ITEM 1. BUSINESS
Unless the context otherwise requires: (i) the term the "Company" and the term "Marvel" each refer to Marvel Enterprises, Inc. (formerly Toy Biz, Inc.), a Delaware corporation, and its subsidiaries; (ii) the term "MEG" refers to Marvel Entertainment Group, Inc., a Delaware corporation, and its subsidiaries, prior to the consummation of the Merger, as defined below, and its emergence from bankruptcy; (iii) the term "Toy Biz, Inc." refers to the Company prior to the consummation of the Merger; (iv) the term "Marvel Licensing" refers to the Marvel Licensing business division of the Company; (v) the term "Marvel Publishing" refers to the Marvel Publishing business division of the Company; and (vi) the term "Toy Biz" refers to the Toy Biz business division of the Company. Unless otherwise indicated, the statement of operations data and statement of cash flows data included in this Report do not include (i) Fleer Corp., Frank H. Fleer Corp. and SkyBox International Inc. (each a wholly-owned subsidiary of the Company), substantially all of the assets of which the Company sold on February 11, 1999 (the "Fleer Sale"), or (ii) Panini SpA("Panini"), which the Company sold on October 5, 1999. Certain of the characters and properties referred to in this Report are subject to copyright and/or trademark protection.
Background
On October 1, 1998, the Company acquired MEG by means of a merger between MEG and the Company's wholly-owned subsidiary MEG Acquisition Corp. (the "Merger"). Upon consummation of the Merger, the Company changed its name from "Toy Biz, Inc." to "Marvel Enterprises, Inc." The Merger was part of the Fourth Amended Joint Plan of Reorganization for MEG that was confirmed by the United States District Court for the District of Delaware, which had jurisdiction of MEG's chapter 11 case. MEG's chapter 11 case had begun in December 1996 with MEG's filing of a voluntary petition for bankruptcy protection. Prior to the reorganization, MEG was a principal stockholder of Toy Biz, Inc. See "The Reorganization."
In order to finance a portion of the consideration required to consummate the Merger and certain other transactions contemplated by the plan of reorganization, the Company borrowed $200 million (the "Bridge Loan") from UBS AG, Stamford Branch ("UBS"). The Company used a portion of the proceeds from an offering, completed on February 25, 1999 (the "Notes Offering"), of $250 million of 12% senior notes due 2009 (the "Notes") to repay the Bridge Loan. UBS is an affiliate of Warburg Dillon Read LLC, one of the placement agents in the Notes Offering.
General
The Company is one of the world's most prominent character-based entertainment companies, with a proprietary library of over 4,700 characters. The Company operates in the licensing, comic book publishing and toy businesses in both domestic and international markets. The Company's library of characters includes Spider-Man, X-Men, Captain America, Fantastic Four and The Incredible Hulk and is one of the oldest and most recognizable collections of characters in the entertainment industry.
The Company's characters have been developed through a long history of comic book plots and storylines which give each of them their own personality, context and depth. In addition, the Company's characters exist in the "Marvel
Universe," a fictitious universe which provides a unifying historical and contextual background for the characters and storylines. The "Marvel Universe" concept permits the Company to use some of its more popular characters to enhance the exposure of its lesser-known characters.
The Company's business is divided into three integrated and complementary operating divisions: Marvel Licensing, Marvel Publishing and Toy Biz.
Marvel Licensing
Marvel Licensing licenses the Company's characters for use in a wide variety of consumer products, including apparel, costumes, children's sleepwear, party goods, snack foods, video games, collectibles, posters, footwear, backpacks and linens. Marvel Licensing also receives fees from the sale of licenses to a variety of media, including television, feature films and destination-based entertainment.
The following are examples of media exposure and licensing opportunities that Marvel Licensing has generated for the Company's characters:
Television Programs
Marvel Licensing licenses the Company's characters for use in popular television programs, including Spider-Man, which has appeared on the Fox Kids Television Network since 1994, and X-Men, which has appeared on the Fox Kids Television Network since 1992. In addition, The Incredible Hulk, Fantastic Four, Iron Man and Silver Surfer have aired on syndicated television from time to time in the past. In 2000, Marvel began production of X-Men Evolution, a half hour animated show. This is distributed by Warner Brothers and currently appears on the Kids WB network.
Feature Films
Marvel Licensing has licensed the Company's characters for use in major motion pictures. For example, the Company currently has licenses with Twentieth Century Fox to produce motion pictures featuring X-Men, Fantastic Four and Silver Surfer. The X-Men film was released during July 2000 and a sequel is presently scheduled to be released in November 2002. The Company currently has an outstanding license with Sony Pictures for a motion picture based upon Spider-Man which is scheduled to be released in May 2002, and other outstanding licenses with various other film studios for a number of its other characters and additional discussions are ongoing. Under these licenses, the Company generally retains control over merchandising rights and not less than 50% of movie-based merchandising revenues.
Destination-Based Entertainment
Marvel Licensing licenses the Company's characters for use at theme parks, shopping malls, special events and restaurants. For example, Marvel Licensing has licensed the Company's characters for use as part of an attraction at the Universal Studios Theme Park in Orlando, Florida. Universal Studios unveiled "Marvel Super Hero Island" featuring Spider-Man, The Incredible Hulk and a number of the Company's other characters in 1999.
On-line Media
Marvel Licensing has developed an on-line presence for the Company's characters through the Company's "Marvel.com" and related websites, including the introduction of electronic comics and access to the Company's top writers and artists and plans to extend such presence in 2001.
Non-Toy Merchandise
Marvel Licensing licenses the Company's characters for use in a wide variety of consumer products, including apparel, costumes, children's sleepwear, party goods, snack foods, video games, collectibles, posters, footwear, backpacks and linens.
Marvel Publishing
Since 1995, the comics publishing business has declined, along with the number of retailers that carry comic books.
A significant number of comic specialty stores have left the business, primarily due to a decrease in speculative purchases of both comics and related collectibles (e.g. trading cards.) A significant number of outlets that carried comics as a part of their magazine merchandise programs have dropped the product due to an overall reduction in comics readership. Management believes that this loss of readers was the direct result of a long-term, industry-wide decline in the readability and quality of comic book stories. In 2000, the Company took steps to improve our editorial processes and comic book content and management believes that these were the first steps in the long-term rehabilitation of Marvel publishing.
Comic Books
Marvel Publishing has been publishing comic books since 1939 and has developed a roster of more than 4,700 characters, including the following popular characters: Spider-Man; X-Men (including Wolverine, Nightcrawler, Colossus, Storm, Cyclops, Rogue, Bishop and Gambit); Captain America; Fantastic Four (including Mr. Fantastic, Human Torch, Invisible Woman and The Thing); The Incredible Hulk; Thor; Silver Surfer; Daredevil; Iron Man; Dr. Strange; and Ghost Rider. The Company's characters exist in the "Marvel Universe", a fictitious universe which provides a unifying historical and contextual background for the storylines. Marvel Publishing's titles feature classic Marvel super heroes, newly developed Marvel characters, and characters created by other entities and licensed to Marvel Publishing.
Marvel Publishing's approach to the Marvel characters is to present a contemporary drama suggestive of real people with real problems. This enables the characters to evolve, remain fresh, and, therefore, attract new and retain old readers in each succeeding generation. The "Marvel Universe" concept permits Marvel Publishing to use the popularity of its characters to introduce a new character in an existing Marvel super heroes comic book or to develop more fully an existing but lesser known character. In this manner, formerly lesser known characters such as Thunderbolts and Wolverine have been developed and are now popular characters in their own right and are featured in their own monthly comic books. The "Marvel Universe" concept also allows Marvel Publishing to use its more popular characters to make "guest appearances" in the comic books of lesser-known or newer characters to attempt to increase the circulation of a particular issue or issues.
Comic Book Editorial Process
Marvel Publishing's full-time editorial staff consists of an editor in chief, managing editor and approximately 17 editors associate editors and assistant editors who oversee the quality and consistency of the artwork and editorial copy and manage the production schedule of each issue. The production of each issue requires the editors to coordinate, over a six- to nine-month period, the activities of a writer, a pencil artist, an inker, a colorist and a printer. The majority of this work is performed by third parties outside of Marvel Publishing's premises.
The artists and writers include freelancers who generally are paid on a per-page basis. They are eligible to receive incentives or royalties based on the number of copies sold (net of returns) of the comic books in which their work appears. In 2000, Marvel cut back on the number of expensive, exclusive agreements with writers and artists while establishing new relationships with some of the industry's hottest creators.
The creative process is a team effort led by a Marvel editor. A writer develops a story line; a pencil-artist works with the writer to translate the story into a pictorial sequence of events; an inker enhances the pencil artist's work; a letterer typesets balloons and captions; and a computer artist colors the pages. In 2000, Marvel began to eliminate the costly and inefficient process of hand-coloring books in favor of higher quality, less expensive, computer coloring. These freelance creators and the printers/binders for Marvel comic books are unaffiliated third parties.
Customers, Marketing and Distribution
Marvel Publishing's primary target market for its comic books has been teenagers and young adults in the 13 to 23 year old age group. Established readership of Marvel Publishing's comic books also extends to readers in their mid-thirties. There are two primary types of purchasers of Marvel Publishing's comic books. One is the traditional purchaser who buys comic books like any other magazine. The other is the reader-saver who purchases comic books, typically from a comic book specialty store, and maintains them as part of a collection.
Marvel Publishing's comic book publications are distributed through three channels: (i) to comic book specialty stores on a nonreturnable basis (the "direct market"), (ii) to traditional retail outlets on a returnable basis (the "retail returnable market"), and (iii) on a subscription sales basis.
In 2000, Marvel launched the Ultimate Marvel line, which recreates the Spider-Man and X-Men mythos in a way that is thoroughly modern and accessible to new readers. These books immediately rose to the top of the industry sales charts and have been growing in monthly readership.
For the years ended December 31, 1998, 1999 and 2000, approximately 81%, 80%, and 77%, respectively, of Marvel Publishing's net publishing revenues were derived from sales to the direct market. Marvel Publishing distributes its publications through an unaffiliated entity which, in turn, services specialty market retailers and direct market comic book shops.
In 2000, Marvel returned to its historical policy of printing to order for the Direct Market, thus eliminated the cost of printing and marketing excess inventory. Moreover, it seems to have helped revive collector interest in Marvel comics, as sold out comics are now rising in after-market value. (It is worth distinguishing back-issue collectibility - which had always been a healthy part of the comic book business - from the bubble of mass speculation on over-printed books that marked the early 1990s.)
For the years ended December 31, 1998, 1999 and 2000, approximately 10%, 9% and 8%, respectively, of Marvel Publishing's net publishing revenues were derived from sales to the retail returnable market. The retail returnable market consists of traditional periodical retailers such as newsstands, convenience stores, drug stores, supermarkets, mass merchandise and national bookstore chains. The distributors sell Marvel Publishing's publications to wholesalers, who in turn sell to the retail outlets. Management issues credit to these distributors for unsold and returned copies. Distribution to national bookstore chains is accomplished through a separate distributor.
For the years ended December 31, 1998, 1999 and 2000, approximately 3%, 2% and 2%, respectively, of Marvel Publishing's net publishing revenues were derived from subscription sales.
For the years ended December 31, 1998, 1999 and 2000, approximately 6%, 9% and 13%, respectively, of Marvel Publishing's net publishing revenues were derived from advertising sales and other publishing activities. In most of Marvel Publishing's comic publications, ten pages (three glossy cover pages and seven inside pages) are allocated for advertising. The products advertised include sports and entertainment trading cards, video games, role playing games, movies, candy, cereals, toys, models and other consumer packaged goods. Marvel Publishing permits advertisers to advertise in a broad range of Marvel Publishing's comic book publications which target specific groups of titles that have a younger or older readership.
Toy Biz
Toy Biz designs, develops, markets and distributes both innovative and traditional toys in the boys', girls', activities/games and electronic toy categories based on popular entertainment properties, consumer brand names and proprietary designs. Toy Biz's products are distributed to a number of general and specialty merchandisers and distributors in the United States and internationally.
The toy industry is a highly competitive environment in which large mass market toy retailers dominate the industry and feature a large selection of toys. In recent years, entertainment conglomerates, through films, television shows, video games and the internet and print products, have emerged as important content providers for toy manufacturers. In addition, continued consolidation among discount-oriented retailers can be expected to require toy companies to keep prices low and to implement and maintain production and inventory control methods permitting them to respond quickly to changes in demand. In addition to the competitive pressures placed on manufacturers and distributors, the toy industry is subject to changing consumer preferences and significant seasonal patterns in sales. Some products in the toy industry are perennial favorites and others are successfully marketed only for a limited period of time.
Due to the uncertainty of the toy industry and the fact that retailers continue to work down excess inventories of declining brands, management has taken several initiatives to restructure Toy Biz and position it for improved financial and operating performance. These initiatives, which include previously announced staffing reductions and the elimination of certain high risk product categories and lines and shifting emphasis of its business to direct import, will enable Toy Biz to re-deploy its resources on a more focused set of opportunities. These include traditional Marvel-character franchises and the Lord of the Rings Toy License. Accordingly, in the fourth quarter of 2000, Marvel wrote down certain inventories, packaging, tooling and design and development costs related to the Toy Biz division. The write-downs resulted in $22.9 million of fourth quarter adjustments and relate primarily to discontinued toy lines in the game and promotional doll categories.
Products
Toy Biz has historically marketed a variety of toy products designed for children of different age groups. Toy Biz's current product strategy is to increase sales of Marvel-based toys, which generate higher margins than the Company's other toy product lines. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview." In 2000, approximately 75 % of the Company's net toy sales were generated from products not based on the Marvel characters. Toy Biz produces a portion of its products under licenses which it has obtained from third parties. In carrying out its business strategy, Toy Biz continuously monitors existing licensed properties and pursues new licenses where it believes that the new licenses fit with Toy Biz's core product lines, or where they may add to Toy Biz's core product mix.
Some of Toy Biz's licenses confer rights to exploit original concepts developed by toy inventors and designers. Other licenses, referred to as trademark or brand name licenses, permit Toy Biz to produce toys bearing the recognized consumer trademark or brand name owned by the licensor. In return for these rights Toy Biz pays royalties to its licensors. Royalties paid by Toy Biz to licensors and inventors are typically based on a percentage of net sales. Most licenses have terms of one to three years and some are renewable at the option of Toy Biz upon payment of minimum guaranteed payments or the attainment of certain sales levels during the term of the license. In the future, royalty rates and minimum guaranteed royalty payments may increase or decrease depending upon various competitive forces in the toy industry.
Boys' Products. Toy Biz is a leading marketer of youth entertainment products for domestic and international markets. These products are based on fictional action adventure characters owned or licensed by the Company. Action figures and accessories relating to the X-Men motion picture were the most successfully developed of Toy Biz's action figures and accessory line during 2000. Toy Biz also produces and markets a line of toys under license from World Championship Wrestling (WCW) and Pokemon. Toy Biz is currently developing a line of action figures, accessories and role play items based upon J.R.R. Tolkien's literary phenomenon "The Lord of the Rings." New Line Cinema (a division of AOL/Time Warner) is producing the "The Lord of the Rings" for major theatrical release beginning December 2001 and will release Part II during Holiday 2002 and Part III for Holiday 2003.
Girls' Products. Toy Biz had a very successful product in the feature plush category last year with "Puppy Magic." "Puppy Magic" is a soft stuffed mother dog and three puppies that are electronically interactive. Toy Biz has extended this technology and play pattern to kittens for 2001 with the introduction of "Kitty Magic.".
Activity Toys. The Company believes that the Spectra Star brand name accounts for a substantial share of the United States mass market kite business. Toy Biz also utilizes license-driven products to expand the consumer appeal of its kite products. Toy Biz's kite licenses have been granted by well-known licensors such as Disney, Sony Pictures, Nickelodeon, Universal Studios and Warner Bros. Toy Biz's activity toy products also include model rocketry products.
Design and Development
Toy Biz maintains a product development staff and also obtains new product ideas from third-party inventors. The time from concept to production of a new toy can range from six to twenty-four months, depending on product complexity.
Toy Biz relies on independent parties in China to manufacture a substantial portion of its products. The remainder of its products are manufactured in Mexico or the United States. As a matter of policy, Toy Biz uses several different manufacturers that compete for the Company's business. By concentrating its manufacturing among certain manufacturers, Toy Biz pursues a strategy of selecting manufacturers at which Toy Biz's product volume qualifies Toy Biz as a significant customer. Toy Biz is not a party to any long-term agreement with any manufacturer in the Far East.
Toy Biz's Spectra Star products are manufactured mainly in Mexico by the Company's Mexican subsidiary.
