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Marvel Entertainment/Inc · 10-K · For 12/31/97

Filed On 3/31/98 · SEC File 1-13638 · Accession Number 940180-98-359

  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 3/31/98  Marvel Entertainment/Inc          10-K       12/31/97    6:167                                    Donnelley Rr & So..12/FA

Annual Report — Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                         63    373K 
 2: EX-10.26    Master Agreement                                      36    117K 
 3: EX-10.31    Second Amended Joint Plan of Reorganization           64    236K 
 4: EX-21.1     Subsidiaries of the Company                            1      4K 
 5: EX-23       Consent of Ernst & Young Llp                           1      6K 
 6: EX-27       Financial Data Schedule                                2      8K

10-K — Annual Report
Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Business Certain Relationships and Related Transactions Change of Control Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Company Registration Rights Agreement Directors and Executive Officers of the Registrant Executive Compensation Exhibits, Financial Statement Schedules, and Reports on Form 8-K Financial Statements and Supplementary Data Item 3 Legal Proceedings Liquidity and Capital Resources Management's Discussion and Analysis of Financial Condition and Results of Operations Market for Registrant's Common Equity and Related Stockholder Matters Marvel Studios Notes to Consolidated Financial Statements Part I Part Ii Part Iii Part Iv Predecessor Company Properties Proposed Combination with Marvel Proxy and Stock Option Agreements Quantitative and Qualitative Disclosures About Market Risk Report of Independent Auditors Security Ownership of Certain Beneficial Owners and Management Selected Financial Data Signatures Stockholders' Agreement and Class B Common Stock Submission of Matters to A Vote of Security Holders Valuation and Qualifying Accounts
1	1st Page - Filing Submission
4	Part I
"	Item 1. Business
"	Change of Control
13	Proposed Combination with Marvel
15	Item 2. Properties
"	Item 3. Legal Proceedings
"	Item 3
16	Item 4. Submission of Matters to A Vote of Security Holders
"	Part Ii
"	Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
17	Item 6. Selected Financial Data
"	Predecessor Company
18	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
20	Liquidity and Capital Resources
22	Item 7 A. Quantitative and Qualitative Disclosures About Market Risk
"	Item 8. Financial Statements and Supplementary Data
23	Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
"	Part Iii
"	Item 10. Directors and Executive Officers of the Registrant
26	Item 11. Executive Compensation
29	Item 12. Security Ownership of Certain Beneficial Owners and Management
30	Item 13. Certain Relationships and Related Transactions
31	Stockholders' Agreement and Class B Common Stock
"	Company Registration Rights Agreement
32	Marvel Studios
33	Proxy and Stock Option Agreements
35	Part Iv
"	Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
40	Signatures
43	Report of Independent Auditors
48	Notes to Consolidated Financial Statements
63	Valuation and Qualifying Accounts

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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, 1997

[ ] 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

TOY BIZ, INC.

(Exact name of Registrant as specified in its charter)

Delaware 13-3711775
(State of incorporation) (I.R.S. employer identification number)

685 Third Avenue
New York, New York 10017

(Address of principal executive offices, including zip code)

(212) 588-5100
(Registrant's telephone number, including area code)

------------------------------------------------------------

Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None

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 stock held by
non-affiliates of the Registrant as of March 25, 1998 was $138,689,704, based on
a price of $9 7/8 per share, the closing sales price for the Registrant's Class
A Common Stock as reported in the New York Stock Exchange Composite Transaction
Tape on that date.

As of March 25, 1998, there were 27,746,127 outstanding shares of the
Registrant's Class A Common Stock, par value $.01 per share (the "Class A Common
Stock").

DOCUMENTS INCORPORATED BY REFERENCE

None.

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TABLE OF CONTENTS

Page
----

PART I.......................................................................1
ITEM 1. BUSINESS...................................................1
ITEM 2. PROPERTIES................................................12
ITEM 3. LEGAL PROCEEDINGS.........................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......13

PART II.....................................................................13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................13
ITEM 6. SELECTED FINANCIAL DATA...................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................15
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...............................................19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.......................20

PART III....................................................................20
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........20
ITEM 11. EXECUTIVE COMPENSATION....................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............27

PART IV.....................................................................32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K...............................................32

SIGNATURES..................................................................37

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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, or on behalf of, the
Company: (i) developments in the Marvel bankruptcy proceedings (including the
Company's proposal with respect thereto); (ii) a decrease in the level of media
exposure or popularity of Marvel characters resulting in declining revenues of
toys based on such characters; (iii) the lack of commercial success of
properties owned by major entertainment companies that have granted the Company
toy licenses; (iv) consumer acceptance of new toy product introductions; (v) 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; (vi) changing
consumer preferences; (vii) production delays or shortfalls; and (viii) general
economic conditions.

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PART I

ITEM 1. BUSINESS

General

Toy Biz, Inc. (the "Company") was incorporated in Delaware on March 18,
1993. The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool,
activity and electronic toy categories, based on popular entertainment
properties, consumer brand names and proprietary designs. The Company's products
are distributed to a number of general and specialty merchandisers and
distributors, principally in the United States and around the world.

For purposes of this Form 10-K Annual Report, the "Company" includes,
unless the context otherwise requires, the Company, its subsidiaries and their
respective predecessors. The "Predecessor Company" means Toy Biz, Inc., a
Delaware corporation incorporated in 1990 and subsequently renamed Zib Inc., and
its foreign sales affiliate, Toy Biz International Ltd., a Hong Kong
corporation. The Company's principal executive offices are located at 685 Third
Avenue, New York, New York 10017 and its telephone number is (212) 588-5100.

In connection with the Company's formation, the Company obtained an
exclusive, perpetual and paid up license (the "Marvel License") from Marvel
Entertainment Group, Inc. ("Marvel") in exchange for approximately 46% of the
common stock of the Company. The Marvel License permits the Company to produce a
broad range of toys based on Marvel's more than 3,500 characters (the "Marvel
Characters"). The Company also has licenses to manufacture certain toy products
based on non-Marvel Characters depicted in television programs such as Xena:

Warrior Princess(TM) and Men in Black(TM), both of which are or are planned to
be, broadcast on network, syndicated or cable television. A number of motion
pictures as to which the Company has obtained licenses to manufacture certain
products have been, or are about to be, released. These include feature films
such as Godzilla, The Lost World: Jurassic Park, Batman and Robin and Blues
Brothers 2000. The Company has also begun marketing collector figures based upon
the characters appearing in popular video games such as Tomb Raider(TM) and
Resident Evil.(TM)

The Company believes that media events associated with the characters
on which it bases certain of its toy products increase overall consumer
awareness and popularity of these characters and the Company has in part
followed a strategy intended to capitalize on the popularity generated by such
media exposure. The Company also has used its success in marketing the Marvel
line as a means of attracting licenses for use of recognized trademarks and
brand names such as Gerber(R) and NASCAR(R).

