-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ODu/FWuGfYbOm+MD9zVCVshyNt9d5SU45NMKi1XkQjQ63/VXkg3KViunx22l2htj SCTmkl0XJWT/Ujb7yhQmkw== 0000933730-00-000003.txt : 20000411 0000933730-00-000003.hdr.sgml : 20000411 ACCESSION NUMBER: 0000933730-00-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARVEL ENTERPRISES INC CENTRAL INDEX KEY: 0000933730 STANDARD INDUSTRIAL CLASSIFICATION: DOLLS & STUFFED TOYS [3942] IRS NUMBER: 133711775 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13638 FILM NUMBER: 583769 BUSINESS ADDRESS: STREET 1: 387 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126960808 MAIL ADDRESS: STREET 1: 387 PARK AVE SOUTH CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: TOY BIZ INC DATE OF NAME CHANGE: 19941213 10-K 1 ANNUAL REPORT ON FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR []TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-13638 MARVEL ENTERPRISES, INC. --------------------------------------------------- (Exact name of Registrant as specified in its charter) (formerly known as Toy Biz, Inc.) Delaware 13-3711775 ------------------ ----------------------------- (State of incorporation) (I.R.S. employer identification number) 387 Park Avenue South New York, New York 10016 -------------------------------------------- (Address of principal executive offices, including zip code) (212) 696-0808 ---------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share Securities registered pursuant to Section 12(g) of the Act: 8% Cumulative Convertible Exchangeable Preferred Stock, par value $.01 per share Plan Warrants for the purchase of Common Stock Class A Warrants for the purchase of Common Stock Class B Warrants for the purchase of 8% Cumulative Convertible Exchangeable Preferred Stock Class C Warrants for the purchase of Common Stock 12% Senior Notes due 2009 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of March 1, 2000 was {$91,055,439} based on a price of {$6.0625) per share, the closing sales price for the Registrant's Common Stock as reported in the New York Stock Exchange Composite Transaction Tape on that date. As of March 1, 2000, there were 33,637,513 outstanding shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF CONTENTS
Page ---- PART I ITEM 1. BUSINESS.......................................................... 1 ITEM 2. PROPERTIES........................................................10 ITEM 3. LEGAL PROCEEDINGS.................................................10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...........................................12 ITEM 6. SELECTED FINANCIAL DATA...........................................12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................13 ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................................18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......................................18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................19 ITEM 11. EXECUTIVE COMPENSATION............................................21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................................................33 SIGNATURES....................................................................37
i CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The factors discussed herein concerning the Company's business and operations could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-K Annual Report. When used in this Form 10-K, the words "intend", "estimate", "believe", "expect" and similar expressions are intended to identify forward-looking statements. In addition, the following factors, among others, could cause the Company's financial performance to differ materially from that expressed in any forward-looking statements made by the Company: Potential inability to successfully implement business strategy. A decrease in the level of media exposure or popularity of our characters resulting in declining revenues from products based on those characters. If movies or television programs based upon Marvel characters which are scheduled to be released are not successful, the ability to obtain new licenses for motion pictures or televisions shows may be substantially diminished. The lack of commercial success of properties owned by major entertainment companies that have granted us toy licenses. The lack of consumer acceptance of new product introductions. The imposition of quotas or tariffs on toys manufactured in China as a result of a deterioration in trade relations between the U.S. and China. A large number of Marvel's toy products are manufactured in China, which subjects us to risks of currency exchange fluctuations, transportation delays and interruptions, and political and economic disruptions. Our ability to obtain products from our Chinese manufacturers is dependent upon the United States' trade relationship with China. The "most favored nation" status of China, which is reviewed annually by the United States government, is a regular topic of political controversy. The loss of China's "most favored nation" status would increase the cost of importing products from China significantly, which could have a material adverse effect on us. The imposition of further trade sanctions on China could result in significant supply disruptions or higher merchandise costs to us. We might not be able to find alternate sources of manufacturing outside China on acceptable terms even if we want or need to. Our inability to find those alternate sources could have a material adverse effect on us. Changing consumer preferences. Our new and existing toy products are subject to changing consumer preferences. Most of our toy products can be successfully marketed for only a limited period. In particular, toys based on feature films are in general successfully marketed for only a year or two following the film's release. Existing product lines might not retain their current popularity or new products developed by us might not meet with the same success as our current products. We might not accurately anticipate future trends or be able to successfully develop, produce and market products to take advantage of market opportunities presented by those trends. Part of our strategy is to make toys based on the anticipated success of feature film releases and TV show broadcasts. If these releases and broadcasts are not successful, we may not be able to sell these toys profitably, if at all. Production delays or shortfalls, Continued concentration of toy retailers and pressure by certain of our major retail customers to significantly reduce their toy inventory levels. The retail toy business is highly concentrated. The five largest customers for our toy products accounted in the aggregate for approximately 70% of our total toy sales in 1999. An adverse change in, or termination of, our relationship with one or more of our major customers could have a material adverse effect on us. Each of our five top toy customers also uses, to some extent, inventory management systems which shift a portion of retailers' inventory risk onto us. Our production of excess products to meet anticipated retailer demand could result in markdowns and increased inventory carrying costs for us on even our most popular items. If we fail to anticipate a high demand for our products, however, we face the risk that we may be unable to provide adequate supplies of popular toys to retailers in a timely fashion, particularly during the Christmas season, and may consequently lose sales. The impact of competition and changes to the competitive environment on our products and services. Other factors detailed from time to time in our filings with the Securities and Exchange Commission. These forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements to reflect events or circumstances after the date of this report, including changes in business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events. ii PART I ITEM 1. BUSINESS Unless the context otherwise requires: (i) the term the "Company" and the term "Marvel" each refer to Marvel Enterprises, Inc. (formerly Toy Biz, Inc.), a Delaware corporation, and its subsidiaries; (ii) the term "MEG" refers to Marvel Entertainment Group, Inc., a Delaware corporation, and its subsidiaries, prior to the consummation of the Merger, as defined below, and its emergence from bankruptcy; (iii) the term "Toy Biz, Inc." refers to the Company prior to the consummation of the Merger; (iv) the term "Marvel Licensing" refers to the Marvel Licensing business division of the Company; (v) the term "Marvel Publishing" refers to the Marvel Publishing business division of the Company; and (vi) the term "Toy Biz" refers to the Toy Biz business division of the Company. Unless otherwise indicated, the statement of operations data and statement of cash flows data included in this Report do not include (i) Fleer Corp., Frank H. Fleer Corp. and SkyBox International Inc. (each a wholly-owned subsidiary of the Company), substantially all of the assets of which the Company sold on February 11, 1999 (the "Fleer Sale"), or (ii) Panini SpA("Panini"), which the Company sold on October 5, 1999. Certain of the characters and properties referred to in this Report are subject to copyright and/or trademark protection. Background On October 1, 1998, the Company acquired MEG by means of a merger between MEG and the Company's wholly-owned subsidiary MEG Acquisition Corp. (the "Merger"). Upon consummation of the Merger, the Company changed its name from "Toy Biz, Inc." to "Marvel Enterprises, Inc." The Merger was part of the Fourth Amended Joint Plan of Reorganization for MEG that was confirmed by the United States District Court for the District of Delaware, which had jurisdiction of MEG's chapter 11 case. MEG's chapter 11 case had begun in December 1996 with MEG's filing of a voluntary petition for bankruptcy protection. Prior to the reorganization, MEG was a principal stockholder of Toy Biz, Inc. See "The Reorganization." In order to finance a portion of the consideration required to consummate the Merger and certain other transactions contemplated by the plan of reorganization, the Company borrowed $200 million (the "Bridge Loan") from UBS AG, Stamford Branch ("UBS"). The Company used a portion of the proceeds from an offering, completed on February 25, 1999 (the "Notes Offering"), of $250 million of 12% senior notes due 2009 (the "Notes") to repay the Bridge Loan. UBS is an affiliate of Warburg Dillon Read LLC, one of the placement agents in the Notes Offering. General The Company is one of the world's most prominent character-based entertainment companies, with a proprietary library of over 4,500 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, 1 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. During 1999, Marvel Licensing licensed the Avengers and additional Spider-Man episodes to Fox Kids Television Network. Feature Films Marvel Licensing has licensed the Company's characters for use in major motion pictures. For example, in March 1999, the Company licensed to Sony Pictures the right to create motion pictures based on the Spider-Man character. The Company received a non-refundable advance against future royalties due from Sony Pictures on revenues generated by the first motion picture to be produced under the license. Sony will be required to make additional advances against royalties due on revenues generated if subsequent motion pictures are produced. The Company also granted Sony Pictures rights to produce television programming based on Spider-Man following the release by Sony of the first Spider-Man motion picture. The Company and Sony Pictures have also agreed to jointly pursue merchandise licensing opportunities for motion picture and television-related merchandise through a jointly owned limited partnership. The Company has retained all other licensing rights with respect to the Spider-Man character. 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 is presently scheduled to be released during July 2000. In addition, the Company currently has outstanding licenses with various 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 2000. 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 Marvel Publishing is one of the world's leading publishers of comic books. Since 1995, the domestic comic book publishing market has declined primarily as a result of reduced readership, lower speculative purchases and lower selling prices, which in turn caused a contraction in the number of comic 2 book specialty stores. Comic Books Marvel Publishing has been publishing comic books since 1939 and has developed a roster of more than 4,500 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, creative director, art director and approximately 18 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. Marvel Publishing has entered into agreements with certain artists and writers under which those persons have agreed to provide their services to Marvel Publishing on an exclusive basis, generally for a period of one to three years. Management believes that the financial terms of these agreements are competitive within the industry and are consistent with current and expected levels of comic book sales. The creative process begins with the development of a story line. From the established story line, the writer develops a character's actions and motivations into a plot. After the writer has developed the plot, the pencil artist translates it into an action-filled pictorial sequence of events. The penciled story is returned to the writer who adds dialogue, indicating where the balloons and captions should be placed. The completed dialogue and artwork are forwarded to a letterer who letters the dialogue and captions in the balloons. Next, an inker enhances the pencil artist's work in order to make the drawing appear three-dimensional. The artwork is then sent to a coloring artist. Typically using only four colors in varying shades, the coloring artist uses overlays to create over 100 different tones. This artwork is subcontracted to a color separator who produces separations and sends the finished material to the printer. Unaffiliated entities produce color separations and print all of Marvel Publishing's comic books. 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 3 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. For the years ended December 31, 1997, 1998 and 1999, approximately 68%, 81%, and 80%, respectively, of Marvel Publishing's net publishing revenues were derived from sales to the direct market. Marvel Publishing distributes its publications through an unaffiliated entity which, in turn, services specialty market retailers and direct market comic book shops. For the years ended December 31, 1997, 1998 and 1999, approximately 22%, 10% and 9%, 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, 1997, 1998 and 1999, approximately 3%, 3% and 2%, respectively, of Marvel Publishing's net publishing revenues were derived from subscription sales. For the years ended December 31, 1997, 1998 and 1999, approximately 7%, 6% and 9%, respectively, of Marvel Publishing's net publishing revenues were derived from advertising sales and other publishing activities. In most of Marvel Publishing's comic publications, ten pages (three glossy cover pages and seven inside pages) are allocated for advertising. The products advertised include sports and entertainment trading cards, video games, role playing games, movies, candy, cereals, toys, models and other consumer packaged goods. Marvel Publishing permits advertisers to advertise in a broad range of Marvel Publishing's comic book publications which target specific groups of titles that have a younger or older readership. 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 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. 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 1999, 4 approximately 85% 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 developed under license from World Championship Wresting (WCW) were the most successfully developed of Toy Biz's action figures and accessory line during 1999. Toy Biz also produces and markets a line of Spider-Man and X-Men toys. Girls' Products. Toy Biz's girls' business continues to be well received by consumers with new introductions and product line extensions. Kindergarden Babies and Miss Party Surprise lines were the Company's top-selling girls products in 1999. 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 and Toy Biz's proprietary multi-activity game tables. Games. Toy Biz entered the game market with the introduction of Electronic Talking Rotten Egg in 1998 and in 1999 introduced the popular Electronic Interactive Whac-a-Mole Game, based on the popular arcade game. 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. 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. 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 5 internationally, with sales to customers in the United States accounting for approximately 78%, 84% and 85% of the Company's net toy sales in 1997, 1998 and 1999, 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 Toys, a division of Consolidated Stores, Inc., which customers accounted in the aggregate for approximately 60%, 66% and 70% of the Company's total toy sales in 1997, 1998 and 1999, 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. Management believes that adequate alternative storage facilities are available. Disruptions in shipments from China or from this facility could have a material adverse effect on Toy Biz. 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 6 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, 1999, the Company employed approximately 800 persons (including operations in Hong Kong and Mexico). The Company also contracts for creative work on an as-needed basis with approximately 530 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 had 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: 7 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 expire 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, the Company paid approximately $4.2 million of additional Administration Expense Claims and during 1999, the Company 8 paid and additional $10.4 of Administration Expense Claims. The Company estimates that it may be required to pay between $8.5 million and $10.5 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 securityholders 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 securityholders, the High River Group and Westgate Group shall cause securities beneficially owned by them to be present at the meeting for quorum purposes but to abstain from voting on the matter. The Standstill Agreements will terminate on October 1, 2002, subject to earlier termination under certain circumstances. 9 Litigation Trusts In accordance with the Plan, two litigation trusts were formed on the consummation date of the Plan. Each litigation trust is now the legal owner of litigation claims that formerly belonged to MEG and its subsidiaries. The primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to pursue bankruptcy avoidance claims. The primary purpose of the other trust (the "MAFCO Litigation Trust") is to pursue certain litigation claims against Ronald O. Perelman and various related entities and individuals. The Company has agreed to lend up to $1.1 million to the Avoidance Litigation Trust and up to $1 million to the MAFCO Litigation Trust, in each case on a revolving basis to fund the trust's professional fees and expenses. Each litigation trust is obligated to reimburse the Company for all sums advanced, with simple interest at the rate of 10% per year. Net litigation proceeds of each trust will be distributed to the trust's beneficiaries only after the trust has, among other things, paid all sums owed to the Company, released the Company from any further obligation to make loans to the trust, and established reserves to satisfy indemnification claims. The Company is entitled to 65.1% of net litigation proceeds from the Avoidance Litigation Trust. The Company is not entitled to any net litigation proceeds from the MAFCO Litigation Trust. ITEM 2. PROPERTIES The Company has the following principal properties:
Facility Location Square Feet Owned/Leased - -------- -------- ----------- ------------ Office.....................................New York, New York 69,000 Leased Office.....................................New York, New York 37,000 Leased Office.....................................New York, New York 15,000 Leased Office/Showroom............................New York, New York 14,100 Leased Office/Warehouse...........................Yuma, Arizona 80,000 Owned Warehouse..................................Fife,Washington 210,000 Leased Manufacturing..............................San Luis, Mexico 190,000 Owned Office.....................................Santa Monica, California 2,800 Leased
ITEM 3. LEGAL PROCEEDINGS The Company is a party to certain legal actions described below. In addition, the Company is involved in various other legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any outstanding legal proceeding and there can be no assurances, the Company believes that its legal proceedings and claims (including those described below), individually and in the aggregate, are not likely to have a material adverse effect on its financial condition, results of operations or cash flows. Spider-Man Litigation. The Company's subsidiaries Marvel Entertainment Group, Inc. 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 and pending in the Superior Court of the State of California for the County of Los Angeles, to which Metro-Goldwyn Mayer Studios Inc. and two of its affiliates ("MGM"), Columbia Tristar Home Video and related entities ("Sony"), Viacom 10 International Inc. ("Viacom") and others were also parties. In February 1999, the Superior Court granted summary judgment to the Marvel Parties and dismissed MGM's claims. In March 1999, MGM, Sony and the Marvel Parties settled all remaining claims among themselves. The litigation among Sony, the Marvel Parties and Viacom over claims by Viacom to the rights to distribute on pay and free television a feature length live action motion picture based on the Spider-Man character were not resolved. After a trial in February 1999, the Superior Court held that Viacom has no rights with respect to any Spider-Man film to be produced by Sony, the Marvel Parties or any future licensee of the Marvel Parties. Viacom has filed a Notice of Appeal but no date for the appeal has been scheduled. It is the Company's position that the Superior Court's decision was correct and that Viacom has no rights with respect to distribution of a Spider-Man film. Although there can be no assurances, the Company believes that the Superior Court decision will be upheld on appeal. Woldfman Litigation. On January 24, 1997, Marvin A. Wolfman ("Wolfman") filed a proof of claim in the bankruptcy cases of MEG and Marvel Characters, Inc. asserting ownership rights to a number of characters that appeared in stories written by Wolfman and published by Marvel Comics during the 1970s. In November 1999 a hearing was held in the United States District Court for the District of Delaware to determine the ownership rights to the characters covered by Wolfman's claim and the matter is sub judice. On August 20, 1998, Wolfman commenced an action in the United States District Court for the Central District of California against New Line Cinema Corporation ("New Line"), Time Warner Companies, Inc., the Company, MEG and Marvel Characters, Inc. The complaint in that action alleges that the motion picture Blade (featuring Blade and Deacon Frost which were among the characters included within Wolfman's January 24, 1997 proof of claim), produced and distributed by New Line pursuant to an agreement with MEG, as well as the Company's sale of action figure toys, infringes Wolfman's claimed copyrights and trademarks as the author of the original stories featuring the Blade and Deacon Frost characters (collectively, the "Work") and that Wolfman created the Work and granted MEG's predecessor in interest only the non-exclusive right to publish the Work in print for Marvel Comics' Tomb of Dracula series. The complaint also charges the defendants in the action with unfair competition and other tortious conduct based upon Wolfman's asserted rights in the Work. The relief sought by the complaint includes a declaration that the defendants have infringed Wolfman's copyrights, compensatory and punitive damages, an injunction and various other forms of equitable relief. In late August 1998 Wolfman dismissed the complaint against MEG and Marvel Characters, Inc. The action has been stayed against the other named defendants pending the outcome of the November 1999 hearing in Delaware with respect to Wolfman's proof of claim. 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 and that the termination notices filed by Simon are invalid and of no legal effect. Simon has asserted a counterclaim in the action seeking a declaration that he is the sole owner of the Captain America character. Administration Expense Claims Litigation. Unresolved Administration Expense Claims are pending which seek amounts totaling approximately $16.8 million and additional unresolved Administration Expense Claims are pending which do not seek specified dollar amounts. The Company is contesting all of the unresolved Administration Expense Claims. Although there can be no assurance, the Company expects that it will be required to pay substantially less than the amounts sought by the holders of the Administration Expense Claims. 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 1999. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for each fiscal quarter indicated, the high and low prices for the Company's Common Stock as reported in the New York Stock Exchange Composite Transaction Tape. Fiscal Year High Low ------------- --------- --------- 1998 First Quarter $ 10 7/16 $ 6 15/16 Second Quarter $ 11 5/16 $ 8 15/16 Third Quarter $ 10 7/16 $ 6 3/8 Fourth Quarter $ 6 7/8 $ 4 5/16 1999 First Quarter $ 7 $ 5 3/8 Second Quarter $ 9 3/4 $ 6 5/8 Third Quarter $ 7 1/2 $ 5 1/8 Fourth Quarter $ 7 7/8 $ 4 11/16 As of March 1, 2000, there were 387 holders of record of the Company's Common Stock. The Company has not declared any dividends on the Common Stock. The working capital facility restricts the Company's ability to pay dividends on the Common Stock. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA The following table presents selected combined or consolidated financial data, derived from the Company's audited financial statements, for the five-year period ended December 31, 1999. The selected financial data of the Company for the years ended December 31, 1998 and 1999 are not comparable to prior periods due to the Company's acquisition of MEG on October 1, 1998. The Company has not paid dividends on its capital stock during any of the periods presented below.