Toy Biz maintains a Hong Kong office from which it regularly monitors the progress and performance of its manufacturers and subcontractors. Toy Biz also uses Acts Testing Labs (H.K.) Ltd., a leading independent quality-inspection firm, to maintain close contact with its manufacturers and subcontractors in China and to monitor quality control of Toy Biz's products. Toy Biz uses an affiliate of Acts Testing Labs (H.K.) Ltd. to provide testing services for a limited amount of product currently produced in the United States.
Customers, Marketing and Distribution
Toy Biz markets and distributes its products in the United States and internationally, with sales to customers in the United States accounting for approximately 84%, 85% and 72% of the Company's net toy sales in 1998, 1999 and 2000, respectively.
Outlets for Toy Biz's products in the United States include specialty toy retailers, mass merchandisers, mail order companies and variety stores, as well as independent distributors who purchase products directly from Toy Biz and ship them to retail outlets. Toy Biz's five largest customers include Toys 'R' Us, Inc., Wal-Mart Stores, Inc., Kmart Corporation, Target Stores, Inc., a division of Target Corp., and Kay-Bee Toy Stores, which accounted in the aggregate for approximately 66%, 70% and 60% of the Company's total toy sales in 1998, 1999 and 2000, respectively. Our customer base for toys is concentrated.
Toy Biz maintains a sales and marketing staff and retains various independent manufacturers' sales representative organizations in the United States. Toy Biz's management coordinates and supervises the efforts of its salesmen and its other sales representatives. Toy Biz also directly introduces and markets to customers new products and extensions to previously marketed product lines by participating in the major toy trade shows in New York, Hong Kong and Europe and through a showroom maintained by Toy Biz in New York.
Toy Biz's products are sold outside the United States through independent distributors by the Company's Hong Kong subsidiary, under supervision of Toy Biz's management. Toy Biz's international product line generally includes products currently or previously offered in the United States, packaged to meet local regulatory and marketing requirements.
Toy Biz utilizes an independent public warehouse in the Seattle, Washington area, for storage of its products.
Intellectual Property
The Company believes that its library of proprietary characters as well as its "Marvel" trade name represent its most valuable assets and that its library could not be easily replicated. The Company currently conducts an active program of maintaining and protecting its intellectual property rights in the United States and in approximately 55 foreign countries. The Company's principal trademarks have been registered in the United States, certain of the countries in Western Europe and South America, Japan, Israel and South Africa. While the Company has registered its intellectual property in these countries, and expects that its rights will be protected in these countries, certain other countries do not have intellectual property laws that protect United States holders of intellectual property and there can be no assurance that the Company's rights will not be violated or its characters "pirated" in these countries.
Advertising
Although a portion of the Company's advertising budget for its toy products is expended for newspaper advertising, magazine advertising, catalogs and other promotional materials, the Company allocates a majority of its advertising budget for its toy products to television promotion. The Company advertises on national television and purchases advertising spots on a local basis. Management believes that television programs underlying the Company's toy product lines increase exposure and awareness.
The Company currently engages Tangible Media, Inc. ("Tangible Media"), an affiliate of Isaac Perlmutter, to purchase certain of its advertising. Mr. Perlmutter is a director and a principal stockholder of the Company. The Company retains the services of a media consulting agency for advice on matters of advertising creativity.
Competition
The industries in which the Company competes are highly competitive.
Marvel Licensing competes with a diverse range of entities which own intellectual property rights in characters. These include D.C. Comics (which is owned by Time Warner, Inc.), The Walt Disney Company and other entertainment-related entities. Many of these competitors have greater financial and other resources than the Company.
Marvel Publishing competes with over 500 publishers in the United States. Some of Marvel Publishing's competitors such as D.C. Comics are part of integrated entertainment companies and may have greater financial and other resources than the Company. Marvel Publishing also faces competition from other entertainment media, such as movies and video games, but management believes that it benefits from the low price of comic books in relation to those other products.
Toy Biz competes with many larger toy companies in the design and development of new toys, the procurement of licenses and for adequate retail shelf space for its products. The larger toy companies include Hasbro, Inc., Mattel Inc., Playmates, Inc. and Bandai, Co., Ltd., and Toy Biz considers Just Toys, Inc., Empire of Carolina, Inc. and Ohio Art Co. to be among its competitors as well. Many of these competitors have greater financial and other resources than the Company. The toy industry's highly competitive environment continues to place cost pressures on manufacturers and distributors. Discretionary spending among potential toy consumers is limited and the toy industry competes for those dollars along with the makers of computers and video games. Management believes that strong character and product licenses, the industry reputation and ability of its senior management, the quality of its products and its overhead and operational controls have enabled Toy Biz to compete successfully.
Employees
As of December 31, 2000, the Company employed approximately 720 persons (including operations in Hong Kong and Mexico). The Company also contracts for creative work on an as-needed basis with approximately 500 active freelance writers and artists. The Company's employees are not subject to any collective bargaining agreements. Management believes that the Company's relationship with its employees is good.
Government Regulations
The Company is subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws empower the Consumer Product Safety Commission (the "CPSC") to protect children from hazardous toys and other articles. The CPSC has the authority to exclude from the market articles which are found to be hazardous. Similar laws exist in some states and cities in the United States, Canada and Europe. The Company maintains a quality control program (including the inspection of goods at factories and the retention of an independent quality-inspection firm) designed to ensure compliance with applicable laws.
The Reorganization
On December 27, 1996, MEG and certain of its subsidiaries filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (collectively, the "Bankruptcy Case"). The Fourth Amended Plan of Reorganization (the "Plan") proposed by Toy Biz, Inc. and certain secured creditors of MEG in the Bankruptcy Case was confirmed by the United States District Court for the District of Delaware (the "District Court"), which has assumed jurisdiction over the Bankruptcy Case, and in connection with that confirmation, all appeals relating to consummation of the Plan were withdrawn by all parties involved in the Bankruptcy Case.
The Merger, the Equity Securities Issuances, the Secured Creditors Cash Payment, the Unsecured Creditors Cash Payment, the Initial Administration Expense Claims Payment, the Panini Payment, the Panini Guaranty, the Dispute Settlement and Professional Fees Payments, the Capital Contribution, the Refinancing, the Bridge Loan, the Standstill Agreements and the Litigation Trusts, in each case as described below, are referred to in this Report collectively as the "Reorganization."
Pursuant to the Plan, the Company used the proceeds from the Bridge Loan, together with other funds, to consummate the following transactions on October 1, 1998, the date of the Plan's consummation:
Merger
Pursuant to an Agreement and Plan of Merger, dated as of August 12, 1998, by and among MEG, MEG Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Toy Biz, Inc., and Toy Biz, Inc., MEG Acquisition Corp. merged with and into MEG, with MEG surviving as a wholly-owned subsidiary of Toy Biz, Inc.
Equity Securities Issuances
In connection with the consummation of the Plan, the Company issued (collectively, the "Equity Securities Issuances"):
(1) 16.9 million shares of 8% Preferred Stock as follows: (a) 7.9 million shares to certain secured creditors of MEG (the "Secured Creditors") and (b) 9.0 million shares to certain purchasers (the "Preferred Stock Investors");
(2) 13.1 million shares of Common Stock to the Secured Creditors;
(3) warrants to purchase up to 1.75 million shares of Common Stock at an exercise price of $17.25 per share (the "Plan Warrants") to certain unsecured creditors of MEG (the "Unsecured Creditors"); and
(4) the following warrants to former stockholders of MEG and holders of certain class securities litigation claims concerning MEG stock (collectively, the "MEG Equity Holders"), the Unsecured Creditors and certain other creditors of MEG: (a) three-year warrants to purchase 4 million shares of Common Stock at an exercise price of $12.00 per share (the "Stockholder Series A Warrants"); (b) six-month warrants to purchase 3 million shares of 8% Preferred Stock at an exercise price of between $10.65 and $11.88, based on the date of warrant issuance, per share (the "Stockholder Series B Warrants"); and (c) four-year warrants to purchase 7 million shares of Common Stock at an exercise price of $18.50 per share (the "Stockholder Series C Warrants," and together with the Stockholder Series A Warrants and the Stockholder Series B Warrants, the "Stockholder Warrants"; the Stockholder Warrants and the Plan Warrants, collectively, the "Warrants"). The Stockholder Series B Warrants were issued in three tranches on October 14, 1998, with an exercise price of $10.65 per share (these warrants expired on April 14, 1999); on December 23 1998, with an exercise price of $10.86 per share (these warrants expired on June 23, 1999); and on October 17, 1999, with an exercise price of $11.88 per share (these warrants expired on April 17, 2000). The completion of all distributions to the Unsecured Creditors is pending (other than of Stockholder Series B Warrants) until the District Court makes certain determinations concerning the amount of the Unsecured Creditors' allowed claims.
Secured Creditors Cash Payment
The Company paid $221.8 million in cash (the "Secured Creditors Cash Payment") to the Secured Creditors. An additional $10 million had been paid to the Secured Creditors in the second quarter of 1998 in connection with the sale of MEG's confectionery business.
Unsecured Creditors Cash Payment
The Company deposited money into a trust account that will be used to make a cash payment to the Unsecured Creditors in an amount equal to the lesser of (i) $2.0 million plus fifteen percent (15%) of the amount of their allowed claims and (ii) $8.0 million (the "Unsecured Creditors Cash Payment"). The Unsecured Creditors Cash Payment will equal $8.0 million plus accrued interest.
Initial Administration Expense Claims Payment
The Company agreed to pay in cash all administration expense claims incurred in connection with the Bankruptcy Case (the "Administration Expense Claims"). On the consummation date of the Plan, the Company paid approximately $20.2 million of Administration Expense Claims (the "Initial Administration Expense Claims Payment"). In December 1998 and during 1999 and 2000, the Company paid approximately $4.2 million, $10.4 million and $2.1 million, respectively, of additional Administration Expense Claims. The Company estimates that it may be required to pay between $6.5 million and $8.5 million of additional
Administrative Expense Claims, although there can be no assurance as to the amount the Company will be required to pay. If the aggregate amount of Administration Expense Claims is in excess of $35 million, Zib Inc. ("Zib"), an affiliate of Mr. Perlmutter, has agreed that Zib or one of its affiliates will lend the Company the amount of the excess in exchange for a five-year promissory note from the Company (the "Excess Administration Expense Claims Note") which would bear interest at 2% above the interest rate on the Notes.
Panini Payment and Panini Guaranty
The Company paid $13 million in cash (the "Panini Payment") to certain creditors (the "Panini Creditors") of Panini and issued to the Panini Creditors a deficiency guaranty (the "Panini Guaranty") of up to $27 million of Panini`s United States bank indebtedness. On October 5, 1999, the Company sold Panini to ID4 Holding S.p.A. ("ID4"), a newly created company owned jointly by Fineldo S.p.A., an Italian conglomerate engaged in various consumer product and financing businesses and controlled by Vittorio Merloni, and the Senior Management of Panini. In connection with ID4's purchase of the Panini equity, for which the Company received a nominal price, ID4 also purchased all of Panini's outstanding U.S. bank debt and the Company was released from the Panini Guaranty. The Company made a cash payment of $11.2 million to Panini's bank lenders to obtain its release from the Panini Guaranty. As part of the sale, the Company also entered into an agreement whereby Panini would continue as the Company's international publishing licensee under a five-year license.
Dispute Settlement and Professional Fees Payments
The Company paid $3.5 million in cash (the "Dispute Settlement Payment") to certain claimants in the Bankruptcy Case in settlement of disputes. The Company also paid $200,000 (the "Professional Fees Payment") to Dickstein Partners Inc. in reimbursement of professional fees incurred in connection with the purchase of shares of 8% Preferred Stock on October 1, 1998. Dickstein Partners Inc. is an affiliate of Mark Dickstein, who was a director of the Company from October 1998 until October 1999.
Capital Contribution
The Company received a capital contribution totaling $1.5 million (the "Capital Contribution") from an affiliate of Mr. Perlmutter and from Avi Arad. Mr. Arad is a director, executive officer, and principal stockholder of the Company.
Refinancing
The Company repaid all outstanding indebtedness (the "Refinancing") under Toy Biz, Inc.'s then-existing working capital facility.
Bridge Loan
The Company obtained the Bridge Loan from UBS. A portion of the proceeds from the Notes Offering were used to repay the Bridge Loan.
Standstill Agreements
Carl C. Icahn and High River Limited Partnership (the "High River Group") and Vincent Intrieri and Westgate International L.P. (the "Westgate Group") entered into standstill agreements (the "Standstill Agreements") on the consummation date of the Plan. Pursuant to the Standstill Agreements, the High River Group and the Westgate Group have each agreed that they will not, and will not permit their affiliates or associates to, among other things, seek to control the management of the Company. In addition, the Standstill Agreements require that the High River Group and Westgate Group vote all securities beneficially owned by them in connection with any action to be taken by the Company's security holders with respect to which an abstention will have the same effect as a vote against the matter, in proportion to the votes cast with respect to that action by all other holders of securities. With respect to all other matters to be voted upon at a meeting of the Company's security holders, the High River Group and Westgate Group shall cause securities beneficially owned by them to be present at the meeting for quorum purposes but to abstain from voting on the matter. The Standstill Agreements will terminate on October 1, 2002, subject to earlier termination under certain circumstances.
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.
ITEM 2. PROPERTIES
The Company has the following principal properties:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal actions described below. In addition, the Company is involved in various other legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any outstanding legal proceeding and there can be no assurances, the Company believes that its legal proceedings and claims (including those described below), individually and in the aggregate, are not likely to have a material adverse effect on its financial condition, results of operations or cash flows.
Spider-Man Litigation. The Company's subsidiaries MEG and Marvel Characters, Inc., (collectively, the "Marvel Parties") have been parties to a consolidated case, concerning rights to produce and /or distribute a live action motion picture based on the Spider-Man character which was completely settled in March 2001.
Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A. Wolfman commenced an action in the United States District Court for the Central District of California against New Line Cinema Corporation, Time Warner Companies, Inc., the Company, MEG and its wholly owned subsidiary, Marvel Characters, Inc., and others. The complaint alleges that the motion picture Blade, produced and distributed by New Line pursuant to an agreement with MEG, as well as the Company's sale of related action figure toys, infringes Wolfman's claimed copyrights and trademarks as the author of the original stories featuring the Blade and Deacon Frost characters (collectively, the "Work") and that Wolfman created the Work as an independent contractor engaged by MEG. The relief sought by complaint includes a declaration that the defendants have infringed Wolfman's copyrights, compensatory and punitive damages, an injunction and various other forms of equitable relief. The Company believes that each component of the Work was created for MEG as a "work for hire" within the meaning of the applicable copyright statute and believes that all of Wolfman's claims are without merit and intends to defend the action vigorously if the action is allowed to proceed.
On February 24, 1999, Wolfman and the Company entered into a stipulation pursuant to which the United States District Court for the District of Delaware will determine the issue of whether Wolfman or Marvel Characters, Inc. (which is now a wholly owned subsidiary of the Company) is the rightful owner of Blade and Deacon Frost and a number of other characters. In the context of this proceeding, the Company has sought a declaration that Marvel Characters, Inc., not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial on the merits was held in December 1999 and on November 6, 2000 the judge issued an opinion and order finding in favor of the Company and holding that the Company is the lawful owner of the rights claimed by Wolfman. As of this date, Wolfman filed an appeal which has not been scheduled.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S. Copyright Office written notices under the Copyright Act purporting to terminate effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by Simon of the Captain America character to the Company's predecessor. On February 24, 2000, the Company commenced an action against Simon in the United States District Court for the Southern District of New York. The complaint alleges that the Captain America character was created by Simon and others as a "work for hire" within the meaning of the applicable copyright statute and that Simon had acknowledged this fact in connection with the settlement of previous suits against the Company's predecessors in 1969. The suit seeks a declaration that Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain America character.
Administration Expense Claims Litigation. The Company has initiated litigation contesting the amount of certain Administration Expense Claims submitted to the Company for payment. While the amounts claimed are material to the Company's financial position, the Company believes that the ultimate resolution of these matters will not be material to the Company's financial condition, results of operations or cash flows, although there can be no assurances.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2000.
PART II
ITEM 5.
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.
As of March 21, 2001, there were 614 holders of record of the Company's Common Stock.
The Company has not declared any dividends on the Common Stock. The working capital facility restricts the Company's ability to pay dividends on the Common Stock. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources."
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected combined or consolidated financial data, derived from the Company's audited financial statements, for the five-year period ended December 31, 2000. The selected financial data of the Company for the years ended December 31, 1998 and 1999 are not comparable to prior periods due to the Company's acquisition of MEG on October 1, 1998. The Company has not paid dividends on its capital stock during any of the periods presented below.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements of the Company and the related notes thereto, and the other financial information included elsewhere in this Report.