Change of Control

At the time of the Company's initial public offering in 1995 (the
"IPO"), Marvel received shares of class B common stock, par value $.01 per share
("Class B Common Stock") of the Company which had ten votes per share. All of
the other stockholders of the Company received shares of class A common stock,
par value $.01 per share ("Class A Common Stock" and together with the Class B
Common Stock, the "Common Stock") of the Company which had one vote per share.
Two voting trusts were created under voting trust agreements ("Voting Trust
Agreements"), each of which held one share of Class B Common Stock, for the
purpose of providing the Company's other principal stockholders, Isaac
Perlmutter ("Mr. Perlmutter") and Avi Arad ("Mr. Arad"), with the ability to
veto certain significant corporate actions. Also at the time of the Company's
IPO, the Company, Marvel, Mr. Perlmutter (including two affiliates of Mr.
Perlmutter through which Mr. Perlmutter held his shares of Class A Common Stock)
and Mr. Arad entered into a Stockholders' Agreement (the "Stockholders'
Agreement") which addressed the composition of the Company's board of directors.
The Stockholders' Agreement provided that the Class B Common Stock would be
converted into Class A Common Stock if Ronald O. Perelman ("Mr. Perelman"), who
was then the indirect beneficial owner of a majority of Marvel's common stock,
ceased to control Marvel. Subsequently, Marvel transferred its shares of Class B
Common Stock to Marvel Characters, Inc., a wholly-owned subsidiary of Marvel
("Characters"), and Characters became a party to the Stockholders' Agreement,
with the result

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that Characters owned approximately 26.6% of the outstanding Common Stock but
held approximately 78.4% of the voting power of the Common Stock. See "Item 13.
Certain Relationships and Related Transactions -- Stockholders' Agreement and
Class B Common Stock".

On December 27, 1996, Marvel and virtually all of its subsidiaries,
including Characters (the "Marvel Debtors"), filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). In separate cases, Marvel Holdings Inc. ("Marvel
Holdings"), Marvel (Parent) Holdings Inc. ("Marvel (Parent)") and Marvel III
Holdings Inc. ("Marvel III" and together with Marvel Holdings and Marvel
(Parent), the "Marvel Holding Companies") filed voluntary petitions for
reorganization under Chapter 11. The Marvel Holding Companies were the owners of
a majority of Marvel's common stock and were the entities through which Mr.
Perelman held his majority ownership position in Marvel.

During the period between December 27, 1996 and June, 1997, as a result
of proceedings in those bankruptcy cases, creditors of the Marvel Holding
Companies (the "Marvel Holding Companies Creditors") obtained the right to vote
the shares of the common stock of the Marvel Holding Companies and elected new
boards of directors for those entities. On June 20, 1997 Marvel Holdings voted
its pledged shares of Marvel common stock to elect a new board of directors of
Marvel.

The Company contends that, under the Stockholders' Agreement, the loss
of control of Marvel by Mr. Perelman in those bankruptcy proceedings triggered
the conversion of the shares of Class B Common Stock held by Characters into an
equal number of shares of Class A Common Stock and that the effect of that
conversion was to reduce the voting power of Characters as a stockholder of the
Company from approximately 78.4% to approximately 26.6% and to terminate the
Stockholders' Agreement.

The enforceability of the conversion provisions of the Stockholders'
Agreement has been disputed by the bankruptcy trustee appointed in the
bankruptcy cases of the Marvel Debtors (the "Chapter 11 Trustee"), by the equity
committee appointed in those cases and by High River Limited Partnership and
Westgate International L.P., which are affiliates of Carl C. Icahn and Vincent
Intrieri, both of whom are members of Marvel's board of directors. Those parties
maintain that Characters continues to own shares of Class B Common Stock. On
June 20, 1997, Characters purported to exercise the 78.4% voting power
associated with those shares to remove a majority of the Company's directors and
to replace them with Marvel nominees. On June 23, 1997, the Company, Mr.
Perlmutter, the two affiliates of Mr. Perlmutter who were parties to the
Stockholders' Agreement and Avi Arad commenced adversary proceedings in the
Marvel bankruptcy cases against Marvel, Characters and Marvel Holdings for a
declaration that the Class B Common Stock owned of record by Characters
converted to Class A Common Stock on or before June 20, 1997, and that the
incumbent board of the Company is the Company's duly constituted board and for
an injunction enjoining those defendants from interfering with the proper and
orderly functioning of the Company's incumbent board of directors.

On October 7, 1997, the Company and various senior secured creditors of
the Marvel Debtors agreed to pursue a combination of the Company with Marvel.
See "Item 1. Business -- Proposed Combination with Marvel."

On October 30, 1997, Marvel and certain of its subsidiaries filed suit
against the Company, its directors and a number of other defendants in the
United States District Court for the District of Delaware (the "District Court")
claiming, among other things, that the Company's board of directors properly
consists of Character's nominees and that the actions of the Company's incumbent
board were unauthorized.

On December 8, 1997, the Company, Mr. Perlmutter, the two affiliates
of Mr. Perlmutter who were parties to the Stockholders' Agreement and Avi Arad
asked the District Court for a summary judgment ruling in favor of their claims
in the adversary proceeding.

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On March 30, 1998, the District Court granted the Company's motion for summary
judgment and directed the entry of a judgment declaring that as a result of the
June 20, 1997 change of control of Marvel, the Class B Common Stock owned by
Characters converted, as of that date, into Class A Common Stock. See "Item 1.
Business -- Proposed Combination with Marvel" and "Item 3. Legal Proceedings."

The change in control of the Company described above constituted an
event of default under the Company's credit facility. Subsequently, the Company
and The Chase Manhattan Bank amended the credit facility and as a consequence of
this amendment, the Company is no longer in default under the credit facility.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

Developments With Respect to the Company's Business During Fiscal Year 1997

During the past fiscal year, the Company continued to launch products
based on the various Marvel Character groups mentioned above. These included,
among other things, new products and product line extensions in the Company's
X-Men(R) and Spider-Man(R) ranges.

During 1997, the Company also continued its efforts to develop toys
under licenses for recognized consumer brand names and other popular characters
such as The Lost World: Jurassic Park and Xena: Warrior Princess(TM). The
Company continued to build on its line of dolls and infant and toddler learning
toys marketed under the Gerber(R) trademark. The Company also continued to
develop products under its license from NASCAR(R) and several well-known stock
car drivers.

During 1997, the Company also continued to manufacture and distribute
additional proprietary products in various categories including: Casey
Cartwheel(TM), Baby Headstand Surprise(TM), Magic Stroller Baby(TM), Take Care
of Me Triplets(TM) and multi-activity game tables.

Since completing the acquisitions of the assets of Spectra Star, Inc.
("Spectra Star(R)") and Quest Aerospace Education, Inc. ("Quest") in 1995, the
Company's specialized activity toy business has continued to grow, with Spectra
Star(R) brand kites comprising a substantial share of United States domestic
kite business, and Quest(TM) brand rockets entering the growing mass merchandise
market and specialty store distribution channels.