Year Ended ------------------------------------------------------------- Dec. 31, Dec. 31, Dec.31, Dec.31, Dec.31, 1995 1996 1997 1998 1999 --------- -------- -------- ------- --------- (in thousands, except per share amounts) Statement of Operations Data: Net sales.................... $196,395 $221,624 $150,812 $232,076 $319,645 Operating income (loss)...... 47,014 27,215 (49,288) (19,460) 256 Net income (loss) ........... 28,402 16,687 (29,465) (32,610) (33,791) Basic and diluted net income (loss) per common share . 1.05 0.61 (1.06) (1.23) (1.43) Preferred dividend requirement -- 105 71 3,380 14,220 At December 31: Balance Sheet Data: Working capital (deficit) 85,174 102,192 74,047 (133,392) 91,919 Total assets................. 152,218 171,732 150,906 689,904 654,637 Borrowings................... -- -- 12,000 200,000 -- Other non-current debt....... -- -- -- 27,000 250,000 Redeemable preferred stock... 3,016 1,681 -- 172,380 186,790 Stockholders' equity......... 111,332 137,455 107,981 183,624 135,763
12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements of the Company and the related notes thereto, and the other financial information included elsewhere in this Report. Set forth below is a discussion of the financial condition and results of operations of the Company for the three fiscal years ended December 31, 1999. 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 10%, 13% and 77%, respectively, of the Company's net sales for the year ended December 31, 1999. The Company's strategy is to increase the media exposure of the Marvel characters through its media and promotional licensing activities, which it believes will create revenue opportunities for the Company through sales of toys and other licensed merchandise. In particular, the Company plans to focus its future toy business on marketing and distributing toys based on the Marvel characters, which provide the Company with higher margins because no license fees are required to be paid to third parties and, because of media exposure, require less promotion and advertising support than the Company's other toy categories. The Company intends to use comic book publishing to support consumer awareness of the Marvel characters and to develop new characters and storylines. The Company records as revenue the present value of licensing fees from its licensing activities at the time the Company's characters are available to the licensee and the collection of licensing fees is reasonably assured. Licensing fees booked as revenue but not yet received are recorded as receivables. Licensing receivables due more than one year beyond the balance sheet date are discounted to their net present value. Operating Expenses: Cost of Sales There generally is no material cost of sales associated with the licensing of the Company's characters. Cost of sales for comic book publishing consists of art and editorial, printing and distribution costs. Art and editorial costs account for the most significant portion of publishing cost of sales. Art and editorial costs consist of compensation to editors, writers and artists. The Company generally hires writers and artists on a freelance basis but has exclusive employment contracts with certain key writers and artists. The Company out-sources the printing of its comic books to an unaffiliated company. The Company's cost of printing is subject to fluctuations in commodity-based products such as paper. Cost of sales for the toy business consists of product and package manufacturing, shipping and agents' commissions. The most significant portion of cost of sales is product and package manufacturing. The Company, which utilizes multiple manufacturers, solicits multiple bids for each project in order to control its manufacturing costs. A substantial portion of the Company's toy manufacturing takes place in China. A substantial portion of the Company's toy manufacturing contracts are denominated in Hong Kong dollars. 13 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. General and administrative costs consist of salaries and corporate overhead. The Company expects warehousing and store merchandising costs to change over time in line with the Company's toy sales. 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 amortized over the life of the respective product. Results of Operations of the Company 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 from 1998 to 1999 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 from $5.6 million in 1998 to approximately $35.1 million in 1999 due to the inclusion of the full-year's activity in 1999. 14 The Toy Biz division produced a net decrease of approximately $2.0 million from $91.5 million in 1998 to $89.5 million in 1999; 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 increase 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. Year ended December 31, 1998 compared with year ended December 31, 1997 The Company's net sales increased to $232.1 million for the year ended December 31, 1998 from $150.8 million in the 1997 period. The increase in net sales was partially due to the inclusion of $19.6 million in publishing and licensing revenues in the fourth quarter of 1998 as a result of the acquisition of MEG on October 1, 1998. Net sales in the toy division increased $61.6 million to $212.4 million in 1998. Net sales in the domestic boys' toys category increased $20.1 million to $63.2 million in 1998 due primarily to the introduction of the WCW/NWO Bashin' Brawlers in the second half of 1998, which accounted for $17.2 million in net sales. Net sales in the domestic girls' toys category increased $3.3 million in 1998 to $42.0 million due primarily to the increased product line of new promotional dolls in 1998. Net sales of domestic activity toys and other products increased $3.7 million to $31.7 million in 1998 due primarily to shipments of products related to the Godzilla feature film released in 1998. The Company believes that its net sales in each of its domestic toy categories was adversely affected by Toys 'R' Us' decision to eliminate excess inventory through a one-time reduction in inventory that resulted in significant declines in its purchases from toy manufacturers. Net sales of toy products sold through the import division increased $16.7 million to $47.2 million in 1998, due primarily to shipments of Godzilla products in 1998. International net toy sales increased $.7 million to $28.1 million in 1998. The Company recorded sales allowances of $2.9 million in 1998 which were attributable to the impact of the Merger on the Company's relationship with certain of its international distributors, compared to $18.0 million of sales allowances in 1997 that the Company believes were related to the impact of the Bankruptcy Case on Toy Biz, Inc.'s relationships with its international distributors. Gross profit increased $60.2 million to $104.1 million for 1998 from $43.9 million in 1997 in part as a result of lower sales allowances in 1998 described above. Gross profit as a percentage of net sales increased to approximately 45% in 1998 from approximately 29% in 1997. The inclusion of MEG's publishing and licensing operations in the fourth quarter of 1998 resulted in $11.4 million of additional gross profit. The gross profit of the publishing and licensing operations as a percentage of publishing and licensing net sales was approximately 58% in the fourth quarter of 1998. 15 Selling, general and administrative expense increased $25.0 million to $97.1 million in 1998 from $72.1 million in 1997. Selling, general and administrative expense as a percentage of net sales decreased to approximately 42% in 1998 from approximately 48% in 1997. The increase in selling, general and administrative expense was partially due to the inclusion of $5.7 million of publishing and licensing selling, general and administrative expense for the fourth quarter of 1998. The increase during 1998 was also due to $11.7 million of expenses relating to the termination of license agreements resulting from the Company's integration of MEG's operations, as well as a $9.8 million increase in royalty and advertising expense in 1998 primarily related to the success of the WCW/NWO Bashin' Brawlers. Depreciation and amortization expense decreased $1.2 million to $19.3 million in 1998 from $20.5 million in 1997 primarily due to additional amortization expense recorded in 1997 related to early write-offs of discontinued toy products based on Marvel characters as a result of the Bankruptcy Case. Amortization of goodwill and other intangibles increased $6.6 million to $7.1 million in 1998 from $0.5 million in 1997. The increase was due to the amortization of goodwill created pursuant to the MEG acquisition completed on October 1, 1998. Interest expense increased $8.6 million to $9.4 million in 1998 from $0.8 million in 1997, primarily due to $8.6 million in interest expense on the Bridge Loan for the fourth quarter of 1998. As a result of the above, the Company reported a net loss of $32.6 million in 1998 compared to a net loss of $29.5 million in 1997. The Company reported a loss per share after preferred dividends of $1.23 in 1998 compared to a loss per share after preferred dividends of $1.06 in 1997. Liquidity and Capital Resources The Company's primary sources of liquidity are cash on hand, cash flow from operations and cash available from the $60.0 million Citibank working capital facility. The Company anticipates that its primary needs for liquidity will be to: (i) conduct its business; (ii) meet debt service requirements; (iii) make capital expenditures; and (iv) pay Administration Expense Claims. Net cash provided by the Company's operations during fiscal 1997, 1998 and 1999 was $12.8 million, $42.0 million and $0.8 million, respectively. At December 31, 1999, the Company had working capital of $91.9 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 $239.8 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 16 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. 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 $385,000 as of March 15, 2000. 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 during 1999 the Company paid an additional $10.4 million of Administration Expense Claims. The Company estimates that it may be required to pay between $8.5 million and $10.5 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. The balance in the trust account as of December 31, 1999 is approximately $8.5 million. Capital expenditures (excluding acquisitions) by the Company during fiscal 1997, 1998 and 1999 were approximately $17.7 million, $17.3 million and $21.0 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. 17 Seasonality The Company's annual operating performance depends, in large part, on its sales of toys during the relatively brief Christmas selling season. During 1997, 1998 and 1999, 67%, 60% and 62%, respectively, of the Company's domestic net toy sales were realized during the second half of the year. Management expects that the Company's toy business will continue to experience a significant seasonal pattern for the foreseeable future. This seasonal pattern requires significant use of working capital mainly to build inventory during the year, prior to the Christmas selling season, and requires accurate forecasting of demand for the Company's products during the Christmas selling season. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required by this item, the report of the independent auditors thereon and the related financial statement schedule required by Item 14(a)(2) appear on pages F-2 to F-30. See the accompanying Index to Financial Statements and Financial Statement Schedule on page F-1. The supplementary financial data required by Item 302 of Regulation S-K appears in Note 11 to the December 31, 1999 Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Executive Officers and Directors The following table sets forth the name, age (as of March 1, 2000) and position of each person who serves as an executive officer or director of the Company: Name Age Position Morton E. Handel.............. 64 Chairman of the Board of Directors Avi Arad...................... 52 Director and Chief Creative Officer; President and Chief Executive Officer of Marvel Studios F. Peter Cuneo................ 56 President, Chief Executive Officer and Director Sid Ganis..................... 60 Director Shelley F.Greenhaus........... 46 Director James F. Halpin............... 49 Director Michael M. Lynton............. 40 Director Lawrence Mittman.............. 49 Director Isaac Perlmutter.............. 57 Director Rod Perth..................... 56 Director Michael J. Petrick............ 38 Director Alan Fine..................... 49 President and Chief Executive Officer of Toy Biz David J. Fremed............... 39 Senior Vice President and Acting Chief Financial Officer William Jemas................. 42 President of Publishing and New Media Allen S. Lipson............... 57 Executive Vice President, Business and Legal Affairs and Secretary Richard Ungar................. 49 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. since July 1997. Mr. Handel also serves as a director of Concurrent Computer Corp., 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. 19 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 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. Michael M. Lynton has been a Director of the Company since October 1998. Mr. Lynton has been President of AOL International since February 2000 and was Chairman and Chief Executive Officer of The Penguin Group from 1996 until assuming his current position with AOL. From 1987 to 1996, at The Walt Disney Company, Mr. Lynton was President of Hollywood Pictures and President of Disney Publishing--Magazines and Books. Lawrence Mittman has been a Director of the Company since October 1998. Mr. Mittman has been a partner in the law firm of Battle Fowler 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, Jim Henson Television Group Worldwide since May 1999. 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. 20 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. David J. Fremed has served as Senior Vice President and Acting Chief Financial Officer of the Company since February 2000. From February 1999 until February 2000, he was Senior Vice President and Chief Financial Officer of Toy Biz. From October 1996 to February 1999, Mr. Fremed served as the Company's Chief Financial Officer and Treasurer. From 1990 to October 1996, Mr. Fremed served as the Vice President/Controller of the Company. William Jemas has been President Publishing and New Media 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 Presidient and General Counsel of Remington. Richard Ungar has served as the President of Marvel Character 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 1999, with the exception of a Form 3 for Sid Ganis (to report his status as a director) which was filed late. 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 1999 and the Company's four most highly 21 compensated executive officers, other than the Company's Chief Executive Officers, who were serving as executive officers of the Company on December 31, 1999 (the "Named Executive Officers"), for services rendered in all capacities to the Company and its subsidiaries during such periods. Summary Compensation Table
Long-Term Annual Compensation(1) Compensation ---------------------------------------------------- ------------ Other Annual Securities Underlying Name and Principal Position Year Salary($) Bonus(2) Compensation Options (#) - --------------------------- --------- -------- --------- ------------- -------------------- F. Peter Cuneo (4) 1999 $295,000 $ 490,000 750,000 President and Chief Executive Officer Eric Ellenbogen (5) 1999 444,231 2,500,000(6) President and Chief Executive 1998 57,692 ---- 720,000 Officer Alan Fine (7) 1999 500,000 225,000 $5,673(3) 200,000 President and Chief Executive Officer 1998 425,000 307,001 300,000 of the Company's Toy Biz Division 1997 400,000 302,816 Avi Arad (8) 1999 375,000 201,563 109,774(9) Chief Creative Officer of the 1998 375,000 ---- 1,000,000 Company and President and Chief Executive 1997 375,000 ---- Officer of the Company's Marvel Studios Division Robert S. Hull (10) 1999 272,403 225,000 3,854(3) 200,000 Executive Vice President and Chief Financial Officer William H. Hardie, III (11) 1999 260,000 248,958 4,168(3) Executive Vice President, 1998 260,000 25,000 100,000 Business Affairs 1997 83,539 10,000
(1) Does not include value of perquisites and other personal benefits for any Named Executive Officer (other than 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) Amounts shown are the Company matching contributions to the Company's 401(k) Plan (4) Mr. Cuneo's employment with the Company commenced in July 1999. (5) Mr. Ellenbogen's employment with the Company commenced in December 1998 and terminated in July 1999. (6) Payment in connection with termination of Mr. Ellenbogen's employment. (7) Mr. Fine commenced employment with the Company in May 1996, and was appointed as the President and Chief Executive Officer of the Company's Toy Biz division in the fourth quarter of 1998. (8) 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. 22 (9) Amounts shown for company provided automobile and driver. (10) Mr. Hull's employment with the Company commenced in February 1999 and terminated in February 2000. (11) Mr. Hardie's employment with the Company commenced in September 1997 and terminated in December 1999. Option Grants Table The following table shows the Company's grants of stock options to the Named Executive Officers in 1999. 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 1999.
Number of Percent of Shares of Total Potential Realizable Common Stock Options Value at Assumed Annual Underlying Granted to Exercise Rates of Stock Price Options Granted Employees Price Expiration Appreciation Name in 1999 in 1999 per share Date for Option Terms ------------------------ --------------- ---------- -------- --------- ---------------------- 5% 10% ---------- ---------- F. Peter Cuneo (1)............. 750,000 35.4% 7.250 7/21/09 $3,419,644 $8,665,744 Alan Fine (2).................. 200,000 9.4% 6.375 3/5/09 801,848 2,031,968 Robert S. Hull (3) ............ 200,000 9.4% 6.500 2/5/09 817,750 2,071,810
(1) Mr. Cuneo's options become exercisable in four equal installments: options to buy 187,500 shares of Common Stock are exercisable immediately and options to buy an additional 187,500 shares of Common Stock become exercisable on each of July 19, 2000, July 19, 2001 and July 19, 2002. (2) Mr. Fine's options become exercisable in three equal installments: options to buy 66,667 shares of Common Stock are exercisable on each of March 5, 2000, March 5, 2001 and March 5, 2002. (3) Mr. Hull's options were scheduled to become exercisable in three equal installments: options to buy 66,667 shares of Common Stock became exercisable on February 5, 2000 and options for an additional 66,667 were to become exerciseable on February 5, 2001 and February 5, 2002. Mr. Hull's employment with the Company terminated in February 2000 and accordingly, all options exercisable in 2001 and 2002 were terminated. Year-End 1999 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, 1999. Mr. Hardie exercised 25,000 options in December 1999. No other Named Executive Officers exercised stock options during 1999.
Number of Shares of Value of Common Stock Underlying Unexercised Unexercised Options at In-the-Money Options at Name Year-End (1) Year-End - ---------------------- ----------------------------- ------------------------------ Exercisable Unexercisable Exercisable Unexercisable ----------- ------------- ----------- ------------- Eric Ellenbogen.............................. 240,000 480,000 ------ -------- F. Peter Cuneo............................... 187,500 562,500 ------ -------- Avi Arad..................................... 500,000 500,000 ------ -------- Alan Fine.................................... 150,000 350,000 ------ -------- Robert S. Hull............................... --------- 200,000 ------ -------- William H. Hardie, III....................... --------- ----------- ------ --------
(1) Represents shares of Common Stock underlying stock options. None of the Named Executive Officers holds SARs (stock appreciation rights). 23 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; David J. Fremed, the Acting Chief Financial Officer of the Company; 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. In July 1999 the Company entered into a separation agreement with Mr. Ellenbogen. 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 $3.6 million, $4.3 million and $3.0 during the years ended December 31, 1997, 1998 and 1999, 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 24 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 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. Fremed. Pursuant to his employment agreement, Mr. Fremed 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. Fremed receives a base salary, subject to discretionary increases, of $215,000. Mr. Fremed is entitled to a bonus of $30,000 per year plus discretionary bonuses and participation in the Company's stock option plan as determined by the Board. Mr. Fremed also receives a $750 monthly automobile allowance and is entitled to participate in employee benefit plans generally available to the Company's employees. Mr. Fremed's employment agreement provides that, in the event of termination other than for cause, Mr. Fremed is entitled to his salary and car allowance earned through the date of termination and thereafter for a period up to nine months. 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, 2001. 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 Agreement with Mr. Lipson. Pursuant to his employment agreement, Mr. Lipson has agreed to render his services to the Company for a term of employment expiring on November 15, 2002. Under his employment agreement, Mr. Lipson receives a base salary, subject to discretionary increases, of $325,000. Mr. Lipson is entitled to a bonus for 1999 of $180,000 and thereafter, is eligible to earn an annual bonus based on the attainment of certain performance goals. Mr. Lipson also receives a $1,200 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. Lipson with a suitable apartment in Manhattan for up to one year. Pursuant to his employment agreement, Mr. Lipson has been granted options to purchase 150,000 shares of Common Stock. The options will vest over a three-year period. 25 Employment and Agreement with Mr.Ungar. Pursuant to his employment agreement, Mr. Unger has agreed to render his services to the Company for a term of employment expiring on October 25, 2002. Under his employment agreement, Mr. Unger receives a base salary, subject to discretionary increases, of $325,000. Mr. Unger is entitled to a bonus for 1999 of $140,000 and thereafter, 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. Unger 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. Unger is the sole shareholder, are parties to a Loan Out Agreement under which Brentwood agrees to provide the services of Mr. Unger 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. Separation Agreements with Mr. Ellenbogen. Pursuant to a separation agreement with the Company entered into in July 1999, Mr. Ellenbogen's employment with the Company as President and Chief Executive Officer terminated in that month. Under his separation agreement, Mr. Ellenbogen received a payment of $2,500,000. The separation agreement also provides that Mr. Ellenbogen's options to buy an additional 480,000 shares of Common Stock become exercisable in the event of certain changes in control of the Company before January 15, 2001, but otherwise will not become exercisable. Mr. Ellenbogen's other stock options have been terminated. Termination Provisions. The employment agreements of Messrs Cuneo, Fine, Jemas, Lipson and Unger 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, Fremed, Jemas, Lipson and Unger 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, Lynton, Perlmutter and Petrick serve now, and served during 1999, 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 1999 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 26 (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 $1,274,000, $1,147,000 and $1,170,000 in 1997, 1998 and 1999, respectively. The Company retains the services of a non-affiliated media consulting agency on matters of advertising creativity. 27 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 18% of the rent paid under the sublease for the space, which obligations reflect the approximate percentage of floor space occupied by Tangible Media. The Cost Sharing Agreement also requires Tangible Media to reimburse the Company for any related overhead expenses comprised of commercial rent tax, repair and maintenance costs and telephone and facsimile services, in proportion to its percentage occupancy. The Cost Sharing Agreement is coterminous with the term of the Company's sublease for its executive offices. The Company paid approximately $38,000 and $147,000 in 1997 and 1998, respectively, to Tangible Media under this Agreement. However, under this Agreement, Tangible Media paid approximately $155,000 to the Company in 1999. 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 15, 2000, 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. 28 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.
Shares of Common Stock Beneficially Owned Sole Voting Shared Voting Sole Dispositive Shared Dispositive Power Power Power Power ----------------- ---------------- ----------------- ------------------- Five Percent Stockholders, Directors Percent Percent Percent Percent Percent and Executive Officers Number of Class Number of Class Number of Class Number of Class - -------------------------------- -------- -------- ---------- ------- -------- -------- --------- --------- Avi Arad (1)(2)....................... -- * 30,105,992 65.6% 4,650,000 13.6% -- * 1698 Post Road East Westport, Connecticut 06880 Isaac Perlmutter(2)(3)................ -- * 30,105,992 65.6% 14,443,029 37.5% -- * P.O. Box 1028 Lake Worth, Florida 33460 The Chase Manhattan Corporation(2)(4).. -- * 30,105,992 65.6% 2,180,334 6.3% -- * 270 Park Avenue New York, New York 10017 Morgan Stanley & Co. Incorporated(2)(5)..................... -- * 30,105,992 65.6% -- * 5,163,449 14.1% 1585 Broadway New York, New York 10036 Whippoorwill Associates, Inc. as agent of and/or general partner for certain institutions and funds (6).......................... -- * 3,745,927 10.4% -- * 3,745,927 10.4% 11 Martine Avenue White Plains, NY 10606 Value Partners, Ltd.(7).............. 4,360,420 12.4% -- * 4,360,420 10.4% -- * Suite 808 4514 Cole Avenue Dallas, Texas 75205 Mark H. Rachesky, M.D. (8)........... -- * 2,115,042 5.9& -- * 2,115,042 5.9% Morton E. Handel (9)................. 27,667 * -- * -- * -- * F. Peter Cuneo (10).................. 187,714 * -- * -- * -- * Sid Ganas(11)........................ 16,667 * -- * -- * -- * Shelley F. Greenhaus (12)............ 26,667 * -- * -- * -- * James F. Halpin (13)................. 31,667 * -- * -- * -- * Michael M. Lynton (13)............... 26,667 * -- * -- * -- * Lawrence Mittman (13)................ 26,667 * -- * -- * -- * Rod Perth (13)....................... 26,667 * -- * -- * -- * Michael J. Petrick................... -- * -- * -- * -- * Alan Fine (14)....................... 216,667 * -- * -- * -- * David J. Fremed (15)................. 50,000 * -- * -- * -- * William Jemas........................ -- * -- * -- * -- * Allen S. Lipson ..................... 1,000 * -- * -- * -- * Richard Ungar........................ -- * -- * -- * -- * Eric Ellenbogen(16).................. 240,000 * -- * -- * -- * William H. Hardie, III (17).......... -- * -- * -- * -- * Robert S. Hull(18)................... 66,667 * -- * -- * -- * All current executive officers and directors as a group (16 persons)(2)(19).............. 445,169 1.3% 30,105,992 65.6% 19,809,413 57.0% -- *
- ------------------- * Less than 1%. 29 (1) Figures include 500,000 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 4,650,000 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 10,562,661 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 13,334 shares of Common Stock subject to stock options granted to Mr. Perlmutter pursuant to the Stock Incentive Plan which are immediately exercisable. Other shares over which Mr. Perlmutter may be deemed to have sole dispositive power are directly held as follows: Holder Shares of Common Stock Shares of 8% Preferred Stock --------------------------------------------------------- ---------------------- ---------------------------- Zib......................................................... 9,256,000 -- The Laura and Isaac Perlmutter Foundation Inc............... 250,000 -- Object Trading Corp......................................... 33,500 3,856,390 Classic Heroes, Inc......................................... 0 255,000 Biobright Corporation....................................... 0 255,000 Isaac Perlmutter T.A........................................ 0 320,998 Isaac Perlmutter............................................ 20,000 --
The sole stockholder of Zib, a Delaware corporation, is Isaac Perlmutter T.A., a Florida trust (the "Perlmutter Trust"). Mr. Perlmutter is a trustee and the sole beneficiary of the Perlmutter Trust, and may revoke it at any time. Mr. Perlmutter is a director and the president of the Laura and Isaac Perlmutter Foundation Inc., a Florida not-for-profit corporation. Mr. Perlmutter is the sole stockholder of (i) Object Trading Corp., a Delaware corporation, (ii) Classic Heroes, Inc., a Delaware corporation and (iii) Biobright Corporation, 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 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 14,443,029 shares over which Mr. Perlmutter may be deemed to have sole dispositive power (which include shares of Common Stock underlying 4,687,388 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 10,562,661 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 2,180,334 shares over which The Chase Manhattan Corporation may be deemed to have sole dispositive power (which include shares of Common Stock underlying 858,092 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 10,562,661 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. 30 (5) Morgan Stanley is a party to the Stockholders' Agreement. Morgan Stanley shares dispositive power over 5,163,449 shares with its parent, Morgan Stanley Dean Witter & Co. Except for those 5,163,449 shares (which include shares of Common Stock underlying 2,681,047 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 10,562,661 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 2,278,284 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 76,747 shares of Common Stock (which include shares of Common Stock underlying 46,545 shares of 8% Preferred Stock) that are not subject to the Stockholders' Agreement. (7) Timothy G. Ewing, as managing general partner of Value Partners, Ltd., may direct the vote and disposition of the shares beneficially owned by Value Partners, Ltd. and may also direct the vote and disposition of an additional 1,990 shares of Common Stock that he beneficially owns. (8) 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 1,957,663 shares of 8% Preferred Stock. (9) Figures include 33,334 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. (10) Figures include 187,500 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. (11) Figures include 6,667 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. (12) Figures include 13,334 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. (13) Figures include 13,334 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. (14) Figures include 216,667 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. (15) Figures include 50,000 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. (16) Mr. Ellenbogen is no longer employed by the Company. Figures include 240,000 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. 31 (17) Mr. Hardie is no longer employed by the Company. (18) Mr. Hull is no longer employed by the Company. Figures include 66,667 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. (19) Figures include 625,836 shares of Common Stock subject to stock options granted pursuant to the Stock Incentive Plan which are immediately exercisable. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For a description of certain relationships and related transactions involving individuals who served during 1999 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. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed with this Report 1. Financial Statements See the accompanying Index to Financial Statements and Financial Statement Schedule on page F-1. 2. Financial Statement Schedule See the accompanying Index to Financial Statements and Financial Statement Schedule on page F-1. 3. Exhibits See the accompanying Exhibit Index appearing on page 46. (b) Reports on Form 8-K. During the last quarter of 1999, the Company filed the following Current Reports on Form 8-K: 1. Current Report on Form 8-K dated October 14, 1999, reporting Items 5 and 7. (c) Exhibits. See the Exhibit Index immediately below. 33 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 3.1, above), defining the rights of holders of Common Stock. 4.2 Article VI of the Restated Certificate of Incorporation (see Exhibit 3.1, above), defining the rights of holders of 8% Preferred Stock. 4.3 Indenture, dated as of February 25, 1999, defining the rights of holders of 12% senior notes due 2009. (Incorporated by reference to Exhibit 4.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998.) 4.4 Plan Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.) 4.5 Class A Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.) 4.6 Class B Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.) 4.7 Class C Warrant Agreement, dated as of October 1, 1998, between the Registrant and American Stock Transfer & Trust Company, as warrant agent. (Incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K dated October 13, 1998 and filed with the Securities and Exchange Commission on October 14, 1998.) 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.) 34 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 Lease, dated December 3, 1993, by and between 200 Fifth Avenue Associates and the Registrant. (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, File No. 33-87268.) 10.11 Sublease, dated December 19, 1996, by and between Gruner & Jahr USA Publishing and the Registrant. (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.12 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.) 10.13 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.) 10.14 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)* 10.15 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.)* 35 10.16 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.)* 10.17 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.)* 10.18 Employment Agreement, dated as of January 1, 1998, by and between David J. Fremed and the Company. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998.)* 10.19 Employment Agreement, dated as of October 29, 1999, between the Company and Richard Ungar.* 10.20 Loan Out Agreement, dated as of October 29, 1999, between the Company and Brentwood Television Funnies, Inc..* 10.21 Employment Agreement, dated as of October 29, 1999, between the Company and Allen S. Lipson.* 10.22 Employment Agreement, dated as of January 26, 2000, between the Company and Bill Jemas.* 10.23 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.)* 10.24 Amended and Restated Master Agreement, dated as of November 19, 1997, by and among the Registrant, certain secured creditors of Marvel and certain secured creditors of Panini SpA and Amendments 1 and 2 thereto. (Incorporated by reference to Exhibit 10.26 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997.) 10.25 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). 10.26 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). 10.27 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). 10.28 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). 27 Financial Data Schedule. * Management contract or compensatory plan or arrangement. 36 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. /s/ F. Peter Cuneo By:----------------------- F. Peter Cuneo President and Chief Executive Officer Date:March 29, 2000 POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Allen S. Lipson his true and lawful attorney-in-fact with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report and to cause the same to be filed, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to said attorney-in-fact and agent full power and authority to do and perform each and every act and thing whatsoever requisite or desirable to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things that said attorney-in-fact and agent, or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------------- ------------------------------ -------------- /s/F. Peter Cuneo President, Chief Executive Officer March 29, 2000 - ----------------- and Director (principal executive officer) F. Peter Cuneo /s/ David J.Fremed Senior Vice President and Acting Chief March 29, 2000 - ------------------ Financial Officer (principal financial and David J.Fremed accounting officer) /s/ Morton E. Handel Chairman of the Board of Directors March 27, 2000 - -------------------- Morton E. Handel /s/ Avi Arad Director March 27, 2000 - ------------------ Avi Arad /s/Sid Ganis Director March 28, 2000 - ------------------ Sid Ganis /s/ Shelley F. Greenhaus Director March 27, 2000 - ------------------------ Shelley F. Greenhaus Director March , 2000 - ------------------- James F. Halpin Director March , 2000 - -------------------- Michael M. Lynton /s/ Lawrence Mittman Director March 28, 2000 - --------------------- Lawrence Mittman /s/ Isaac Perlmutter Director March 28, 2000 - --------------------- Isaac Perlmutter /s/ Rod Perth Director March 24, 2000 - --------------------- Rod Perth /s/Michael J. Petrick Director March 29, 2000 - -------------------- Michael J. Petrick 37 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULE
Marvel Enterprises, Inc. (f/k/a Toy Biz, Inc.) Page - ---------------------------------------------- ----- ` Report of Independent Auditors.......................................................................... F-2 Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999............................... F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1998, and 1999............. F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1998, and 1999................................................................................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998, and 1999............. F-6 Notes to Consolidated Financial Statements.............................................................. F-7 Financial Statement Schedule - ----------------------------- Schedule II-Valuation and Qualifying Accounts........................................................... F-33
All other schedules prescribed by the accounting regulations of the Commission are not required or are inapplicable and therefore have been omitted. F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders of Marvel Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Marvel Enterprises, Inc. (formerly Toy Biz, Inc.) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 schedule 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, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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, present fairly in all material respects the information set forth therein /S/ ERNST & YOUNG LLP New York, New York February 8, 2000 F-2 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1999 ------------ ---------- (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents...................................................... $ 43,691 $64,814 Accounts receivable, net....................................................... 50,312 55,841 Inventories, net .............................................................. 32,598 39,385 Assets held for resale ........................................................ 26,000 -- Income tax receivable ......................................................... 7,396 -- Deferred income taxes, net .................................................... 538 7,042 Deferred financing costs....................................................... 8,281 1,384 Prepaid expenses and other..................................................... 3,768 4,443 ------------ -------- Total current assets.................................................... 172,584 172,909 . Molds, tools and equipment, net.................................................. 15,548 17,226 Product and package design costs, net ........................................... 5,909 6,949 Goodwill and other intangibles, net ............................................. 487,731 440,361 Income tax receivable ........................................................... -- 1,327 Deferred charges and other assets................................................ 5,053 6,512 Deferred financing costs......................................................... -- 9,353 Deferred income taxes, net ...................................................... 3,079 -- ------------- -------- Total assets............................................................. $ 689,904 $654,637 ============ ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................................... $ 7,294 $ 9,613 Accrued expenses and other .................................................... 70,672 53,380 Borrowings..................................................................... 200,000 -- Administrative claims payable.................................................. 19,914 9,507 Unsecured creditors payable ................................................... 8,096 8,490 ----------- -------- Total current liabilities................................................ 305,976 80,990 Senior notes..................................................................... -- 250,000 Panini liability ................................................................ 27,000 -- Deferred income taxes .......................................................... 924 1,094 ----------- -------- Total liabilities........................................................ 333,900 332,084 ----------- -------- 8% cumulative convertible exchangeble redeemable preferred stock, $.01 par value, 75,000,000 shares authorized, 17,238,000 issued and outstanding in 1998 and 18,677,460 issued and 186,790 outstanding in 1999, liquidation preference $10 per share..................................................... 172,380 186,790 ----------- -------- Stockholders' equity Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued....... -- -- Common stock, $.01 par value, 250,000,000 shares authorized, 40,846,127 issued and 33,452,127 outstanding in 1998 and 40,951,241 issued and 33,557,241 outstanding in 1999.......................................................... 408 409 Additional paid-in capital....................................................... 215,035 215,184 Retained earnings(deficit)....................................................... 1,136 (46,875) ------------ -------- Total stockholders' equity before treasury stock......................... 216,579 168,718 Treasury stock, 7,394,000 shares................................................. (32,955) (32,955) ------------- --------- Total stockholders' equity .............................................. 183,624 135,763 ------------ -------- Total liabilities, redeemable convertible preferred stock and stockholders' equity................................................. $ 689,904 $ 654,637 ========= =========
See Notes to Consolidated Financial Statements. F-3 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, ------------------------------ 1997 1998 1999 ----------- --------- ---------- (in thousands, except per share data) Net sales......................................................... $ 150,812 $ 232,076 $319,645 Cost of sales..................................................... 106,951 127,978 150,858 --------- ---------- ------- Gross profit...................................................... 43,861 104,098 168,787 Operating expenses: --------- ---------- -------- Selling, general and administrative.......................... 72,081 97,135 124,596 Depreciation and amortization................................ 20,548 19,332 18,078 Amortization of goodwill and other intangibles............... 520 7,091 25,857 --------- ---------- -------- Total expenses.......................................... 93,149 123,558 168,531 --------- ---------- -------- Operating (loss) income........................................... (49,288) (19,460) 256 Interest expense.................................................. (776) (9,440) (32,077) Other income, net................................................. 414 676 4,043 --------- ---------- --------- Loss before income taxes..................................... (49,650) (28,224) (27,778) Income tax (benefit) expense ................................ (20,185) 4,386 4,482 --------- ---------- --------- Net loss before extraordinary item...................... $(29,465) $ (32,610) $(32,260) Extraordinary item, net of tax benefit of $1,021.................. -- -- 1,531 --------- ---------- ---------- Net loss.................................................. $(29,465) $ (32,610) $ (33,791) --------- ---------- ---------- Less: preferred dividend requirement.............................. 71 3,380 14,220 --------- ---------- ---------- Net loss attributable to Common Stock........................ $(29,536) $ (35,990) $ (48,011) ========= ========== ========== Basic and diluted net loss per common share: Net loss before extraordinary item............................. $ (1.06) $ (1.23) $ (1.39) Extraordinary item............................................. -- -- $ (0.04) --------- ---------- ---------- Net loss....................................................... $ (1.06) $ (1.23) $ (1.43) ======== ========== ========== Weighted average number of common shares outstanding........... 27,746 29,173 33,533
See Notes to Consolidated Financial Statements. F-4 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common Additional Retained Stock Stock Paid-In Earnings Treasury Shares Amount Capital (Deficit) Stock Total -------- ------ -------- ---------- -------- --------- (in thousands) Balance at December 31, 1996................ 27,743 $277 $70,587 $66,591 -- $137,455 Exercise of stock options................... 3 -- 62 -- -- 62 Accretion of redeemable preferred stock..... -- -- (71) -- -- (71) Net loss.................................... -- -- -- (29,465) -- (29,465) -------- ------ --------- ---------- -------- --------- Balance at December 31, 1997................ 27,746 277 70,578 37,126 -- 107,981 Capital contribution........................ -- -- 1,500 -- -- 1,500 Capital transactions in connection with acquisition Issuance of common stock............... 13,100 131 125,957 -- -- 126,088 Valuation of warrants.................. -- -- 17,000 -- -- 17,000 Acquisition of treasury stock.......... (7,394) -- -- -- (32,955) (32,955) Preferred dividend declared................. -- -- -- (3,380) -- (3,380) Net loss.................................... -- -- -- (32,610) -- (32,610) -------- ------- ---------- --------- ---------- -------- Balance at December 31, 1998................ 33,452 $408 $215,035 $1,136 $(32,955) $183,624 Issuance of common stock.................... 80 1 -- -- -- 1 Exercise of stock purchase warrants......... 25 -- 147 -- -- 147 Stock warrants exercised by stockholders..... -- -- 2 -- -- 2 Preferred dividend declared................. -- -- -- (14,220) -- (14,220) Net loss.................................... -- -- -- (33,791) -- (33,791) -------- ------- ---------- --------- ------------ ------- Balance at December 31, 1999................ 33,557 $ 409 $215,184 $(46,875) $(32,955) $135,763 ========= ====== ========= ========= ========= ========
See Notes to Consolidated Financial Statements. F-5 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------------- 1997 1998 1999 --------- --------- ---------- (in thousands) Net loss............................................................ $(29,465) $(32,610) $ (33,791) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................................... 21,068 26,423 43,935 Provision for doubtful accounts................................. -- 409 1,721 Deferred financing charges...................................... -- 2,596 2,888 Deferred income taxes........................................... (1,321) 7,494 2,922 Extraordinary item, net......................................... -- -- 1,531 Changes in operating assets and liabilities: Accounts receivable........................................ 45,076 12,774 (7,544) Inventories................................................ (2,452) (7,317) (6,798) Income tax receivable...................................... (17,542) 10,146 6,069 Prepaid expenses and other................................. (581) 2,953 (774) Deferred charges and other assets.......................... -- (4,918) (2,315) Accounts payable, accrued expenses and other .............. (2,032) 24,034 (7,029) --------- ---------- --------- Net cash provided by operating activities............................ 12,751 41,984 815 --------- --------- --------- Cash flow used in investing activities: Acquisition of Marvel Entertainment Group, net of cash received. -- (257,865) -- Payment of administrative claims, net........................... -- (12,985) (10,013) Net proceeds from sale of Fleer and settlement of Panini........ -- -- 11,980 Purchases of molds, tools and equipment......................... (12,448) (10,702) (13,660) Expenditures for product and package design costs............... (5,169) (4,955) (7,136) Patents......................................................... (127) (1,668) (181) (Purchase) sale of Colorforms assets............................ (4,556) 2,786 -- --------- ---------- ---------- Net cash used in investing activities........................... (22,300) (285,389) (19,010) --------- ---------- ---------- Cash flow from financing activities: Proceeds from (payment of) bridge facility...................... -- 200,000 (200,000) Proceeds from Senior Notes offering, net of offering costs of $11,022................................................... -- -- 238,978 Exercise of stock options....................................... 62 -- 147 Issuance of Common Stock........................................ -- -- 1 Net borrowings (repayments) under credit agreement.............. 12,000 (12,000) -- Redemption of Preferred Stock................................... (939) -- -- Proceeds from capital contribution.............................. -- 1,500 -- Proceeds from Preferred Stock offering.......................... -- 90,000 -- Proceeds from exercise of Stock Warrants........................ -- -- 192 ---------- ---------- --------- Net cash provided by financing activities....................... 11,123 279,500 39,318 ---------- ---------- --------- Net increase in cash and cash equivalents....................... 1,574 36,095 21,123 Cash and cash equivalents at beginning of year.................. 6,022 7,596 43,691 ---------- ---------- --------- Cash and cash equivalents at end of year........................ $ 7,596 $43,691 $64,814 ========== ========== ========== Supplemental disclosure of cash flow information: Interest paid during the period................................. $ 820 $ 5,302 $29,768 Net income taxes recovered during the year...................... (476) (12,594) (4,172) Other non-cash transactions: Preferred stock dividends....................................... 71 3,380 14,220 Issuance of securities in connection with the acquisition of Marvel Entertainment Group, Inc., and treasury stock......... -- 189,133 --
See Notes to Consolidated Financial Statements. F-6 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 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 4,500 characters, the Company has entered the licensing and comic book publishing businesses domestically and internationally. The term the "Company" and the term "Marvel" each refer to Marvel Enterprises, Inc., and its subsidiaries after the acquisition. The term "MEG" refers to Marvel Entertainment Group, Inc., and its subsidiaries, prior to the consummation of the acquisition, and its emergence from bankruptcy and the term "Toy Biz, Inc." refers to the Company prior to the consummation of the acquisition. Toy Biz, Inc. was formed on April 30, 1993 pursuant to a Formation and Contribution Agreement ( "Formation Agreement "), entered into by a predecessor company to Toy Biz, Inc. (the "Predecessor Company "), Mr. Isaac Perlmutter (the sole stockholder of the Predecessor Company), MEG and Avi Arad ( "Mr. Arad "). The Predecessor Company had been MEG's largest toy licensee. The Predecessor Company was incorporated in 1990, pursuant to an asset purchase agreement with Charan Industries, Inc. In accordance with the Formation Agreement, the Predecessor Company contributed all of its and an affiliate's assets ($23,335,000) and certain specified liabilities ($21,949,000) to Toy Biz, Inc. for 44% of Toy Biz, Inc.'s capital stock. Such specified liabilities included approximately $15,363,000 due to Mr. Perlmutter and other affiliated companies of the Predecessor Company. A portion of the assumed liabilities due to Mr. Perlmutter was paid in cash ($8,752,000) and the remainder of the assumed liabilities due to Mr. Perlmutter was converted into a promissory note ($6,611,000). MEG made a capital contribution of $500,000 for 46% of Toy Biz, Inc.'s capital stock and a loan, in the form of a note, of $8,507,000. In addition, MEG granted Toy Biz, Inc. an exclusive, perpetual and paid up license to design and distribute toys based on MEG characters. Pursuant to the Formation Agreement, in exchange for the contribution to Toy Biz, Inc. of his interests in certain license agreements with Toy Biz, Inc. and cash, Mr. Arad received 10% of Toy Biz, Inc.'s capital stock. In addition, Toy Biz, Inc. granted Mr. Arad the Arad Stock Option (the "Option") to acquire an additional 10% of Toy Biz, Inc.'s capital stock. Mr. Arad also agreed to enter into the Arad Consulting Agreement and the Master License Agreement. On October 1, 1998, pursuant to the Fourth Amended Joint Plan of Reorganization proposed by the senior secured lenders of MEG and Toy Biz, Inc. (the "Plan"), MEG became a wholly-owned subsidiary of Toy Biz, Inc. Toy Biz, Inc. also changed its name to Marvel Enterprises, Inc. on that date. The acquisition of MEG was accounted for using the purchase method of accounting. The results of the acquired business have been included in the Company's consolidated results of operations from October 1, 1998. The Plan was confirmed on July 31, 1998 by the United States District Court for the District of Delaware, which had been administering the MEG bankruptcy cases, and was approved by the Company's stockholders at a meeting on September 11, 1998. F-7 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 In accordance with the Plan, the Toy Biz, Inc. stockholders, other than MEG, immediately after the Reorganization continued to own approximately 40% of the outstanding common stock of the Company (assuming the conversion of all of the shares of 8% Cumulative Convertible Exchangeable Preferred Securities (the 8% Preferred Stock") issued by the Company pursuant to the Plan but not assuming the exercise of any warrants issued pursuant to the Plan) and the senior secured lenders of MEG received (i) approximately $231.8 million in cash and (ii) common and 8% Preferred Stock issued by the Company which (assuming the conversion of all 8% Preferred Stock) represent approximately 42% of the common stock of the Company. Investors purchased 9.0 million shares of 8% Preferred Stock that, represent approximately 18% of the common stock of the Company (assuming the conversion of all 8% Preferred Stock). Under the Plan, holders of allowed unsecured claims of MEG ("Unsecured Creditors") will receive (i) up to $8.0 million in cash and (ii) between 1.0 million and 1.75 million warrants having a term of four years and entitling the holders to purchase common stock of the Company at $17.25 per share. The exact amount of cash and warrants to be distributed to the Unsecured Creditors will be determined by reference to the aggregate amount of allowed unsecured claims. In addition, Unsecured Creditors will receive (i) distributions from any future recovery on certain litigation and (ii) a portion of the Stockholder Warrants as described below. Finally, the Plan provides that three other series of warrants (the "Stockholder Warrants") will be distributed to the Unsecured Creditors, to former holders of shares of MEG common stock, to holders of certain class securities litigation claims arising in connection with the purchase and sale of MEG common stock and to LaSalle National Bank. The Stockholder Warrants consist of (a) three-year warrants to purchase 4.0 million shares of common stock of the Company at $12.00 per share, (b) six-month warrants to purchase 3.0 million shares of 8% Preferred Stock for $10.65 per share subject to increase based upon the date of issuance of the six-month warrants and (c) four-year warrants to purchase 7.0 million shares of common stock of the Company at $18.50 per share. The recipients of the Stockholder Warrants will also be entitled to receive distributions from any future recovery on certain litigation. Certain other cash distributions were also provided for by the Plan in connection with settling certain of the disputes arising out of MEG's bankruptcy. In accordance with the Plan, two litigation trusts were formed on the consummation date of the Plan. Each litigation trust is now the legal owner of litigation claims that formerly belonged to MEG and its subsidiaries. The primary purpose of one of the trusts (the "Avoidance Litigation Trust") is to pursue bankruptcy avoidance claims. The primary purpose of the other trust (the "MAFCO Litigation Trust") is to pursue certain litigation claims against Ronald O. Perelman and various related entities and individuals. The Company has agreed to lend up to $1.1 million to the Avoidance Litigation Trust and up to $1.0 million to the MAFCO Litigation Trust, in each case on a revolving basis to fund the trust's professional fees and expenses. Each litigation trust is obligated to reimburse the Company for all sums advanced, with simple interest at the rate of 10% per year. Net litigation proceeds of each trust will be distributed to the trust's beneficiaries only after the trust has, among other things, paid all sums owed to the Company, released the Company from any further obligation to make loans to the trust, and established reserves to satisfy indemnification claims. The Company is entitled to 65.1% of net litigation proceeds from the Avoidance Litigation Trust. The Company is not entitled to any net litigation proceeds from the MAFCO Litigation Trust. F-8 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 The preliminary purchase price of MEG, including related fees, net of liabilities assumed, was approximately $446.9 million which included approximately $257.9 million in cash and the remainder in securities of the Company as outlined above, net of shares of the Company owned by MEG and reacquired in these transactions. Goodwill from the acquisition will be amortized over 20 years. During 1999, the Company finalized certain preliminary portions of the purchase price allocation relating to its acquisition of MEG. The final fair value of the assets and liabilities acquired is summarized below.
(in thousands) Current assets................... $ 42,851 Noncurrent assets................ 4,971 Goodwill and other intangible assets......................... 462,180 Current liabilities.............. (55,952) Non-current liabilities.......... (11,180) --------- $ 442,870 =========
In the preliminary allocation of the purchase price as of December 31, 1998, Fleer/SkyBox ("Fleer"), MEG's subsidiaries engaged in the sale of sports and entertainment trading cards, was presented as an asset held for sale and the Company's maximum liability relating to Panini S.p.A.("Panini"), MEG's Italian subsidiary engaged in the children's activity sticker and adhesive paper business, was presented as a long-term liability on the consolidated balance sheet as of December 31, 1998. In February 1999, the Company sold substantially all of the assets of Fleer for approximately $23.2 million, in cash, after adjustments and assumption of certain liabilities. Proceeds from this transaction were partially used to repay the bridge facility with the remainder used for working capital purposes. On October 8, 1999, the Company received nominal consideration for its equity interest in Panini. In connection with the sale, the Company made a payment to Panini's secured lenders of $11.2 million and obtained a release from the maximum liability, a $27.0 million guarantee of Panini's debt in favor of such secured lenders. The completion of the purchase price allocation 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 has occurred as of January 1, 1997: F-9 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999
For the Year Ended December 31, -------------------- 1997 1998 --------- ------- (in millions, except per share) Net sales.......................... $220.3 $274.5 Operating loss..................... (79.4) (33.9) Net loss........................... (96.1) (81.0) Basic and diluted loss per share... (3.28) (2.82)
2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, except for Panini and Fleer . Upon consolidation, all significant intercompany accounts and transactions are eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The principal areas of judgement relate to provisions for returns, other sales allowances and doubtful accounts, the realizability of inventories, goodwill and other intangible assets, and the impairment reserve for minimum royalty guarantees and minimum advances, molds, tools and equipment, and product and package design costs. Actual results could differ from those estimates. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market. F-10 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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, 1999, 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, 1997, 1998 and 1999 were approximately $2,174,000, $1,418,000 and $146,000 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, 1999, 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, 1997, 1998 and 1999 was approximately $1,230,000, $1,425,000 and $486,000 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, 1997, 1998 and 1999, amortization of goodwill and other intangibles was approximately $520,000, $7,091,000 and $25,857,000 respectively. F-11 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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, 1997, 1998 and 1999, R&D expenses were $4,599,000, $4,498,000 and $6,366,000 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, 1997, 1998 and 1999, toy distribution fees and sub-licensing revenues were $3,265,000, $1,250,000 and $337,000 respectively. F-12 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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, 1997, 1998 and 1999, advertising expenses were $27,910,000, $31,762,000 and $39,267,000, respectively. At December 31, 1998 and 1999 the Company had incurred $469,000 and $1,307,000 respectively, of prepaid advertising costs, principally related to production of advertisement that will be first run in fiscal 1999 and 2000, respectively Royalty Expense 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 fair value of all financial instruments approximate their carrying value based on their stated interest rate compared to prevailing rates available to the Company at December 31, 1999. F-13 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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 loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic loss per share, except the number of shares is increased assuming the exercise of dilutive stock options and warrants and other dilutive securities using the treasury stock method, unless the effect is anti-dilutive. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement No. 130 ("SFAS 130"), Reporting Comprehensive Income. The Company's adoption of SFAS 130 had no effect on the Company as the Company does not have any comprehensive income items. Recent Accounting Pronouncements SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - - In June 1998, the Financial Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted beginning in fiscal 2000. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. Management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. F-14 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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. Reclassifications Certain prior year amounts have been reclassified to conform with the current year's presenation. 3. Assets Held for Resale Shortly after the acquisition of MEG, the Company concluded that Fleer did not fit the Company's long-term strategy and the Company decided to dispose of this operation. On February 11, 1999, the Company sold substantially all of Fleer's assets for approximately $23.2 million in cash, after adjustments and assumptions of certain liabilities. $15.0 million of the proceeds were utilized to repay the Bridge Facility. The Company remains liable under certain contracts of the Fleer business and has been indemnified against such liabilities by the purchaser of such business. In its preliminary purchase price allocation, the Company estimated the fair value of Fleer's net assets to be $26.0 million. The difference between this amount and the actual proceeds was accounted for as an adjustment to goodwill. F-15 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 4. Details of Certain Balance Sheet Accounts
December 31, ------------------------ 1998 1999 ----------- --------- (in thousands) Accounts receivable, net, consists of the following: Accounts receivable................................................ $ 75,235 $84,353 Less allowances for: Doubtful accounts................................................ (3,608) (3,951) Advertising, markdowns, returns, volume discounts and other...... (21,315) (24,561) ----------- ---------- Total....................................................... $ 50,312 $55,841 =========== ========== Inventories, net, consist of the following: Toys: Finished goods................................................... $24,685 $31,397 Component parts, raw materials and work-in-process............... 3,977 4,787 ---------- --------- Total Toys.................................................. 28,662 36,184 Publishing: Finished goods................................................... 754 -- Editorial and raw materials...................................... 3,182 3,201 ---------- --------- Total publishing............................................ 3,936 3,201 ---------- --------- Total....................................................... $32,598 $39,385 ========== ========= Molds, tools and equipment, net, consists of the following: Molds, tools and equipment......................................... $21,465 $23,047 Office equipment and other......................................... 9,121 10,189 Less accumulated depreciation and amortization..................... (15,038) (16,010) ---------- --------- Total....................................................... $15,548 $17,226 ========== ========= Product and package design costs, net, consists of the following: Product design costs............................................... $8,125 $8,856 Package design costs............................................... 3,567 3,868 Less accumulated amortization...................................... (5,783) (5,775) ---------- --------- Total....................................................... $5,909 $ 6,949 ========== ========= Goodwill and other intangibles, net, consists of the following: Goodwill........................................................... $492,424 $470,729 Patents and other intangibles...................................... 3,726 3,902 Less accumulated amortization...................................... (8,419) (34,270) Total....................................................... $487,731 $440,361 ========== ========= Accrued expenses and other consists of the following: Accrued advertising costs.......................................... $8,183 $ 6,787 Accrued royalties.................................................. 9,584 8,197 Inventory purchases................................................ 7,389 5,547 Deferred financing costs........................................... 4,000 -- Income taxes payable............................................... 4,709 4,366 Deferred income taxes ............................................. 2,693 5,948 Litigation Trust accrual........................................... 2,100 675 Other accrued expenses............................................. 32,014 21,860 ---------- -------- Total....................................................... $70,672 $ 53,380 ========== ========
F-16 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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 bears interest at either the bank's base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on the Company's financial performance or at the Eurodollar rate plus a margin ranging from 1.75% to 2.25% depending on the Company's financial performance. The UBS Credit Facility requires the Company to pay a commitment fee of 0.50% per annum on the average daily unused portion of the facility. There have been no borrowings under the UBS Credit Facility. The Company had approximately $1.6 million in letters of credit outstanding as of December 31, 1998, which reduce the available amount under the UBS Credit Facility. UBS's commitment to advance funds and issue letters of credit under the UBS Credit Facility has been terminated effective as of February 3, 1999. The Bridge Facility and the UBS Credit Facility were secured by all of the Company's assets (other than Panini) and contained various financial covenants, as well as restrictions on new indebtedness, acquisitions and similar investments, the sale or transfer of assets, capital expenditures, restricted payments, payment of dividends, issuing guarantees and creating liens. On February 25, 1999, the Company completed a $250.0 million offering of senior notes (the "Senior Notes") in a private placement exempt from registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A under the Act. Net proceeds of approximately $239.0 million were used to pay all outstanding balances under the Bridge Facility and for working capital. The Senior Notes are due June 15, 2009 and bear interest at 12% per annum. The Senior Notes may be redeemed beginning June 15, 2004 for a redemption price of 106% of the principal amount, plus accrued interest. The redemption price decreases 2% each year after 2004 and will be 100% of the principal amount, plus accrued interest, beginning on June 15, 2007. In addition, 35% of the Senior Notes may, under certain circumstances, be redeemed before June 15, 2002 at 112% of the principal amount, plus accrued interest. Principal and interest on the Senior Notes are guaranteed on a senior basis jointly and severally by each of the Company's domestic subsidiaries. On August 20, 1999, the Company completed an exchange offer under which it exchanged virtually all of the Senior Notes, which contained restrictions on transfer, for an equal principal amount of registered, transferable notes whose terms are identical in all other material respects to the terms of the Senior Notes. In February 1999, in connection with the repayment of the Bridge Facility and the termination of the UBS Credit Facility, the Company recorded an extraordinary charge of approximately $1.5 million, net of tax benefit for the write-off of deferred financing costs associated with these two facilities. F-17 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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. 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 $385,000 as of December 31, 1999. 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, 1998 and 1999 were 12.10% and 12.00%, respectively and the weighted average interest rates for 1998 and 1999 were 11.31% and 12.02%, respectively. The maximum amounts outstanding during 1997, 1998 and 1999 were $12.0 million, $200.0 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, 1997, 1998 and 1999 were $776,000, $9,440,000 and $32,077,000 respectively. 6. Stockholders' Equity On September 11, 1998, the Company's stockholders approved changes in the Company's capital structure in connection with the approval of the Plan. These changes eliminated the Class B Common Stock, authorized an additional 150.0 million shares of common stock (for a maximum authorized amount of 250.0 million shares) and authorized 100.0 million shares of preferred stock, including 75.0 million shares of 8% Preferred Stock and 25.0 million shares of preferred stock with a $.01 par value. The 8% Preferred Stock is convertible into 1.039 fully paid and non-assessable shares of common stock of the Company. The Company is required to redeem all outstanding shares of the 8% Preferred Stock on October 1, 2011 at $10.00 per share plus all accrued and unpaid dividends. The 8% Preferred Stock generally votes together with the common stock on all matters. The Company has the option to pay the dividend in cash or additional 8% Preferred Stock, but cannot pay cash dividends on its 8% Preferred Stock as long as the Bridge Facility is outstanding. On March 31, June 30, September 30 and December 31,1999, the Company issued 344,312, 352,420, 359,019 and 366,184 shares, respectively, of 8% Preferred Stock in payment of dividends declared and payable to stockholders of record on those dates. In addition, holders of warrants to purchase the Company's 8% Preferred Stock exercised 17,525 warrants during 1999. Proceeds from these exercises totaled approximately $192,000. F-18 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 The Company issued the following securities in accordance with the Plan: (a) 7.9 million shares of 8% Preferred Stock to MEG fixed senior secured lenders, (b) 9.0 million shares of 8% Preferred Stock to new investors at $10.00 per share, (c) 13.1 million shares of common stock to the MEG fixed senior secured lenders, (d) four-year warrants to purchase up to 1.75 million shares of common stock at $17.25 per share, (e) three-year warrants to purchase 4.0 million shares of common stock at $12.00 per share, (f) six-month warrants to purchase 3.0 million shares of preferred stock for $10.65 per share subject to increase based upon the date of issuance of the six-month warrants, and (g) four-year warrants to purchase 7.0 million shares of common stock at $18.50 per share.