Set forth below is a discussion of the financial condition and results of operations of the Company for the three fiscal years ended December 31, 2000. Because of the significant effect of the Reorganization on the Company's results of operations, the Company's historical results of operations and period-to-period comparisons will not be indicative of future results.
Overview
Net Sales
The Company's net sales are generated from (i) licensing the Marvel characters for use in merchandise, promotions, feature films, television programs, theme parks and various other areas; (ii) publishing comic books, including related advertising revenues; and (iii) marketing and distributing toys, including toys based on the Marvel characters, proprietary toy products and toys based on properties licensed to the Company from third parties. Licensing, publishing and toys have accounted for 8%, 20% and 72%, respectively, of the Company's net sales for the year ended December 31, 2000.
The Company's strategy is to increase the media exposure of the Marvel characters through its media and promotional licensing activities, which it believes will create revenue opportunities for the Company through sales of toys and other licensed merchandise. The Company intends to use comic book publishing to support consumer awareness of the Marvel characters and to develop new characters and storylines.
Due to the deteriorating financial performance of Toy Biz, the Company has eliminated certain product categories and lines in an effort to focus its future toy business on marketing and distributing toys based on the Marvel characters, which provide the Company with higher margins because no license fees are required to be paid to third parties and, because of media exposure, require less promotion and advertising support than the Company's other toy categories. In 2001, Toy Biz will substantially reduce its advertising and promotion costs as compared to 1999 and 2000 when approximately $37.8 million and approximately $35.3 million, respectively, were spent on these costs. In addition, Toy Biz will market and distribute toys associated with Lord of the Rings Toy License which will coincide with the releases of all three films in the trilogy presently scheduled to be released in December of 2001, 2002 and 2003.
The Company records as revenue the present value of licensing fees from its licensing activities at the time the Company's characters are available to the licensee and the collection of licensing fees is reasonably assured. Licensing fees booked as revenue but not yet realized are recorded as receivables. Licensing receivables due more than one year beyond the balance sheet date are discounted to their net present value and are recorded as deferred charges.
Operating Expenses: Cost of Sales
There generally is no material cost of sales associated with the licensing of the Company's characters.
Cost of sales for comic book publishing consists of art and editorial, printing and distribution costs. Art and editorial costs account for the most significant portion of publishing cost of sales. Art and editorial costs consist of compensation to editors, writers and artists. The Company generally hires writers and artists on a freelance basis but has exclusive employment contracts with certain key writers and artists.
The Company out-sources the printing of its comic books to an unaffiliated company. The Company's cost of printing is subject to fluctuations in commodity-based products such as paper.
Cost of sales for the toy business consists of product and package manufacturing, shipping and agents' commissions. The most significant portion of cost of sales is product and package manufacturing. The Company, which utilizes multiple manufacturers, solicits multiple bids for each project in order to control its manufacturing costs. A substantial portion of the Company's toy manufacturing takes place in China. A substantial portion of the Company's toy manufacturing contracts are denominated in Hong Kong dollars.
In connection with the restructuring of Toy Biz, the Company increased its inventory reserve by an additional $3.8 million by writing down certain inventories in the fourth quarter of 2000 related to discontinued toy lines in the game and promotional dolls categories.
Operating Expenses: Selling, General and Administrative
Selling, general and administrative costs consist primarily of advertising, royalties, general and administrative, warehousing and store merchandising. The most significant portion of selling, general and administrative costs is advertising and royalties.
Advertising expense varies with the Company's product mix.
Royalties are payable on toys based on characters licensed from third parties, such as World Championship Wrestling, Universal Studios and Sony Pictures, as well as toys developed by outside inventors. There are no royalty payments for Marvel-character-based toy products. Reserves for unpaid guaranteed royalties on discontinued toy lines were increased by an additional $0.8 million during the fourth quarter of 2000.
General and administrative costs consist of salaries and corporate overhead.
The Company expects warehousing and store merchandising costs to be reduced over time with the elimination of certain product categories and lines.
Operating Expenses: Depreciation and Amortization
Depreciation and amortization expense consists of amortization of goodwill and other intangibles, tooling, product design and development, packaging design and depreciation expense. Amortization expense increased significantly as a result of the goodwill created pursuant to the combination of Toy Biz, Inc. and MEG, which is amortized over an assumed 20-year life.
Tooling and product design and development and packaging design expense, which are attributable to the toy business, are normally amortized over the life of the respective product. However, in the fourth quarter of 2000, the Company wrote down its tooling, product design and development and packaging design costs by an additional $16.8 million in excess of normal amortization in connection with the discontinuance of certain product categories and lines.
Results of Operations of the Company
Year ended December 31, 2000 compared with year ended December 31, 1999
The Company's net revenue decreased approximately $88.0 million to $231.6 million for the year ended December 31, 2000 from $319.6 million in the 1999 period. The decrease in net revenue was mainly due to a reduction in toy sales, specifically WCW products and Dolls such as Kindergarden Babies and Miss Party Surprise which was partially offset by increased sales of Activity Toys and Marvel products relating to the X-Men motion picture. Toy sales were further reduced by $1.5 million for additional returns and allowances related to discontinued product categories and lines. Licensing revenue decreased by approximately $11.7 million in 2000 from 1999 primarily due to a substantial license payment received in 1999 from Sony Pictures Entertainment in return for the rights to produce a motion picture based on the Spider-Man character. Publishing revenue increased by approximately $2.2 million primarily due to increased advertising and custom comics relating to the X-Men motion picture.
Gross profit decreased approximately $65.7 million to $103.1 million in 2000 from $168.8 million in 1999. The reduction in toy and licensing gross profit accounted for approximately $58.1 million and approximately $11.7 million, respectively, of the decrease which was partially offset by an increase in Publishing gross profit of $4.1 million. Gross Profit as a percentage of net sales decreased to approximately 45% in 2000 from approximately 53% in 1999. The licensing and publishing divisions produced gross margins of 97% and 51%, respectively. The gross profit margin for the Toy Biz division decreased to 37% in 2000 from 49% in 1999 due primarily to a higher percentage of WCW and Girl products sold during 1999 which generally have higher gross profit margins. Fourth quarter adjustments totaling $3.8 million relating to the Company's writedown of certain inventories added to a higher cost of sales component and a lower gross margin in 2000.
Selling, general and administrative expense decreased approximately $17.1 million to $107.5 million in 2000 from $124.6 million in 1999. Expense reductions in the toy and corporate divisions accounted for approximately $14.1 million and approximately $6.7 million, respectively, of the decrease primarily due to lower advertising, royalty, payroll and professional fees. Selling, general and administrative expense as a percentage of net sales increased to approximately 46% in 2000 from approximately 39% in 1999 mainly due to a reduction in toy sales, development costs for The Avengers and X-Men Evolution animated television series in addition to one-time start-up costs for the Marvel.com website.
Depreciation and amortization expense increased approximately $12.6 million to $30.7 million in 2000 from $18.1 million in 1999 primarily due to additional amortization expense of $16.8 million recorded in the fourth quarter of 2000 for accelerated write-offs of tooling, product design and development and packaging design related to discontinued toy products. This was partially offset by lower amortization of $4.2 million due to reduced capital expenditures in 2000.
Amortization of goodwill and other intangibles decreased approximately $1.8 million to $24.0 million in 2000 from $25.9 million in 1999. The decrease was mainly due to the completion of the purchase price allocation relating to the acquisition of MEG which resulted in a net decrease in goodwill of $21.7 million in 1999.
Interest expense decreased approximately $0.2 million to $31.9 million in 2000 from $32.1 million in 1999, primarily due to a reduction in deferred financing charges.
As a result of the above, the Company reported a net loss of $89.9 million in 2000 compared to a net loss of $33.8 million in 1998. The Company reported a loss per share after preferred dividends of $3.13 in 2000 compared to a loss per share after preferred dividends of $1.43 in 1999.
Year ended December 31, 1999 compared with year ended December 31, 1998
The Company's net sales increased to $319.6 million for the year ended December 31, 1999 from $232.1 million in the 1998 period. The increase in net sales was partially due to the inclusion of twelve months of licensing and publishing revenues in 1999, while only three months of activity was included in 1998, accounting for an increase of approximately $25.9 million and approximately $28.3 million in licensing and publishing revenues, respectively. Toy Biz sales increased by approximately $33.3 million in 1999 from 1998 primarily due to sales of WCW action figures, a product line that was introduced in 1999 and increased sales of large and small dolls, partially offset by a decline in the sales of Marvel-related product.
Gross profit increased $64.7 million to $168.8 million for 1999 from $104.1 million in 1998. The inclusion of the licensing and publishing divisions for twelve months in 1999, while included for only three months in 1998, accounted for approximately $25.7 million and approximately $11.9 million, respectively, of the increase while gross profit from the Toy Biz division increased approximately $27.1 million. Gross Profit as a percentage of net sales increased to approximately 53% in 1999 from approximately 45% in 1998. The licensing and publishing divisions produced gross margins of 98% and 44%, respectively. The gross profit margin for the Toy Biz division increased to 49% in 1999 from 44% in 1998 due primarily to a higher percentage of promotional products, that generally have higher gross profit margins, sold during 1999 and various one-time sales adjustments relating to the Company's acquisition of MEG recorded in 1998.
Selling, general and administrative expense increased $27.5 million to $124.6 million in 1999 from $97.1 million in 1998. Selling, general and administrative expense as a percentage of net sales decreased to approximately 39% in 1999 from approximately 42% in 1998. The selling, general and administrative expenses for the licensing, publishing and corporate divisions increased approximately $29.5 million to $35.1 million from $5.6 million in 1998 due to the inclusion of the full-year's activity in 1999.
The Toy Biz division produced a net decrease of approximately $2.0 million to $89.5 million in 1999 from $91.5 million in 1998; however, the 1998 period included $11.7 million of expenses relating to the termination of license agreements resulting from the Company's integration of MEG's operations which did not recur in 1999. Discounting the one-time charges from 1998, the Toy Biz division accounted for an increase of approximately $9.7 million primarily due to increased advertising and royalty expenses related to increased sales of promotional items in 1999.
Depreciation and amortization expense decreased $1.2 million to $18.1 million in 1999 from $19.3 million in 1998 primarily due to additional amortization expense recorded in 1998 related to early write-offs of discontinued toy products based on Marvel characters as a result of the Bankruptcy Case.
Amortization of goodwill and other intangibles increased $18.8 million to $25.9 million in 1999 from $7.1 million in 1998. The increase was due to the amortization of goodwill created pursuant to the MEG acquisition completed on October 1, 1998.
Interest expense increased $22.7 million to $32.1 million in 1999 from $9.4 million in 1998, primarily due to $25.4 million in interest on the Senior Notes in 1999, offset by a reduction in interest expense related to the Bridge Loan from 1998 to 1999.
As a result of the above, the Company reported a net loss of $33.8 million in 1999 compared to a net loss of $32.6 million in 1998. The Company reported a loss per share after preferred dividends of $1.43 in 1999 compared to a loss per share after preferred dividends of $1.23 in 1998
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand, cash flow from operations and cash available from the $40.0 million Citibank working capital facility, which was reduced $20.0 million in 2000 from $60.0 million in 1999. The Company anticipates that its primary needs for liquidity will be to: (i) conduct its business; (ii) meet debt service requirements; (iii) make capital expenditures; and (iv) pay Administration Expense Claims.
Net cash provided by (used in) the Company's operations during fiscal 1998, 1999 and 2000 was $42.0 million, $0.8 million and ($24.2) million, respectively.
At December 31, 2000, the Company had working capital of $41.7 million.
On October 1, 1998, the Company obtained the Bridge Loan from UBS. The Company used a portion of the proceeds from the Notes Offering to repay the Bridge Loan on February 25, 1999.
On October 1, 1998, the Company and UBS entered into a $50 million credit facility. There were no borrowings under that credit facility, and it was terminated on February 25, 1999.
On February 25, 1999, the Company completed a $250.0 million offering of senior notes (the "Senior Notes") in a private placement exempt from registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A under the Act. Net proceeds of approximately $239.0 million were used to pay all outstanding balances under the Bridge Facility and for working capital. The Senior Notes are due June 15, 2009 and bear interest at 12% per annum. The Senior Notes may be redeemed beginning June 15, 2004 for a redemption price of 106% of the principal amount, plus accrued interest. The redemption price decreases 2% each year after 2004 and will be 100% of the principal amount, plus accrued interest, beginning on June 15, 2007. In addition, 35% of the Senior Notes may, under certain circumstances, be redeemed before June 15, 2002 at 112% of the principal amount, plus accrued interest. Principal and interest on the Senior Notes are guaranteed on a senior basis jointly and severally by each of the Company's domestic subsidiaries. On August 20, 1999, the Company completed an exchange offer under which it exchanged virtually all of the Senior Notes, which contained restrictions on transfer, for an equal principal amount of registered, transferable notes whose terms are identical in all other material respects to the terms of the Senior Notes.
In February 1999, in connection with the repayment of the Bridge Facility and the termination of the UBS Credit Facility, the Company recorded an extraordinary charge of approximately $1.5 million, net of tax benefit for the write-off of deferred financing costs associated with these two facilities.
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered an agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit Facility"). The Citibank Credit Facility bears interest at either the bank's base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on the Company's financial performance or at the Eurodollar rate plus a margin ranging from 2.25% to 2.75% depending on the Company's financial performance. The Citibank Credit Facility requires the Company to pay a commitment fee of
0.625% per annum on the average daily unused portion of the facility unless there is at least $20.0 million outstanding borrowings in which case the rate is 0.50% per annum for the amount outstanding above $20.0 million. In March 2000, the parties agreed to an amendment whereby financial covenants would not be tested as long as the total amount outstanding does not exceed $20.0 million and the borrowing base less the total outstanding amount exceeds $20.0 million. In April 2000, the parties agreed to reduce the Citibank Credit Facility to $40.0 million. In August 2000, the parties agreed to an amendment whereby financial covenants would not be tested as long as the total amount outstanding does not exceed $20.0 million and the borrowing base less the total outstanding amount exceeds $10.0 million during June, July and August 2000 and $20.0 million at all other times. In addition, the amendment requires the re-negotiation of the financial covenants once financial projections are provided to the Lender. The Company has not borrowed under the Citibank Credit Facility. The amount available under this facility is reduced by the amount of letters of credit outstanding, which is approximately $15.4 million as of March 1, 2001. The Citibank Credit Facility is secured by a lien on all of the Company's inventory and receivables.
On October 1, 1998, the Company sold 9.0 million shares of 8% Preferred Stock at $10 per share for an aggregate of $90.0 million. The 8% Preferred Stock pays quarterly dividends on a cumulative basis on the first business day of January, April, July and October in each year, commencing January 4, 1999. Dividends are payable, at the option of the Board, in cash, in additional shares of 8% Preferred Stock or in any combination thereof. The Company is restricted under the Indenture and under the Citibank Credit Facility from making dividend payments on the 8% Preferred Stock except in additional shares of 8% Preferred Stock. Each share of 8% Preferred Stock may be converted, at the option of its holder, into 1.039 shares of Common Stock. The Company must redeem all outstanding shares of 8% Preferred Stock on October 1, 2011.
On the consummation date of the Plan, the Company made the Initial Administration Expense Claims Payment of $20.2 million. In December 1998, the Company paid approximately $4.2 million of additional Administration Expense Claims and paid an additional $10.4 million and $2.1 million of Administration Expense Claims during 1999 and 2000, respectively. The Company estimates that it may be required to pay between $6.5 million and $8.5 million of additional Administration Expense Claims, although there can be no assurance as to the amount the Company will be required to pay.
The Company will be required to make the Unsecured Creditors Cash Payment at such time as the amount thereof is determined. The Company deposited $8 million into a trust account to satisfy the maximum amount of such payment. During 2000, the Company received approximately $1.9 million from the trust account as a result of a settlement with the NBA. The balance in the trust account as of December 31, 2000 is approximately $7.0 million.
Capital expenditures (excluding acquisitions) by the Company during fiscal 1998, 1999 and 2000 were approximately $17.3 million, $21.0 million and $15.1 million, respectively.
The Company believes that cash on hand, cash flow from operations, borrowings available under the Citibank working capital facility and other sources of liquidity, will be sufficient for the Company to conduct its business, meet debt service requirements, make capital expenditures and pay Administration Expense Claims.