Industry Background

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 such
dollars along with the makers of computers and video games. The Company believes
that its products are well made, attractively priced, and benefit from
television exposure arising from scheduled programming, media events,
advertising and the strength of recognized trademarks or brand names.

Large mass market toy retailers dominate the toy industry and feature a
large selection of toys. 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.

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Products

The Company has historically marketed a variety of toy products
designed for children of different age groups. The Company's current product
strategy seeks broad expansion and diversification of its product lines.

Boys' Products

The Marvel License includes more than 3,500 Marvel Characters, all of
which are available to the Company for toy development. The segment of the
Marvel universe which has been most successfully developed by the Company is the
X-Men(R), consisting of over 300 characters. The popularity of the X-Men(R)
primarily resulted from that character group's long-standing success as a comic
book title, as well as the past success of the Fox Kids Network's animated
X-Men(R) television show. The Company's sales of the X-Men(R) product line have
decreased in 1996 and 1997 as that product line has matured although the Company
believes that the Company can continue to take advantage of the popularity of
the X-Men group of characters by introducing new assortments of action figures,
play sets and vehicles.

The Spider-Man(R) product line also capitalizes on an animated
television series which is broadcast on the Fox Kids Network. The Spider-Man(R)
toy line includes action figures, vehicles, play sets and accessories such as
the popular Spiderman Web Blaster(TM). The Company has recently launched Silver
Surfer(TM) products based upon the Silver Surfer animated television program
which began broadcasting on the Fox Kids Network in February 1998.

The Company's boys' business is also comprised of non-Marvel Character
genres supported by television advertising and broadcasts as well as popular
video game characters. The Company continues to market a line of action figures
and play sets based on characters portrayed in the Xena: Warrior Princess(TM)
syndicated television program. The Company also markets play sets and vehicles
using well-known stock car drivers and NASCAR(R) licenses. The Company has
recently launched action figure lines based upon two popular video game titles;
Tomb Raider(TM) and Resident Evil(TM).

Many of the action figure properties have proven to be highly popular
with the Company's international customers, especially those in Europe.

Girls' Products

The Company's girls' business has continued to be well received by
consumers with new introductions and product line extensions. Casey
Cartwheel(TM) and Magic Stroller Baby(TM) were top-selling unit volume dolls
during 1997. The Company also continued to market Baby Tumbles Surprise(TM) and
Baby Headstand Surprise(TM) and extended another line with the introduction of
the Take Care of Me Triplets(TM) dolls. The Company believes that it will
continue to be an important source of new girls' products for the retail toy
market.

Preschool Products

The Company continues to take advantage of the name recognition and the
goodwill associated with the Gerber(R) name with the production of its line of
dolls, as well as infant and toddler learning toys with the Gerber(R) trademark
and/or the famous trademarked Gerber(R) baby face.

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Activity Toys

The Spectra Star(R) brand name accounts for a substantial share of the
United States domestic kite business, and also utilizes license-driven products
to expand consumer appeal. The Company's kite licenses have been granted by
well-known licensors such as Disney, Sony, Universal and Warner Bros. The
Company's activity toy products also include the model rocketry products
associated with the business acquired from Quest and the Company's proprietary
multi-activity game tables.

Factors Which May Affect the Company's Product Strategy

The success of the Company's product strategy depends in part upon
consumer acceptance of its new toy products for which there can be no assurance.
Consumer acceptance of many of the Company's products is dependent on the
popularity generated by television programs and other media events, the strength
of recognized consumer trademarks and brand names, and consumer interest in the
Company's core product categories. There can be no assurance that any scheduled
or anticipated television program or other media event will occur at all or will
continue to be broadcast or will otherwise result in substantial marketing value
to, or sales of, the Company's toy products. Further, there can be no assurance
that the goodwill associated with recognized consumer trademarks or brand names
will add marketing value to the Company's toy products or that the Company's
core products will maintain the buying interest of consumers. The Company's new
and existing products are also subject to changing consumer preferences. Some
products in the toy industry are successfully marketed for a limited period,
sometimes only one or two years. There can be no assurance that any existing
product lines will retain their current popularity or that new products
developed by the Company will meet with the same success as the Company's
current products. While it is impossible to predict future trends in a business
as fad-oriented as the toy industry, the Company believes its product line is
sufficiently diverse to benefit from such trends. No assurance can be given that
the Company will accurately anticipate future trends or will be able to
successfully develop, produce and market products to take advantage of market
opportunities presented by such trends.

The Company believes its sales and business have been adversely
affected by concerns among retailers as to the impact of the Marvel bankruptcy.
While the Company is attempting to address these concerns, to the extent they
are not alleviated, it can be expected that they will continue to adversely
affect demand for the Company's products.

Licensing and Related Rights

In carrying out its business strategy, the Company continuously
monitors existing licensed properties and pursues new licenses, where it
believes such licenses fit with the Company's core product lines, or where they
may add to the Company's core product mix.

In 1997, the Company produced a majority of its products under licenses
which it has obtained from third parties. Some of these licenses confer rights
to exploit original concepts developed by toy inventors and designers. Character
licenses, such as the Marvel License, permit the Company to manufacture and
market toys based on characters owned by others which have or develop their own
popular identity, often through exposure in various media such as television
programs, movies, cartoons and books. Other licenses, referred to as trademark
or brand name licenses, permit the Company to produce toys bearing the
recognized consumer trademark or brand name owned by the licensor. In return for
these rights (other than those under the Marvel License), the Company pays
royalties to its licensors.

A determination to acquire a character license must frequently be made
before the commercial introduction of the property in which a licensed character
appears, and such license arrangements often require thinimum royalties.
Accordingly, the success of a character licensing program is dependent upon the
ability of the Company to accurately assess the future success and popularity of
the character

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properties which it is evaluating, to bid for such properties on a selective
basis in accordance with such evaluation and to capitalize on the properties for
which it has obtained licenses in an expeditious manner. The success of the
trademark licensing program depends in part on whether the strength of the
licensed trademark will produce marketing value for the toy products. There can
be no assurance that products produced under the licenses acquired by the
Company will obtain significant market acceptance.

Royalties paid by the Company 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 the Company 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.

Marvel License Agreement

In connection with the formation of the Company, Marvel granted the
Company the Marvel License, an exclusive, perpetual and paid up license, subject
to certain limitations, to manufacture and distribute a broad range of toys and
toy-related products based upon the Marvel Characters and properties in which it
owns copyrights, trademarks or trade names. The Marvel License covers all
characters (including the associated copyrights and trademarks) owned by Marvel
and disseminated under the Marvel Comics(R) trademark during the perpetual term
of the Marvel License. The Marvel License currently covers more than 3,500
different Marvel Characters, including: Marvel Super Heroes(TM), X-Men(R) and
X-Force(TM) (including Wolverine(R), Nightcrawler(TM), Colossus(TM), Storm(TM),
Cyclops(TM), Bishop(R) and Gambit(TM)); Spider-Man(R); Captain America(R);
Fantastic Four(TM) (including Mr. Fantastic(TM), The Human Torch(TM), Invisible
Woman(TM) and The Thing(TM)); Hulk(R); Thor(TM); The Silver Surfer(TM);
Daredevil(TM); Iron Man(R); The Punisher(R); Dr. Strange(TM); Ghost Rider(TM);
Cable(TM) and the other Marvel Characters. The Marvel License covers specified
categories of toys and toy-related products. In connection with the Marvel
bankruptcy proceedings, representatives of various Marvel Holding Companies
Creditors have publicly stated that they could seek to reject the Marvel License
as an executory contract. The Company would vigorously oppose any such action to
reject the Marvel License and would seek any and all damages resulting from any
such action.