As of December 31, 1999, the Company had reserved shares of common stock for issuance as follows: Conversion of 8% preferred stock......................................................... 19,406 Exercise of common stock purchase warrants............................................... 12,750 Exercise of common stock options......................................................... 5,265 Exercise of preferred stock purchase warrants............................................. 973 ------ Total 38,394
In connection with the Plan, the Company received a $1.5 million capital contribution from an affiliate of Mr. Perlmutter and Mr. Arad. Mr. Perlmutter and Mr. Arad received no additional equity for such contribution. 7. Stock Option Plans Under the terms of the Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan"), incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance units and performance shares may be granted to officers, employees, consultants and directors of the Company and its subsidiaries. In November 1998, the Company authorized a maximum aggregate number of shares of Common Stock as to which options and rights may be granted under the Stock Incentive Plan of 6.0 million shares, including options described below. All options granted and outstanding under the Company's previous stock incentive plan (the "1995 Stock Option Plan") and all previous stock option plans of MEG were canceled at or prior to the consummation of the Plan on October 1, 1998. F-19 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 Information with respect to options under the stock option plans are as follows:
Weighted Average Option Price per Exercise Shares Share Price ---------- ------------------ --------- Outstanding at December 31, 1996............... 1,120,885 $15.00-$22.63 Canceled....................................... (484,666) $18.12 Exercised...................................... (3,333) $18.00 Granted........................................ -- -- Outstanding at December 31, 1997............... 632,886 $15.00-$22.63 Canceled....................................... (632,886) $17.92 Exercised...................................... -- -- Granted (under 1998 Stock Incentive Plan)... 3,551,000 $ 6.05 --------- Outstanding at December 31, 1998............... 3,551,000 $ 5.88-$6.25 Canceled....................................... (379,250) $6.06 Exercised...................................... (25,000) $5.88 Granted........................................ 2,118,000 $6.48 --------- Outstanding at December 31, 1999............... 5,264,750 $ 5.00-$7.25 $6.22 ========= Exercisable at December 31, 1999 1,671,140 $ 5.88-$7.25 $6.20 =========
Options granted under the Stock Incentive Plan in 1999 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, 1999, 630,250 shares were available for future grants of options and rights. At December 31, 1999, the weighted average remaining contractual life of the options outstanding is 7.97 years. The Company accounts for its stock options under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on date of grant, no compensation expense is recognized. The Company has elected to follow the disclosure-only provisions under FASB Statement No. 123, "Accounting for Stock-Based Compensation," ("FAS 123"). For the purposes of FAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: F-20 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999
Years Ended December 31, ------------------------------------- 1998 1999 1997 --------- --------- ------------- (in thousands, except per share data) Net loss as reported............................................... $(29,465) $(32,610) $(33,791) Pro forma net loss................................................. (29,816) (35,679) $(39,214) Pro forma net loss per share attributable to Common Stock--basic And diluted..................................................... $ (1.08) $ (1.34) $( 1.59)
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 option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. The effects of applying FAS 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net income in future years. 8. Sales to Major Customers and International Operations The Company primarily sells its merchandise to major retailers, principally throughout the United States. Credit is extended based on an evaluation of the customer's financial condition and, generally, collateral is not required. Credit losses are provided for in the financial statements and 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, 1997, three customers accounted for approximately 22%, 15% and 12%of total net sales. During the year ended December F-21 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 31, 1998, three customers accounted for approximately 23%, 15% and 10% 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. 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, 1997, 1998 and 1999, international sales were approximately 22%, 16%, and 15 %, respectively, of total net toy sales. During the years ended December 31, 1997, 1998 and 1999, the Hong Kong operations reported operating income of approximately $5,868,000, $1,534,000 and $5,055,000 and income before income taxes of $6,102,000, $1,884,000 and $5,472,000, respectively. At December 31, 1998 and 1999, the Company had assets in Hong Kong of approximately $27,276,000 and $35,997,000, respectively. The Hong Kong subsidiary represented $27,799,000 and $31,926,000, of the Company's consolidated retained earnings during the years ended December 31, 1998 and 1999,respectively. 9. Restructuring and Other Unusual Costs In connection with the consummation of the Plan, the Company reviewed its relationships with its foreign distributors, as well as the Company's relationship with certain suppliers, for business conflicts. As part of integrating MEG's operations with those of the Company, the Company plans on reevaluating its international licensing and product distribution relationships. In addition, certain products that were at various stages of design and marketing are being discontinued and written-off because of business conflicts that arose out of the acquisition of MEG. 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.
(in thousands) Net sales (allowances)................ $ 2,925 Cost of sales......................... 1,193 Selling general and administrative.... 11,676 Depreciation and amortization......... 1,032 ----------- $ 16,826 Cash charges.......................... $ 3,400 Non-cash charges...................... $ 13,426 ----------- $ 16,826 ===========
F-22 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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. The Company expects to pay the remaining cash charges under contractual obligations extending to 2000. 10. Income Taxes The provision (benefit) for income taxes is summarized as follows:
Years Ended December 31, ------------------------------- 1997 1998 1999 --------- ----------- -------- (in thousands) Current: Federal.................... $(19,196) $(6,189) $ (146) State...................... (191) 410 534 Foreign.................... 523 824 1,172 --------- -------- ------- $(18,864) $(4,955) $1,560 Deferred: Federal.................... $ 1,287 $ 6,025 $2,794 State...................... (2,068) 3,316 128 --------- -------- ------- (1,321) 9,341 2,922 --------- -------- ------- Income tax (benefit) expense ..... $(20,185) $ 4,386 $4,482 ========= ======== =======
F-23 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 The differences between the statutory Federal income tax rate and the effective tax rate are attributable to the following:
Years Ended December 31, -------------------------- 1997 1998 1999 --------- -------- -------- Federal income tax provision computed at the statutory rate..... (35.0)% (35.0)% (35.0)% State taxes, net of Federal income tax effect................... (5.7)% (4.7)% 1.9% Non-deductible amortization expense............................. -- 7.9% 30.0% Foreign taxes................................................... -- -- 2.9% Purchase accounting............................................. -- -- 17.1% Increase in valuation allowance................................. -- 48.6% -- Other........................................................... (1.3)% (0.8)% ---------- -------- -------- Total provision for income taxes................................ (40.7)% 15.5% 16.1% ========== ========= ========
For financial statement purposes, the Company records income taxes using a liability approach which results in the recognition and measurement of deferred tax assets based on the likelihood of realization of tax benefits in future years. Deferred taxes result from temporary differences in the recognition of income and expenses for financial and income tax reporting purposes and differences between the fair value of assets acquired in business combinations accounted for as purchases and their tax bases. The significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, ------------------- 1998 1999 -------- --------- (in thousands) Deferred tax assets: Accounts receivable ...................... $ 4,573 $ 5,159 Inventory................................. 6,623 6,192 Sales returns reserves.................... 4,505 2,014 Employment reserves....................... 3,999 4,017 Restructuring reserves.................... 589 477 Reserve related to foreign investments.... 2,373 3,546 Other reserves............................ 1,038 956 Net operating loss carryforwards.......... 26,847 43,849 Tax credit carryforwards.................. 657 4,019 Other..................................... 3,759 3,932 -------- --------- Total gross deferred tax assets........... 54,963 74,161 Less valuation allowance.................. (51,346) (67,119) -------- --------- Net deferred tax assets................... 3,617 7,042 -------- --------- Deferred tax liabilities: Depreciation/amortization ................ 636 477 Licensing, net............................ 2,981 5,948 Other..................................... -- 617 -------- --------- Total gross deferred tax liabilities...... 3,617 7,042 -------- --------- Net deferred tax asset (liability)........ -- -- ======== =========
F-24 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 During 1998 and 1999, 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, 1999 includes $36.2 million which, if realized, will be accounted for as a reduction of goodwill. At December 31, 1999, the Company has Federal net operating loss carryforwards of approximately $85.9 million. This loss carryforward will expire in years 2009 through 2019. Of the total Federal loss carryforward, approximately $78.3 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 $128.0 million. The state and local loss carryforwards will expire in various jurisdictions in years 2001 through 2019. The state and local loss carryforwards are generally subject to the Section 382 limitation. No benefit was provided for either the Federal or state and local net operating loss carryforwards at December 31, 1999. 11. Quarterly Financial Data (unaudited) Summarized quarterly financial information for the years ended December 31, 1998 and 1999 is as follows:
1998 1999 -------------------------------------------- --------------------------------------------- Quarter Ended March 31 June 30 September 30 December 31 March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- -------- ------- ------------ ----------- (in thousands, except per share data) Net sales.................. $42,641 $48,675 $ 65,045 $ 75,715 $75,258 $61,510 $ 89,882 $ 92,995 Gross profit............... 19,408 22,895 26,300 35,495 42,608 30,679 47,531 47,969 Operating income (loss).... 1,882 3,607 (11,969) (12,980) 9,068 (4,044) 3,172 (7,940) Net income (loss).......... 1,076 2,106 (7,223) (28,569) (2,927) (9,070) (4,644) (17,150) Preferred divided Requirement.............. -- -- -- 3,380 3,443 3,525 3,590 3,662 Basic and dilutive net income (loss) per common share... $ 0.04 $ 0.08 $ (0.26) $ (0.96) $(0.19) $ (0.38) $ (0.25) $ ( 0.62)
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. 12. Related Party Transactions Mr. Perlmutter indirectly purchased approximately $34.9 million of the 8% Preferred Stock in connection with the Plan. Prior to the Company's acquisition of MEG on October 1, 1998, MEG provided support to the Company relating to licensing agreements, promotion, legal and financial matters. The cost for these support services has been included in selling, general and administrative expenses, and amounted to $141,000 for the year ended December 31, 1997. The Company did not receive any services from MEG subsequent to the acquisition. F-25 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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, 1997, 1998 and 1999, the Company paid fees and commissions to the affiliate totaling approximately $1,274,000, $1,147,000 and $1,170,000, respectively, relating to such advertisements. The Company accrued royalties to Mr. Arad for toys he invented or designed of $3,624,000, $4,254,000 and $2,981,000 during the years ended December 31, 1997, 1998 and 1999, respectively. At December 31, 1998 and 1999, the Company had an accrual to Mr. Arad of $457,000 and $1,028,000, respectively, for unpaid royalties. The Company shares office space and certain general and administrative costs with affiliated entities. Rent received from affiliates for the years ended December 31, 1997, 1998 and 1999 was $116,000, $105,000 and $106,000, respectively. While certain costs are not allocated among the entities, the Company believes that it bears its proportionate share of these costs. 13. Commitments and Contingencies The Company is a party to various noncancellable operating leases involving office and warehouse space expiring on various dates from June 30, 2000 through April 30, 2010. The leases are subject to escalations based on cost of living adjustments and tax allocations. Minimum future obligations on these leases are as follows:
(in thousands) 2000.......... $ 2,437 2001.......... 1,437 2002.......... 631 2003.......... 490 2004.......... 511 Thereafter.... 2,268 --------- $ 7,774 ========
Rent expense amounted to approximately $1,220,000, $1,060,000, and $2,691,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The Company is a party to various royalty agreements with future guaranteed royalty payments through 2001. Such minimum future obligations are as follows:
(in thousands) 2000..... $ 1,601 2001..... 784 2002..... 88 -------- $ 2,473 =======
F-26 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 The Company has recorded approximately $10,270,000 as a net receivable for minimum guaranteed royalties as of December 31, 1999. The portion receivable after one year from the balance sheet date is included in other assets. The minimum guaranteed royalties receivable are due as follows:
(in thousands) 2000............................ $ 6,733 2001............................ 4,151 2002............................ 2,478 2003 and thereafter............. 3,000 Allowances and discounting...... (6,092) --------- $ 10,270 =========
Legal Matters The Company is a party to certain legal actions described below. In addition, the Company is involved in various other legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any outstanding legal proceeding and there can be no assurances, the Company believes that its legal proceedings and claims (including those described below), individually and in the aggregate, are not likely to have a material adverse effect on its financial condition, results of operations or cash flows. Certain Bankruptcy Proceedings. As a result of the consummation of the Plan on October 1, 1998, all claims against MEG with respect to orders issued by the District Court in connection with the Plan have been released, as have all claims by MEG against the Company and all claims against the Company concerning the effect of the June 1997 change of control of MEG on the voting power of the stock in the Company owned by MEG. Spider-Man Litigation. The Company's subsidiaries Marvel Entertainment Group, Inc. and Marvel Characters, Inc. (collectively, the "Marvel Parties") 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 and pending in the Superior Court of the State of California for the County of Los Angeles, to which Metro-Goldwyn Mayer Studios Inc. and two of its affiliates ("MGM"), Columbia Tristar Home Video and related entities ("Sony"), Viacom International Inc. ("Viacom") and others were also parties. In February 1999, the Superior Court granted summary judgment to the Marvel Parties and dismissed MGM's claims. In March 1999, MGM, Sony and the Marvel Parties settled all remaining claims among themselves. The litigation among Sony, the Marvel Parties and Viacom over claims by Viacom to the rights to distribute on pay and free television a feature length live action motion picture based on the Spider-Man character were not resolved. After a trial in February 1999, the Superior Court held that Viacom has no rights with respect to any Spider-Man film to be produced by Sony, the Marvel Parties or any future licensee of the Marvel Parties. Viacom has filed a Notice of Appeal but no date for the appeal has been scheduled. It is the Company's position that the Superior Court's decision was correct and that Viacom has no rights with respect to distribution of a Spider-Man film. Although there can be no assurances, the Company believes that the Superior Court decision will be upheld on appeal. F-27 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 Woldfman Litigation. On January 24, 1997, Marvin A. Wolfman ("Wolfman") filed a proof of claim in the bankruptcy cases of MEG and Marvel Characters, Inc. asserting ownership rights to a number of characters that appeared in stories written by Wolfman and published by Marvel Comics during the 1970s. In November 1999 a hearing was held in the United States District Court for the District of Delaware to determine the ownership rights to the characters covered by Wolfman's claim and the matter is sub judice. On August 20, 1998, Wolfman commenced an action in the United States District Court for the Central District of California against New Line Cinema Corporation ("New Line"), Time Warner Companies, Inc., the Company, MEG and Marvel Characters, Inc. The complaint in that action alleges that the motion picture Blade (featuring Blade and Deacon Frost which were among the characters included within Wolfman's January 24, 1997 proof of claim), produced and distributed by New Line pursuant to an agreement with MEG, as well as the Company's sale of action figure toys, infringes Wolfman's claimed copyrights and trademarks as the author of the original stories featuring the Blade and Deacon Frost characters (collectively, the "Work") and that Wolfman created the Work and granted MEG's predecessor in interest only the non-exclusive right to publish the Work in print for Marvel Comics' Tomb of Dracula series. The complaint also charges the defendants in the action with unfair competition and other tortious conduct based upon Wolfman's asserted rights in the Work. The relief sought by the complaint includes a declaration that the defendants have infringed Wolfman's copyrights, compensatory and punitive damages, an injunction and various other forms of equitable relief. In late August 1998 Wolfman dismissed the complaint against MEG and Marvel Characters, Inc. The action has been stayed against the other named defendants pending the outcome of the November 1999 hearing in Delaware with respect to Wolfman's proof of claim. 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 and that the termination notices filed by Simon are invalid and of no legal effect. Simon has asserted a counterclaim in the action seeking a declaration that he is the sole owner of the Captain America character. Administration Expense Claims Litigation. Unresolved Administration Expense Claims are pending which seek amounts totaling approximately $16.8 million and additional unresolved Administration Expense Claims are pending which do not seek specified dollar amounts. The Company is contesting all of the unresolved Administration Expense Claims. Although there can be no assurance, the Company expects that it will be required to pay substantially less than the amounts sought by the holders of the Administration Expense Claims. F-28 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 14. Benefits Plans The Company has a 401(k) Plan for its employees. In addition, in connection with the sale of Fleer (see Note 3), the Company retained certain liabilities related to a noncontributory defined benefit pension plan for salaried employees. In prior years, this plan was amended to prohibit participation by new participants. The accumulated benefit obligation is approximately $19.2 million. The funded value of plan assets is approximately $16.6 million and the pension liability at December 31, 1999 is approximately $3.1 million. Plan expenses for the years ended December 31, 1997, 1998 and 1999 were not significant. 15. Segment Information Following the Company's acquisition of MEG, the Company realigned its businesses into three segments: Toy Merchandising and Distributing, Publishing and Licensing Segments. Toy Merchandising and Distributing Segment The toy merchandising and distributing segment designs, develops, markets and distributes 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 3,500 Marvel Characters. The Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, newly developed Marvel Characters, and characters created by other entities and licensed to the Company. F-29 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 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) theme parks and site-based entertainment.
Toys Publishing Licensing Total --------- ---------- --------- --------- (in thousands) Year ended December 31, 1997 Net sales....................................... $ 150,812 -- -- $ 150,812 Gross profit.................................... 43,861 -- -- 43,861 Operating loss.................................. (49,288) -- -- (49,288) EBITDA(1)....................................... (28,220) -- -- (28,220) Total capital expenditures...................... 17,744 -- -- 17,744 Toys Publishing Licensing Corporate Total --------- ---------- ---------- --------- --------- (in thousands) Year ended December 31, 1998 Net sales....................................... $ 212,436 $ 14,707 $ 4,933 -- $ 232,076 Gross profit.................................... 92,743 6,820 4,535 -- 104,098 Operating (loss) income......................... (18,742) 258 (976) -- (19,460) EBITDA(1)....................................... 1,259 1,409 4,295 -- 6,963 Total capital expenditures...................... 17,325 -- -- -- 17,325 Identifiable assets for continuing operations... 149,842 101,697 401,098 11,267 663,904 Net assets held for disposition................. -- 26,000 -- -- 26,000 --------- ---------- --------- --------- --------- Total identifiable assets....................... $ 149,842 $127,697 $401,098 $ 11,267 $ 689,904 Toys Publishing Licensing Corporate Total --------- ---------- ---------- --------- -------- (in thousands) Year ended December 31, 1999 Net sales....................................... $ 245,775 $ 43,007 $ 30,863 -- $ 319,645 Gross profit.................................... 119,788 18,725 30,274 -- 168,787 Operating income (loss)......................... 10,932 3,707 (100) (14,283) 256 EBITDA(1)....................................... 30,282 8,341 19,851 (14,283) 44,191 Total capital expenditures...................... 20,977 -- -- -- 20,977 Identifiable assets for continuing operations... $ 184,973 $ 86,263 $383,401 -- $654,637 ---------- --------- --------- -------- -------- Total identifiable assets....................... $ 184,973 $ 86,263 $383,401 -- $654,637
(1) "EBITDA" is defined as earnings before extraordinary items, interest expense, taxes, depreciation and amortization. EBITDA does not represent net income or cash flow from operations as those terms are defined by generally accepted accounting principles and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. F-30 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999 16. Supplemental Financial Information The following represents the supplemental consolidating condensed financial statements of Marvel Enterprises, Inc., which is the issuer of the Senior Notes, and its subsidiaries that guarantee the Notes and the non-guarantor subsidiaries as of December 31, 1998 and 1999 and for each of the three years ended December 31, 1999.