Seasonality
The Company's annual operating performance depends, in large part, on its sales of toys during the relatively brief Christmas selling season. During 1998, 1999 and 2000, 60%, 62% and 62%, respectively, of the Company's net toy sales were realized during the second half of the year. Management expects that the Company's toy business will continue to experience a significant seasonal pattern for the foreseeable future. This seasonal pattern requires significant use of working capital mainly to build inventory during the year, prior to the Christmas selling season, and requires accurate forecasting of demand for the Company's products during the Christmas selling season.
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in Hong Kong and Mexico. In the normal course of business, the operations are exposed to fluctuations in currency values. Management believes that the impact of currency fluctuations do not represent a significant risk in the context of the Company's current international operations. The Company does not generally enter into derivative financial instruments in the normal course of business, nor are such instruments used for speculative purposes.
Market risks related to the Company's operations result primarily from changes in interest rates. At December 31, 2000, all of the Company's long-term debt bore interest at a fixed rate, and all of the Company's outstanding preferred stock earns dividends at a fixed rate. However, the fair market value of the fixed rate debt and the outstanding preferred stock is sensitive to changes in interest rates. The Company is subject to the risk that the market interest rates will decline and the interest rates for the fixed rate debt and the fixed dividend yield on the outstanding preferred stock will exceed the then prevailing market rates. Under its current policies, the Company does not utilize any interest rate derivative instruments to manage its exposure to interest rate changes.
Additional information relating to the Company's outstanding financial instruments is included in Item 7 - Management's Discussion and Anyalysis of Financial Condition and Results of Operations.
ITEM 8.
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 to. See the accompanying Index to Financial Statements and Financial Statement Schedule on page. The supplementary financial data required by Item 302 of Regulation S-K appears in Note 11 to the December 31, 2000 Consolidated Financial Statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following table sets forth the name, age (as of March 1, 2001) and position of each person who serves as an executive officer or director of the Company:
Name Age Position
Morton E. Handel......... 65 Chairman of the Board of Directors Avi Arad................. 53 Director and Chief Creative Officer; President and Chief Executive Officer of Marvel Studios F.. Peter Cuneo.......... 57 President, Chief Executive Officer and Director Sid Ganis................ 61 Director Shelley F.Greenhaus...... 47 Director James F. Halpin.......... 50 Director Lawrence Mittman......... 50 Director Isaac Perlmutter......... 58 Director Rod Perth................ 57 Director Michael J. Petrick....... 39 Director Alan Fine................ 50 President and Chief Executive Officer of Toy Biz William Jemas............ 43 President of Publishing and Consumer Products Allen S. Lipson.......... 58 Executive Vice President, Business and Legal Affairs and Secretary Richard Ungar............ 50 President of Marvel Characters Group
Directors
The name, principal occupation for the last five years, selected biographical information and period of service as a director of the Company of each director are set forth below.
Morton E. Handel has been the Chairman of the Board of Directors of the Company since October 1998 and was first appointed as a director of Toy Biz, Inc. in June 1997. Mr. Handel is also the President of S&H Consulting Ltd., a financial consulting group. Mr. Handel has held that position since 1990. Mr. Handel has also held the position of Director and President of Ranger Industries, Inc. from July 1997 until February 2001. Mr. Handel also serves as a director of Concurrent Computer Corp., a director of Linens N Things since May 2000 and was previously Chairman of the Board of Directors and Chief Executive Officer of Coleco Industries, Inc.
Avi Arad has been the Chief Creative Officer of the Company and the President and Chief Executive Officer of the Company's Marvel Studios Division (which is responsible for motion picture and television licensing and development) since October 1998. Mr. Arad has been a Director of the Company since April 1993. From April 1993 through September 1998, Mr. Arad served as a consultant to Toy Biz, Inc. Mr. Arad was the President and Chief Executive Officer of New World Animation, a media production company under common control with MEG, from April 1993 until February 1997 and held the same position at the Marvel Studios division of MEG from February 1997 until November 1997. At New World Animation and MEG's Marvel Studios division, Mr. Arad served as the Executive Producer of the X-Men and the Spider-Man animated TV series. Mr. Arad has been a toy inventor and designer for more than 20 years for major toy companies including Mattel Inc., Hasbro, Inc. and Tyco Toys, Inc. During his career, Mr. Arad has designed or codesigned more than 160 toys. Mr. Arad is also the owner of Avi Arad & Associates ("Arad Associates"), a firm engaged in the design and development of toys and the production and distribution of television programs.
F. Peter Cuneo has served as the Company's President and Chief Executive Officer since July 1999. From September 1998 to July 1999, Mr. Cuneo served as Managing Director of Cortec Group Inc., a private equity fund. From February 1997 to September 1998, Mr. Cuneo was Chairman of Cuneo & Co., L.L.C., a private investment firm. From May 1996 to February 1997, Mr. Cuneo was President, Chief Executive Officer and a Director of Remington Products Company, L.L.C., a manufacturer and marketer of personal care appliances; from May 1993 to May 1996, he was President and Chief Operating Officer at Remington.
Sid Ganis has been a Director of the Company since October 1999. Mr. Ganis is President of Out of the Blue Entertainment, a provider of motion pictures, television and musical entertainment for Sony Pictures Entertainment and others which he founded, since September 1996. From January 1991 until September 1996, Mr Ganis held various executive positions with Sony Picutres, including Vice Chairman of Columbia Pictures and President of Worldwide Marketing for Columbia/TriStar Motion Picture Companies.
Shelley F. Greenhaus has been a Director of the Company since October 1998. Mr. Greenhaus has been the President and Managing Director of Whippoorwill Associates, Inc. ("Whippoorwill"), an investment advisor which he founded, since 1990. Whippoorwill manages investment accounts for a prominent group of institutional and individual investors from around the world.
James F. Halpin has been a Director of the Company since March 1995. Mr. Halpin retired in March 2000 as President, Chief Executive and Operating Officer and a director of CompUSA Inc., a retailer of computer hardware, software, accessories and related products, which he had been with since May 1993. Mr. Halpin is also a director of both Interphase Corporation, a manufacturer of high-performance networking equipment for computers, and Lowe's Companies, Inc., a chain of home improvement stores.
Lawrence Mittman has been a Director of the Company since October 1998. Mr. Mittman has been a partner in the law firm of Paul, Hastings, Janofsy & Walker LLP for more than the past five years.
Isaac Perlmutter has served as a Director of the Company since April 1993 and he served as Chairman of the Board until March 1995. Mr. Perlmutter purchased Toy Biz, Inc.'s predecessor company from Charan Industries, Inc. in January 1990. Mr. Perlmutter is actively involved in the management of the affairs of Toy Biz, Inc. and has been an independent financial investor for more than the past five years. Mr. Perlmutter is also a director of Ranger Industries, Inc. As an independent investor, Mr. Perlmutter currently has, or has had within the past five years, controlling ownership interests in Ranger Industries, Inc., Remington Products Company, Westwood Industries, Inc., a manufacturer and distributor of table and floor lamps, Job Lot Incorporated (and its predecessor Job Lot Associates L.P.), a discount oriented retail chain, and Tangible Media, Inc., a media buying and advertising agency.
Rod Perth has been a Director of the Company since October 1998. Mr.Perth has been President of Television, for Moviewatch Network, a start-up cable/satellite network founded by Hubbard Broadcasting since September 2000. From May 1999 until August 2000, he was President, Jim Henson Television Group Worldwide and from October 1994 until July 1998, Mr. Perth was the President of USA Networks Entertainment at USA Network. At USA Network, Mr. Perth was responsible for the development and production of programming, including programming for the Sci-Fi Channel. Prior to joining USA Network, Mr. Perth served as Senior Vice President, Late Night and Non-Network Programming at CBS Entertainment, where he was instrumental in the resurgence of the CBS Late Night Franchise and was a key member of the team that brought the "Late Show with David Letterman" to CBS. Mr. Perth joined the CBS Entertainment division in 1989 as Vice President, Late Night Programs.
Michael J. Petrick has been a Director of the Company since October 1998. Mr. Petrick is a Managing Director of Morgan Stanley & Co. Incorporated, and has been with Morgan Stanley since 1989. Mr. Petrick also serves as a Director of CHI Energy, Inc. and Premium Standard Farms, Inc.
All of the Company's Directors were selected pursuant to the Stockholders' Agreement (as defined, along with other capitalized terms used in this paragraph, in "Certain Relationships and Related Transactions-Stockholders' Agreement"). Messrs. Handel, Arad, Cuneo, Halpin, Mittman and Perlmutter were designated by the Investor Group and Messrs. Ganis, Greenhaus, Lynton, Perth and Petrick were designated by the Lender Group.
Executive Officers
The following sets forth the positions held with the Company and selected biographical information for the executive officers of the Company who are not Directors.
Alan Fine served as a Director of the Company from June 1997 until October 1998. Mr. Fine has been the President and Chief Executive Officer of Toy Biz since October 1998. Previously, he served as the Chief Operating Officer of the Company, a position to which he was appointed in September 1996. From June 1996 to September 1996, Mr. Fine was the President and Chief Operating Officer of Toy Biz International Ltd. From May 1995 to May 1996, Mr. Fine was the President and Chief Operating Officer of Kay-Bee Toys, a national toy retailer, and from December 1989 to May 1995, he was the Senior Vice President General Merchandise Manager of Kay-Bee Toys.
William Jemas has been President, Publishing and Consumer Products since February 2000. Previously he was Executive Vice President, Madison Square Garden Sports from December 1998 until February 2000. From July 1996 until December 1998, he was founder and President of Blackbox, L.L.C. and worked and consulted for several media companies, including Lancet Media, G-Vox Interactive and Hearst Entertainment. From July 1993 until June 1996, Mr Jemas held various executive positions with The Marvel Entertainment Group, including Executive Vice President and President of Fleer Corporation.
Allen S. Lipson has been the Executive Vice President Business and Legal Affairs and Secretary of the Company since November 1999. From May 1996 until November 1999, Mr. Lipson was Vice President, Administration, General Counsel and Secretary of Remington Products Company L.L.C. and from October 1988 until May 1996 he was Vice President and General Counsel of Remington.
Richard Ungar has served as the President of Marvel Characters Group since October 1999. From May 1999 until October 1999, he was a consultant for Marvel and from October 1998 until May 1999, Mr. Ungar was Chairman of BKM, Inc., a children's television network. From January 1997 until October 1998, Mr. Ungar was an independent consultant/producer and from January 1992 until January 1997, he held various postions with New World Entertainment, including President of Prgramming and President and C.E.O. of New World Animation.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Officers, directors and ten-percent stockholders are required by regulation of the Securities and Exchange Commission to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of Forms 3, 4 and 5 available to the Company and written representations from certain of the directors, officers and ten-percent stockholders that no form is required to be filed, the Company believes that no director, officer or beneficial owner of more than ten percent of the Common Stock failed to file on a timely basis reports required pursuant to Section 16(a) of the Exchange Act with respect to 2000, with the exception of a Form 3 for Sid Ganis (to report his status as a director) which was filed late.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years indicated concerning the compensation awarded to, earned by or paid to the Chief Executive Officers of the Company during 2000 and the Company's four most highly compensated executive officers, other than the Company's Chief Executive Officers, who were serving as executive officers of the Company on December 31, 2000 (the "Named Executive Officers"), for services rendered in all capacities to the Company and its subsidiaries during such periods.
(1) Does not include value of perquisites and other personal benefits for any Named Executive Officer (other than Mr. Cuneo and Mr. Arad) since the aggregate amount of such compensation is the lesser of $50,000 or 10% of the total of annual salary and bonus reported for the named executive.
(2) Bonus amounts shown are those accrued for and paid in or after the end of the year.
(3) Mr. Cuneo's employment with the Company commenced in July 1999.
(4) Amounts shown include $50,700 for apartment provided by Company. $18,000 car allowance and $9,978 in Company matching contribution to the Company's 401(k) Plan.
(5) Amounts shown are the Company matching contributions to the Company's 401(k) Plan
(6) Mr. Arad's employment with the Company commenced in October 1998. Amounts shown for periods prior to October 1, 1998 represent consulting fees received by Mr. Arad.
(7) Amounts shown for company provided automobile and driver and in 2000, reimbursement of moving expenses of $38,672 incurred arising from Mr. Arad moving to the West Coast
(8) Mr. Jemas's employment with the Company commenced in February 2000.
(9) Mr. Ungar's employment with the Company commenced in October 1999.
(10) Amounts shown include payments to a personal service company owned by Mr. Ungar.
Option Grants Table
The following table shows the Company's grants of stock options to the Named Executive Officers in 2000. Each stock option grant was made under the Stock Incentive Plan, which became unconditionally effective on January 20, 1999. No SARs (stock appreciation rights) were granted by the Company in 2000.
(1) Mr. Jemas' options become exercisable in three equal installments: options to buy 41,667 shares of Common Stock become exercisable on each of February 14, 2001, February 14, 2002 and February 14, 2003.
(2) Mr. Jemas' options become exercisable in three equal installments: options to buy 16,667 shares of Common Stock are exercisable on each of July 10, 2001, July 10, 2002 and July 10, 2003.
Year-End 2000 Option Value Table
The following table shows the number and value of exercisable and unexercisable stock options held by the Named Executive Officers at December 31, 2000. No Named Executive Officers exercised stock options during 2000.
(1) Represents shares of Common Stock underlying stock options. None of the Named Executive Officers holds SARs (stock appreciation rights).
Compensation of Directors
Non-employee directors currently receive an annual retainer of $25,000 and an annual grant of 10,000 shares of Common Stock to be immediately vested. Non-employee directors also receive a one-time grant of five-year options to purchase 20,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of the grant. Those options expire within 90 days following the date a director ceases to serve on the Board and vest one-third on the date of the grant and one-third on each of the two succeeding anniversaries of the grant. In addition, the chairmen of the Compensation and Nominating Committee and the Audit Committee receive an annual retainer of $5,000, and the non-executive Chairman of the Board receives an annual payment of $100,000 and a one-time grant of options to purchase 30,000 shares of Common Stock on the same terms as those applicable to the options made available to the other non-employee members of the Board.
Members of the Board who are officers or employees of the Company or any of its subsidiaries do not receive compensation for serving in their capacity as directors.
Employment Agreements
The Company has entered into employment agreements with each of the following executive officers: Avi Arad, the Company's Chief Creative Officer and the President and Chief Executive Officer of the Company's Marvel Studios Division; F. Peter Cuneo, the President and Chief Executive Officer of the Company; Alan Fine, the President and Chief Executive Officer of the Company's Toy Biz Division; Bill Jemas, President of Publishing and New Media; Allen S. Lipson, the Executive Vice President, Business and Legal Affairs of the Company and Richard Ungar, President of Marvel Characters Group.
Employment and License Agreements with Mr. Arad. Pursuant to his employment agreement, Mr. Arad has agreed to render his exclusive and full-time services to the Company for a term of employment expiring on December 31, 2000. Under his employment agreement, Mr. Arad receives a base salary, subject to discretionary increases, of $375,000. Mr. Arad is entitled to discretionary bonuses and participation in the Company's stock option plan as determined by the Board. Mr. Arad also is entitled to the use of an automobile with driver and is entitled to participate in employee benefit plans generally available to the Company's employees. Mr. Arad's employment agreement provides that, in the event of termination other than for cause, Mr. Arad is entitled to his salary earned through the date of termination and thereafter for a period of up to twelve months. Mr. Arad's employment agreement replaces his consulting agreement with the Company, under which Mr. Arad also earned $375,000 per year.
In addition, the Company and Arad Associates, of which Mr. Arad is the sole proprietor, are parties to a license agreement which provides that Arad Associates is entitled to receive royalty payments on net sales of Marvel-character-based toys and on net sales of non-Marvel-character-based toys of which Mr. Arad is the inventor of record. In no event, however, may the total royalties payable to Arad Associates during any calendar year exceed $7.5 million. The Company accrued royalties to Mr. Arad for toys he invented or designed of approximately $4.3 million, $3.0 million and $1.6 million during the years ended December 31, 1998, 1999 and 2000 respectively. In September 1998, the license with Arad Associates was amended to provide that Arad Associates will receive an annual royalty of $650,000 for products based on the Marvel characters (the former royalty rate was 4%). The amendment leaves intact a provision that Arad Associates is to receive a negotiated royalty not to exceed 5% of net sales of products not based on the Marvel characters.
Employment Agreement with Mr. Cuneo. Pursuant to his employment agreement, Mr. Cuneo has agreed to render his exclusive and full-time services to the Company for a term of employment expiring on July 21, 2002. Under his employment agreement, Mr. Cuneo receives a base salary, subject to discretionary increases, of $650,000. Starting in 2000, Mr. Cuneo will be eligible to earn an annual bonus based on the attainment of certain performance goals. The target annual bonus is equal to 60% of Mr. Cuneo's base salary. Mr. Cuneo also receives a $1,500 monthly automobile allowance and is entitled to participate in employee benefit plans available to similarly situated employees of the Company. The Company has agreed to provide Mr. Cuneo with a suitable apartment in Manhattan for up to one year, and the Company will pay Mr. Cuneo a $25,000 relocation allowance if he relocates his primary residence to the New York City metropolitan area during the term of his employment.