The Marvel License restricts Marvel, subject to the Company's prior
consent, from manufacturing, using, distributing or advertising the licensed
products and from granting other licenses to use the Marvel Characters in
connection with any licensed toy products. If the Company fails to substantially
attain performance goals for sales of any category of licensed products, Marvel
has the right to require the Company to enter into one or more sublicenses with
respect to that category of licensed products on terms and conditions that
Marvel and the Company reasonably determine. While Marvel has never required the
Company to enter into any such sublicenses, the Company maintains an active
sublicensing program, as to which it retains all revenues, and has granted
sublicenses under the Marvel License to a variety of companies in the United
States and around the world.

Master License Agreement

Mr. Arad and the Company are parties to a license agreement which
amended the licenses between Mr. Arad and the Predecessor Company outstanding at
the time of the Company's formation and which governs the licensing of new
material to the Company by Mr. Arad thereafter. The license agreement provides
that Mr. Arad is entitled to receive royalty payments on net sales of Marvel
Character-based toys and on net sales of non-Marvel based toys of which Mr. Arad
is the inventor of record. In no event, however, may the total royalties payable
to Mr. Arad during any calendar year exceed $7.5 million.

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Gerber License Agreement

The Company is a party to a license agreement with the Gerber Products
Company (the "Gerber License") which grants the Company an exclusive license to
use the Gerber(R) trademark in connection with the manufacture and distribution
of dolls as well as infant and toddler learning toys. The Gerber License, which
continues until December 31, 1999, provides for a royalty on net sales of the
licensed products and contains certain minimum sales guarantees and customary
quality control and indemnification provisions. The Gerber License is terminable
immediately by Gerber if Avi Arad & Associates ceases to be involved in the
product development and marketing of the licensed products or upon a change of
ownership, control or management of the Company without Gerber's prior approval.
Gerber could claim that the change in control of Marvel and the conversion of
Marvel's shares of Class B Common Stock resulted in a change in control of the
Company within the meaning of the Gerber Agreement. In such event, the Company
will seek any necessary approval from Gerber for which there can be no
assurance.

Intellectual Property Rights

The Company believes that intellectual property rights, including
trademarks, patented devices and designs, and copyrighted material, owned or
licensed by it represent valuable assets in the operation of its business. The
Company generally seeks trademark, patent and copyright protection in the United
States and certain other countries for intellectual property rights used in its
business to the extent that such protection is available and meaningful. The
Company believes that all material intellectual property rights necessary for
the operation of its business are adequately protected and available to it.

Design and Development; Manufacturing

The Company 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.

The Company relies on independent parties in the People's Republic of
China ("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, the Company uses several different manufacturers. By
concentrating its manufacturing among certain manufacturers, the Company thereby
pursues a strategy of selecting manufacturers at which the Company's product
volume qualifies the Company as a significant customer. The Company is not a
party to any long-term agreement with any manufacturer.

The principal raw materials used in the production and sale of the
Company's products are plastics and paper products. Raw materials are generally
purchased by the manufacturers who deliver completed products to the Company.
The Company believes that an adequate supply of raw materials used in the
manufacture of its products is readily available from existing and alternative
sources at reasonable prices. However, there can be no assurance that, in the
event of a disruption in raw material supplies, alternative sources of supply
could be obtained in a timely manner.

While the Company is not dependent on any single manufacturer in China
to supply it with products, the Company is subject to the risks of foreign
manufacturing, including currency exchange fluctuations, transportation delays
and interruptions, and political or economic disruptions affecting international
businesses generally. 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 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 the Company. The imposition of further trade sanctions on China could
result in significant supply disruptions or higher

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merchandise costs to the Company. The Company believes that alternate sources of
manufacturing are available outside China, although there can be no assurance
that these alternate sources will be available on acceptable terms.

Transactions in which the Company purchases goods from manufacturers
are mostly effected in Hong Kong dollars and, accordingly, fluctuations in Hong
Kong monetary rates may have an impact on the cost of goods.

However, in recent years, the value of the Hong Kong dollar has been
tied to the value of the United States dollar, eliminating fluctuations between
the two currencies. There can be no assurance that the Hong Kong dollar will
continue to be tied to the United States dollar. Furthermore, appreciation of
Chinese currency values relative to the Hong Kong dollar could increase the cost
to the Company of products manufactured in China and thereby have a negative
impact on the Company.

The Company's Spectra Star(R) products are manufactured mainly in
Mexico. The Company recently completed the construction of a new manufacturing
facility in Mexico in order to expand manufacturing capacity for the Spectra
Star(R) and possibly other product lines. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

The Company maintains a Hong Kong office from which it regularly
monitors the progress and performance of its manufacturers and subcontractors.
The Company 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 the Company's
products. The Company 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

The Company markets and distributes its products throughout the world,
with sales to customers in the United States accounting for approximately 78% of
the Company's net sales in 1997.

The following table sets forth information concerning the Company's net
sales in the United States and internationally:

Year ended December 31,
-----------------------
1995 1996 1997
---- ---- ----
(In Millions)

Domestic Sales......... $175.8 $176.6 $117.6

International Sales.... 20.6 45.0 33.2
---- ---- ----

Total............. $196.4 $221.6 $150.8
====== ====== ======

Outlets for the Company'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
the Company and ship them to retail outlets. The Company's five largest
customers include Toys 'R' US, Inc., Wal- Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., a division of Dayton-Hudson Corp. and Kay-Bee Toys, a
division of Consolidated Stores, Inc. which customers accounted in the aggregate
for approximately 77.2% of the Company's domestic gross sales and 60.2% of the
Company's total sales in 1997.

The Company maintains a sales and marketing staff and retains various
independent manufacturers' sales representative organizations in the United
States. The Company's senior management coordinates and supervises the efforts
of its salesmen and its other sales representatives. The Company also directly
introduces and markets to
8

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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 the Company in New York.

The Company's products are sold outside the United States through
independent distributors by its Hong Kong subsidiary, under supervision of the
Company's management. The Company's international product line generally
includes products currently or previously offered in the United States, packaged
to meet local regulatory and marketing requirements.

The Company utilizes an independent public warehouse in the Seattle,
Washington area, for storage of its products. The Company believes that adequate
alternative storage facilities are available. Disruptions in shipments from
China or from this facility could have a material adverse effect on the Company.