Issuer And Non- Guarantors Guarantors Total ----------- ---------- --------- (in thousands) For The Year Ended December 31, 1997 Net sales................................... $ 117,571 $ 33,241 $150,812 Gross profit................................ 33,542 10,319 43,861 Operating (loss)income...................... (55,205) 5,917 (49,288) Net (loss)income............................ (34,613) 5,148 (29,465) For The Year Ended December 31, 1998 Net sales................................... $ 196,106 $ 35,970 $232,076 Gross profit................................ 91,281 12,817 104,098 Operating (loss) income..................... (21,106) 1,646 (19,460) Net (loss) income........................... (33,806) 1,196 (32,610) For The Year Ended December 31, 1999 Net sales................................... $ 280,355 $ 39,290 $319,645 Gross profit................................ 154,759 14,028 168,787 Operating (loss) income..................... (4,925) 5,181 256 Net (loss) income........................... (37,994) 4,203 (33,791) Issuer And Non- Inter- Guarantors Guarantors company Total ----------- ---------- ----------- -------- (in thousands) December 31, 1998 Current assets ............................. $ 173,985 $ 27,095 $ (28,496) $172,584 Non-current assets.......................... 513,412 3,908 -- 517,320 ----------- ---------- ---------- -------- Total assets................................ $ 687,397 $ 31,003 $ (28,496) $689,904 =========== ======== ========== ======== Current liabilities......................... 329,674 4,798 (28,496) 305,976 Non-current liabilities..................... 27,924 -- -- 27,924 8% Preferred Stock.......................... 172,380 -- -- 172,380 Stockholders' equity........................ 157,419 26,205 -- 183,624 ----------- -------- ---------- -------- $ 687,397 $ 31,003 $ (28,496) $689,904 =========== ======== ========== ======== December 31, 1999 Current assets.............................. $ 165,580 $ 7,329 $ -- $172,909 Non-current assets.......................... 481,302 32,427 (32,001) 481,728 ----------- ------- ---------- -------- Total assets................................ $ 646,882 $39,756 $ (32,001) $654,637 =========== ======= ========== ======== Current liabilities......................... 103,877 9,114 (32,001) 80,990 Non-current liabilities..................... 251,094 -- -- 251,094 8% Preferred Stock.......................... 186,790 -- -- 186,790 Stockholders' equity........................ 105,121 30,642 -- 135,763 ----------- ------- ---------- -------- $ 646,882 $39,756 $ (32,001) $654,637 =========== ======= ========== ========
F-31 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999
Issuer and Non- Guarantors Guarantors Total ---------- ----------- -------- (in thousands) Year Ended December 31, 1997 Cash Flows From Operating Activities: Net (loss) Income.......................................... $ (34,613) $ 5,148 $(29,465) =========== =========== ========= Net cash provided by (used in) operating activities... 13,191 (440) 12,751 Net cash (used in) provided by investing activities... (22,503) 203 (22,300) Net cash provided by financing activities............. 11,123 11,123 ----------- ----------- --------- -- -- Net increase (decrease) in cash............................ 1,811 (237) 1,574 Cash, at beginning of year................................. 5,151 871 6,022 ----------- ----------- --------- Cash, at end of year....................................... $ 6,962 $ 634 % 7,596 =========== =========== ========= Year Ended December 31, 1998 Cash Flows From Operating Activities: Net (loss) Income.......................................... $ (33,806) $ 1,196 $(32,610) =========== =========== ========= Net cash provided by operating activities... 40,959 1,025 41,984 Net cash used in investing activities... (285,164) (225) (285,389) Net cash provided by financing activities... 279,500 279,500 ----------- ----------- --------- -- -- Net increase in cash...................................... 35,295 800 36,095 Cash, at beginning of year ............................... 6,962 634 7,596 ----------- ----------- -------- Cash, at end of year...................................... $ 42,257 $ 1,434 $ 43,691 =========== =========== ========= Year Ended December 31, 1999 Cash Flows From Operating Activities: Net (loss) Income......................................... $ (37,994) $ 4,203 $(33,791) =========== ========== ========= Net cash provided by operating activities............ 57 758 815 Net cash used in investing activities................ (18,981) (29) (19,010) Net cash provided by financing activities............ 39,318 -- 39,318 ----------- ----------- Net increase in cash...................................... 20,394 729 21,123 Cash, at beginning of year............................... 42,257 1,434 43,691 ----------- ----------- --------- Cash, at end of year..................................... $ 62,651 $ 2,163 $ 64,814 =========== ========== =========
F-32 MARVEL ENTERPRISES, INC. (formerly Toy Biz, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1999
VALUATION AND QUALIFYING ACCOUNTS Allowances Balance Acquired Charged to Sales Charged to Balance At Beginning in MEG or Costs and Other at End Description of Period Acquisition Expenses Accounts Deductions of Period - ----------------------------------- ------------ ----------- --------------- ---------- ---------- --------- (in thousands) Year Ended December 31, 1997 Allowances included in Accounts Receivable. Net: Doubtful accounts--current......... $ 485 -- -- -- $ 55 $ 430 Advertising, markdowns, returns, volume discounts and other...... 14,856 -- 55,746(1) -- 41,215 29,387 Year Ended December 31, 1998 Allowances included in Accounts Receivable. Net: Doubtful accounts--current......... 430 3,112 409(2) -- 343 3,608 Doubtful accounts--non-current..... -- 521 -- -- -- 521 Advertising, markdowns, returns, volume discounts, and other..... 29,387 6,255 33,998(1) -- 48,325 21,315 Year Ended December 31, 1999 Allowances included in Accounts Receivable. Net: Doubtful accounts--current......... 3,608 -- 1,141(3) -- 798 3,951 Doubtful accounts--non-current..... 521 -- 580(2) -- 121 980 Advertising, markdowns, returns, volume discounts and other...... 21,315 (380) 47,728 (1) -- 44,102 24,561
(1) Charged to sales (2) Charged to costs and expenses. (3) 1,228 charged to costs and expenses and (87) charged to sales. F-33 EX-10.19 2 EMPLOYMENT AGREEMENT EXHIBIT 10.19 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 29, 1999, between Marvel Enterprises, Inc., a Delaware corporation (the "Company") and Richard Ungar (the "Executive"). WHEREAS, the Company wishes to employ the Executive, and the Executive wishes to accept such employment, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Employment, Duties and Acceptance. 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive and full-time services, except as stated herein below, to the Company as President of the Company's Marvel Characters Group or in such other executive position as may be mutually agreed upon by the Company and the Executive. The Executive shall report solely to the Company's Chief Executive Officer and Board of Directors and shall perform such other duties consistent with such positions as may be assigned to the Executive by the Company's Chief Executive Officer or Board of Directors. 1.2 Acceptance. The Executive hereby accepts such employment and agrees to render the services described above. During the Term, the Executive agrees to serve the Company faithfully and to the best of the Executive's ability. The Company and Executive acknowledge that the Company has also entered into a Loan Out Agreement for Executive Producer Services of the Executive, dated the same date as this Agreement, pursuant to which Brentwood Television Funnies, Inc. ("Brentwood") has agreed to supply the Executive to the Company to serve as an Executive Producer of television programs of the Company (the "Loan-Out Agreement"). The Executive agrees to devote the Executive's entire business time, energy and skill to the Executive's employment under this Agreement and to the provision of services under the Loan Out Agreement and to use the Executive's professional efforts, skill and ability to promote the Company's interests. The Company acknowledges that the Executive is currently involved in various business projects which are listed on Schedule 1 to this Agreement (the "Prior Projects"). The Company acknowledges that the Prior 1 Projects are the personal business activities of the Executive and agrees that the Executive may continue to devote up to 10% of his business time, in the aggregate, to the Prior Projects and to any other personal business activities of the Executive which are approved by the Board (the "Other Approved Activities") to the extent that the Prior Projects and the Other Approved Activities do not materially interfere with the performance of the Executive's duties under this Agreement. The Executive agrees to accept election, and to serve during all or any part of the Term, as an officer or director of the Company and of any subsidiary or affiliate of the Company, without any compensation therefor other than that specified in this Agreement, if elected to any such position by the shareholders or by the Board of Directors of the Company or of any subsidiary or affiliate, as the case may be. If the Executive is elected a director of the Company, as contemplated herein, the Company shall provide the Executive with the same director and officer liability insurance coverage as that provided to other directors under any director and officer liability insurance policy of the Company which is in effect at that time. 1.3 Location. The duties to be performed by the Executive hereunder shall be performed primarily at the offices of the Company in Los Angeles, California, subject to reasonable and customary travel requirements on behalf of the Company. The Company and the Executive understand that the Executive's duties are likely to require him to spend a portion of his business time at the Company's office in New York City and that the amount of time that the Executive is required to spend at the Company's New York City office will fluctuate from month to month based upon the projects on which the Executive is then working. The Company agrees, however, that the portion of the Executive's time that he is required to spend at the Company's New York City office is not generally expected to exceed one week per month. 2. Term of Employment 2.1 The Term. The term of the Executive's employment under this Agreement (the "Term") shall commence on October 25, 1999 (the "Effective Date") and shall end on October 25, 2002 (the "Expiration Date"). The Term shall end earlier than the Expiration Date if sooner terminated pursuant to Section 4 hereof. The Expiration Date shall be automatically postponed for one year, and the Term shall be automatically extended by one year, unless either party hereto provides the other party with written notice (a "Notice of Nonrenewal"), not later than sixty days prior to the Expiration Date, of its election not to permit the Term to be so extended, and the Expiration Date shall thereafter be automatically postponed for one additional year and the Term shall thereafter be automatically extended by one additional year, on each subsequent anniversary of the date of this Agreement, unless either party provides the other party with written notice, not later than sixty days prior to such subsequent anniversary 2 of the date of this Agreement, of its election not to permit the Term to be so extended. 3. Compensation; Benefits. 3.1 Salary. As compensation for all services to be rendered pursuant to this Agreement, the Company agrees to pay the Executive during the Term a base salary, payable bi-weekly in arrears, at the annual rate of $250,000 less such deductions or amounts to be withheld as required by applicable law and regulations and deductions authorized by the Executive in writing. The Executive's base salary shall be reviewed no less frequently than annually by the Board of Directors and may be increased, but not decreased, by the Board of Directors. The Executive's base salary as in effect from time to time is referred to in this Agreement as the "Base Salary". 3.2 Bonus. In addition to the amounts to be paid to the Executive pursuant to Section 3.1 hereof, the Executive will be entitled to receive a cash bonus on the Effective Date in the amount of $40,000 as a starting bonus (the "Effective Date Bonus") and an additional cash bonus in respect of 1999 in the amount of $100,000 (the "1999 Bonus"). With respect to each fiscal year of the Term after 1999, the Executive will be eligible to receive a cash bonus based upon the attainment of performance goals set by the Board of Directors (the "Bonus Performance Goals"). The Executive's target annual bonus amount shall be 85% of his base salary for the year. If the Executive's Base Salary is increased by the Board of Directors, the Board of Directors shall also review the Executive's target annual bonus amount and may increase, but not decrease, the Executive's target annual bonus as a percentage of his base salary. The 1999 Bonus shall be paid to the Executive no later than February 1, 2000. Each annual bonus in respect of subsequent fiscal years shall be paid when annual bonuses are paid generally to the Company's other senior executive officers but in no event later than the ninetieth day of the next fiscal year. 3.3 Business Expenses. The Company shall pay for or reimburse the Executive for all reasonable expenses actually incurred by or paid by the Executive during the Term in the performance of the Executive's services under this Agreement, including the cost and expense associated with the use of a cell phone, upon presentation of expense statements or vouchers or such other supporting information as the Company customarily may require of its officers. 3.4 Vacation. During the Term, the Executive shall be entitled to a vacation period or periods of four (4) weeks per year taken in accordance with the vacation policy of the Company during each year of the Term. Vacation time not used by the end of a calendar year shall be forfeited. 3 3.5 Fringe Benefits. During the Term, the Executive shall be entitled to all benefits for which the Executive shall be eligible under any qualified pension plan, 401(k) plan, group insurance or other so-called "fringe" benefit plan which the Company provides to its executive employees generally, together with executive medical benefits for the Executive, as from time to time in effect for executive employees of the Company generally. 3.6 Additional Benefits. During the Term, the Executive shall be entitled to such other benefits as are specified in Schedule 2 to this Agreement. 4. Termination. 4.1 Death. If the Executive shall die during the Term, the Term shall terminate immediately. 4.2 Disability. If during the Term the Executive shall become physically or mentally disabled, whether totally or partially, such that the Executive is unable to perform the Executive's principal services hereunder for (i) a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, the Company may at any time after the last day of the six consecutive months of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Executive (but before the Executive has recovered from such disability), terminate the Term. 4.3 Cause. The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 4.3(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) breach by the Executive of any of his obligations under Section 5 hereof; (iii) any willful and intentional acts of the Executive involving fraud, theft, misappropriation of funds, embezzlement or material dishonesty affecting the Company or willful misconduct by the Executive which has, or could reasonably be expected to have, a material adverse effect on the Company; or (iv) the Executive's conviction of, or plea of guilty or nolo contendre to, an offense which is a felony in the jurisdiction involved. 4 4.4 Other Permitted Termination by the Company. The Term may be terminated by the Company at any time if the term of Brentwood's engagement under the Loan Out Agreement (the "Loan Out Term") is terminated by the Company as permitted by, and not in breach by the Company of, the Loan Out Agreement or if the Loan Out Term is terminated by Brentwood for any reason. 4.5 Permitted Termination by the Executive. (a) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive to duties materially inconsistent with the Executive's positions as described in Section 1.1 hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause or disability or by the Executive other than for Good Reason; (ii) any material breach of this Agreement by the Company which is continuing;(iii) a change in the location of the Executive's principal place of employment to a location other than as specified in Section 1.3 hereof; or (iv) the occurrence of a Third Party Change in Control (as defined in Section 4.5(d)) provided, however, that the Executive shall not be deemed to have Good Reason pursuant to clauses (i) and (ii) above unless the Executive gives the Company written notice that the specified conduct or event has occurred and making specific reference to this Section 4.5 and the Company fails to cure such conduct or event within thirty (30) days of receipt of such notice. (b) The Term may be terminated by the Executive at any time by giving the Company a notice of termination specifying a termination date no less than sixty (60) days after the date the notice is given. (c) The Term may be terminated by the Executive at any time if the Loan Out Term is terminated by Brentwood as permitted by, and not in breach by Brentwood of, the Loan Out Agreement or if the Loan Out Term is terminated by the Company for any reason. 4.6 Severance. (a) If the Term is terminated (A) pursuant to Section 4.1, 4.2 or 4.3 of this Agreement, (B) by the Executive other than pursuant to Section 4.5(a) of this Agreement, or (C) by the Company pursuant to Section 4.4 of this Agreement in connection with or following termination of the Loan Out Term under the circumstances described in clauses (A) or (B) of Section 4.6(a) of the Loan Out Agreement the Executive shall be entitled to receive his Base Salary, benefits and reimbursements provided hereunder at the rates provided in Sections 3.1, 3.3, 3.5 and 3.6 hereof to the date on which such termination 5 shall take effect. In addition, if the Term is terminated pursuant to Section 4.1 or 4.2 of this Agreement or by the Company pursuant to Section 4.4 of this Agreement in connection with or following termination of the Loan Out Agreement pursuant to Section 4.1 or 4.2 of the Loan Out Agreement, the Executive shall also be entitled to receive any bonus which he has been awarded under Section 3.2 in respect of a previously completed fiscal year but which has not been paid and a pro rata portion (based on time) of the annual bonus for the year in which the termination date occurs (a "Pro Rata Bonus"). The Pro Rata Bonus to which the Executive is entitled, if any, for each year other than 1999 shall be determined by reference to the attainment of the performance goals referred to in Section 3.2 as of the end of the fiscal year in which termination of employment occurs and shall be paid when bonuses in respect of that year are generally paid to the Company's other executives but in no event later than the ninetieth day of the next fiscal year. If, within three months after the Effective Date, the Term is terminated pursuant to Section 4.3 of this Agreement, by the Executive other than pursuant to Section 4.5(a) of this Agreement, or by the Company pursuant to Section 4.4 of this Agreement in connection with or following termination of the Loan Out Agreement pursuant to Section 4.3 of the Loan Out Agreement or under the circumstances described in clause (B) of Section 4.6(a) of the Loan Out Agreement, the Executive shall promptly repay to the Company the Effective Date Bonus and the Company shall have the right to offset any severance amounts due to the Executive by the amount not so repaid. If, prior to June 30, 2000, the Term is terminated pursuant to Section 4.3 of this Agreement, by the Executive other than pursuant to Section 4.5(a) of this Agreement, or by the Company pursuant to Section 4.4 of this Agreement in connection with or following termination of the Loan Out Agreement pursuant to Section 4.3 of the Loan Out Agreement or under the circumstances described in clause (B) of Section 4.6(a) of the Loan Out Agreement, the Executive shall promptly repay to the Company the 1999 Bonus and the Company shall have the right to offset any severance amounts due to the Executive by the amount not so repaid. (b) Except as provided in Section 4.6(c) of this Agreement, if the Term is terminated (A) by the Executive pursuant to clauses (i), (ii) or (iii) of Section 4.5(a) of this Agreement, (B) by the Company other than pursuant to Section 4.1, 4.2, 4.3 or 4.4 of this Agreement, (C) by the Executive pursuant to Section 4.5(c) of this Agreement in connection with or following termination of the Loan Out Term under the circumstances described in clause (A) or (B) of Section 4.6(a) of the Loan Out Agreement, or (D) if the Term expires on the Scheduled Expiration Date as a result of the Company giving a Notice of Nonrenewal, the Company shall continue thereafter to provide the Executive (i) payments of Base Salary in the manner and amounts specified in Section 3.1 until the second anniversary of the date of termination, (ii) if termination occurs prior to the time that the 1999 Bonus is paid, a bonus in the amount of 6 $100,000, if termination occurs after December 31, 1999, a Pro Rata Bonus, and if termination occurs at any time after a bonus has been awarded under Section 3.2 in respect of a previously completed fiscal year and prior to the time that the bonus has been paid, the amount of that bonus, and (iii) fringe benefits in the manner and amounts specified in Section 3.5 until the earlier of the Expiration Date, the period ending on the date the Executive begins work as an employee or consultant for any other entity or twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest for the period specified in clause (iii) of this Section 4.6(b)(unless vesting is accelerated upon the occurrence of a Third Party Change in Control as described in Schedule I) and shall remain exercisable for ninety days after the end of that period. Bonuses payable pursuant to this Section 4.6(b), other than the Pro Rata Bonus, shall be payable in the manner described in Section 3.2 within 30 days after the date of termination. The Pro Rata Bonus to which the Executive is entitled, if any, shall be paid within the time period provided in Section 4.6(a) of this Agreement. The Executive shall have no duty or obligation to mitigate the amounts or benefits required to be provided pursuant to this Section 4.6(b), nor shall any such amounts or benefits be reduced or offset by any other amounts to which Executive may become entitled; provided, that if the Executive becomes employed by a new employer or self-employed prior to the earlier of the Expiration Date or twelve (12) months after the date of termination, up to one-half of the Base Salary payable to the Executive pursuant to this Section 4.6(b) shall be reduced by an amount equal to the amount earned from such employment with respect to that period (and the Executive shall be required to return to the Company, without interest, any amount by which such payments pursuant to this Section 4.6(b) exceed the Base Salary to which the Executive is entitled after giving effect to that reduction) and, if the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan, the corresponding medical and other welfare benefits provided under this Section 4.6(b) shall be terminated. As a condition to the Executive receiving the payments under Section 4.6(b), the Executive agrees to permit verification of his employment records and Federal income tax returns by an independent attorney or accountant, selected by the Company but reasonably acceptable to the Executive, who agrees to preserve the confidentiality of the information disclosed by the Executive except to the extent required to permit the Company to verify the amount received by Executive from other active employment. (c) If the Term is terminated upon or following the occurrence of a Third Party Change in Control (as defined in Section 4.6(d)) or in contemplation of a Third Party Change in Control, and such termination is by the Executive 7 pursuant to Section 4.5(a) of this Agreement, by the Company other than pursuant to Section 4.1, 4.2, 4.3 or 4.4 of this Agreement, by the Executive pursuant to Section 4.5(c) of this Agreement in connection with or following termination of the Loan Out Agreement under the circumstances described in to clause (A) or (B) of Section 4.6(b) of the Loan Out Agreement, or occurs on the Scheduled Expiration Date as a result of the Company giving a Notice of Nonrenewal, the Company shall thereafter provide the Executive (i) an amount equal to two (2) times the sum of (x) the then current Base Salary and (y) the average of the two most recent annual bonuses paid (treating any annual bonus which is not paid as a result of the Executive's failure to attain the Bonus Performance Goals as having been paid in an amount equal to zero) to the Executive during the Term (or if only one annual bonus has been paid, the amount of that annual bonus, and if that termination occurs prior to the time at which the 1999 Bonus is paid, $100,000), to be paid in a lump sum within 30 days after the date of termination, and (ii) benefits in the manner and amounts specified in Section 3.5 until the second anniversary of the date of termination or, with respect to medical and other welfare benefits, when the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan if sooner than the second anniversary of the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest until the second anniversary of the date of termination unless vesting is accelerated upon the occurrence of the Third Party Change in Control as described in Schedule I. (d) For purposes of this Agreement, a Third Party Change in Control shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an Excluded Person or Excluded Group (as defined below) (hereinafter, a "Third Party"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company, (ii) the Company is a party to any merger, consolidation or similar transaction as a result of which the shareholders of the Company immediately prior to such transaction beneficially own securities of the surviving entity representing less than fifty percent (50%) of the combined voting power of the surviving entity's outstanding securities entitled to vote in the election of directors of the surviving entity or (iii) all or substantially all of the assets of the Company are acquired by a Third Party. "Excluded Group" means a "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that (i) includes one or more Excluded 8 Persons; provided, that the voting power of the voting stock of the Company "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such Excluded Persons (without attribution to such Excluded Persons of the ownership by other members of the "group") represents a majority of the voting power of the voting stock "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such group or (ii) exists solely by virtue of the fact that the members of such group are parties to the Stockholders' Agreement, dated as of October 1, 1998, by and among the Company, Isaac Perlmutter, Avi Arad, Mark Dickstein, The Chase Manhattan Bank, Morgan Stanley & Co. Incorporated, Whippoorwill Associates Incorporated and various other stockholders of the Company, as that agreement may be amended from time to time (the "Stockholders Agreement"). "Excluded Person" means (i) while the Stockholders Agreement is in effect in substantially its current form, any person or entity who or which is a party to the Stockholders Agreement as of the Effective Date and any affiliate of such a party to the Stockholders Agreement who becomes a party to the Stockholders Agreement, and (ii) Isaac Perlmutter and Avi Arad or any of their affiliates. (e)(i) If any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for the Executive's benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, the Executive's employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets (a "Parachute Payment" or "Parachute Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Parachute Payments. (ii) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company's expense by the Company's regular outside auditors (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within ten days of the 9 Termination Date if applicable, or promptly upon request by the Company or by the Executive (provided the Executive reasonably believes that any of the Parachute Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Parachute Payment or Parachute Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Parachute Payment or Parachute Payments. Within ten days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 4.6(e)(ii) shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm's determination notwithstanding the existence of any Dispute. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 4.6(e)(iii) below. The Company and the Executive shall resolve any Dispute in accordance with the terms of this Agreement. (iii) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, the parties acknowledge that it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to the Executive from any governmental taxing authority that the Executive's tax liability (whether in respect of the Executive's current taxable year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Parachute Payment or Parachute Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of determination by the Company (which shall include the position taken by the Company, together with its consolidated group, on its federal income tax return) or (iv) upon the resolution of the Dispute to the Executive's satisfaction. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to the Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by 10 reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Parachute Payment or Parachute Payments (or portion thereof) with respect to which the Executive had previously received a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred when the Executive has received from the applicable government taxing authority a refund of taxes or other reduction in the Executive's tax liability by reason of the Excise Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to the Executive and the Executive shall pay to the Company on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to the Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to the Executive until the date of repayment to the Company. (iv) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Parachute Payment or Parachute Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Parachute Payment or Parachute Payments or the Gross Up Payment. 5. Protection of Confidential Information; Non-Competition 5.1 In view of the fact that the Executive's work for the Company will bring the Executive into close contact with many confidential affairs of the Company not readily available to the public, as well as plans for future developments by the Company, the Executive agrees: 5.1.1 To keep and retain in the strictest confidence all confidential matters of the Company, including, without limitation, "know how", trade secrets, customer lists, pricing policies, operational methods, technical processes, formulae, inventions and research projects, and other business affairs of the Company ("Confidential Information"), learned by the Executive heretofore or hereafter, and not to use or disclose them to anyone outside of the Company, either during or after the Executive's employment with the Company, except in the course of performing the Executive's duties hereunder or with the 11 Company's express written consent; provided, however, that the restrictions of this Section 5.1.1 shall not apply to that part of the Confidential Information that the Executive demonstrates is or becomes generally available to the public other than as a result of a disclosure by the Executive or is available, or becomes available, to the Executive on a non-confidential basis, but only if the source of such information is not prohibited from transmitting the information to the Executive by a contractual, legal, fiduciary, or other obligation; and 5.1.2 To deliver promptly to the Company on termination of the Executive's employment by the Company, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints and other documents (and all copies thereof) relating to the Company's business and all property associated therewith, which the Executive may then possess or have under the Executive's control. 