Pursuant to his employment agreement, Mr. Cuneo has been granted options to purchase 750,000 shares of Common Stock. The options vest over a three-year period. The options become exercisable in full upon a change in control of the Company.
Employment Agreement with Mr. Fine. Pursuant to his employment agreement, Mr. Fine has agreed to render his exclusive and full-time services to the Company for a term of employment expiring on March 1, 2001, which was renewed for an additional two years. Under his employment agreement, Mr. Fine receives a base salary, subject to discretionary increases, of $500,000. Mr. Fine is eligible to earn an annual bonus based on the attainment of certain performance goals. The employment agreement further provides for participation in the Company's stock option plan as determined by the Board and provides that Mr. Fine shall be entitled to receive a grant of options to purchase 200,000 shares of Common Stock (in addition to the options previously granted to Mr. Fine to purchase 300,000 shares of Common Stock). Mr. Fine also receives a $1,000 monthly automobile allowance and is entitled to participate in employee benefit plans generally available to the Company's employees.
Employment Agreement with Mr. Jemas. Pursuant to his employment agreement, Mr. Jemas has agreed to render his exclusive and full-time services to the Company for a term of employment expiring on February 15, 2002. Under his employment agreement, Mr. Jemas receives a base salary, subject to discretionary increases, of $275,000. The employment agreement provides for a sign-on bonus of $100,000 payable in two installments of $50,000 each and a bonus for 2000 equal to at least 50% of his base salary for the year. Mr. Jemas also receives a $1,100 monthly automobile allowance and is entitled to participate in employee benefit plans generally available to the Company's employees. The employment agreement further provides for participation in the Company's stock option plan as determined by the Board and provides that Mr. Jemas shall be entitled to receive a grant of options to purchase 125,000 shares of Common Stock
Employment and Agreement with Mr.Ungar. Pursuant to his employment agreement, Mr. Ungar has agreed to render his services to the Company for a term of employment expiring on October 25, 2002. Under his employment agreement, Mr.Ungar receives a base salary, subject to discretionary increases, of $325,000. Mr. Ungar is eligible to earn an annual bonus based on the attainment of certain performance goals. Mr. Ungar also receives a $1,300 monthly automobile allowance and is entitled to participate in employee benefit plans available to similarly situated employees of the Company. Pursuant to his employment agreement, Mr. Ungar has been granted options to purchase 200,000 shares of Common Stock. The options will vest over a three-year period.
In addition, the Company and Brentwood Television Funnies, Inc. ("Brentwood"), of which Mr. Ungar is the sole shareholder, are parties to a Loan Out Agreement under which Brentwood agrees to provide the services of Mr. Ungar as Executive Producer on all television programs involving Marvel characters for a term expiring on October 25, 2002. Under the agreement, Brentwood receives a producer fee of $175,000 per year, subject to discretionary increases.
Termination Provisions. The employment agreements of Messrs Cuneo, Fine, Jemas and Ungar and the Loan Out Agreement with Brentwood, provide that, in the event of termination, the executive is entitled to certain payments and benefits depending on the circumstances of the termination. Upon a change in control of the Company, the executive is entitled to a severance payment equal to two times the sum of his then-current base salary and the average of the two most recent annual bonuses paid. If any payments to the executive under his employment agreement ("Parachute Payments") would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, then the executive will be entitled to receive an additional payment from the Company (a "Gross-Up Payment") in an amount such that the executive retains, after the payment of all taxes, an amount of the Gross-Up Payment equal to the excise tax imposed on the Parachute Payments.
Confidential Information and Related Provisions. Each of the employment agreements with Messrs. Arad, Cuneo, Fine, Jemas and Ungar prohibits disclosure of proprietary and confidential information regarding the Company and its business to anyone outside the Company both during and subsequent to employment and otherwise provides that all inventions made by the employees during their employment belong to the Company. In addition, those employees agree during their employment, and for one year thereafter, not to engage in any competitive business activity.
Compensation Committee Interlocks and Insider Participation
Messrs. Handel, Halpin, Perlmutter and Petrick serve now, and served during 2000, on the Company's Compensation and Nominating Committee. None of the individuals mentioned above was an officer or employee of the Company, or any of its subsidiaries, during 2000 or formerly. Mr. Handel is, and Mr. Perlmutter once was, the Company's non-executive Chairman of the Board.
Stockholders' Agreement
The Company and the following stockholders are parties to a Stockholders' Agreement (the "Stockholders' Agreement") dated as of October 1, 1998:
(1) (i) Avi Arad, (ii) Isaac Perlmutter, (iii) Isaac Perlmutter T.A., (iv) The Laura and Isaac Perlmutter Foundation Inc., (v) Object Trading Corp., and (vi) Zib Inc. (the "Perlmutter/Arad Group");
(2) (i) Mark Dickstein, (ii) Dickstein & Company, L.P., (iii) Dickstein Focus Fund L.P., (iv) Dickstein International Limited, (v) Elyssa Dickstein, Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, (vi) Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark and Elyssa Dickstein Foundation, and (vii) Elyssa Dickstein (the "Dickstein Entities" and, together with the Perlmutter/Arad Group, the "Investor Group"); and
(3) (i) The Chase Manhattan Bank, (ii) Morgan Stanley & Co. Incorporated ("Morgan Stanley"), and (iii) Whippoorwill as agent of and/or general partner for certain accounts and funds (the "Lender Group").
The Stockholders' Agreement provides that its parties will take such action as may reasonably be in their power to cause the Board to include, subject to certain conditions, six directors designated by the Investor Group and five directors designated by the Lender Group. The number of directors that the Investor Group and the Lender Group may designate will be reduced following June 30, 2000 in the event of decreases in beneficial ownership of capital stock of the Company below certain pre-determined levels, as set forth in the Stockholders' Agreement. The Stockholders' Agreement provides for the creation of various committees of the Board as well as the composition of those committees.
The parties to the Stockholders' Agreement have the power to vote, in the aggregate, approximately 55.8% in combined voting power of the outstanding shares of Common Stock and 8% Preferred Stock. The 55.8% figure does not include shares beneficially owned by the Dickstein Entities. Those shares are covered by the Stockholders' Agreement, but the Company does not know the number of those shares. The Dickstein Entities beneficially own less than 5% of the Common Stock and no longer file ownership reports on Schedules 13D or 13G with the Securities and Exchange Commission.
Registration Rights Agreements
Mr. Dickstein and certain of his affiliates, Object Trading Corp. (an affiliate of Mr. Perlmutter), Whippoorwill as agent for and/or general partner for certain institutions and funds, the Company and certain other parties are parties to a Registration Rights Agreement dated as of October 1, 1998 (the "October Registration Rights Agreement"). Mr. Arad, Mr. Perlmutter, certain affiliates of Mr. Perlmutter (other than Object Trading Corp.) and the Company are parties to a Registration Rights Agreement dated as of December 8, 1998 (the "December Registration Rights Agreement").
The terms of the December Registration Rights Agreement are substantially identical to those of the October Registration Rights Agreement. Under the terms of each of the Registration Rights Agreements, the Company has agreed to file a shelf registration statement under the Securities Act registering the resale of all shares of Common Stock and 8% Preferred Stock issued to the stockholder parties thereto pursuant to the Plan, all shares of Common Stock issuable upon conversion of those shares of 8% Preferred Stock, certain convertible debt securities that the Company may exchange for the 8% Preferred Stock and the Common Stock issuable upon conversion thereof and all shares of Common Stock otherwise owned by the stockholder parties to the respective Registration Rights Agreement as of the date thereof. The Registration Rights Agreements also give the stockholder parties thereto piggyback registration rights with respect to underwritten public offerings by the Company of its equity securities.
Agreements Relating to the Purchase of Preferred Shares
Zib (an entity owned entirely by Mr. Perlmutter), Dickstein Partners Inc. (an affiliate of Mr. Dickstein) and Toy Biz, Inc. entered into a Commitment Letter, dated November 19, 1997, in which Zib and Dickstein Partners Inc. committed to purchase $60 million and $30 million in amount, respectively, of the 8% Preferred Stock of the Company to be issued pursuant to the Plan. Pursuant to the Plan and a Stock Purchase Agreement dated as of October 1, 1998, (i) certain secured creditors of MEG purchased, pursuant to an option in the Plan, $20,071,480 in amount of 8% Preferred Stock that would otherwise have been purchased by Zib; (ii) Whippoorwill, as agent of and/or general partner for certain institutions and funds, purchased, pursuant to an assignment from Zib, $5 million in amount of 8% Preferred Stock that would otherwise have been
purchased by Zib; (iii) Zib purchased $34,928,520 in amount of 8% Preferred Stock; and (iv) Dickstein Partners Inc. and its assignees purchased $30 million in amount of 8% Preferred Stock.
Tangible Media Advertising Services
Tangible Media, a corporation which is wholly owned by Mr. Perlmutter, acts as the Company's media consultant in placing certain of the Company's advertising and, in connection therewith, receives certain fees and commissions based on the cost of the placement of such advertising. Tangible Media received payments of fees and commissions from the Company totaling approximately $1,147,000, $1,170,000 and $966,000 in 1998, 1999, and 2000 respectively. The Company retains the services of a non-affiliated media consulting agency on matters of advertising creativity.
Employee, Office Space and Overhead Cost Sharing Arrangements
The Company and Tangible Media have shared certain space at the Company's principal executive offices and related overhead expenses. Since 1994, Tangible Media and the Company have been parties to an employee, office space and overhead cost sharing agreement governing the Company's sharing of employees, office space and overhead expenses (the "Cost Sharing Agreement"). Under the Cost Sharing Agreement, any party thereto may through its employees provide services to another party, upon request, whereupon the party receiving services shall be obligated to reimburse the providing party for the cost of such employees' salaries and benefits accrued for the time devoted by such employees to providing services. Under the Cost Sharing Agreement, Tangible Media is obligated to reimburse the Company for rent paid under the sublease, related overhead expenses comprised of commercial rent tax, repair and maintenance costs and telephone and facsimile services, in proportion to its percentage occupancy. The Cost Sharing Agreement is coterminous with the term of the Company's sublease for its executive offices. Under this Agreement, Tangible Media paid approximately $147,000, $155,000 and $67,000 to the Company in 1998, 1999 and 2000 respectively.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of Common Stock and 8% Preferred Stock, as of March 9, 2001 (based on 33,947,923) shares of Common Stock outstanding on that date), by (i) each person known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock or 8% Preferred Stock (based, in part, upon copies of all Schedules 13D and 13G provided to the Company), (ii) each director of the Company, (iii) each Named Executive Officer and (iv) all executive officers and directors of the Company as a group. Because the voting or dispositive power of certain shares listed in the table is shared, the same securities are sometimes listed opposite more than one name in the table and the sharing of voting or dispositive power is described in a footnote. The total number of shares of Common Stock and 8% Preferred Stock listed below for directors and executive officers as a group eliminates such duplication.
Each share of 8% Preferred Stock is convertible by its holder into 1.039 shares of Common Stock. The table assumes that no unexercised warrants for the purchase of stock of the Company have been exercised. As far as the Company is aware, none of the stockholders named in the table owns any warrants for the purchase of stock of the Company.
Under the rules of the Securities and Exchange Commission, beneficial ownership of a share of 8% Preferred Stock constitutes beneficial ownership of 1.039 shares of Common Stock (the amount into which the 8% Preferred Stock is convertible). Beneficial ownership of Common Stock is shown in the main part of the table and the portion of that beneficial ownership traceable to beneficial ownership of 8% Preferred Stock is set forth in the footnotes.
The Schedules 13D and 13G that the Company used in compiling the table take differing positions as to whether shares of stock covered by the Stockholders' Agreement are held with "shared voting power." The table does not attempt to reconcile those differences.
* Less than 1%.
(1) Figures include 770,000 shares of Common Stock subject to stock options granted to Mr. Arad pursuant to the Stock Incentive Plan which are immediately exercisable. Mr. Arad is a party to the Stockholders' Agreement. Except for the 4,920,000 shares over which Mr. Arad may be deemed to have sole dispositive power, shares over which Mr. Arad may be deemed to have shared voting power (which include shares of Common Stock underlying 11,433,341 shares of 8% Preferred Stock) are beneficially owned by other parties to the Stockholders' Agreement and it is only by reason of Mr. Arad's position as a party to the Stockholders' Agreement that Mr. Arad may be deemed to possess that shared voting power.
(2) Figures in the table and in the footnotes for the number of shares beneficially owned by parties to the Stockholders' Agreement do not include shares beneficially owned by Dickstein Partners Inc. and certain of its affiliates that are signatories to the Stockholders' Agreement. Shares of Common Stock beneficially owned by Dickstein Partners Inc. and those
affiliates are covered by the Stockholders' Agreement, but the Company does not know the number of those shares. Dickstein Partners Inc. and its affiliates beneficially own less than 5% of the Common Stock and no longer file ownership reports on Schedules 13D or 13G with the Securities and Exchange Commission.
(3) Mr. Perlmutter is a party to the Stockholders' Agreement.
(a) Figures include 30,000 shares of Common Stock subject to stock options granted to Mr. Perlmutter pursuant to the Stock Incentive Plan which are immediately exercisable. Other shares over which Mr. Perlmutter may be deemed to have sole dispositive power are directly held as follows:
The sole stockholder of Zib, a Delaware corporation, is Isaac Perlmutter T.A., a Florida trust (the "Perlmutter Trust"). Mr. Perlmutter is a trustee and the sole beneficiary of the Perlmutter Trust, and may revoke it at any time. Mr. Perlmutter is a director and the president of the Laura and Isaac Perlmutter Foundation Inc., a Florida not-for-profit corporation. Mr. Perlmutter is the sole stockholder of (i) Object Trading Corp., a Delaware corporation, (ii) Classic Heroes, Inc., a Delaware corporation and (iii) Biobright Corporation, a Delaware corporation and (iv)Tangible Media, Inc., a Delaware Corporation. Mr. Perlmutter may be deemed to possess (i) the power to vote and dispose of the shares of Common Stock directly held by Zib, Object Trading Corp., Classic Heroes, Inc., Biobright Corporation, Tangible Media, Inc. and the Perlmutter Trust and (ii) the power to direct the vote and disposition of the shares of Common Stock directly held by the Laura and Isaac Perlmutter Foundation Inc.
(b) Except for the 15,270,151 shares over which Mr. Perlmutter may be deemed to have sole dispositive power (which include shares of Common Stock underlying 5,073,774 shares of 8% Preferred Stock), shares over which Mr. Perlmutter may be deemed to have shared voting power (which include shares of Common Stock underlying 11,433,341 shares of 8% Preferred Stock) are beneficially owned by parties to the Stockholders' Agreement which are unaffiliated with Mr. Perlmutter and it is only by reason of Mr. Perlmutter's position as a party to the Stockholders' Agreement that Mr. Perlmutter may be deemed to possess that shared voting power.
(4) (a) Shares over which The Chase Manhattan Corporation, a Delaware corporation, may be deemed to have sole dispositive power are held directly by The Chase Manhattan Bank, a New York corporation that is wholly owned by The Chase Manhattan Corporation. The Chase Manhattan Bank is a party to the Stockholders' Agreement.
(b) Except for the 2,253,826 shares over which The Chase Manhattan Corporation may be deemed to have sole dispositive power (which include shares of Common Stock underlying 928,825 shares of 8% Preferred Stock), shares over which The Chase Manhattan Corporation may be deemed to have shared voting power (which include shares of Common Stock underlying 11,433,341 shares of 8% Preferred Stock) are beneficially owned by parties to the Stockholders' Agreement which are unaffiliated with The Chase Manhattan Corporation and it is only by reason of The Chase Manhattan Bank's position as a party to the Stockholders' Agreement that The Chase Manhattan Corporation may be deemed to possess that shared voting power.
(5) Morgan Stanley is a party to the Stockholders' Agreement. Morgan Stanley shares dispositive power over 5,401,810 shares with its parent, Morgan Stanley Dean Witter & Co. Except for those 5,401,810 shares (which include shares of Common Stock underlying 3,015,049 shares of 8% Preferred Stock), shares over which Morgan Stanley may be deemed to have shared voting power (which include shares of Common Stock underlying 11,433,341 shares of 8% Preferred Stock) are beneficially owned by parties to the Stockholders' Agreement which are unaffiliated with Morgan Stanley and it is only by reason of Morgan Stanley's position as a party to the Stockholders' Agreement that Morgan Stanley may be deemed to possess that shared voting power.