Advertising

Although a portion of the Company's advertising budget is expended for
newspaper advertising, magazine advertising, catalogs and other promotional
materials, the Company allocates a majority of its advertising budget to
television promotion. The Company advertises on national television and
purchases advertising spots on a local basis. The Company believes that
television programs underlying various Company product lines increase exposure
and awareness. The Company currently engages Tangible Media, Inc. ("Tangible
Media"), an affiliate of Mr. Perlmutter, to purchase all advertising for the
Company. The Company believes that its transactions with Tangible Media are on
terms which are no less favorable to the Company than those that it could obtain
from independent third parties, and the Company may engage other companies to
perform similar services at any time. The Company retains the services of a
media consulting agency for advice on matters of advertising creativity.

Competition

The toy industry is highly competitive and the Company 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 the Company considers Just Toys, Inc., Lewis Galoob Toys,
Inc., Empire of Carolina, Inc. and Ohio Art Co. to be among its competitors as
well. The Company believes that the Marvel License, other 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 the Company to compete successfully.

Seasonality

The Company, like the toy industry in general, experiences a
significant seasonal pattern in sales and net income due to the heavy demand for
toys during the Christmas season. During 1995, 1996 and 1997, 69%, 64% and 67%,
respectively, of the Company's domestic net sales were realized during the
months of July through December. This seasonal pattern requires significant use
of working capital mainly to build inventory during the year, prior to the
Christmas selling season. The Company expects that its business will continue to
experience a significant seasonal pattern for the foreseeable future.

Government Regulations; Insurance

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, in 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) to ensure compliance with applicable laws. The

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Company's business exposes it to potential product liability risks which are
inherent in the design, marketing and sale of children's products. The Company
currently maintains product liability insurance and an umbrella liability
policy. In the event of a successful claim against the Company, a lack of
sufficient insurance coverage could have a material adverse effect on the
Company's business and operations. Moreover, though the Company maintains what
it considers to be adequate insurance, any successful claim could materially and
adversely affect the reputation and prospects of the Company.

Employees

As of March 25, 1998, the Company had 640 employees, of whom 68 were
based at the Company's New York office, 48 were based at the Company's Arizona
offices, 500 were based at the Company's facility in Mexico, 4 were based in the
California office and 20 were based at the Company's Hong Kong office.

Proposed Combination With Marvel

On October 8, 1997, the Company, certain senior secured creditors of
the Marvel Debtors (the "Consenting Lenders") and certain creditors of Panini
(the "Consenting Panini Lenders") filed, with the Bankruptcy Court, a Joint Plan
of Reorganization proposing the combination of the Company and Marvel (as since
amended, the "Plan").

In connection with the Plan, stockholders of the Company, other than
Characters, currently would receive approximately 41% of the common stock of the
Company and Marvel ("the Combined Company") (assuming the conversion of all
preferred stock but not assuming any exercise of warrants) and the senior
secured creditors of Marvel would receive a combination of cash and common and
preferred securities issued by the Combined Company which (under the same
assumptions) would represent approximately 40% of the common stock of the
Combined Company. An investor group, in which Mr. Perlmutter is expected to be a
participant, would purchase securities that (under the same assumptions) would
represent approximately 19% of the common stock of the Combined Company. The
Plan is being proposed by in excess of two-thirds in amount of Marvel's senior
secured lenders and is supported by the Official Committee of the Unsecured
Creditors of Marvel. Consummation of the Plan is subject to a number of
conditions including approval of the Company's stockholders and the District
Court. A hearing has been ordered by the District Court for May 4, 1998, to
consider a motion by the Company to confirm the Plan. The Company currently
anticipates that a meeting of the stockholders of the Company will be held in
the second quarter of 1998 for the purpose of considering and voting upon
approval of the Plan. In connection with that meeting, the Company will
distribute separate proxy materials describing the transactions contemplated by
the Plan and the other circumstances in connection therewith. As part of the
agreements setting forth the terms of the Plan, Messrs. Perlmutter and Arad have
agreed to vote all shares of Common Stock owned by them in favor of the Plan.

The Plan contemplates that for a period of 30 days after the
confirmation of the Plan, the Company will cooperate in efforts to sell Marvel
and the Company on a combined basis and that if a transaction can be arranged
which would result in stockholders of the Company (other than Characters)
receiving approximately $13.75 in exchange for each share of Common Stock held
by them, the Company will be sold in that transaction. The Plan provides that
any excess proceeds payable by the buyer in that transaction will not increase
the amount to be received by holders of Common Stock, but instead will inure to
the benefit of claimants in the Marvel bankruptcy.

The Plan was filed pursuant to a master agreement, dated October 7,
1997 (as since amended, the "Master Agreement"), by and among the Company, the
Consenting Leaders and the Consenting Panini Lenders. The Master Agreement
recites the intention of the Consenting Lenders and the Company to jointly
propose the Plan as creditors and parties in interest in the bankruptcy cases of
the Marvel Debtors. The Master Agreement provides, in general, that its parties
will use their reasonable best efforts to effectuate the Plan and to maintain
the status quo in various respects until the Plan is consummated.

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The Company agrees, in the Master Agreement, not to take various
actions without the permission of the Consenting Lenders unless those actions
are expressly contemplated by the Master Agreement, the Plan, or agreements
contemplated by the Plan (the "Plan Documents"). In particular, the Company
agrees that it will not, unless permitted by the Consenting Lenders or by the
terms of the Plan Documents: (i) issue or encumber any stock of the Company;
(ii) amend its certificate of incorporation or its by-laws; (iii) authorize a
stock split, combination, or reclassification; (iv) declare or pay dividends;
(v) redeem shares of the Company; (vi) combine with any other company; (vii)
mortgage a material portion of its assets unless in the usual course of business
(including in connection with the Company's current credit agreement); (viii)
incur or guarantee indebtedness outside the usual course of business; or (ix)
enter into any agreements with Company insiders other than consistent with past
practice.

The Company is obliged, under the Master Agreement, to arrange, on or
before the consummation date of the Plan (the "Consummation Date"), three forms
of financing for the company to survive the merger of the Company and Marvel
(the"Merger"): (i) ninety million dollars ($90,000,000) in cash from purchasers
of a new class of 8% cumulative convertible preferred stock to be issued by the
Combined Company (the "8% Preferred Stock"); (ii) a term loan facility in the
amount of one hundred and forty million dollars ($140,000,000), secured by all
the assets of the Combined Company; and (iii) a revolving credit (working
capital) facility in the amount of seventy-five million dollars ($75,000,000).
The Company's failure to obtain the financing required by the Master Agreement
would be a breach of the Master Agreement by the Company.