5.2 During his employment and for a period of one (1) year after he ceases to be employed by the Company under this Agreement or otherwise, if such cessation arises pursuant to Section 4.3, or as a result of termination by the Executive other than pursuant to Section 4.4(a), the Executive shall not, directly or indirectly, enter the employ of, or render any services to, any person, firm or corporation engaged in any business competitive with the business of the Company or of any of its subsidiaries or affiliates; the Executive shall not engage in such business on the Executive's own account; and the Executive shall not become interested in any such business, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any other relationship or capacity; provided, however, that nothing contained in this Section 5.2 shall be deemed to prohibit the Executive from acquiring, solely as an investment, up to five percent (5%) of the outstanding shares of capital stock of any public corporation or from engaging in the Prior Projects and Other Approved Activities as contemplated by Section 1.2. 5.3 If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of Sections 5.1 or 5.2 hereof, the Company shall have the following rights and remedies: 5.3.1 The right and remedy to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; and 5.3.2 The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive 12 as the result of any transactions constituting a breach of any of the provisions of Section 5.2 hereof, and the Executive hereby agrees to account for and pay over such Benefits to the Company. Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. 5.4 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, hereafter are construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. 5.5 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, are held to be unenforceable because of the duration of such provision or the area covered thereby, the parties hereto agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and, in its reduced form, said provision shall then be enforceable. 5.6 The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 5.1 and 5.2 hereof upon the courts of any state within the geographical scope of such covenants. In the event that the courts of any one or more of such states shall hold such covenants wholly unenforceable by reason of the breadth of such covenants or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Company's right to the relief provided above in the courts of any other states within the geographical scope of such covenants as to breaches of such covenants in such other respective jurisdictions, the above covenants as they relate to each state being for this purpose severable into diverse and independent covenants. 5.7 In the event that any action, suit or other proceeding in law or in equity is brought to enforce the covenants contained in Sections 5.1 and 5.2 hereof or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Company in such action, suit or other proceeding shall (on demand of the Company) be paid by the Executive. In the event the Company fails to obtain a judgment for money damages or an injunction in favor of the 13 Company, all expenses (including reasonable attorneys' fees) of the Executive in such action, suit or other proceeding shall (on demand of the Executive) be paid by the Company. 6. Inventions and Patents. 6.1 The Executive agrees that, except as provided in Section 6.2, all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company or for one year thereafter (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. 6.2 The Company acknowledges that the Executive may conceive, develop or invent Inventions in connection with his work on the Prior Projects and Other Permitted Activities. The Company agrees that it shall have no interest in any Inventions which relate primarily to the Prior Projects or Other Permitted Activities. Nothing contained herein shall be construed so as to grant the Company any interest whatsoever in any such Inventions or in any Inventions which were created prior to the Effective Date. 7. Intellectual Property. 7.1 Except as provided in Section 7.2, the Company shall be the sole owner of all the products and proceeds of the Executive's services hereunder, including, but not limited to, all materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Executive may acquire, obtain, develop or create in connection with and during his employment (collectively, "Intellectual Property"), free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever (other than the Executive's right to receive payments hereunder). The Executive shall, at the request of the Company, execute such assignments, certificates or other 14 instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such Intellectual Property. 7.2. The Company acknowledges that the Executive will acquire, obtain, develop and create Intellectual Property in connection with his work on the Prior Projects and Other Permitted Activities. The Company agrees that it shall have no right, title or interest in any Intellectual Property which was developed in connection with, or relates primarily to, the Prior Projects or Other Permitted Activities. Nothing contained herein shall be construed so as to grant the Company any right, title or interest whatsoever in any Intellectual Property which was created or acquired by the Executive prior to the Effective Date. 8. Indemnification. To the fullest extent permitted by applicable law, Executive shall be indemnified and held harmless for any action or failure to act in his capacity as an officer or employee of the Company or any of its affiliates or subsidiaries. In furtherance of the foregoing and not by way of limitation, if Executive is a party or is threatened to be made a party to any suit because he is an officer or employee of the Company or such affiliate or subsidiary, he shall be indemnified against expenses, including reasonable attorney's fees, judgments, fines and amounts paid in settlement if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. Indemnification under this Section 8 shall be in addition to any other indemnification by the Company of its officers and directors. Expenses incurred by Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 8 shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of Executive to repay such amount in the event that it shall ultimately be determined that he is not entitled to indemnification by the Company. Such undertaking shall be accepted without reference to the financial ability of Executive to make repayment. The provisions of this Section 8 shall apply as well to the Executive's actions and omissions as a trustee of any employee benefit plan of the Company, its affiliates or subsidiaries. 9. Arbitration; Legal Fees Except with respect to injunctive relief under Section 5 of this Agreement, any dispute or controversy arising out of or relating to this Agreement shall be resolved exclusively by arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment on the award may be entered in any court 15 having jurisdiction thereof. The Company shall reimburse the Executive's reasonable costs and expenses incurred in connection with any arbitration proceeding pursuant to this Section 9 if the Executive (and, if the arbitration proceeding also relates to the Loan Out Agreement, the Producer) is the substantially prevailing party in that proceeding. 10. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company, to: Marvel Enterprises, Inc. 387 Park Avenue South New York, New York 10016 Attention: President If to the Executive, to: Richard Ungar 305 Dalehurst Avenue Los Angeles, California 90024 11. General. 11.1 This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. 11.2 The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be 16 bound by or liable for any alleged representation, promise or inducement not so set forth. This Agreement expressly supersedes all agreements and understandings between the parties regarding the subject matter hereof and any such agreement is terminated as of the date first above written. 11.4 This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate or (ii) to third parties in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 11.5 This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 12. Subsidiaries and Affiliates. As used herein, the term "subsidiary" shall mean any corporation or other business entity controlled directly or indirectly by the Company or other business entity in question, and the term "affiliate" shall mean and include any 17 corporation or other business entity directly or indirectly controlling, controlled by or under common control with the Company or other business entity in question. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: MARVEL ENTERPRISES, INC. /s/ F. Peter Cuneo By: ------------------------- Name: F. Peter Cuneo Title: President & Chief Executive Officer EXECUTIVE: /s/ Richard Ungar --------------------------- Richard Ungar SCHEDULE 1 Prior Projects In Production: "Dan Dare: Pilot of the Future" "Kong: The Animated Series" In Development: "Dojo Dogs" "ComBatz" "Snug as a Bug in a Rug" "Pencilneck Mall" Toys in Development: "ToolBots" "Hop Scotch Babies" Other Business Interests: Unnamed Art Bilger Internet Company - involvement to be limited to advisory role and possibly a board seat. Consultancy and board membership with BKN until December 31, 1999. SCHEDULE 2 Additional Benefits: 1. Automobile Allowance. The Executive shall be eligible for an automobile allowance in the amount of $1,300 per month in accordance with the Company's policy. 2. Stock Option Plan. The Executive shall be eligible to participate in the Marvel Enterprises, Inc. Stock Option Plan (the "Stock Option Plan") and to receive 200,000 options to purchase shares (the "Shares") of the common stock, par value $.01 per share ("Common Stock"), of the Company pursuant to the terms of the Marvel Enterprises, Inc. Stock Option Plan (the "Stock Option Plan") and related Stock Option Agreement subject to the terms and conditions approved by the committee of the Board of Directors of the Company which administers the Stock Option Plan. The options shall be scheduled to vest as to one-third of the Shares on each of the first, second and third anniversaries of the date they are granted, shall vest as to all of the Shares upon a Third Party Change in Control and shall be subject to all other terms and conditions of the Stock Option Plan and the related Stock Option Agreement between the Company and the Executive. The Executive's participation in the Stock Option Plan shall not be, or be deemed to be, a fringe benefit or additional benefit for purposes of Section 4.6(b)(iii) of this Agreement, and the Executive's stock option rights shall be governed strictly in accordance with the Stock Option Plan and the related Stock Option Agreement. In the event of any conflict between this Agreement and the Stock Option Plan and the related Stock Option Agreement, or any ambiguity in any such agreements, the Stock Option Plan and the related Stock Option Agreement shall control. 3. Travel. The Executive shall be reimbursed for all reasonable costs and expenses when traveling on Company business. The Executive shall be entitled to travel by business class on all trans-continental and international business flights. When the Executive stays overnight in New York City in the performance of his duties, the Company shall, at the option of the Executive, either reimburse the Executive for the cost of hotel accommodations in an amount up to $250 per night plus taxes or, if the Executive stays in his own apartment in New York City, pay the Executive $200 per night in lieu of hotel expense. 4. Reimbursement of COBRA Expenses. The Executive shall be reimbursed for the cost of continued COBRA coverage under the health insurance plans of his former employer until he becomes eligible to participate in the Company's health insurance plan. 5. Reimbursement of Legal Fees. The Executive shall be reimbursed for his reasonable legal fees and expenses incurred in connection with the review and negotiation of this Agreement. EX-10.20 3 LOAN OUT AGREEMENT EXHIBIT 10.20 LOAN OUT AGREEMENT FOR EXECUTIVE PRODUCER SERVICERS OF RICHARD UNGAR AGREEMENT dated as of October 29, 1999 between Marvel Enterprises, Inc., a Delaware corporation (the "Company"); and Brentwood Television Funnies, Inc. (the "Lender") for the services of its employee, Richard Ungar (the "Producer"). 1. Services, employment and acceptance. The Company engages the Lender and Lender agrees to supply and make available to the Company, the services of the Producer to serve as Executive Producer on all television programs involving the Marvel characters during the term of this agreement, along with such other individuals as the Company may select as Executive Producers on such television programs, provided, that, if the Lender or the Producer shall be entitled to any fees as a result of the same, the Lender or the Executive, as the case may be, shall assign to the Company any such rights to such fees. 2. Term. The term of the engagement provided for in Section 1 of this Agreement (the "Term") shall commence on October 25, 1999 and shall end on October 25, 2002 (the "Expiration Date"). The Term shall end earlier than the Expiration Date if sooner terminated pursuant to Section 4 of this Agreement. The Company and the Producer are parties to an employment agreement, dated the same date as this agreement, pursuant to which the Producer is to be employed by the Company as President of the Company's Marvel Characters Group (the "Employment Agreement"). If the term of the Producer's employment under the Employment Agreement (the "Employment Term") is extended to a date which is later than the Expiration Date, the Expiration Date shall be automatically postponed, and the Term shall be automatically extended, to the later date to which the Employment Term is extended. -3- 3. Compensation. As compensation for all services to be rendered pursuant to this Agreement, the Company agrees to pay Lender during the Term a producer fee, payable bi-weekly in arrears, at the annual rate of $175,000. Lender shall be paid as a fully independent contractor and shall be solely responsible for any withholdings and deductions required by applicable law and regulations. The producer fee shall be reviewed no less frequently than annually by the Board of Directors and may be increased, but not decreased, by the Board of Directors. The producer fee as in effect from time to time is referred to in this Agreement as the "Producer Fee". If there ceases to be any television production by the Company during the Term, the Company shall continue to pay the Producer Fee to the Lender which shall, in such event, provide the services of Producer as a creative consultant to Company for the Company's other creative ventures. 4. Termination. 4.1 Death. If the Producer shall die during the Term, the Term shall terminate immediately. 4.2 Disability. If during the Term, the Producer shall become physically or mentally disabled, whether totally or partially, such that the Producer is unable to perform the Producer's principal services hereunder for (i) a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, the Company may at any time after the last day of the six consecutive months of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Producer (but before the Producer has recovered from such disability), terminate the Term. 4.3 Cause. The Term may be terminated by the Company upon notice to the Lender upon the occurrence of any event constituting "Cause" as defined herein. As used herein, the term "Cause" means: (i) the Lender's or the Producer's willful and intentional failure or refusal to perform or observe any of their material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Lender written notice that the specified conduct has occurred and making specific reference to this Section 4.3(i) and the Lender or the Producer, as the case may be, fails to cure the conduct within thirty (30) days after the Lender's receipt of such notice; (ii) breach by the Lender or the Producer of any of their obligations under Section 5 hereof; (iii) any willful and intentional acts of the Producer or the Executive involving fraud, theft, misappropriation of funds, embezzlement or material dishonesty affecting the Company or willful misconduct by the Lender or the Producer which has, or could reasonably be expected to have, a material adverse effect on the Company; or (iv) the Lender's or the Executive's conviction of, or plea of guilty or nolo contendre to, an offense which is a felony in the jurisdiction involved. 4.4 Other Permitted Termination by the Company. The Term may be terminated by the Company at any time if the Employment Term is terminated by the Company as permitted by, and not in breach of, the Employment Agreement or if the Employment Agreement is terminated by the Executive for any reason. 4.5 Permitted Termination by the Lender. (a) The Term may be terminated by the Lender upon notice to the Company of any event constituting "Good Reason" as defined herein. As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Lender: (i) assignment of the Producer to duties materially inconsistent with the Producer's position as described in Section 1.1 hereof; (ii) any material breach of this Agreement by the Company which is continuing; or (iii) the occurrence of a Third Party Change in Control (as defined in Section 4.6(d)) provided, however, that the Lender shall not be deemed to have Good Reason pursuant to clauses (i) and (ii) above unless the Lender gives the Company written notice that the specified conduct or event has occurred and making specific reference to this Section 4.5 and the Company fails to cure such conduct or event within thirty (30) days of receipt of such notice. (b) The Term may be terminated by the Lender at any time by giving the Company a notice of termination specifying a termination date no less than sixty (60) days after the date the notice is given. (c) The Term may be terminated by the Lender at any time if the Employment Term is terminated by the Producer pursuant to Section 4.5(a) of the Employment Agreement. 4.6 Termination Fee. (a) If the Term is terminated (A) pursuant to Section 4.1, 4.2 or 4.3 of this Agreement,(B) by the Lender other than pursuant to Section 4.5(a) of this Agreement, or (C) by the Company pursuant to Section 4.4 of this Agreement in connection with or following termination of the Employment Term under the circumstances described in clauses (A) or (B) or Section 4.6(a) of the Employment Agreement, the Lender shall be entitled to receive its Producer Fee at the rate provided in Section 3 hereof to the date on which such termination shall take effect. -9- (b) Except as provided in Section 4.6(c) of this Agreement, if the Term is terminated (A) by the Lender pursuant to clauses (i) or (ii) of Section 4.5(a) of this Agreement, (B) by the Company other than pursuant to Section 4.1, 4.2, 4.3 or 4.4 of this Agreement, (C) by the Lender pursuant to Section 4.5(c) of this Agreement in connection with or following termination of the Employment Term under the circumstances described in clause (A) or (B) of Section 4.6(b) of the Employment Agreement, or (D) if the Employment Term expires as a result of the Company giving a Notice of Nonrenewal under the Employment Agreement, the Company shall continue thereafter to pay the Producer Fee to the Lender until the second anniversary of the date of termination. The Lender shall have no duty or obligation to mitigate the amounts or benefits required to be provided pursuant to this Section 4.6(b), nor shall any such amounts or benefits be reduced or offset by any other amounts to which Lender may become entitled; provided, that if the Producer becomes employed by a new employer or self-employed prior to the earlier of the Expiration Date or twelve (12) months after the date of termination, up to one-half of the Producer Fee payable to the Lender pursuant to this Section 4.6(b) shall be reduced by an amount equal to the amount earned from such employment with respect to that period (and the Lender shall be required to return to the Company, without interest, any amount by which such payments pursuant to Section this 4.6(b) exceed the Producer Fee to which the Executive is entitled after giving effect to that reduction). As a condition to the Lender receiving the payments under Section 4.6(b), the Lender agrees to cause the Producer to permit verification of his employment records and Federal income tax returns by an independent attorney or accountant, selected by the Company but reasonably acceptable to the Lender, who agrees to preserve the confidentiality of the information disclosed by the Producer except to the extent required to permit the Company to verify the amount received by the Producer from other active employment. (c) If the Term is terminated upon or following the occurrence of a Third Party Change in Control (as defined in Section 4.5(d)) or in contemplation of a Third Party Change in Control, and such termination is by the Lender pursuant to Section 4.5(a) of this Agreement, by the Company other than pursuant to Section 4.1, 4.2, 4.3 or 4.4 of this Agreement, by the Lender pursuant to Section 4.5(c) of this Agreement in connection with or following termination of the Employment Term under the circumstances described in clause (A) or (B) of Section 4.6(b) of the Employment Agreement, or occurs as a result of the Company giving a Notice of Nonrenewal under the Employment Agreement, the Company shall thereafter pay to the Producer an amount equal to two (2) times the then current Producer Fee. (d) For purposes of this Agreement, a Third Party Change in Control shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an Excluded Person or Excluded Group (as defined below) (hereinafter, a "Third Party"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company, (ii) the Company is a party to any merger, consolidation or similar transaction as a result of which the shareholders of the Company immediately prior to such transaction beneficially own securities of the surviving entity representing less than fifty percent (50%) of the combined voting power of the surviving entity's outstanding securities entitled to vote in the election of directors of the surviving entity or (iii) all or substantially all of the assets of the Company are acquired by a Third Party. "Excluded Group" means a "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that (i) includes one or more Excluded Persons; provided, that the voting power of the voting stock of the Company "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such Excluded Persons (without attribution to such Excluded Persons of the ownership by other members of the "group") represents a majority of the voting power of the voting stock "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such group or (ii) exists solely by virtue of the fact that the members of such group are parties to the Stockholders' Agreement, dated as of October 1, 1998, by and among the Company, Isaac Perlmutter, Avi Arad, Mark Dickstein, The Chase Manhattan Bank, Morgan Stanley & Co. Incorporated, Whippoorwill Associates Incorporated and various other stockholders of the Company, as that agreement may be amended from time to time (the "Stockholders Agreement"). "Excluded Person" means (i) while the Stockholders Agreement is in effect in substantially its current form, any person or entity who or which is a party to the Stockholders Agreement as of the Effective Date and any affiliate of such a party to the Stockholders Agreement who becomes a party to the Stockholders Agreement, and (ii) Isaac Perlmutter and Avi Arad or any of their affiliates. 5. Inventions and Patents. 5.1 The Lender agrees that, except as provided in Section 5.2, all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by the Lender or the Producer during the Term or for one year thereafter (collectively, "Inventions") shall belong to the Company, provided, that such Inventions grew out of the Producer's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Lender shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Lender or the Producer in connection therewith, (a) assign, and cause the Producer to assign, to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign, and cause the Producer to sign, all papers necessary to carry out the foregoing; and (c) cause the Producer to give testimony in support of the Producer's or the Lender's inventorship. 5.2 The Company acknowledges that the Lender and the Producer may conceive, develop or invent Inventions in connection with the Producer's work on the Prior Projects and Other Permitted Activities. The Company agrees that it shall have no interest in any Inventions which relate primarily to the Prior Projects or Other Permitted Activities. Nothing contained herein shall be construed so as to grant the Company any interest whatsoever in any such Inventions or in any Inventions which were created prior to the Effective Date. 6. Intellectual Property. 6.1 Except as provided in Section 5.2, the Company shall be the sole owner of all the products and proceeds of the Lender's and the Producer's services hereunder, including, but not limited to, all materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Lender or the Producer may acquire, obtain, develop or create in connection with and during the Term (collectively, "Intellectual Property"), free and clear of any claims by the Lender or the Producer (or anyone claiming under the Lender or Producer) of any kind or character whatsoever (other than the Lender's right to receive payments hereunder). The Lender shall, and shall cause the Producer to, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such Intellectual Property. 6.2 The Company acknowledges that the Lender and the Producer will acquire, obtain, develop and create Intellectual Property in connection with the Producer's work on the Prior Projects and Other Permitted Activities. The Company agrees that it shall have no right, title or interest in any Intellectual Property which was developed in connection with, or relates primarily to, the Prior Projects or Other Permitted Activities. Nothing contained herein shall be construed so as to grant the Company any right, title or interest whatsoever in any Intellectual Property which was created or acquired by the Executive prior to the Effective Date. 7. Lender Representations. The Lender represents that it is a validly existing corporation and has the sole and exclusive right and authority to provide the services of the Producer to the Company as contemplated by this Agreement, and that the entering into and performance of this agreement by the Lender and the provision of services hereunder by the Producer and the acceptance thereof by the Company will not violate any law, rule, regulation, order, contract or agreement to which either the Lender or the Producer is a party or is bound or affected. 8. Independent Contractors; No Joint Venture. The parties acknowledge and agree that the relationship between the Company and the Lender is that of independent contractors and not that of employer and employee. Nothing in this agreement is intended to create or will be deemed to create or constitute a joint venture or partnership between the Company and the Lender. 9. Payroll Taxes. The Lender will be responsible for the payment of all withholding, payroll and other taxes payable in respect of the payments received by the Lender under this agreement and hereby agrees to indemnify and hold the Company harmless from any obligation or penalty arising from the failure to pay such taxes. 10. Arbitration; Legal Fees. Any dispute or controversy arising out of or relating to this Agreement shall be resolved exclusively by arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment on the award may be entered in any court having jurisdiction thereof. The Company shall reimburse the Lender's reasonable costs and expenses incurred in connection with any arbitration proceeding pursuant to this Section 10 if the Lender (and, if the arbitration proceeding also relates to the Employment Agreement, the Executive) is the substantially prevailing party in that proceeding. 11. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company, to: Marvel Enterprises, Inc. 387 Park Avenue South New York, New York 10016 Attention: President If to the Lender, to: Brentwood Television Funnies, Inc. 305 Dalehurst Avenue Los Angeles, California 90024 12. General. 12.1 This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. 12.2 The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 12.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. This Agreement expressly supersedes all agreements and understandings between the parties regarding the subject matter hereof and any such agreement is terminated as of the date first above written. 12.4 This Agreement, and the Lender's rights and obligations hereunder, may not be assigned by the Lender. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate or (ii) to third parties in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 12.5 This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12.6 This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: MARVEL ENTERPRISES, INC. /s/ F. Peter Cuneo By: -------------------------- Name: F. Peter Cuneo Title: President & Chief Executive Officer THE LENDER: BRENTWOOD TELEVISION FUNNIES, INC. /s/ Richard Ungar By: -------------------------- Name: Richard Ungar Title: Ratification The undersigned, Richard Ungar, hereby consents to the terms and conditions of, and agrees to perform all of the duties, obligations and services required of the Producer under the foregoing agreement. In addition, the undersigned unconditionally guarantees the payment of any obligations by the Lender to the Company arising under or by virtue of the provisions of Section 9 of the foregoing Agreement. The undersigned further agrees to look solely to the Lender and not to the Company for all compensation and benefits to which he may be entitled under the Agreement for performing the duties, obligations and services required therein. /s/ Richard Ungar ----------------------------- Richard Ungar EX-10.21 4 EMPLOYMENT AGREEMENT EXHIBIT 10.21 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of October 29, 1999, between Marvel Enterprises, Inc., a Delaware corporation (the "Company") and Allen S. Lipson (the "Executive"). WHEREAS, the Company wishes to employ the Executive, and the Executive wishes to accept such employment, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Employment, Duties and Acceptance. 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive and full-time services to the Company as Executive Vice President -- Business and Legal Affairs or in such other executive position as may be mutually agreed upon by the Company and the Executive. The Executive shall report solely to the Company's Chief Executive Officer and Board of Directors and shall perform such other duties consistent with such positions as may be assigned to the Executive by the Company's Chief Executive Officer or Board of Directors. 