(6) Whippoorwill may be deemed to be the beneficial owner of these shares (which include shares of Common Stock underlying 2,466,072 shares of 8% Preferred Stock) because it has discretionary authority with respect to the investments of, and acts as agent for, the direct holders of the shares. Whippoorwill disclaims any beneficial ownership of Common Stock or 8% Preferred Stock except to the extent of Whippoorwill's pecuniary interest in that stock, if any. Whippoorwill, as agent of and/or general partner for certain institutions and funds, is a party to the Stockholders' Agreement. Figures include 80,730 shares of Common Stock (which include shares of Common Stock underlying 50,379 shares of 8% Preferred Stock) that are not subject to the Stockholders' Agreement.
(7) Based on a Schedule 13G filed with the Securities and Exchange Commission on November 12, 1999 by (i) MHR Institutional Partners LP, a Delaware limited partnership ("Institutional Partners"); (ii) MHRM Partners LP, a Delaware limited partnership ("MHRM"); (iii) MHR Capital Partners LP, a Delaware limited partnership ("Capital Partners"); (iv) MHR Institutional Advisors LLC, a Delaware limited liability company ("Institutional Advisors") and the general partner of Institutional Partners and MHRM; (v) MHR Advisors LLC, a Delaware limited liability company ("Advisors") and the general partner of Capital Partners; and (vi) Mark H. Rachesky, M.D., the managing member of Institutional Advisors and Advisors. Each party named in this footnote has an office at 40 West 57th Street, 33rd Floor, New York, NY 10019. Figures include shares of Common Stock underlying 2,119,036 shares of 8% Preferred Stock.
(8) Figures include 60,000 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable.
(9) Figures include 375,000 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable and 214 shares of Common Stock, of which Mr. Cuneo disclaims beneficial ownership, owned by Mr. Cuneo's son.
(10) Figures include 23,334 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable.
(11) Figures include 30,000 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. Does not include shares held by various institutions and funds with respect to whose investments Whippoorwill has discretionary authority and for which Whippoorwill acts as agent. Mr. Greenhaus is the president and managing director of Whippoorwill. Mr. Greenhaus disclaims beneficial ownership of the shares of Common Stock and 8% Preferred Stock owned by discretionary accounts managed by Whippoorwill as set forth above except to the extent of his pecuniary interest in that stock, if any.
(12) Figures include 30,000 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable.
(13) Figures include 358,334 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable.
(14) Figures include 41,667 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable.
(15) Figures include 66,667 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable.
(16) Figures in the "Sole Voting Power" column, the "Shared Voting Power" column, include, respectively, 1,095,002, 800,000 and 800,000 shares of Common Stock granted pursuant to the Stock Incentive Plan which are immediately exercisable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain relationships and related transactions involving individuals who served during 2000 on the Board's Compensation and Nominating Committee (or its predecessor), see "Item 11. Executive Compensation-Compensation Committee Interlocks and Insider Participation."
Notes Offering
Morgan Stanley, a beneficial owner of more than 5% of the Company's Common Stock, acted as a placement agent in the previously described Notes Offering, which the Company completed on February 25, 1999. The Notes were offered only (i) to qualified institutional buyers under Rule 144A of the Securities Act and (ii) outside the United States in compliance with Regulation S. As a placement agent, Morgan Stanley purchased the Notes from the Company at a discount. The Company and certain of its subsidiaries, on the one hand, and the placement agents (including Morgan Stanley), on the other hand, agreed to indemnify each other against certain liabilities in connection with the Notes Offering, including liabilities under the Securities Act.
Other Agreements with Affiliates
On March 5, 1999, the Company engaged Morgan Stanley to provide financial advice and assistance. In exchange for those services, the Company has agreed to pay Morgan Stanley a fee of $1,750,000.
PART IV
ITEM 14.
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.
2. Financial Statement Schedule
See the accompanying Index to Financial Statements and Financial Statement Schedule on page.
3. Exhibits
See the accompanying Exhibit Index appearing on page 46.
(b) Reports on Form 8-K. During the last quarter of 1999, the Company filed the following Current Reports on Form 8-K:
1. Current Report on Form 8-K dated October 14, 1999, reporting Items 5 and 7.
(c) Exhibits. See the Exhibit Index immediately below.
EXHIBIT INDEX
Exhibit No.
2.1 Fourth Amended Joint Plan of Reorganization for Marvel Entertainment Group, Inc. dated July 31, 1998 and filed with the United States District Court for the District of Delaware on July 31, 1998, with attached exhibits. (Incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.)
2.2 Asset Purchase Agreement by and among Fleer Corp., Frank H. Fleer Corp. and SkyBox International Inc. and Golden Cycle, LLC, dated as of January 29, 1999. (Incorporated by reference to Exhibit 2.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
3.1 Restated Certificate of Incorporation. (Incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.)
3.2 Bylaws (as restated and amended). (Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
4.1 Article V of the Restated Certificate of Incorporation (see Exhibit 31, above), defining the rights of holders of Common Stock.
4.2 Article VI of the Restated Certificate of Incorporation (see Exhibit 31, above), defining the rights of holders of 8% Preferred Stock.
4.3 Indenture, dated as of February 25, 1999, defining the rights of holders of 12% senior notes due 2009. (Incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
4.4 Plan Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.)
4.5 Class A Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.)
4.6 Class B Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.)
4.7 Class C Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.)
10.1 Revolving Credit Facility between the Company and Citibank N.A. dated as of April 1, 1999. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.)
10.2 Security Agreement, dated as of April 1, 1999, among the Company, the subsidiary guarantors party thereto and Citibank N.A., as collateral agent. (Incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.)
10.3 Stockholders' Agreement, dated as of October 1, 1998, by and among the Registrant, Avi Arad, the Dickstein Entities (as defined therein), the Perlmutter Entities (as defined therein), The Chase Manhattan Bank, Morgan Stanley & Co. Incorporated, and Whippoorwill Associates, Incorporated, as agent of and/or general partner for certain accounts. (Incorporated by reference to Exhibit 99.4 to the Company's Current Report on Form 8-K/A dated and filed with the Securities and Exchange Commission on October 16, 1998.)
10.4 Stock Purchase Agreement, dated as of October 1, 1998, by and among the Registrant and Dickstein & Co., L.P., Dickstein Focus Fund L.P., Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark and Elyssa Dickstein Foundation, Elyssa Dickstein, Object Trading Corp., and Whippoorwill Associates, Incorporated. (Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K/A dated and filed with the Securities and Exchange Commission on October 16, 1998.)
10.5 Registration Rights Agreement, dated as of October 1, 1998, by and among the Registrant, Dickstein & Co., L.P., Dickstein Focus Fund L.P., Dickstein International Limited, Elyssa Dickstein, Jeffrey Schwarz and Alan Cooper as Trustees U/T/A/D 12/27/88, Mark Dickstein, Grantor, Mark Dickstein and Elyssa Dickstein, as Trustees of the Mark and Elyssa Dickstein Foundation, Elyssa Dickstein, Object Trading Corp., Whippoorwill/Marvel Obligations Trust - 1997, and Whippoorwill Associates, Incorporated. (Incorporated by reference to Exhibit 99.5 to the Registrant's Current Report on Form 8-K/A dated and filed with the Securities and Exchange Commission on October 16, 1998.)
10.6 Registration Rights Agreement, dated as of December 8, 1998, by and among the Registrant, Marvel Entertainment Group, Inc., Avi Arad, Isaac Perlmutter, Isaac Perlmutter T.A., The Laura & Isaac Perlmutter Foundation Inc., and Zib Inc. (Incorporated by reference to Exhibit 10.4 of the Registrants Annual Report on Form 10-K for the year ended December 31, 1998.)
10.7 Registration Rights Agreement, dated February 25, 1999, by and among the Registrant, certain subsidiaries of the Registrant, Morgan Stanley & Co. Incorporated and Warburg Dillon Read LLC. (Incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.)
10.8 Lease dated as of July 1, 1986, between 387 P.A.S. Enterprises and Cadence Industries Corporation (9th Floor). (Incorporated by reference to Exhibit 10.7 to the Registration Statement of Marvel Entertainment Group, Inc. on Form S-1, File No. 33-40574, dated May 14, 1991.)
10.9 Lease Modification and Extension Agreement dated as of July 1, 1991, between 387 P.A.S. Enterprises and the Marvel Entertainment Group, Inc. (9th, 10th, 11th and 12th Floors). (Incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K of Marvel Entertainment Group, Inc. for the fiscal year ended December 31, 1991.)
10.10 Sublease, dated as of June 9, 2000 betrween HSBC Bank USA and the Registrant, as amended by First Amendment to Sublease dated December 1, 2000.
10.11 License Agreement, dated March 1, 1993, by and between the Registrant and Gerber Products Company as amended by Amendment thereto, dated April 5, 1995. (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, File No. 33-87268 and Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.) (Confidential treatment has been requested for a portion of this exhibit.)
10.12 Master License Agreement, dated as of April 30, 1993, between Avi Arad & Associates and the Registrant. (Incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1, File No 33-87268.)
10.13 Separation Agreement made on July 16, 1999 by and between Eric Ellenbogen and the Company.(Incorporated by reference to Exhibit 10.3 of the Company's Quartely Report on Form 10-Q for the quarter ended June 30, 1999)*
10.14 Employment Agreement between the Company and F. Peter Cuneo, dated as of July 19, 1999. (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)*
10.15 Employment Agreement, dated as of September 30, 1998, by and between Avi Arad and the Company. (Incorporated by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.)*
10.16 Employment Agreement by and between the Company and Alan Fine, dated as of March 1, 1999. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)*
10.17 Employment Agreement, dated as of October 29, 1999, between the Company and Richard Ungar.(Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999)*
10.18 Loan Out Agreement, dated as of October 29, 1999, between the Company and Brentwood Television Funnies, Inc..(Incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999)*
10.19 Employment Agreement, dated as of October 29, 1999, between the Company and Allen S. Lipson.(Incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999)*
10.20 Employment Agreement, dated as of January 26, 2000, between the Company and Bill Jemas.(Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999)*
10.21 1998 Stock Incentive Plan. (Incorporated by reference to Annex A of the Company's Information Statement on Schedule 14C, filed with the Securities and Exchange Commission on December 30, 1998.)*
10.22 Amended and Restated Master Agreement, dated as of November 19, 1997, by and among the Registrant, certain secured creditors of Marvel and certain secured creditors of Panini SpA and Amendments 1 and 2 thereto. (Incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997.)
10.23 Amended and Restated Proxy and Stock Option Agreement, dated as of November 19, 1997, between the Company and Avi Arad (Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated November 24, 1997).
10.24 Amended and Restated Proxy of Stock Option Agreement, dated as of November 19, 1997 among the Company, Isaac Perlmutter, Isaac Perlmutter T.A. and Zib Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated November 24, 1997).
10.25 Commitment Letter, dated as of November 19, 1997, by and between the Registrant, Dickstein Partners Inc., and Zib Inc. (Incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated November 24, 1997).
10.26 Agreement, dated as of November 19, 1997, by and among Dickstein Partners, Inc., Isaac Perlmutter, Avi Arad and Joseph M. Ahearn (Incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated November 24, 1997).
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
23.1 Consent of Independent Auditors.
24 Power of attorney (included on signature page hereto).
* Management contract or compensatory plan or arrangement.
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 - ----------------------- F. Peter Cuneo
President, Chief Executive Officer and Acting Chief Financial Officer
Date: March 30, 2001
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Allen S. Lipson his true and lawful attorney-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report and to cause the same to be filed, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to said attorney-in-fact and agent full power and authority to do and perform each and every act and thing whatsoever requisite or desirable to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - ----------------- ---------------------------------- -------------- President, Chief Executive Officer /s/F. Peter Cuneo Acting Chief Financial Officer March 30, 2001 - ----------------- and Director (principal executive officer) F. Peter Cuneo
/s/ Morton E. Handel Chairman of the Board of Directors March 30, 2001 - -------------------- Morton E. Handel
/s/ Avi Arad Director March 30, 2001 - ------------ Avi Arad
Director March 30, 2001 - ------------ Sid Ganis
Director March 30, 2001 - --------------------- Shelley F. Greenhaus
/s/ James F. Halpin - ------------------- Director March 30, 2001 James F. Halpin
/s/ Lawrence Mittman Director March 30, 2001 - -------------------- Lawrence Mittman
/s/ Isaac Perlmutter Director March 30, 2001 - -------------------- Isaac Perlmutter
/s/ Rod Perth Director March 30, 2001 - ------------- Rod Perth
Director March 30, 2001 - ---------------------- Michael J. Petrick
AND FINANCIAL STATEMENTS SCHEDULE
All other schedules prescribed by the accounting regulations of the Commission are not required or are inapplicable and therefore have been omitted.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Marvel Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Marvel Enterprises, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marvel Enterprises, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/S/ ERNST & YOUNG LLP
New York, New York February 9, 2001
MARVEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements.
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements.
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000
1. Description of Business and Basis of Presentation
The Company designs, markets and distributes boys, girls, preschool, activity and electronic toys based on popular entertainment properties and consumer brand names. The Company also designs, markets and distributes its own line of proprietary toys. The Company's toy business is conducted both domestically and internationally. Through its acquisition of MEG in 1998, one of the world's most prominent character-based entertainment companies with a proprietary library of over 4,700 characters, the Company has entered the licensing and comic book publishing businesses domestically and internationally.
The term the "Company" and the term "Marvel" each refer to Marvel Enterprises, Inc., and its subsidiaries after the acquisition. The term "MEG" refers to Marvel Entertainment Group, Inc., and its subsidiaries, prior to the consummation of the acquisition, and its emergence from bankruptcy and the term "Toy Biz, Inc." refers to the Company prior to the consummation of the acquisition.
Toy Biz, Inc. was formed on April 30, 1993 pursuant to a Formation and Contribution Agreement ( "Formation Agreement "), entered into by a predecessor company to Toy Biz, Inc. (the "Predecessor Company "), Mr. Isaac Perlmutter (the sole stockholder of the Predecessor Company), MEG and Avi Arad ( "Mr. Arad "). The Predecessor Company had been MEG's largest toy licensee. The Predecessor Company was incorporated in 1990, pursuant to an asset purchase agreement with Charan Industries, Inc.
In accordance with the Formation Agreement, the Predecessor Company contributed all of its and an affiliate's assets ($23,335,000) and certain specified liabilities ($21,949,000) to Toy Biz, Inc. for 44% of Toy Biz, Inc.'s capital stock. Such specified liabilities included approximately $15,363,000 due to Mr. Perlmutter and other affiliated companies of the Predecessor Company. A portion of the assumed liabilities due to Mr. Perlmutter was paid in cash ($8,752,000) and the remainder of the assumed liabilities due to Mr. Perlmutter was converted into a promissory note ($6,611,000). MEG made a capital contribution of $500,000 for 46% of Toy Biz, Inc.'s capital stock and a loan, in the form of a note, of $8,507,000. In addition, MEG granted Toy Biz, Inc. an exclusive, perpetual and paid up license to design and distribute toys based on MEG characters. Pursuant to the Formation Agreement, in exchange for the contribution to Toy Biz, Inc. of his interests in certain license agreements with Toy Biz, Inc. and cash, Mr. Arad received 10% of Toy Biz, Inc.'s capital stock. In addition, Toy Biz, Inc. granted Mr. Arad the Arad Stock Option (the "Option") to acquire an additional 10% of Toy Biz, Inc.'s capital stock. Mr. Arad also agreed to enter into the Arad Consulting Agreement and the Master License Agreement.