The Master Agreement sets forth various conditions to each party's
performance. Among the conditions to certain obligations of the Consenting
Lenders is that there be no "Stockholder Breach Event" as defined in the proxy
and stock option agreements of Mr. Perlmutter and Mr. Arad. See "Item 13.
Certain Relationships and Related Transactions -- Proxy and Stock Option
Agreements." Another condition to the Consenting Lenders' performance is that
the Company, Mr. Perlmutter (and certain of his affiliates), and Mr. Arad enter
into a stockholders' agreement pursuant to which the Perlmutter affiliates and
Mr. Arad agree to vote their shares of stock of the Combined Company in favor of
the election to the Combined Company's eleven-member board of directors of five
nominees designated by the Consenting Lenders and certain of the Consenting
Lenders' transferees for as long as the Consenting Lenders and those transferees
hold more than a specified percentage of the outstanding stock of the Combined
Company.

The Master Agreement provides that if it or the Merger Agreement is
terminated by the Consenting Lenders because of a breach by the Company, then,
upon request by the Consenting Lenders, the Company will reconvert the shares of
the Company's Common Stock that were converted from Class B Common Stock to
Class A Common Stock upon the change of control at Marvel ("Converted Class B
Shares") back into duly authorized, fully paid and nonassessable shares of Class
B Common Stock. As a condition to any obligation of the Company to reconvert the
Converted Class B Shares, the holders of the Converted Class B Shares must
execute and deliver a new stockholders' agreement and new voting trust
agreements. The terms of the new stockholders' agreement and the new voting
trust agreements are substantially the same as those of the Stockholders'
Agreement and Voting Trust Agreements.

The Master Agreement specifies certain dates by which events are
contemplated to occur. If the events do not occur by the stated dates, various
parties may terminate or withdraw from the Master Agreement. For example, the
Company may terminate the Master Agreement if, through no fault of the
Company's, the Consummation Date has not occurred on or before November 20,
1998. Unless a missed deadline has been caused by a Consenting Lender or a
Consenting Panini Lender, each Consenting Lender may withdraw from the Master
Agreement (a) before June 10, 1998, if the Plan has not been confirmed by the
court on or before June 1, 1998; (b) before July 25, 1998, if the Consummation
Date has not occurred on or before July 14, 1998; and (c) at any time during the
sixty-day period following various judicial determinations, adverse to the
Company's board of directors that approved the Master Agreement, based on a
contention that that board of directors was not the duly authorized board of the
Company.

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ITEM 2. PROPERTIES

The Company's principal executive offices and showroom are located in
New York City where the Company occupies approximately 30,000 square feet of
office space pursuant to a sublease that expires in June 2000. Under a lease
that expires in 2004, the Company also maintains a showroom at the Toy Center
Building in New York City, where the Company leases approximately 5,200 square
feet of display and office space. The Company owns a warehouse facility
consisting of approximately 80,000 square feet in Yuma, Arizona, and leases
additional property in Arizona pursuant to a lease that expires in 2006, where
it manufactures the Quest product line. The Company owns a manufacturing
facility consisting of approximately 210,000 square feet located in San Luis,
Mexico primarily for the production of its Spectra Star kites. The Company also
leases office space in Santa Monica, California for the Spectra Star division.
The Company believes that additional office and warehouse space is readily
available and that such new space, together with the Company's existing
facilities, will be adequate and suitable for the operation of its business for
the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

On December 28, 1995 G.D.L. Management Incorporated ("GDL") commenced
an action against the Company, Mr. Perlmutter and the Predecessor Company in the
Supreme Court of the State of New York, County of New York. The amended
complaint alleged that GDL was entitled to receive ten percent of the capital
stock of the Predecessor Company pursuant to a 1990 agreement between GDL and
Mr. Perlmutter and sought money damages based on the value of ten percent of the
Company's Class A Common Stock beneficially owned by Mr. Perlmutter and a
variety of equitable remedies. The action was settled by Mr. Perlmutter and GDL
without liability to the Company in December 1997.

On June 23, 1997, the Company, Zib Inc., Isaac Perlmutter T.A., Isaac
Perlmutter and Avi Arad commenced adversary proceedings in the United States
Bankruptcy Court for the District of Delaware in the Marvel bankruptcy cases
against Marvel, Characters and Marvel Holdings for a declaration that the Class
B Common Stock owned of record by Characters converted to Class A Common Stock
on or before June 20, 1997, and that the incumbent board of the Company is the
Company's duly constituted board and for an injunction enjoining the Marvel
defendants from interfering with the proper and orderly functioning of the
Company's incumbent board of directors. The District Court held a hearing on the
Company's request for summary judgment in its favor on these claims on March 12,
1998. On March 30, 1998, the District Court granted the Company's motion for
summary judgment and directed the entry of a judgment declaring that as a result
of the June 20, 1997 change of control of Marvel, the Class B Common Stock owned
by Characters converted, as of that date, into Class A Common Stock.

On October 30, 1997, Marvel and its subsidiaries filed an action
against the Company, its directors and a number of other defendants in the
District Court. The complaint against the Company and its directors alleges that
the Company and its directors have breached their fiduciary duty to Marvel, as a
minority stockholder in Toy Biz, and have otherwise wrongfully acted, in putting
forward the reorganization proposal to combine the Company and Marvel and
thereby conclude Marvel's bankruptcy proceedings and by refusing to recognize
Marvel's designees to the Company's board of directors. The complaint also
alleges that the Company's proposed reorganization plan violates certain
provisions of the Bankruptcy Code and is therefore invalid. The complaint
further alleges that the Company has breached an agreement with Marvel by
failing to contribute any amounts to the operations of Marvel Studios. Finally,
the complaint alleges that the Company has wrongfully interfered with Marvel's
efforts to negotiate with the Marvel secured lenders for the resolution of the
bankruptcy proceedings. On December 8, 1997 the Company and its directors filed
a motion to dismiss various claims asserted against them in this action. That
motion has not yet been scheduled for a hearing. The Company believes that the
action was not properly commenced and that the claims against it and the
Company's directors are without merit and the Company intends to defend this
action vigorously.

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During 1995, the Company licensed the Apple name to be used in
educational toys in exchange for $1,000,000 and future royalty payments. Shortly
after licensing the Apple name, Apple made public certain financial difficulties
Apple was experiencing. The Company has not made minimum royalty payments of
$1,000,000 for 1996 and 1997 and has commenced an arbitration proceeding against
Apple for return of the original 1995 payment. Apple is asserting the right to
receive the $2,000,000 in unpaid royalties.

The Company is involved in variong in the normal course of business.
The Company believes that the final outcome of these proceedings will not have a
material adverse effect on the Company's results of operations or financial
position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this report.

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 Class A Common Stock as reported in the
New York Stock Exchange Composite Transaction Tape.

Fiscal Year High Low
----------- ---- ---

1996
First Quarter $ 24 3/4 $ 17 7/8
Second Quarter $ 22 3/8 $ 17 5/8
Third Quarter $ 20 1/4 $ 14
Fourth Quarter $ 19 7/8 $ 17

1997
First Quarter $ 20 $ 8 3/8
Second Quarter $ 11 $ 8 1/4
Third Quarter $ 11 $ 7 15/16
Fourth Quarter $ 9 11/16 $ 7 9/16

As of March 25, 1998, there were 85 holders of record of the Company's
Class A Common Stock.