1.2 Acceptance. The Executive hereby accepts such employment and agrees to render the services described above. During the Term, the Executive agrees to serve the Company faithfully and to the best of the Executive's ability, to devote the Executive's entire business time, energy and skill to such employment and to use the Executive's professional efforts, skill and ability to promote the Company's interests. The Executive further agrees to accept election, and to serve during all or any part of the Term, as an officer or director of the Company and of any subsidiary or affiliate of the Company, without any compensation therefor other than that specified in this Agreement, if elected to any such position by the shareholders or by the Board of Directors of the Company or of any subsidiary or affiliate, as the case may be. 1.3 Location. The duties to be performed by the Executive hereunder shall be performed primarily at the principal executive office of the Company in New York City, subject to reasonable and customary travel requirements on behalf of the Company. 2. Term of Employment 2.1 The Term. The term of the Executive's employment under this Agreement (the "Term") shall commence on November 15, 1999 (the "Effective Date") and shall end on November 15, 2002 (the "Expiration Date"). The Term shall end earlier than the Expiration Date if sooner terminated pursuant to Section 4 hereof. The Expiration Date shall be automatically postponed for one year, and the Term shall be automatically extended by one year, unless either party hereto provides the other party with written notice(a "Notice of Nonrenewal"), not later than sixty days prior to the Expiration Date, of its election not to permit the Term to be so extended, and the Expiration Date shall thereafter be automatically postponed for one additional year and the Term shall thereafter be automatically extended by one additional year, on each subsequent anniversary of the date of this Agreement, unless either party provides the other party with written notice, not later than sixty days prior to such subsequent anniversary of the date of this Agreement, of its election not to permit the Term to be so extended. 3. Compensation; Benefits. 3.1 Salary. As compensation for all services to be rendered pursuant to this Agreement, the Company agrees to pay the Executive during the Term a base salary, payable bi-weekly in arrears, at the annual rate of $325,000 less such deductions or amounts to be withheld as required by applicable law and regulations and deductions authorized by the Executive in writing. The Executive's base salary shall be reviewed no less frequently than annually by the Board of Directors and may be increased, but not decreased, by the Board of Directors. The Executive's base salary as in effect from time to time is referred to in this Agreement as the "Base Salary". 3.2 Bonus. In addition to the amounts to be paid to the Executive pursuant to Section 3.1 hereof, the Executive will be entitled to receive a cash bonus in respect of 1999 in the amount of $180,000 (the "1999 Bonus"). With respect to each fiscal year of the Term after 1999, the Executive will be eligible to receive a cash bonus based upon the attainment of performance goals set by the Board of Directors (the "Bonus Performance Goals"). The Executive's target annual bonus amount shall be 50% of his base salary for the year. The 1999 Bonus shall be paid to the Executive no later than February 1, 2000. Each annual bonus in respect of subsequent fiscal years shall be paid when annual bonuses are paid generally to the Company's other senior executive officers but in no event later than the ninetieth day of the next fiscal year. 2 3.3 Business Expenses. The Company shall pay for or reimburse the Executive for all reasonable expenses actually incurred by or paid by the Executive during the Term in the performance of the Executive's services under this Agreement, including the cost and expense associated with the use of a cell phone, upon presentation of expense statements or vouchers or such other supporting information as the Company customarily may require of its officers. 3.4 Vacation. During the Term, the Executive shall be entitled to a vacation period or periods of four (4) weeks per year taken in accordance with the vacation policy of the Company during each year of the Term. Vacation time not used by the end of a calendar year shall be forfeited. 3.5 Fringe Benefits. During the Term, the Executive shall be entitled to all benefits for which the Executive shall be eligible under any qualified pension plan, 401(k) plan, group insurance or other so-called "fringe" benefit plan which the Company provides to its executive employees generally, together with executive medical benefits for the Executive, as from time to time in effect for executive employees of the Company generally. 3.6 Additional Benefits. During the Term, the Executive shall be entitled to such other benefits as are specified in Schedule I to this Agreement. 4. Termination. 4.1 Death. If the Executive shall die during the Term, the Term shall terminate immediately. 4.2 Disability. If during the Term the Executive shall become physically or mentally disabled, whether totally or partially, such that the Executive is unable to perform the Executive's principal services hereunder for (i) a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, the Company may at any time after the last day of the six consecutive months of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Executive (but before the Executive has recovered from such disability), terminate the Term. 4.3 Cause. The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, 3 that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 4.3(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) breach by the Executive of any of his obligations under Section 5 hereof; (iii) any willful and intentional acts of the Executive involving fraud, theft, misappropriation of funds, embezzlement or material dishonesty affecting the Company or willful misconduct by the Executive which has, or could reasonably be expected to have, a material adverse effect on the Company; or (iv) the Executive's conviction of, or plea of guilty or nolo contendre to, an offense which is a felony in the jurisdiction involved. 4.4 Permitted Termination by the Executive. (a) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive to duties materially inconsistent with the Executive's positions as described in Section 1.1 hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause or disability or by the Executive other than for Good Reason; (ii) any material breach of this Agreement by the Company which is continuing;(iii) a change in the location of the Executive's principal place of employment to a location other than as specified in Section 1.3 hereof; or (iv) the occurrence of a Third Party Change in Control (as defined in Section 4.5(d)) provided, however, that the Executive shall not be deemed to have Good Reason pursuant to clauses (i) and (ii) above unless the Executive gives the Company written notice that the specified conduct or event has occurred and making specific reference to this Section 4.4 and the Company fails to cure such conduct or event within thirty (30) days of receipt of such notice. (b) The Term may be terminated by the Executive at any time by giving the Company a notice of termination specifying a termination date no less than sixty (60) days after the date the notice is given. 4.5 Severance. (a) If the Term is terminated pursuant to Section 4.1, 4.2 or 4.3 hereof, or by the Executive other than pursuant to Section 4.4(a), the Executive shall be entitled to receive his Base Salary, benefits and reimbursements provided hereunder at the rates provided in Sections 3.1, 3.5 and 3.6 hereof to the date on which such termination shall take effect. In addition, if the Term is terminated pursuant to Section 4.1 or 4.2, the Executive shall also be entitled to receive any bonus which has been awarded under Section 3.2 4 in respect of a previously completed fiscal year but which has not yet been paid and a pro rata portion (based on time) of the annual bonus for the year in which the termination date occurs (a "Pro Rata Bonus"). The Pro Rata Bonus to which the Executive is entitled, if any, for each year other than 1999 shall be determined by reference to the attainment of the performance goals referred to in Section 3.2 as of the end of the fiscal year in which termination of employment occurs and shall be paid when bonuses in respect of that year are generally paid to the Company's other executives but in no event later than the ninetieth day of the next fiscal year. If, prior to June 30, 2000, the Term is terminated pursuant to Section 4.3 hereof or by the Executive other than pursuant to Section 4.4(a), the Executive shall promptly repay to the Company the 1999 Bonus and the Company shall have the right to offset any severance amounts due to the Executive by the amount not so repaid. (b) Except as provided in Section 4.5(c), if the Term is terminated by the Executive pursuant to clauses (i), (ii) or (iii) of Section 4.4(a) or by the Company other than pursuant to Section 4.1, 4.2 or 4.3, or if the Term expires on the Scheduled Expiration Date as a result of the Company giving a Notice of Nonrenewal, the Company shall continue thereafter to provide the Executive (i) payments of Base Salary in the manner and amounts specified in Section 3.1 until the first anniversary of the date of termination, (ii) if termination occurs prior to the time that the 1999 Bonus is paid, a bonus in the amount of $180,000 and if termination occurs at any time after a bonus has been awarded under Section 3.2 in respect of a previously completed fiscal year and prior to the time that the bonus has been paid, the amount of that bonus, (iii) a Pro Rata Bonus for the year in which termination occurs and (iv) fringe benefits in the manner and amounts specified in Section 3.5 until the earlier of the Expiration Date, the period ending on the date the Executive begins work as an employee or consultant for any other entity or twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest for the period specified in clause (iv) of this Section 4.5(b)(unless vesting is accelerated upon the occurrence of a Third Party Change in Control as described in Schedule I) and shall remain exercisable for ninety days after the end of that period. Bonuses payable pursuant to this Section 4.5(b), other than the Pro Rata Bonus, shall be payable in the manner described in Section 3.2 within 30 days after the date of termination. The Pro Rata Bonus to which the Executive is entitled, if any, shall be paid within the time period provided in Section 4.5(a). The Executive shall have no duty or obligation to mitigate the amounts or benefits required to be provided pursuant to this Section 4.5(b), nor shall any such amounts or benefits be reduced or offset by any other amounts to 5 which Executive may become entitled; provided, that if the Executive becomes employed by a new employer or self-employed prior to the earlier of the Expiration Date or twelve (12) months after the date of termination, up to one-half of the Base Salary payable to the Executive pursuant to this Section 4.5(b) shall be reduced by an amount equal to the amount earned from such employment with respect to that period (and the Executive shall be required to return to the Company, without interest, any amount by which such payments pursuant to Section this 4.5(b) exceed the Base Salary to which the Executive is entitled after giving effect to that reduction) and, if the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan, the corresponding medical and other welfare benefits provided under this Section 4.5(b) shall be terminated. As a condition to the Executive receiving the payments under Section 4.5(b), the Executive agrees to permit verification of his employment records and Federal income tax returns by an independent attorney or accountant, selected by the Company but reasonably acceptable to the Executive, who agrees to preserve the confidentiality of the information disclosed by the Executive except to the extent required to permit the Company to verify the amount received by Executive from other active employment. (c) If the Term is terminated by the Executive pursuant to Section 4.4(a), or by the Company other than pursuant to Section 4.1, 4.2 or 4.3, or if the Term expires on the Scheduled Expiration Date as a result of the Company giving a Notice of Nonrenewal and, in any such event, the termination shall occur upon or following the occurrence of a Third Party Change in Control (as defined in Section 4.5(d) or in contemplation of a Third Party Change in Control, the Company shall thereafter provide the Executive (i) an amount equal to two (2) times the sum of (x) the then current Base Salary and (y) the average of the two most recent annual bonuses paid (treating any annual bonus which is not paid as a result of the Executive's failure to attain the Bonus Performance Goals as having been paid in an amount equal to zero) to the Executive during the Term (or if only one annual bonus has been paid, the amount of that annual bonus, and if that termination occurs prior to the time at which 1999 Bonus is paid,$180,000), to be paid in a lump sum within 30 days after the date of termination, and (ii) benefits in the manner and amounts specified in Section 3.5 until twelve (12) months after the date of termination or, with respect to medical and other welfare benefits, when the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan if sooner than twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest until twelve (12) months after the date of termination unless vesting is accelerated upon the occurrence of the Third Party Change in Control as described in Schedule I. 6 (d) For purposes of this Agreement, a Third Party Change in Control shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an Excluded Person or Excluded Group (as defined below) (hereinafter, a "Third Party"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company, (ii) the Company is a party to any merger, consolidation or similar transaction as a result of which the shareholders of the Company immediately prior to such transaction beneficially own securities of the surviving entity representing less than fifty percent (50%) of the combined voting power of the surviving entity's outstanding securities entitled to vote in the election of directors of the surviving entity or (iii) all or substantially all of the assets of the Company are acquired by a Third Party. "Excluded Group" means a "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that (i) includes one or more Excluded Persons; provided that the voting power of the voting stock of the Company "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such Excluded Persons (without attribution to such Excluded Persons of the ownership by other members of the "group") represents a majority of the voting power of the voting stock "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such group or (ii) exists solely by virtue of the fact that the members of such group are parties to the Stockholders' Agreement, dated as of October 1, 1998, by and among the Company, Isaac Perlmutter, Avi Arad, Mark Dickstein, The Chase Manhattan Bank, Morgan Stanley & Co. Incorporated, Whippoorwill Associates Incorporated and various other stockholders of the Company, as that agreement may be amended from time to time (the "Stockholders Agreement"). "Excluded Person" means (i) while the Stockholders Agreement is in effect in substantially its current form, any person or entity who or which is a party to the Stockholders Agreement as of the Effective Date and any affiliate of such a party to the Stockholders Agreement who becomes a party to the Stockholders Agreement, and (ii) Isaac Perlmutter and Avi Arad or any of their affiliates. (e)(i) If any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for the Executive's benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, the Executive's employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets (a "Parachute Payment" or "Parachute Payments"), would be subject to 7 the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Parachute Payments. (ii) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company's expense by the Company's regular outside auditors (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within ten days of the Termination Date if applicable, or promptly upon request by the Company or by the Executive (provided the Executive reasonably believes that any of the Parachute Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Parachute Payment or Parachute Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Parachute Payment or Parachute Payments. Within ten days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 4.5(e)(ii) shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm's determination notwithstanding the existence of any Dispute. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 4.5(e)(iii) below. The Company and the Executive shall resolve any Dispute in accordance with the terms of this Agreement. (iii) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, the parties acknowledge that it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to the Executive from any governmental taxing authority that the Executive's tax liability (whether in respect of the Executive's current taxable 8 year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Parachute Payment or Parachute Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of determination by the Company (which shall include the position taken by the Company, together with its consolidated group, on its federal income tax return) or (iv) upon the resolution of the Dispute to the Executive's satisfaction. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to the Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Parachute Payment or Parachute Payments (or portion thereof) with respect to which the Executive had previously received a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred when the Executive has received from the applicable government taxing authority a refund of taxes or other reduction in the Executive's tax liability by reason of the Excise Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to the Executive and the Executive shall pay to the Company on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to the Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to the Executive until the date of repayment to the Company. (iv) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Parachute Payment or Parachute Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the 8 Parachute Payment or Parachute Payments or the Gross Up Payment. (f) Except as provided in this Section 4.5, pursuant to the Marvel Enterprises, Inc. Stock Option Plan as provided in Schedule I to this Agreement and as required by law, the Company shall have no further obligation to the Executive after termination of the Term. 5. Protection of Confidential Information; Non-Competition 5.1 In view of the fact that the Executive's work for the Company will bring the Executive into close contact with many confidential affairs of the Company not readily available to the public, as well as plans for future developments by the Company, the Executive agrees: 5.1.1 To keep and retain in the strictest confidence all confidential matters of the Company, including, without limitation, "know how", trade secrets, customer lists, pricing policies, operational methods, technical processes, formulae, inventions and research projects, and other business affairs of the Company ("Confidential Information"), learned by the Executive heretofore or hereafter, and not to use or disclose them to anyone outside of the Company, either during or after the Executive's employment with the Company, except in the course of performing the Executive's duties hereunder or with the Company's express written consent; provided, however, that the restrictions of this Section 5.1.1 shall not apply to that part of the Confidential Information that the Executive demonstrates is or becomes generally available to the public other than as a result of a disclosure by the Executive or is available, or becomes available, to the Executive on a non-confidential basis, but only if the source of such information is not prohibited from transmitting the information to the Executive by a contractual, legal, fiduciary, or other obligation; and 5.1.2 To deliver promptly to the Company on termination of the Executive's employment by the Company, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints and other documents (and all copies thereof) relating to the Company's business and all property associated therewith, which the Executive may then possess or have under the Executive's control. 5.2 For a period of one (1) year after he ceases to be employed by the Company under this Agreement or otherwise, if such cessation arises pursuant to Section 4.3, or as a result of termination by the Executive which is not pursuant to Section 4.4 or is otherwise in breach of this Agreement, the Executive shall not, directly or indirectly, enter the employ of, or render any 10 services to, any person, firm or corporation engaged in any business competitive with the business of the Company or of any of its subsidiaries or affiliates; the Executive shall not engage in such business on the Executive's own account; and the Executive shall not become interested in any such business, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any other relationship or capacity; provided, however, that nothing contained in this Section 5.2 shall be deemed to prohibit the Executive from acquiring, solely as an investment, up to five percent (5%) of the outstanding shares of capital stock of any public corporation or during such one (1) year period, taking a position with a business the main business of which is the sale of retail products to customers. 5.3 If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of Sections 5.1 or 5.2 hereof, the Company shall have the following rights and remedies: 5.3.1 The right and remedy to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; and 5.3.2 The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the provisions of Section 5.2 hereof, and the Executive hereby agrees to account for and pay over such Benefits to the Company. Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. 5.4 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, hereafter are construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. 5.5 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, are held to be unenforceable because of the duration of such provision or the area covered thereby, the parties hereto agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and, in its reduced form, said provision shall then be enforceable. 11 5.6 The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 5.1 and 5.2 hereof upon the courts of any state within the geographical scope of such covenants. In the event that the courts of any one or more of such states shall hold such covenants wholly unenforceable by reason of the breadth of such covenants or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Company's right to the relief provided above in the courts of any other states within the geographical scope of such covenants as to breaches of such covenants in such other respective jurisdictions, the above covenants as they relate to each state being for this purpose severable into diverse and independent covenants. 5.7 In the event that any action, suit or other proceeding in law or in equity is brought to enforce the covenants contained in Sections 5.1 and 5.2 hereof or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Company in such action, suit or other proceeding shall (on demand of the Company) be paid by the Executive. In the event the Company fails to obtain a judgment for money damages or an injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Executive in such action, suit or other proceeding shall (on demand of the Executive) be paid by the Company. 6. Inventions and Patents. The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company or for one year thereafter (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. 12 7. Intellectual Property. The Company shall be the sole owner of all the products and proceeds of the Executive's services hereunder, including, but not limited to, all materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Executive may acquire, obtain, develop or create in connection with and during his employment, free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever (other than the Executive's right to receive payments hereunder). The Executive shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such properties. 8. Indemnification. To the fullest extent permitted by applicable law, Executive shall be indemnified and held harmless for any action or failure to act in his capacity as an officer or employee of the Company or any of its affiliates or subsidiaries. In furtherance of the foregoing and not by way of limitation, if Executive is a party or is threatened to be made a party to any suit because he is an officer or employee of the Company or such affiliate or subsidiary, he shall be indemnified against expenses, including reasonable attorney's fees, judgments, fines and amounts paid in settlement if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. Indemnification under this Section 8 shall be in addition to any other indemnification by the Company of its officers and directors. Expenses incurred by Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 8 shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of Executive to repay such amount in the event that it shall ultimately be determined that he is not entitled to indemnification by the Company. Such undertaking shall be accepted without reference to the financial ability of Executive to make repayment. The provisions of this Section 8 shall apply as well to the Executive's actions and omissions as a trustee of any employee benefit plan of the Company, its affiliates or subsidiaries. 13 9. Arbitration; Legal Fees Except with respect to injunctive relief under Section 5 of this Agreement, any dispute or controversy arising out of or relating to this Agreement shall be resolved exclusively by arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment on the award may be entered in any court having jurisdiction thereof. The Company shall reimburse the Executive's reasonable costs and expenses incurred in connection with any arbitration proceeding pursuant to this Section 9 if the Executive is the substantially prevailing party in that proceeding. 10. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company, to: Marvel Enterprises, Inc. 387 Park Avenue South New York, New York 10016 Attention: President If to the Executive, to: Allen S. Lipson 35 Brookwood Drive Woodbridge, CT 06525 11. General. 11.1 This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. 11.2 The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the 14 subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. This Agreement expressly supersedes all agreements and understandings between the parties regarding the subject matter hereof and any such agreement is terminated as of the date first above written. 11.4 This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate or (ii) to third parties in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 11.5 This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 12. Subsidiaries and Affiliates. As used herein, the term "subsidiary" shall mean any corporation or other business entity controlled directly or indirectly by the Company or other business entity in question, and the term "affiliate" shall mean and include any corporation or other business entity directly or indirectly controlling, controlled by or under common control with the Company or other business entity in question. 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: MARVEL ENTERPRISES, INC. /s/ F. Peter Cuneo By:------------------------------- Name: F. Peter Cuneo Title: President & Chief Executive Officer EXECUTIVE: /s/ Allen S. Lipson ----------------------------- Allen S. Lipson SCHEDULE I Additional Benefits: 1. Automobile Allowance. The Executive shall be eligible for an automobile allowance in the amount of $1,200 per month in accordance with the Company's policy. 2. Stock Option Plan. The Executive shall be eligible to participate in the Marvel Enterprises, Inc. Stock Option Plan (the "Stock Option Plan") and to receive 150,000 options to purchase shares (the "Shares") of the common stock, par value $.01 per share ("Common Stock"), of the Company pursuant to the terms of the Marvel Enterprises, Inc. Stock Option Plan (the "Stock Option Plan") and related Stock Option Agreement subject to the terms and conditions approved by the committee of the Board of Directors of the Company which administers the Stock Option Plan. The options shall be scheduled to vest as to one-third of the Shares on each of the first, second and third anniversaries of the date they are granted, shall vest as to all of the Shares upon a Third Party Change in Control and shall be subject to all other terms and conditions of the Stock Option Plan and the related Stock Option Agreement between the Company and the Executive. The Executive's participation in the Stock Option Plan shall not be, or be deemed to be, a fringe benefit or additional benefit for purposes of Section 4.5(b)(iv) of this Agreement, and the Executive's stock option rights shall be governed strictly in accordance with the Stock Option Plan and the related Stock Option Agreement. In the event of any conflict between this Agreement and the Stock Option Plan and the related Stock Option Agreement, or any ambiguity in any such agreements, the Stock Option Plan and the related Stock Option Agreement shall control. 3. Temporary Housing Allowance. For a period of twelve full months, commencing on a date specified by the Executive which shall be within three months after the Effective Date, or until the date that the Executive relocates his primary residence to a location in the New York City metropolitan area, the Company shall provide the Executive with a suitable one-bedroom apartment in Manhattan (and shall pay related utility charges, other than personal long distance telephone charges) and shall also provide the Executive with monthly parking in a garage in proximity to that apartment. The apartment, utilities and parking referred to in this paragraph shall be provided to the Executive, or the Executive shall be reimbursed by the Company for those expenses, on an after-tax basis so that he shall be reimbursed for any resulting income tax liability (including any income tax liability resulting from payments made pursuant to this sentence). 4. Reimbursement of COBRA Expenses. The Executive shall be reimbursed for the cost of continued COBRA coverage under the health insurance plans of his former employer until he becomes eligible to participate in the Company's health insurance plan. 5. Reimbursement of Legal Fees. The Executive shall be reimbursed for his reasonable legal fees and expenses incurred in connection with the review and negotiation of this Agreement. EX-10.22 5 EMPLOYMENT AGREEMENT EXHIBIT 10.22 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of January 26, 2000, between Marvel Enterprises, Inc., a Delaware corporation (the "Company") and Bill Jemas(the "Executive"). WHEREAS, the Company wishes to employ the Executive, and the Executive wishes to accept such employment, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Employment, Duties and Acceptance. 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive and full-time services to the Company as President of Publishing and New Media or in such other executive position as may be mutually agreed upon by the Company and the Executive. The Executive shall report solely to the Company's Chief Executive Officer and Board of Directors and shall perform such other duties consistent with such positions as may be assigned to the Executive by the Company's Chief Executive Officer or Board of Directors. 