On October 1, 1998, pursuant to the Fourth Amended Joint Plan of Reorganization proposed by the senior secured lenders of MEG and Toy Biz, Inc. (the "Plan"), MEG became a wholly-owned subsidiary of Toy Biz, Inc. Toy Biz, Inc. also changed its name to Marvel Enterprises, Inc. on that date. The acquisition of MEG was accounted for using the purchase method of accounting. The results of the acquired business have been included in the Company's consolidated results of operations from October 1, 1998. The Plan was confirmed on July 31, 1998 by the United States District Court for the District of Delaware, which had been administering the MEG bankruptcy cases, and was approved by the Company's stockholders at a meeting on September 11, 1998.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000
In accordance with the Plan, the Toy Biz, Inc. stockholders, other than MEG, immediately after the Reorganization continued to own approximately 40% of the outstanding common stock of the Company (assuming the conversion of all of the shares of 8% Cumulative Convertible Exchangeable Preferred Securities (the "8% Preferred Stock") issued by the Company pursuant to the Plan but not assuming the exercise of any warrants issued pursuant to the Plan) and the senior secured lenders of MEG received (i) approximately $231.8 million in cash and (ii) common and 8% Preferred Stock issued by the Company which (assuming the conversion of all 8% Preferred Stock) represent approximately 42% of the common stock of the Company. Investors purchased 9.0 million shares of 8% Preferred Stock that, represent approximately 18% of the common stock of the Company (assuming the conversion of all 8% Preferred Stock). Under the Plan, holders of allowed unsecured claims of MEG ("Unsecured Creditors") will receive (i) up to $8.0 million in cash and (ii) between 1.0 million and 1.75 million warrants having a term of four years and entitling the holders to purchase common stock of the Company at $17.25 per share. The exact amount of cash and warrants to be distributed to the Unsecured Creditors will be determined by reference to the aggregate amount of allowed unsecured claims. In addition, Unsecured Creditors will receive (i) distributions from any future recovery on certain litigation and (ii) a portion of the Stockholder Warrants as described below. Finally, the Plan provides that three other series of warrants (the "Stockholder Warrants") will be distributed to the Unsecured Creditors, to former holders of shares of MEG common stock, to holders of certain class securities litigation claims arising in connection with the purchase and sale of MEG common stock and to LaSalle National Bank. The Stockholder Warrants consist of (a) three-year warrants to purchase 4.0 million shares of common stock of the Company at $12.00 per share, (b) six-month warrants to purchase 3.0 million shares of 8% Preferred Stock for $10.65 per share subject to increase based upon the date of issuance of the six-month warrants and (c) four-year warrants to purchase 7.0 million shares of common stock of the Company at $18.50 per share. The recipients of the Stockholder Warrants will also be entitled to receive distributions from any future recovery on certain litigation. Certain other cash distributions were also provided for by the Plan in connection with settling certain of the disputes arising out of MEG's bankruptcy.
In accordance with the Plan, two litigation trusts were formed on the consummation date of the Plan. Each litigation trust is now the legal owner of litigation claims that formerly belonged to MEG and its subsidiaries. The primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to pursue bankruptcy avoidance claims. The primary purpose of the other trust (the "MAFCO Litigation Trust") is to pursue certain litigation claims against Ronald O. Perelman and various related entities and individuals. The Company has agreed to lend up to $1.1 million to the Avoidance Litigation Trust and up to $1.0 million to the MAFCO Litigation Trust, in each case on a revolving basis to fund the trust's professional fees and expenses. Each litigation trust is obligated to reimburse the Company for all sums advanced, with simple interest at the rate of 10% per year. Net litigation proceeds of each trust will be distributed to the trust's beneficiaries only after the trust has, among other things, paid all sums owed to the Company, released the Company from any further obligation to make loans to the trust, and established reserves to satisfy indemnification claims. The Company is entitled to 65.1% of net litigation proceeds from the Avoidance Litigation Trust. The Company is not entitled to any net litigation proceeds from the MAFCO Litigation Trust.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
The preliminary purchase price of MEG, including related fees, net of liabilities assumed, was approximately $446.9 million which included approximately $257.9 million in cash and the remainder in securities of the Company as outlined above, net of shares of the Company owned by MEG and reacquired in these transactions. Goodwill from the acquisition will be amortized over 20 years.
During 1999, the Company finalized certain preliminary portions of the purchase price allocation relating to its acquisition of MEG. The final fair value of the assets and liabilities acquired is summarized below.
In the preliminary allocation of the purchase price as of December 31, 1998, Fleer/SkyBox ("Fleer"), MEG's subsidiaries engaged in the sale of sports and entertainment trading cards, was presented as an asset held for sale and the Company's maximum liability relating to Panini S.p.A.("Panini"), MEG's Italian subsidiary engaged in the children's activity sticker and adhesive paper business, was presented as a long-term liability on the consolidated balance sheet as of December 31, 1998. In February 1999, the Company sold substantially all of the assets of Fleer for approximately $23.2 million, in cash, after adjustments and assumption of certain liabilities. Proceeds from this transaction were partially used to repay the bridge facility with the remainder used for working capital purposes. On October 8, 1999, the Company received nominal consideration for its equity interest in Panini. In connection with the sale, the Company made a payment to Panini's secured lenders of $11.2 million and obtained a release from the maximum liability, a $27.0 million guarantee of Panini's debt in favor of such secured lenders.
The completion of the purchase price allocation in 1999 resulted in a net decrease in goodwill of $21,694. The Company's results of operations for the periods presented do not include the results of operations of Fleer and Panini.
Presented below are the unaudited pro forma results of the Company giving effect to the acquisition of MEG as if it had occurred as of January 1, 1997:
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries, except for Panini and Fleer . Upon consolidation, all significant intercompany accounts and transactions are eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The principal areas of judgement relate to provisions for returns, other sales allowances and doubtful accounts, the realizability of inventories, goodwill and other intangible assets, and the impairment reserve for minimum royalty guarantees and minimum advances, molds, tools and equipment, and product and package design costs. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost (first-in, first-out method) or market.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Molds, Tools, and Equipment
Molds, tools and equipment are stated at cost less accumulated depreciation and amortization. The Company owns the molds and tools used in production of the Company's products by third-party manufacturers. At December 31, 2000, certain of these costs related to products that were not yet in production or were not yet being sold by the Company. For financial reporting purposes, depreciation and amortization is computed by the straight-line method generally over a three-year period (the estimated selling life of related products) for molds and tooling costs and over the useful life for furniture and fixtures and office equipment. On an ongoing basis, the Company reviews the lives and carrying value of molds and tools based on the sales and operating results of the related products. If the facts and circumstances suggest a change in useful lives or an impairment in the carrying value, the useful lives are adjusted and unamortized costs are written off accordingly. Write-offs, in excess of normal amortization, which are included in depreciation and amortization for the years ended December 31, 1998, 1999 and 2000 were approximately $1,418,000, $146,000 and $9,205,000, respectively.
Product and Package Design Costs
The Company capitalizes costs related to product and package design when such products are determined to be commercially acceptable. Product design costs include costs relating to the preparation of precise detailed mechanical drawings and the production of sculptings and other handcrafted models from which molds and dies are made. Package design costs include costs relating to art work, modeling and printing separations used in the production of packaging. At December 31, 2000, certain of these costs related to products that were not yet in production or were not yet being sold by the Company. For financial reporting purposes, amortization of product and package design is computed by the straight-line method generally over a three-year period (the estimated selling life of related products). On an ongoing basis, the Company reviews the useful lives and carrying value of product and package design costs based on the sales and operating results of the related products. If the facts and circumstances suggest a change in useful lives or an impairment in the carrying value, the useful lives are adjusted and unamortized costs are written off accordingly. Write-offs, in excess of normal amortization, which are included in amortization for the years ended December 31, 1998, 1999 and 2000 was approximately $1,425,000, $486,000 and $7,585,000 respectively.
Goodwill and Other Intangibles
Goodwill and other intangibles are stated at cost less accumulated amortization. Goodwill is principally amortized over 20 years and other intangibles are amortized over 3 to 10 years. For the years ended December 31, 1998, 1999 and 2000, amortization of goodwill and other intangibles was approximately $7,091,000, $25,857,000 and $24,012,000, respectively.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Long-Lived Assets
In accordance with Financial Accounting Standards Board ("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company records impairment losses on long-lived assets used in operations, including intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
Deferred Financing Costs
Deferred financing costs, which are mainly costs associated with the Company's Senior Notes, are amortized over the term of the related agreements.
Research and Development
Research and development ("R&D") costs are charged to operations as incurred. For the years ended December 31, 1998, 1999 and 2000, R&D expenses were $4,498,000, $6,366,000 and $13,157,000 respectively.
Revenue Recognition
Sales are recorded upon shipment of merchandise and a provision for future returns and other sales allowances is established based upon historical experience and management estimates. In certain cases, sales made on a returnable basis are recorded net of provisions for estimated returns. These estimates are revised as necessary to reflect actual experience and market conditions.
Subscription revenues generally are collected in advance for a one year subscription and are recognized as income on a pro rata basis over the subscription period.
Income from distribution fees, licensing and sub-licensing of characters owned by the Company are recorded in accordance with the distribution agreement and at the time characters are available to the licensee and collection is reasonably assured. Receivables from licensees due more than one year beyond the balance sheet date are discounted to their present value. For the years ended December 31, 1998, 1999 and 2000, toy distribution fees and sub-licensing revenues were $1,250,000, $337,000 and $0 respectively.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Advertising Costs
Advertising production costs are expensed when the advertisement is first run. Media advertising costs are expensed on the projected unit of sales method during interim periods. For the years ended December 31, 1998, 1999 and 2000, advertising expenses were $31,762,000, $39,267,000 and $36,211,000, respectively. At December 31, 1999 and 2000 the Company had incurred $1,307,000 and $9,000, respectively, of prepaid advertising costs, principally related to production of advertisement that will be first run in fiscal 2000 and 2001, respectively.
Royalties
Minimum guaranteed royalties, as well as royalties in excess of minimum guarantees, are expensed based on sales of related products. The realizability of advanced minimum guarantees paid is evaluated by the Company based on the projected sales of the related products.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax bases of assets and liabilities and are measured using tax rates and laws that are scheduled to be in effect when the differences are scheduled to reverse.
Income tax expense includes U.S. and foreign income taxes, including U.S. Federal taxes on undistributed earnings of foreign subsidiaries to the extent that such earnings are planned to be remitted.
Foreign Currency Translation
The financial position and results of operations of the Company's Hong Kong and Mexican subsidiaries are measured using the U.S. dollar as the functional currency. Assets and liabilities are translated at the exchange rate in effect at year end. Income statement accounts and cash flows are translated at the average rate of exchange prevailing during the period. Translation adjustments, which were not material, arising from the use of differing exchange rates are included in the results of operations.
Fair Value of Financial Instruments
The estimated fair value of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying amounts due to their short-term maturities.
The estimated fair values of the Company's Senior Notes and outstanding 8% Preferred Stock is based on market prices, where available or dealer quotes. The carrying amounts and estimated fair values of these financial instruments were as follows:
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Concentration of Risk
A large number of the Company's toy products are manufactured in China, which subjects the Company to risks of currency exchange fluctuations, transportation delays and interruptions, and political and economic disruptions. The Company's ability to obtain products from its Chinese manufacturers is dependent upon the United States' trade relationship with China. The "most favored nation" status of China, which is reviewed annually by the United States government, is a regular topic of political dialogue. The loss of China's "most favored nation" would increase the cost of importing products from China significantly, which could have a material adverse effect on the Company.
Marvel distributes its comic books to the direct market through the only major comic book distributor. Termination of this distribution agreement could significantly disrupt publishing operations.
Loss Per Share
In accordance with SFAS No. 128 "Earnings Per Share", basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic loss per share, except the number of shares is increased assuming the exercise of dilutive stock options and warrants and other dilutive securities using the treasury stock method, unless the effect is anti-dilutive.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement No. 130 ("SFAS 130"), Reporting Comprehensive Income. The Company's adoption of SFAS 130 had no effect on the Company as the Company does not have any comprehensive income items.
Recent Accounting Pronouncements
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - - In June 1998, the Financial Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted beginning in fiscal 2000. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
SOP 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE is required to be adopted by the Company as of January 1, 2000. The Company's current policy falls within guidelines of SOP 98-1. Also, SOP 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES is required to be adopted by the Company as of January 1, 1999. Management believes that the adoption of SOP 98-5 will not have a material impact on the Company's financial statements.
SAB NO.101, Revenue Recognition in Financial Statements
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, in December 1999 and updated the bulletin in 2000. The new standard was effective January 1, 2000, with implementation required by the fourth quarter of 2000. This pronouncement summarizes the SEC's views of revenmue recognition practices in financial statements and how they apply to generally accepted accounting principles. Adoption of SAB101 did not have a material impact on the Company's financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year's presentation.
3. Assets Held for Resale
Shortly after the acquisition of MEG, the Company concluded that Fleer did not fit the Company's long-term strategy and the Company decided to dispose of this operation. On February 11, 1999, the Company sold substantially all of Fleer's assets for approximately $23.2 million in cash, after adjustments and assumptions of certain liabilities. $15.0 million of the proceeds were utilized to repay the Bridge Facility. The Company remains liable under certain contracts of the Fleer business and has been indemnified against such liabilities by the purchaser of such business. In its preliminary purchase price allocation, the Company estimated the fair value of Fleer's net assets to be $26.0 million. The difference between this amount and the actual proceeds was accounted for as an adjustment to goodwill.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
4. Details of Certain Balance Sheet Accounts
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
5. Debt Financing
To partially finance the acquisition of MEG, the Company obtained a $200.0 million loan (the "Bridge Facility") from UBS AG, Stamford Branch ("UBS AG"). The Bridge Facility bore interest at either the bank's base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus 5.50% or at the Eurodollar rate plus 6.50%. On September 28, 1998, the Company and UBS AG entered an agreement for a $50.0 million Revolving Credit Facility ("UBS Credit Facility"). The Company incurred a commitment fee for the Bridge Facility and the UBS Credit Facility.
The UBS Credit Facility bore interest at either the bank's base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on the Company's financial performance or at the Eurodollar rate plus a margin ranging from 1.75% to 2.25% depending on the Company's financial performance. The UBS Credit Facility required the Company to pay a commitment fee of 0.50% per annum on the average daily unused portion of the facility. There were no borrowings under the UBS Credit Facility. UBS's commitment to advance funds and issue letters of credit under the UBS Credit Facility was terminated effective as of February 3, 1999.
The Bridge Facility and the UBS Credit Facility were secured by all of the Company's assets (other than Panini) and contained various financial covenants, as well as restrictions on new indebtedness, acquisitions and similar investments, the sale or transfer of assets, capital expenditures, restricted payments, payment of dividends, issuing guarantees and creating liens.
On February 25, 1999, the Company completed a $250.0 million offering of senior notes (the "Senior Notes") in a private placement exempt from registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A under the Act. Net proceeds of approximately $239.0 million were used to pay all outstanding balances under the Bridge Facility and for working capital. The Senior Notes are due June 15, 2009 and bear interest at 12% per annum. The Senior Notes may be redeemed beginning June 15, 2004 for a redemption price of 106% of the principal amount, plus accrued interest. The redemption price decreases 2% each year after 2004 and will be 100% of the principal amount, plus accrued interest, beginning on June 15, 2007. In addition, 35% of the Senior Notes may, under certain circumstances, be redeemed before June 15, 2002 at 112% of the principal amount, plus accrued interest. Principal and interest on the Senior Notes are guaranteed on a senior basis jointly and severally by each of the Company's domestic subsidiaries. On August 20, 1999, the Company completed an exchange offer under which it exchanged virtually all of the Senior Notes, which contained restrictions on transfer, for an equal principal amount of registered, transferable notes whose terms are identical in all other material respects to the terms of the Senior Notes.
In February 1999, in connection with the repayment of the Bridge Facility and the termination of the UBS Credit Facility, the Company recorded an extraordinary charge of approximately $1.5 million, net of tax benefit for the write-off of deferred financing costs associated with these two facilities.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered an agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit Facility"). The Citibank Credit Facility bears interest at either the bank's base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on the Company's financial performance or at the Eurodollar rate plus a margin ranging from 2.25% to 2.75% depending on the Company's financial performance. The Citibank Credit Facility requires the Company to pay a commitment fee of 0.625% per annum on the average daily unused portion of the facility unless there is at least $20.0 million outstanding borrowings in which case the rate is 0.50% per annum for the amount outstanding above $20.0 million. In March 2000, the parties agreed to an amendment whereby financial covenants would not be tested as long as the total amount outstanding does not exceed $20.0 million and the borrowing base less the total outstanding amount exceeds $20.0 million. In April 2000, the parties agreed to reduce the Citibank Credit Facility to $40.0 million. In August 2000, the parties agreed to an amendment whereby financial covenants would not be tested as long as the total amount outstanding does not exceed $20.0 million and the borrowing base less the total outstanding amount exceeds $10.0 million during June, July and August 2000 and $20.0 million at all other times. In addition, the amendment requires the re-negotiation of the financial covenants once financial projections are provided to the Lender. The Company has not borrowed under the Citibank Credit Facility. The amount available under this facility, $31,589,000, has been reduced by the amount of letters of credit outstanding, which is approximately $14,615,000 as of December 31, 2000. The Citibank Credit Facility is secured by a lien on all of the Company's inventory and receivables.