The Company has not declared any dividends. For a description of
certain restrictions on payment of dividends, see Note 7 to the December 31,
1997 Consolidated Financial Statements included elsewhere in this Report.

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ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected combined or consolidated
financial data for the business of the Company and the Predecessor Company for
the five year period ended December 31, 1997 which were derived from audited
financial statements of the Company's business.

The Company has not paid dividends on its capital stock during
any of the periods presented below.

[Enlarge/Download Table]

Predecessor
Company
Four Months Eight Months Year Ended
Ended Ended ----------------------------------------------
Apr. 30, Dec. 31, Dec. 31, Dec. 31, Dec.31, Dec.31,
1993 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
(in thousands, except per share amounts)

Statement of Operations
Data: (1) (2)
Net Sales................. $10,175 $79,569 $156,525 $196,395 $221,624 $150,812
Operating income (loss)... ( 1,611) 6,266 32,072 47,014 27,215 (49,288)
Net income (loss) (3)..... ( 1,110) 3,488 18,014 28,402 16,687 (29,465)
Net income (loss) per common
share (3)(4).............. ( 0.04) 0.13 0.67 1.05 0.61 (1.06)

At December 31:

Balance Sheet Data:
Working capital........... 24,780 39,839 85,174 102,192 74,047
Total assets.............. 56,877 104,723 152,218 171,732 150,366
Borrowings under credit facility 4,500 21,500 -- -- 12,000
Due to stockholders and affiliated
companies................. 15,746 16,845 -- -- --
Redeemable preferred stock -- -- 3,016 1,681 --
Stockholders' equity...... 16,283 38,416 111,332 137,455 107,981

(1) The four month period ended April 30, 1993 represents the combined
results of the business of the Company, which was then wholly owned by
Mr. Perlmutter, and Toy Biz International Ltd., a Hong Kong company
indirectly controlled by the Predecessor Company. These operations are
referred to as the Predecessor Company results. The eight month period
ended December 31, 1993 and the years ended December 31, 1994, 1995,
1996 and 1997 represent the consolidated results of the Company. There
was no change in the carrying value of the Company's assets or
liabilities as a result of the April 30, 1993 transaction (see Note 1
of notes to audited financial statements).

(2) The four month period ended April 30, 1993 includes the five months of
results of Toy Biz International Ltd. as a result of changing Toy Biz
International Ltd's fiscal year end from November 30 to December 31.
The sales and operating loss of Toy Biz International Ltd. for the
month of December 1992 were not significant.

(3) For the taxable periods from January 1, 1993 until April 30, 1993, the
Predecessor Company was subject to taxation under Subchapter S of the
Internal Revenue code of 1986, as amended. As a result, the Predecessor
Company was not subject to Federal and certain state income taxes as
its sole stockholder included the results of its operations in his
personal income for tax purposes. Provision for income taxes for the
aforementioned periods reflects income tax benefit (at an assumed
effective combined tax rate of 40%) on a pro forma basis as if the
Predecessor Company had not been an S corporation.

(4) Assumes 27,000,000 common and common equivalent shares outstanding for
periods prior to 1995.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and
results of operations of the Company and its subsidiaries should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
included elsewhere in this Report.

Overview

The Company designs, markets and distributes in the United States and
internationally new and traditional toys in the boys', girls', preschool,
activity and electronic toy categories featuring major entertainment and
consumer brand name properties. The Company also designs, markets and
distributes its own line of proprietary toys. The Company believes that its
business in the boys' toys category domestically and internationally continues
to be negatively impacted as a result of the proceedings surrounding Marvel's
bankruptcy. This includes decreased retailer interest in Marvel brand products
and reduced consumer interest in these products due to reduced promotional
activity by Marvel. The Company believes that the Marvel bankruptcy has had and
will continue to have an adverse impact on the Company in various ways
including, but not limited to, the following: concerns among retailers about the
future of the Marvel brand, the status of the Company due to Marvel's ownership
of 26% of the Company's Common Stock and its claim that it continues to control
the Company through its ownership of Class B Common Stock, potential impact on
the Company's relationship with its distributors, difficulty in obtaining new
licenses and excess legal and administrative expenses.

Results of Operations

Years Ended December 31, 1997 and 1996

The Company's net sales decreased to approximately $150.8 million for
the year ended December 31, 1997 from approximately $221.6 million in the 1996
period. Net sales in the domestic boys' toys category, including sublicense
income, decreased approximately $33.4 million to approximately $43.1 million in
1997. The Company's sales of domestic boys' toys have decreased since the first
quarter of 1996 as compared to the respective prior periods, but the Company
believes that the decrease in this category has been accelerated as a result of
concerns among retailers as to the impact of the Marvel bankruptcy on the future
of the Marvel brand. Net sales in the domestic girls' toys category decreased
approximately $19.2 million to approximately $38.7 million in 1997 due primarily
to the Company's decision to reduce the number of promotional dolls offered for
sale by the Company during 1997 as compared to 1996. Domestic activity toy net
sales increased approximately $1.4 million to approximately $28.0 million in
1997 due primarily to the expansion of the Quest rocket division in the 1997
period. International net sales decreased approximately $17.6 million to
approximately $27.4 million in 1997 from approximately $45.0 million in 1996 due
primarily to the decreased interest in Marvel products in the international
markets. Sales by the Company's import division, which was established in late
1996, accounted for approximately $30.5 million in sales in the 1997 period. Net
sales of other products decreased approximately $10.7 million to approximately
$1.1 million due primarily to a reduction in sales in the preschool category
which was transferred to the import division in 1997. The Company recorded an
additional $18.0 million of sales allowances in the 1997 period that the Company
believes are attributable to the impact of the Marvel bankruptcy on the
Company's relationships with its distributors.

Gross profit decreased 58% to approximately $43.9 million for 1997 from
approximately $105.2 million in 1996. Gross profit as a percentage of net sales
("gross margin") decreased to approximately 29% in 1997 from approximately 47%
in 1996 due to changes in the Company's product mix, additional sales allowances
required due to the Marvel bankruptcy and concerns among retailers about the
future of the Marvel brand and the introduction of the import division which
generally has a lower gross margin than average domestic sales.

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Selling, general and administrative expenses increased 16% to
approximately $72.1 million (approximately 48% of net sales) in 1997 from
approximately $61.9 million (approximately 28% of net sales) in 1996. The
increase in expenses consisted primarily of approximately $2.3 million of
additional professional fees, approximately $5.0 million of additional
advertising expenses and approximately $1.7 million of additional royalties
expensed in the 1997 period. The Company believes that these increases were
primarily attributable to the effects of the Marvel bankruptcy on the Company.
This increase was partially offset by a net reduction in selling expenses due to
a decrease in sales in the 1997 period, offset by additional salaries and
related expenses attributable to the Company's expanded product lines.

