(in thousands)
Year ended December 31, 2001
Net sales..................... $91,708 $49,504 $40,012 $ -- $181,224
Gross profit.................. 26,932 25,577 40,006 -- 92,515
Pre-acquisition litigation
charge................... -- -- (3,000) -- (3,000)
Operating (loss) income....... (5,807) 14,438 2,508 (9,521) 1,618
EBITDA(1)..................... 422 17,618 22,422 (9,521) $30,941
Total capital expenditures.... $ 7,201 30 14 -- 7,245
Identifiable assets for
continuing operations.... $90,856 $74,213 $352,501 $ -- $517,570
Total identifiable assets..... $90,856 $74,213 $352,501 $ -- $517,570
(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-28
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
16. 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, 2000 and 2001 and for each of the three years ended December
31, 2001 .
Issuer
And Non-
Guarantors Guarantors Total
---------- ---------- --------
(in thousands)
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)
For The Year Ended December 31, 2001
Net sales.............................. $157,893 $23,331 $181,224
Gross profit........................... 86,190 6,325 92,515
Operating income....................... 875 743 1,618
Net income ............................ 3,872 1,393 5,265
Issuer
And Non- Inter-
Guarantors Guarantors Company Total
---------- ---------- -------- --------
December 31, 2000
Current assets ......................... $109,870 $ 3,573 $ -- $113,443
Non-current assets...................... 439,504 40,347 (39,337) 440,514
-------- -------- --------- --------
Total assets............................ $549,374 $43,920 (39,337) $553,957
========= ======== ========= ========
Current liabilities..................... 103,233 6,480 (39,337) 70,376
Non-current liabilities................. 250,000 -- -- 250,000
8% Preferred Stock...................... 202,185 -- -- 202,185
Stockholders' equity (deficit).......... (6,044) 37,440 -- 31,396
-------- -------- --------- --------
$549,374 $43,920 ($39,337) $553,957
========= ======== ======== ========
December 31, 2001
Current assets.......................... $ 98,481 $ 1,746 $ -- $100,227
Non-current assets...................... 414,772 41,019 (38,448) 417,343
-------- -------- -------- --------
Total assets............................ $513,253 $42,765 ($38,448) $517,570
========= ======== ======== ========
Current liabilities..................... 106,097 3,652 (38,448) 71,301
Non-current liabilities................. 196,336 -- -- 196,336
8% Preferred Stock...................... 207,975 -- -- 207,975
Stockholders' equity.................... 2,845 39,113 -- 41,958
-------- -------- -------- --------
$513,253 $42,765 ($38,448) $517,570
========= ======== ======== ========
F-29
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
Issuer
and Non-
Guarantors Guarantors Total
----------- ---------- ---------
(in thousands
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
=========== ========== =========
Year Ended December 31, 2001
Cash flows from operating activities:
Net income ................................... $ 3,872 $1,393 $ 5,265
Net cash provided by operating activities... 8,181 632 8,813
Net cash used in investing activities....... (8,896) (15) (8,911)
Net cash provided by financing activities... (1,114) -- (1,114)
----------- ---------- ---------
Net decrease (increase) in cash............... (1,829) 617 (1,212)
Cash, at beginning of year.................... 22,291 512 22,803
=========== ========== =========
Cash, at end of year.......................... $20,462 $ 1,129 $21,591
=========== ========== =========
F-30
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2001
VALUATION AND QUALIFYING ACCOUNTS
Allowances
Balance Acquired in Charged to
At Beginning MEG Acquisition Sales or Costs Charges to Balance
Description of Period Acquisition and Expenses Other Accounts Deductions at End
- ---------------------------- ------------ --------------- -------------- -------------- ---------- -------
(in thousands)
Year Ended December 31, 1999
Allowances included in Accounts
Receivable. Net:
Doubtful accounts -- current......... 3,608 -- 1,141(3) -- 798 3,951
oubtful 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
Year Ended December 31, 2001
Allowances included in Accounts
Receivable. Net:
Doubtful accounts--current............ 4,542 -- 3,470(5) -- 2,737 5,275
Doubtful accounts--non-current........ -- -- -- -- -- --
Advertising, markdowns, returns,
volume discounts and other......... 19,393 -- 15,037(1) -- 22,592 11,838
(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
(5) 3,693 charged to costs and expenses and (223) charged to sales
F-31