The interest rates for borrowings as of December 31, 1999 and 2000 was 12.00% and 12.00%, respectively and the weighted average interest rates for 1999 and 2000 were 12.02% and 12.00%, respectively. The maximum amounts outstanding during 1998, 1999 and 2000 were $200.0 million, $250.0 million and $250.0 million, respectively.
The interest expense, including amortization of Bridge Facility commitment fees and other costs in 1998 and 1999, for the years ended December 31, 1998, 1999 and 2000 were $9,440,000, $32,077,000 and $31,901,000 respectively.
6. Stockholders' Equity
On September 11, 1998, the Company's stockholders approved changes in the Company's capital structure in connection with the approval of the Plan. These changes eliminated the Class B Common Stock, authorized an additional 150.0 million shares of common stock (for a maximum authorized amount of 250.0 million shares) and authorized 100.0 million shares of preferred stock, including 75.0 million shares of 8% Preferred Stock and 25.0 million shares of preferred stock with a $.01 par value.
The 8% Preferred Stock is convertible into 1.039 fully paid and non-assessable shares of common stock of the Company. The Company is required to redeem all outstanding shares of the 8% Preferred Stock on October 1, 2011 at $10.00 per share plus all accrued and unpaid dividends. The 8% Preferred Stock generally votes together with the common stock on all matters. The Company has the option to pay the dividend in cash or additional 8% Preferred Stock. On March 31, June 30, September 30 and December 31, 2000, the Company issued 373,528, 380,982, 388,603 and 396,372 shares, respectively, of 8% Preferred Stock in payment of dividends declared and payable to stockholders of record on those dates.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
The Company issued the following securities in accordance with the Plan: (a) 7.9 million shares of 8% Preferred Stock to MEG fixed senior secured lenders, (b) 9.0 million shares of 8% Preferred Stock to new investors at $10.00 per share, (c) 13.1 million shares of common stock to the MEG fixed senior secured lenders, (d) four-year warrants to purchase up to 1.75 million shares of common stock at $17.25 per share, (e) three-year warrants to purchase 4.0 million shares of common stock at $12.00 per share, (f) six-month warrants to purchase 3.0 million shares of preferred stock for $10.65 per share subject to increase based upon the date of issuance of the six-month warrants, and (g) four-year warrants to purchase 7.0 million shares of common stock at $18.50 per share.
In connection with the Plan, the Company received a $1.5 million capital contribution from an affiliate of Mr. Perlmutter and Mr. Arad. Mr. Perlmutter and Mr. Arad received no additional equity for such contribution.
7. Stock Option Plans
Under the terms of the Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"), incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance units and performance shares may be granted to officers, employees, consultants and directors of the Company and its subsidiaries. In November 1998, the Company authorized a maximum aggregate number of shares of Common Stock as to which options and rights may be granted under the Stock Incentive Plan of 6.0 million shares, including options described below. All options granted and outstanding under the Company's previous stock incentive plan (the "1995 Stock Option Plan") and all previous stock option plans of MEG were canceled at or prior to the consummation of the Plan on October 1, 1998.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Information with respect to options under the stock option plans are as follows:
Options granted under the Stock Incentive Plan in 1999 and 2000 vest generally in three equal installments beginning 12 months after the date of grant. Options granted in 1998 vest generally in four equal installments beginning with the date of the grant. At December 31, 2000, 1,884,750 shares were available for future grants of options and rights. At December 31, 2000, the weighted average remaining contractual life of the options outstanding is 7.02 years.
The Company accounts for its stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on date of grant, no compensation expense is recognized. The Company has elected to follow the disclosure-only provisions under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123"). For the purposes of FAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
The fair value for each option grant under the stock option plans was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the various grants made during 1995 and 1996: risk free interest rates ranging from 5.26% to 7.19%; no dividend yield; expected volatility of 0.354; and expected lives of three years to five years. The weighted average assumptions for the 1998 grants are: 6.0% interest rate; no dividend yield; expected volatility of 0.567; and expected life of three years. The weighted average assumptions for the 1999 grants are: risk free interest rates ranging from 5.19% to 6.36%; no dividend yield; expected volatility of 0.553; and expected life of three years. The weighted average assumptions for the 2000 grants are risk free interest rates ranging from 6.12% to 6.72%: no dividend yield: expected volatility of 0.550: and expected life of three years. The option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
The effects of applying FAS 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net income in future years.
8. Joint Venture
The Company has entered into a jointly owned limited partnership with Sony Pictures in order to pursue licensing opportunities for motion picture and television related merchandise relating to the Spider-Man character. The Company's share of marketing and promotional expenses for the twelve months ended December 31, 2000 totals approximately $263,000.
9. Sales to Major Customers and International Operations
The Company primarily sells its merchandise to major retailers, principally throughout the United States. Credit is extended based on an evaluation of the customer's financial condition and generally, collateral is not required. Credit losses are provided for in the financial statements and have been consistently within management's expectations. In 1997, the Marvel bankruptcy and concerns among retailers about the future of the Marvel brand caused customers to claim higher than expected return and other sales allowances.
During the year ended December 31, 1998, three customers accounted for approximately 23%, 15% and 10%
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
of total net toy sales. During the year ended December 31, 1999, three customers accounted for approximately 29%, 18% and 11% of total net toy sales. During the year ended December 31, 2000, three customers accounted for approximately 26%, 15 % and 8% of total net toy sales.
The Company's Hong Kong subsidiary supervises the manufacturing of the Company's products in China and sells such products internationally. All sales by the Company's Hong Kong subsidiary are made F.O.B. Hong Kong against letters of credit. During the years ended December 31, 1998, 1999 and 2000, international sales were approximately 16%, 15%, and 28 %, respectively, of total net toy sales. During the years ended December 31, 1998, 1999 and 2000, the Hong Kong operations reported operating income of approximately $1,534,000, $5,055,000 and $7,198,000 and income before income taxes of $1,884,000, $5,472,000 and $7,410,000, respectively. At December 31, 1999 and 2000, the Company had assets in Hong Kong of approximately $35,997,000 and $40,356,000, respectively. The Hong Kong subsidiary represented $31,926,000 and $38,057,000, respectively, of the Company's consolidated retained earnings during the years ended December 31, 1999 and 2000.
10. Restructuring and Other Unusual Costs
2000 Product Discontinuance
In connection with the discontinuance of certain categories of its toy business, in an effort to position it for improved financial and operating performance, the Company recorded approximately $22.9 million in charges in the fourth quarter of 2000. These charges related primarily to reductions of inventory to net realizable value, write-offs of moulds, tools and product and package design costs. These costs are reflected in the following captions in the statement of operations.
1998 Restructuring
In connection with the consummation of the Plan in 1998, the Company reviewed its relationships with its foreign distributors, as well as the Company's relationship with certain suppliers, for business conflicts. As part of integrating MEG's operations with those of the Company, the Company reevaluated its international licensing and product distribution relationships. In addition, certain products that were at various stages of design and marketing were discontinued and written-off because of business conflicts that arose out of the acquisition of MEG.
As a result of the above matters, the Company recorded allowances and unusual charges of approximately $16.8 million for the year ended December 31, 1998, which relate to impairment of assets, severance costs and the settlement of litigation that arose in prior years regarding a licensing agreement. These costs are reflected in the following captions in the statement of operations.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Of these costs, approximately $14.9 million and $1.9 million were charged to the third and fourth quarters, respectively, of fiscal 1998. At December 31, 1999, $600,000 of the cash charges remain unpaid. At December 31, 2000, all charges were fully paid for.
11. Income Taxes
The provision (benefit) for income taxes is summarized as follows:
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
The differences the between statutory Federal income tax rate and the effective tax rate are attributable to the following:
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:
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
During 1999 and 2000, the Company recorded a valuation allowance against its deferred tax assets as it was not assured that such assets would be realized in the future. The valuation allowance at December 31, 2000 includes $35.4 million which, if realized, will be accounted for as a reduction of goodwill.
At December 31, 2000, the Company expects to have Federal net operating loss carryforwards of approximately $175.9 million. These loss carryforward will expire in years 2007 through 2020. Of the total Federal loss carryforward, approximately $95.6 million is subject to a Section 382 limitation. Any realization of the amount of loss subject to this limitation will be accounted for as a reduction of goodwill. Additionally, the Company expects to have state and local net operating loss carryforwards of approximately $230.3 million. The state and local loss carryforwards will expire in various jurisdictions in years 2002 through 2020. The state and local loss carryforwards are generally subject to the Section 382 limitation. Benefit was not provided for either the Federal or state and local net operating loss carryforwards at December 31, 2000.
12. Quarterly Financial Data
Summarized quarterly financial information for the years ended December 31, 1999 and 2000 is as follows:
The quarterly period ended December 31, 2000, includes charges totalling $22.9 million related to the discontinuance of certain of the Company's toy catagories.
The income (loss) per common share computation for each quarter and the year are separate calculations. Accordingly, the sum of the quarterly income (loss) per common share amounts may not equal the income (loss) per common share for the year.
13. Related Party Transactions
Mr. Perlmutter indirectly purchased approximately $34.9 million of the 8% Preferred Stock in connection with the Plan.
Prior to the Company's acquisition of MEG on October 1, 1998, MEG provided support to the Company relating to licensing agreements, promotion, legal and financial matters. The cost for these support services has been included in selling, general and administrative expenses, and amounted to $141,000 for the year ended December 31, 1997. The Company did not receive any services from MEG subsequent to the acquisition.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
An affiliate of the Company, which is wholly-owned by Mr. Perlmutter, acts as the Company's media consultant in placing the Company's advertising and, in connection therewith, receives certain fees and commissions based on the cost of the placement of such advertising. During the years ended December 31, 1998, 1999 and 2000, the Company paid fees and commissions to the affiliate totaling approximately $1,147,000, $1,170,000 and $966,000, respectively, relating to such advertisements.
The Company accrued royalties to Mr. Arad for toys he invented or designed of $4,254,000, $2,981,000 and $1,551,000 during the years ended December 31, 1998, 1999 and 2000, respectively. At December 31, 1999 and 2000, the Company had an accrual to Mr. Arad of $1,028,000 and $378,000, respectively, for unpaid royalties.
The Company shares office space and certain general and administrative costs with affiliated entities. Rent allocated to affiliates for the years ended December 31, 1998, 1999 and 2000 was $105,000, $106,000 and $67,000, respectively. While certain costs are not allocated among the entities, the Company believes that it bears its proportionate share of these costs.
14. Commitments and Contingencies
In June 2000, the Company entered into a lease agreement for a corporate office facility. The lease term, which is approximately 5 1/2 years, commences on or about April 1, 2001 and terminates on July 31, 2006. Annual rental rate is approximately $2.8 million for 2001 and 2002, approximately $2.9 million for 2003 and 2004 and approximately $3.0 million for 2005 and 2006. In connection with the lease, the Company was required to provide the landlord with a Standby Letter of Credit in the amount of $4.4 million that is outstanding at December 31, 2000.
The Company is a party to various non-cancelable operating leases involving office and warehouse space expiring on various dates from June 30, 2000 through April 30, 2010. The leases are subject to escalations based on cost of living adjustments and tax allocations. Minimum future obligations on these leases are as follows:
Rent expense amounted to approximately $1,060,000, $2,691,000, and $2,514,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
In June 2000, the Company entered into a merchandise licensing agreement to manufacture and distribute a line of toys associated with motion pictures that are expected to be released at the end of 2001, 2002 and 2003. In connection with this licensing agreement and future minimum royalty obligations, the Company was required to provide the licensor with a $5.0 million cash payment and a Standby Letter of Credit in the amount of $10.0 million that is outstanding at December 31, 2000
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
The Company is a party to various royalty agreements with future guaranteed royalty payments through 2001. Such minimum future obligations are as follows:
The Company has recorded approximately $14,370,000 as a net receivable for minimum guaranteed royalties as of December 31, 2000. The portion receivable after one year from the balance sheet date is included in other assets. The minimum guaranteed royalties receivable are due as follows:
Legal Matters
The Company is a party to certain legal actions described below. In addition, the Company is involved in various other legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any outstanding legal proceeding and there can be no assurances, the Company believes that its legal proceedings and claims (including those described below), individually and in the aggregate, are not likely to have a material adverse effect on its financial condition, results of operations or cash flows.
Spider-Man Litigation. The Company's subsidiaries MEG and Marvel Characters, Inc., (collectively, the "Marvel Parties") have been parties to a consolidated case, concerning rights to produce and /or distribute a live action motion picture based on the Spider-Man character which was settled in March 2001.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A. Wolfman commenced an action in the United States District Court for the Central District of California against New Line Cinema Corporation, Time Warner Companies, Inc., the Company, MEG and its wholly owned subsidiary, Marvel Characters, Inc., and others. The complaint alleges that the motion picture Blade, produced and distributed by New Line pursuant to an agreement with MEG, as well as the Company's sale of related action figure toys, infringes Wolfman's claimed copyrights and trademarks as the author of the original stories featuring the Blade and Deacon Frost characters (collectively, the "Work") and that Wolfman created the Work as an independent contractor engaged by MEG. The relief sought by complaint includes a declaration that the defendants have infringed Wolfman's copyrights, compensatory and punitive damages, an injunction and various other forms of equitable relief. The Company believes that each component of the Work was created for MEG as a "work for hire" within the meaning of the applicable copyright statute and believes that all of Wolfman's claims are without merit and intends to defend the action vigorously if the action is allowed to proceed.
On February 24, 1999, Wolfman and the Company entered into a stipulation pursuant to which the United States District Court for the District of Delaware will determine the issue of whether Wolfman or Marvel Characters, Inc. (which is now a wholly owned subsidiary of the Company) is the rightful owner of Blade and Deacon Frost and a number of other characters. In the context of this proceeding, the Company has sought a declaration that Marvel Characters, Inc., not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial on the merits was held in December 1999 and on November 6, 2000 the judge issued an opinion and order finding in favor of the Company and holding that the Company is the lawful owner of the rights claimed by Wolfman. As of this date, Wolfman filed on appeal which has not been scheduled.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S. Copyright Office written notices under the Copyright Act purporting to terminate effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by Simon of the Captain America character to the Company's predecessor. On February 24, 2000, the Company commenced an action against Simon in the United States District Court for the Southern District of New York. The complaint alleges that the Captain America character was created by Simon and others as a "work for hire" within the meaning of the applicable copyright statute and that Simon had acknowledged this fact in connection with the settlement of previous suits against the Company's predecessors in 1969. The suit seeks a declaration that Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain America character.
Administration Expense Claims Litigation. The Company has initiated litigation contesting the amount of certain Administration Expense Claims submitted to the Company for payment. While the amounts claimed are material to the Company's financial position, the Company believes that the ultimate resolution of these matters will not be material to the Company's financial condition, results of operations or cash flows, although there can be no assurances.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
15. Benefits Plans
The Company has a 401(k) Plan for its employees. In addition, in connection with the sale of Fleer (see Note 3), the Company retained certain liabilities related to a noncontributory defined benefit pension plan for salaried employees. In prior years, this plan was amended to prohibit participation by new participants. The accumulated benefit obligation is approximately $17.0 million. The funded value of plan assets is approximately $17.5 million and the pension liability at December 31, 2000 is approximately $2.0 million. Plan expenses for the years ended December 31, 1998, 1999 and 2000 were not significant.
16. Segment Information
Following the Company's acquisition of MEG, the Company realigned its businesses into three segments: Toy Merchandising and Distributing, Publishing and Licensing Segments.
Toy Merchandising and Distributing Segment
The toy merchandising and distributing segment designs, develops, markets and distributes both innovative and traditional toys in the United States and internationally. The Company's toy products fall into three categories: toys based on its characters, proprietary toys designed and developed by the Company, and toys based on properties licensed to the Company by third parties. Prior to October 1, 1998, the Company operated solely within the toy and merchandising and distributing segment.
Publishing Segment
The publishing segment creates and publishes comic books principally in North America. The acquired company has been publishing comic books since 1939 and has developed a roster of more than 4,700 Marvel Characters. The Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, newly developed Marvel Characters and characters created by other entities and licensed to the Company.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
Licensing Segment
The licensing segment relates to the licensing of or joint ventures involving the Marvel Characters for use with (i) merchandise, (ii) promotions, (iii) publishing, (iv) television and film, (v) on-line and interactive software and (vi) restaurants, theme parks and site-based entertainment.
(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.
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
17. Supplemental Financial Information
The following represents the supplemental consolidating condensed financial statements of Marvel Enterprises, Inc., which is the issuer of the Senior Notes, and its subsidiaries that guarantee the Notes and the non-guarantor subsidiaries as of December 31, 1999 and 2000 and for each of the three years ended December 31, 2000 .
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000
VALUATION AND QUALIFYING ACCOUNTS
(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