1.2 Acceptance. The Executive hereby accepts such employment and agrees to render the services described above. During the Term, the Executive agrees to serve the Company faithfully and to the best of the Executive's ability, to devote the Executive's entire business time, energy and skill to such employment and to use the Executive's professional efforts, skill and ability to promote the Company's interests. The Executive further agrees to accept election, and to serve during all or any part of the Term, as an officer or director of the Company and of any subsidiary or affiliate of the Company, without any compensation therefor other than that specified in this Agreement, if elected to any such position by the shareholders or by the Board of Directors of the Company or of any subsidiary or affiliate, as the case may be. 1.3 Location. The duties to be performed by the Executive hereunder shall be performed primarily at the principal executive office of the Company in New York City, subject to reasonable and customary travel requirements on behalf of the Company. Executive will be permitted to work from his home one day a week consistent with the business needs of the Company and so long as Executive is able to perform his duties hereunder effectively. 2. Term of Employment 2.1 The Term. The term of the Executive's employment under this Agreement (the "Term") shall commence on February 14, 2000 (the "Effective Date") and shall end on February 13, 2001 (the "Expiration Date"). The Term shall end earlier than the Expiration Date if sooner terminated pursuant to Section 4 hereof. The Expiration Date shall be automatically postponed for one year, and the Term shall be automatically extended by one year, unless either party hereto provides the other party with written notice(a "Notice of Nonrenewal"), not later than sixty days prior to the Expiration Date, of its election not to permit the Term to be so extended, and the Expiration Date shall thereafter be automatically postponed for one additional year and the Term shall thereafter be automatically extended by one additional year, on each subsequent anniversary of the date of this Agreement, unless either party provides the other party with written notice, not later than sixty days prior to such subsequent anniversary of the date of this Agreement, of its election not to permit the Term to be so extended. 3. Compensation; Benefits. 3.1 Salary. As compensation for all services to be rendered pursuant to this Agreement, the Company agrees to pay the Executive during the Term a base salary, payable bi-weekly in arrears, at the annual rate of $275,000 less such deductions or amounts to be withheld as required by applicable law and regulations and deductions authorized by the Executive in writing. The Executive's base salary shall be reviewed no less frequently than annually by the Board of Directors and may be increased, but not decreased, by the Board of Directors. The Executive's base salary as in effect from time to time is referred to in this Agreement as the "Base Salary". 3.2 Bonus. In addition to the amounts to be paid to the Executive pursuant to Section 3.1 hereof, the Executive will be entitled to receive the following: (a) a sign on bonus of $100,000 payable $50,000 within ten days after the Effective Date and the balance of $50,000 payable when the 2000 Bonus (as defined below) is paid; and (b) a cash bonus in respect of calendar year 2000 and thereafter based upon the attainment of performance goals set by the Board of Directors (the "Bonus Performance Goals"). The Executive's target annual bonus amount shall be 50% of his base salary for the year; provided that for calendar year 2000, Executive shall receive the amount to which he may be entitled under the 2000 bonus program or $137,500, whichever is greater(the "2000 Bonus"). Each annual bonus, including the 2000 Bonus, shall be paid when annual bonuses are paid generally to the Company's other senior executive officers but in no event later than the ninetieth day of the next calendar year. In the event Executive's employment shall cease as a result of the service of a Notice of Nonrenewal by either party, Executive shall be entitled to receive his applicable bonus for the calendar year proceeding the date in which the Expiration Date falls. 3.3 Business Expenses. The Company shall pay for or reimburse the Executive for all reasonable expenses actually incurred by or paid by the Executive during the Term in the performance of the Executive's services under this Agreement, including the cost and expense associated with the use of a cell phone, upon presentation of expense statements or vouchers or such other supporting information as the Company customarily may require of its officers. The Company shall pay for or provide all business equipment necessary for Executive to perform his duties hereunder. 3.4 Vacation. During the Term, the Executive shall be entitled to a vacation period or periods of four (4) weeks per year taken in accordance with the vacation policy of the Company during each year of the Term. Vacation time not used by the end of a calendar year shall be forfeited. 3.5 Fringe Benefits. During the Term, the Executive shall be entitled to all benefits for which the Executive shall be eligible under any qualified pension plan, 401(k) plan, group insurance or other so-called "fringe" benefit plan which the Company provides to its executive employees generally, together with executive medical benefits for the Executive, as from time to time in effect for executive employees of the Company generally. 3.6 Additional Benefits. During the Term, the Executive shall be entitled to such other benefits as are specified in Schedule I to this Agreement. 4. Termination. 4.1 Death. If the Executive shall die during the Term, the Term shall terminate immediately. 4.2 Disability. If during the Term the Executive shall become physically or mentally disabled, whether totally or partially, such that the Executive is unable to perform the Executive's principal services hereunder for (i) a period of six consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, the Company may at any time after the last day of the six consecutive months of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Executive (but before the Executive has recovered from such disability), terminate the Term. Nothing herein shall be deemed a waiver of any rights Executive may have under the Americans with Disabilities Act or any other applicable Federal or state laws. 4.3 Cause. The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. As used herein, the term "Cause" means: (i) any willful and intentional acts of the Executive involving fraud, theft, misappropriation of funds, embezzlement or material dishonesty affecting the Company or willful misconduct by the Executive which has, or could reasonably be expected to have, a material adverse effect on the Company; or (ii) the Executive's conviction of, or plea of guilty or nolo contendre to, an offense which is a felony in the jurisdiction involved. 4.4 Permitted Termination by the Executive. (a) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive to duties materially inconsistent with the Executive's positions as described in Section 1.1 hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause or disability or by the Executive other than for Good Reason; (ii) any material breach of this Agreement by the Company which is continuing;(iii) a change in the location of the Executive's principal place of employment to a location other than as specified in Section 1.3 hereof; or (iv) the occurrence of a Third Party Change in Control (as defined in Section 4.5(d)) provided, however, that the Executive shall not be deemed to have Good Reason pursuant to clauses (i) and (ii) above unless the Executive gives the Company written notice that the specified conduct or event has occurred and making specific reference to this Section 4.4 and the Company fails to cure such conduct or event within thirty (30) days of receipt of such notice. (b) The Term may be terminated by the Executive at any time by giving the Company a notice of termination specifying a termination date no less than sixty (60) days after the date the notice is given. 4.5 Severance. (a) If the Term is terminated pursuant to Section 4.1, 4.2 or 4.3 hereof, or by the Executive other than pursuant to Section 4.4(a), the Executive shall be entitled to receive his Base Salary, benefits and reimbursements provided hereunder at the rates provided in Sections 3.1, 3.5 and 3.6 hereof to the date on which such termination shall take effect. In addition, if the Term is terminated pursuant to Section 4.1 or 4.2, the Executive shall also be entitled to receive any bonus which has been awarded under Section 3.2 in respect of a previously completed fiscal year but which has not yet been paid and a pro rata portion (based on time) of the annual bonus for the year in which the termination date occurs (a "Pro Rata Bonus"). The Pro Rata Bonus to which the Executive is entitled, if any, for each year other than 2000 shall be determined solely by reference to the attainment of the performance goals referred to in Section 3.2 as of the end of the fiscal year in which termination of employment occurs and shall be paid when bonuses in respect of that year are generally paid to the Company's other executives but in no event later than the ninetieth day of the next fiscal year. The Pro Rata Bonus for 2000 shall be based upon the assumption that the total bonus is $137,500. (b) Except as provided in Section 4.5(c), if the Term is terminated by the Executive pursuant to clauses (i), (ii) or (iii) of Section 4.4(a) or by the Company other than pursuant to Section 4.1, 4.2 or 4.3, the Company shall continue thereafter to provide the Executive (i) payments of Base Salary in the manner and amounts specified in Section 3.1 until the first anniversary of the date of termination, (ii) if termination occurs at any time after a bonus has been awarded under Section 3.2 in respect of a previously completed fiscal year and prior to the time that the bonus has been paid, the amount of that bonus, (iii) a Pro Rata Bonus for the year in which termination occurs and (iv) fringe benefits in the manner and amounts specified in Section 3.5 until the earlier of the Expiration Date, the period ending on the date the Executive begins work as an employee or consultant for any other entity or twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest for the period specified in clause (iv) of this Section 4.5(b)(unless vesting is accelerated upon the occurrence of a Third Party Change in Control as described in Section 4.5(d)) and shall remain exercisable for ninety days after the end of that period. Bonuses payable pursuant to this Section 4.5(b), other than the Pro Rata Bonus, shall be payable in the manner described in Section 3.2 within 30 days after the date of termination. The Pro Rata Bonus to which the Executive is entitled, if any, shall be paid within the time period provided in Section 4.5(a). The Executive shall have no duty or obligation to mitigate the amounts or benefits required to be provided pursuant to this Section 4.5(b), nor shall any such amounts or benefits be reduced or offset by any other amounts to which Executive may become entitled; provided, that if the Executive becomes employed by a new employer or self-employed prior to the earlier of the Expiration Date or twelve (12) months after the date of termination, up to one-half of the Base Salary payable to the Executive pursuant to this Section 4.5(b) shall be reduced by an amount equal to the amount earned from such employment with respect to that period (and the Executive shall be required to return to the Company, without interest, any amount by which such payments pursuant to Section this 4.5(b) exceed the Base Salary to which the Executive is entitled after giving effect to that reduction) and, if the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan, the corresponding medical and other welfare benefits provided under this Section 4.5(b) shall be terminated. As a condition to the Executive receiving the payments under Section 4.5(b), the Executive agrees to permit verification of his employment records and Federal income tax returns by an independent attorney or accountant, selected by the Company but reasonably acceptable to the Executive, who agrees to preserve the confidentiality of the information disclosed by the Executive except to the extent required to permit the Company to verify the amount received by Executive from other active employment. (c) If the Term is terminated by the Executive pursuant to Section 4.4(a), or by the Company other than pursuant to Section 4.1, 4.2 or 4.3, and, in any such event, the termination shall occur upon or following the occurrence of a Third Party Change in Control (as defined in Section 4.5(d)) or in contemplation of a Third Party Change in Control, the Company shall thereafter provide the Executive (i) an amount equal to two (2) times the sum of (x) the then current Base Salary and (y) the average of the two most recent annual bonuses paid (treating any annual bonus which is not paid as a result of the Executive's failure to attain the Bonus Performance Goals as having been paid in an amount equal to zero) to the Executive during the Term (or if only one annual bonus has been paid, the amount of that annual bonus, and if that termination occurs prior to the time at which 2000Bonus is paid,$137,500), to be paid in a lump sum within 30 days after the date of termination, and (ii) benefits in the manner and amounts specified in Section 3.5 until twelve (12) months after the date of termination or, with respect to medical and other welfare benefits, when the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan if sooner than twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest until twelve (12) months after the date of termination unless vesting is accelerated upon the occurrence of the Third Party Change in Control as described in subparagraph (d) below. (d) For purposes of this Agreement, a Third Party Change in Control shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an Excluded Person or Excluded Group (as defined below) (hereinafter, a "Third Party"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company, (ii) the Company is a party to any merger, consolidation or similar transaction as a result of which the shareholders of the Company immediately prior to such transaction beneficially own securities of the surviving entity representing less than fifty percent (50%) of the combined voting power of the surviving entity's outstanding securities entitled to vote in the election of directors of the surviving entity or (iii) all or substantially all of the assets of the Company are acquired by a Third Party. "Excluded Group" means a "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that (i) includes one or more Excluded Persons; provided that the voting power of the voting stock of the Company "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such Excluded Persons (without attribution to such Excluded Persons of the ownership by other members of the "group") represents a majority of the voting power of the voting stock "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such group or (ii) exists solely by virtue of the fact that the members of such group are parties to the Stockholders' Agreement, dated as of October 1, 1998, by and among the Company, Isaac Perlmutter, Avi Arad, Mark Dickstein, The Chase Manhattan Bank, Morgan Stanley & Co. Incorporated, Whippoorwill Associates Incorporated and various other stockholders of the Company, as that agreement may be amended from time to time (the "Stockholders Agreement"). "Excluded Person" means (i) while the Stockholders Agreement is in effect in substantially its current form, any person or entity who or which is a party to the Stockholders Agreement as of the Effective Date and any affiliate of such a party to the Stockholders Agreement who becomes a party to the Stockholders Agreement, and (ii) Isaac Perlmutter and Avi Arad or any of their affiliates. (e)(i) If any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for the Executive's benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, the Executive's employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets (a "Parachute Payment" or "Parachute Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Parachute Payments. (ii) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company's expense by the Company's regular outside auditors (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within ten days of the Termination Date if applicable, or promptly upon request by the Company or by the Executive (provided the Executive reasonably believes that any of the Parachute Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Parachute Payment or Parachute Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Parachute Payment or Parachute Payments. Within ten days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 4.5(e)(ii) shall be paid by the Company to the Executive within ten days of the receipt of the Accounting Firm's determination notwithstanding the existence of any Dispute. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 4.5(e)(iii) below. The Company and the Executive shall resolve any Dispute in accordance with the terms of this Agreement. (iii) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, the parties acknowledge that it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to the Executive from any governmental taxing authority that the Executive's tax liability (whether in respect of the Executive's current taxable year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Parachute Payment or Parachute Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of determination by the Company (which shall include the position taken by the Company, together with its consolidated group, on its federal income tax return) or (iv) upon the resolution of the Dispute to the Executive's satisfaction. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to the Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Parachute Payment or Parachute Payments (or portion thereof) with respect to which the Executive had previously received a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred when the Executive has received from the applicable government taxing authority a refund of taxes or other reduction in the Executive's tax liability by reason of the Excise Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to the Executive and the Executive shall pay to the Company on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to the Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to the Executive until the date of repayment to the Company. (iv) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Parachute Payment or Parachute Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Parachute Payment or Parachute Payments or the Gross Up Payment. (f) Except as provided in this Section 4.5, pursuant to the Marvel Enterprises, Inc. Stock Option Plan as provided in Schedule I to this Agreement and as required by law, the Company shall have no further obligation to the Executive after termination of the Term. 5. Protection of Confidential Information; Non-Competition 5.1 In view of the fact that the Executive's work for the Company will bring the Executive into close contact with many confidential affairs of the Company not readily available to the public, as well as plans for future developments by the Company, the Executive agrees: 5.1.1 To keep and retain in the strictest confidence all confidential matters of the Company, including, without limitation, trade secrets, customer lists, pricing policies, operational methods, technical processes, formulae, inventions and research projects, and other business affairs of the Company ("Confidential Information"), learned by the Executive heretofore or hereafter, and not to use or disclose them to anyone outside of the Company, either during or after the Executive's employment with the Company, except in the course of performing the Executive's duties hereunder or with the Company's express written consent; provided, however, that the restrictions of this Section 5.1.1 shall not apply to that part of the Confidential Information that the Executive demonstrates is or becomes generally available to the public other than as a result of a disclosure by the Executive or is available, or becomes available, to the Executive on a non-confidential basis, but only if to the reasonable belief of Executive the source of such information is not prohibited from transmitting the information to the Executive by a contractual, legal, fiduciary, or other obligation; and 5.1.2 To deliver promptly to the Company on termination of the Executive's employment by the Company, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints and other documents (and all copies thereof) relating to the Company's business and all property associated therewith, which the Executive may then possess or have under the Executive's control. 5.2 For a period of one (1) year after he ceases to be employed by the Company under this Agreement or otherwise, if such cessation arises pursuant to Section 4.3, or as a result of termination by the Executive which is not pursuant to Section 4.4 or is otherwise in breach of this Agreement, the Executive shall not, directly or indirectly, enter the employ of, or render any services to, DC Comics; the Executive shall not become interested in DC Comics, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any other relationship or capacity; provided, however, that nothing contained in this Section 5.2 shall be deemed to prohibit the Executive from acquiring, solely as an investment, up to five percent (5%) of the outstanding shares of capital stock of DC Comics. 5.3 If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of Sections 5.1 or 5.2 hereof, the Company shall have the following rights and remedies: 5.3.1 The right and remedy to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; and 5.3.2 The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as the result of any transactions constituting a breach of any of the provisions of Section 5.2 hereof, and the Executive hereby agrees to account for and pay over such Benefits to the Company. Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. 5.4 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, hereafter are construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. 5.5 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, are held to be unenforceable because of the duration of such provision or the area covered thereby, the parties hereto agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and, in its reduced form, said provision shall then be enforceable. 5.6 The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 5.1 and 5.2 hereof upon the courts of any state within the geographical scope of such covenants. In the event that the courts of any one or more of such states shall hold such covenants wholly unenforceable by reason of the breadth of such covenants or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Company's right to the relief provided above in the courts of any other states within the geographical scope of such covenants as to breaches of such covenants in such other respective jurisdictions, the above covenants as they relate to each state being for this purpose severable into diverse and independent covenants. 5.7 In the event that any action, suit or other proceeding in law or in equity is brought to enforce the covenants contained in Sections 5.1 and 5.2 hereof or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Company in such action, suit or other proceeding shall (on demand of the Company) be paid by the Executive. In the event the Company fails to obtain a judgment for money damages or an injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Executive in such action, suit or other proceeding shall (on demand of the Executive) be paid by the Company. 6. Inventions and Patents. The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company which are legally protectable and/or may have material value to the Company or to a third party (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. 7. Intellectual Property. The Company shall be the sole owner of all reports, memos, products and other personal property arising out of the Executive's services hereunder and all ideas, concepts, formats, suggestions, developments, arrangements, programs and other legally protectable intellectual properties and/or intellectual properties that have a material value to the Company or to a third party that the Executive may acquire, obtain, develop or create in connection with and during his employment, free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever (other than the Executive's right to receive payments hereunder). The Executive shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such properties. 8. Indemnification. To the fullest extent permitted by applicable law, Executive shall be indemnified and held harmless for any action or failure to act in his capacity as an officer or employee of the Company or any of its affiliates or subsidiaries. In furtherance of the foregoing and not by way of limitation, if Executive is a party or is threatened to be made a party to any suit because he is an officer or employee of the Company or such affiliate or subsidiary, he shall be indemnified against expenses, including reasonable attorney's fees, judgments, fines and amounts paid in settlement if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. Indemnification under this Section 8 shall be in addition to any other indemnification by the Company of its officers and directors. Expenses incurred by Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 8 shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of Executive to repay such amount in the event that it shall ultimately be determined that he is not entitled to indemnification by the Company. Such undertaking shall be accepted without reference to the financial ability of Executive to make repayment. The provisions of this Section 8 shall apply as well to the Executive's actions and omissions as a trustee of any employee benefit plan of the Company, its affiliates or subsidiaries. 9. Arbitration; Legal Fees Except with respect to injunctive relief under Section 5 of this Agreement, any dispute or controversy arising out of or relating to this Agreement shall be resolved exclusively by arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Judgment on the award may be entered in any court having jurisdiction thereof. The Company shall reimburse the Executive's reasonable costs and expenses incurred in connection with any arbitration proceeding pursuant to this Section 9 if the Executive is the substantially prevailing party in that proceeding. 10. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): If to the Company, to: Marvel Enterprises, Inc. 387 Park Avenue South New York, New York 10016 Attention: President If to the Executive, to: Bill Jemas 22 Riverside Drive Princeton, N.J. 08540 11. General. 11.1 This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. 11.2 The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. This Agreement expressly supersedes all agreements and understandings between the parties regarding the subject matter hereof and any such agreement is terminated as of the date first above written. 11.4 This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate or (ii) to third parties in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 11.5 This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 12. Subsidiaries and Affiliates. As used herein, the term "subsidiary" shall mean any corporation or other business entity controlled directly or indirectly by the Company or other business entity in question, and the term "affiliate" shall mean and include any corporation or other business entity directly or indirectly controlling, controlled by or under common control with the Company or other business entity in question. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: MARVEL ENTERPRISES, INC. /s/ F. Peter Cuneo By:----------------------- Name: F. Peter Cuneo Title: President & Chief Executive Officer EXECUTIVE: /s/ Bill Jemas -------------------------- Bill Jemas SCHEDULE I Additional Benefits: 1. Automobile Allowance. The Executive shall be eligible for an automobile allowance in the amount of $1,100 per month in accordance with the Company's policy. 2. Stock Option Plan. The Executive shall be eligible to participate in the Marvel Enterprises, Inc. Stock Option Plan (the "Stock Option Plan") and to receive 125,000 options to purchase shares (the "Shares") of the common stock, par value $.01 per share ("Common Stock"), of the Company pursuant to the terms of the Marvel Enterprises, Inc. Stock Option Plan (the "Stock Option Plan") and related Stock Option Agreement subject to the terms and conditions approved by the committee of the Board of Directors of the Company which administers the Stock Option Plan. The options shall be scheduled to vest as to one-third of the Shares on each of the first, second and third anniversaries of the date of the day immediately prior to the Effective Date, shall vest as to all of the Shares upon a Third Party Change in Control and shall be subject to all other terms and conditions of the Stock Option Plan and the related Stock Option Agreement between the Company and the Executive. The Executive's participation in the Stock Option Plan shall not be, or be deemed to be, a fringe benefit or additional benefit for purposes of Section 4.5(b)(iv) of this Agreement, and the Executive's stock option rights shall be governed strictly in accordance with the Stock Option Plan and the related Stock Option Agreement. In the event of any conflict between this Agreement and the Stock Option Plan and the related Stock Option Agreement, or any ambiguity in any such agreements, the Stock Option Plan and the related Stock Option Agreement shall control. 3. Reimbursement of COBRA Expenses. The Executive shall be reimbursed for the cost of continued COBRA coverage under the health insurance plans of his former employer until he becomes eligible to participate in the Company's health insurance plan. 4. Reimbursement of Legal Fees. The Executive shall be reimbursed for his reasonable legal fees and expenses incurred in connection with the review and negotiation of this Agreement. EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of the Registrant - - - ------------------------------
1. Compania de Juguetes Mexicanos, S.A. de C.V. (99%) (Mexico) 2. MEI Holding Company F Corp. (Delaware) 3. MEI Holding Company S Corp. (Delaware) 4. MRV, Inc. (Delaware) 5. Marvel Characters, Inc. (Delaware) 6. Marvel Entertainment Group, Inc. (Delaware) 7. Marvel Restaurant Venture Corp. (Delaware) 8. Spiderman Merchandising L.P. (50%) (Partnership) 9. Toy Biz International Limited (99%) (Hong Kong) 10. UMRV Co. (30%) (Partnership)
EX-23 7 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Post-effective Amendment No.2 to the Registration Statement (Form S-3 No.333-68019) and related Prospectus of Marvel Enterprises, Inc. (formerly Toy Biz, Inc.) of our report dated February 8, 2000 with respect to the consolidated financial statements and schedule of Marvel Enterprises, Inc included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP New York, New York March 28,2000 EX-23.1 8 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under "Experts" in the Registration Statement (Form S-3 No.333-88189) and the related Prospectus of Marvel Enterprises, Inc. for the registration of Class B Warrants, 8% Cumulative Convertible Exchangeable Preferred Stock and Common Stock and to the incorporation by reference of our report dated February 8, 2000 with respect to the consolidated financial statements of Marvel Enterprises, Inc. included in its Annual Report (Form 10-K) for the year ended December 31, 1999, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP New York, New York March 28, 2000 EX-27 9 FDS FOR YEAR ENDED DECEMBER 31, 1999
5 EXHIBIT 27 This schedule contains summary financial information extracted from Marvel Enterprises, Inc. Condensed Consolidated Balance Sheets and Statements of Income and is qualified in its entirety by reference to such financial statements. 0000933730 Marvel Enterprises, Inc. 1,000 U.S. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 64,814 0 84,353 28,512 39,385 172,909 33,236 16,010 654,637 80,990 250,000 0 186,790 409 168,309 654,637 319,645 319,645 150,858 150,858 168,531 0 32,077 (27,778) 4,482 (32,260) 0 (1,531) 0 (33,791) (1.43) (1.43)
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