Depreciation and amortization expense increased to approximately $21.1
million in 1997 from approximately $16.1 million in 1996. The increase was
primarily attributable to increased amortization expense resulting from an
increased investment in product tooling and product design to support the
Company's expanded product line and approximately $2.5 million of additional
expense resulting from early write-offs of products.

Interest expense (income), net was $362,000 and ($596,000) for the
years ended December 31, 1997 and 1996, respectively. The net change was due
primarily to the Company's borrowing of funds in the 1997 period compared with
investing excess cash in the 1996 period.

As a result of the above, the Company reported a net loss of
approximately $29.5 million and a loss per share of $1.06 for the year ended
December 31, 1997.

Years Ended December 31, 1996 and 1995

The Company's net sales increased 12.8% to approximately $221.6 million
from approximately $196.4 million in 1995.

Domestic net sales of boys' toys decreased 27% from approximately
$105.5 million in 1995 to $76.5 million in 1996 due primarily to decreased sales
of the X-Men(R), Fantastic Four(TM) and Iron Man(R) product lines. International
net sales of boys' toys more than doubled from approximately $16.4 million in
1995 to approximately $39.6 million in 1996. Domestic net sales of girls' toys
increased 54% from approximately $37.7 million in 1995 to approximately $57.9
million in 1996 due mainly to the introduction and success of Take Care of Me
Twins(TM) doll, as well as the expansion of the Baby Tumbles Surprise(TM)
category in 1996. Sales in the activity toy category increased 72% from
approximately $15.5 million in domestic net sales in 1995 to approximately $26.6
million in 1996 due to the introduction of the multi-activity game tables and
the full-year effect of kite sales from the Spectra Star(R) acquisition, which
only had four months of sales included in the 1995 year. The preschool category
decreased 32% from approximately $13.5 million in domestic net sales in 1995 to
approximately $9.2 million in 1996. International net sales more than doubled
from approximately $20.6 million in 1995 to approximately $45.0 million in 1996,
due to the continued expansion of the Company's product offerings overseas.
Distribution agreement fees and sub-licensing revenues more than doubled from
approximately $5.7 million in 1995 to approximately $13.6 million in 1996.

Gross profit decreased 3% to approximately $105.2 million in 1996 from
approximately $108.0 million in 1995. Gross profit as percentage of net sales
decreased from approximately 55% in 1995 to approximately 47% in 1996 due
primarily to changes in the Company's product mix, additional sales allowances
and the effect of a higher percentage of international sales, which typically
have a lower gross margin than domestic sales.

Selling, general and administrative expenses increased 28% to
approximately $61.9 million (approximately 28% of net sales) in 1996 from
approximately $48.2 million (approximately 25% of net sales) in 1995. The
increase of approximately $13.7 million was due to increased advertising and
miscellaneous selling and administrative expenses, which increased as a result
of sales growth, and additional salaries attributable to the Company's expanded
product lines, as well as the effect of a full year of the Spectra Star(R)
operations in 1996.

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Depreciation and amortization expense increased to approximately $16.1
million in 1996 from approximately $12.8 million in 1995. This increase was
primarily attributable to increased amortization of product tooling costs
resulting from increased investment in product and package design costs and
molds, tools and equipment to support the Company's expanded product line.
Depreciation and amortization expense as a percentage of net sales increased
from 6.5% in 1995 to 7.2% in 1996. This increase in depreciation expense as a
percentage of net sales was primarily attributable to a changing product mix and
decreased unit sales of boys' toys assortments.

Interest income, net of interest expense, increased 6.4% to $596,000 in
1996 from $560,000 in 1995.

As a result of the above, net income decreased 41% to approximately
$16.7 million in 1996 from approximately $28.4 million in 1995.

Backlog

Customer open orders were approximately $15.2 million on December 31,
1997 and $7.8 million on December 31, 1996. The Company believes that this
increase in open orders resulted from several causes, including the
diversification of the Company's product base.

Liquidity and Capital Resources

The Company's operating activities provided or (used) net cash of
approximately $35.5 million, ($1.2 million) and $11.7 million in 1995, 1996 and
1997, respectively.

Cash used in investing activities in 1995, 1996 and 1997 was
approximately $25.1 million, $23.6 million and $21.3 million, respectively and
consisted of capital expenditures for molds, tools and equipment for the
production of new products, as well as capitalized product and package design
expenditures. In 1997, approximately $3.3 million net cash was used for the
acquisition of Colorforms and approximately $1.3 million net cash was used for
the final payment of the purchase price of Spectra Star(R).

Cash provided by financing activities in 1995, 1996 and 1997 was
approximately $8.0 million, $8.3 million and $11.1 million, respectively. In
1995, cash provided by financing activities consisted principally of net
proceeds from the initial public offering of $44.1 million, offset by repayments
of notes to the stockholders, which totalled approximately $15.1 million, and by
repayments of funds previously borrowed under the Credit Facility with the
balance used for working capital and general corporate purposes. In 1996, cash
provided by financing activities consisted principally of approximately $9.3
million in net proceeds from an additional public offering of Class A Common
Stock completed in August 1996, offset by the redemption of preferred stock
issued in connection with the Spectra Star(R) acquisition, with the balance used
for working capital and general corporate purposes. In 1997, cash provided by
financing activities consisted principally of $12.0 million in borrowings under
the Credit Facility (defined below), offset by the redemption of Preferred Stock
issued in connection with the Spectra Star acquisition.

Since 1995 the Company has had a revolving line of credit (the "Credit
Facility") with a syndicate of banks for which The Chase Manhattan Bank
(formerly named Chemical Bank) serves as administrative agent. The change in
control of the Company resulting from the conversion of Marvel's Class B Common
Stock during 1997, could have allowed the banks to terminate the Credit
Facility. In addition the Company did not reduce its borrowings to zero for a
period of 45 consecutive days commencing during the first six months of 1997, as
required by the Credit Facility, and did not satisfy certain of the financial
covenants under the Credit Facility during 1997. As a result of these
circumstances, on October 21, 1997, the Company and The Chase Manhattan Bank
agreed that the Company would not seek to borrow any additional funds under the
Credit Facility and the banksayment of the amounts outstanding.

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In March 1998, the Company and the Chase Manhattan Bank entered into an
amendment to the Credit Facility extending the duration of the Credit Facility
and modifying its terms. The Credit Facility, as amended (the "Amended Credit
Facility") provides the Company can borrow an aggregate amount of up to $20.0
million (increasing during October through mid-November 1998 to up to $29
million), subject to certain borrowing base limitations based upon the level of
the Company's receivables and inventory. Substantially all of the assets of the
Company continue to be pledged to secure borrowings under the Amended Credit
Facility. Borrowings under the Amended Credit Facility bear interest at either
The Chase Manhattan Bank's alternate base rate or at the Eurodollar rate plus
the applicable margin. The applicable margin is 1% with respect to base rate
loans and 2% with respect to Eurodollar loans. The Amended Credit Facility
requires the Company to pay a commitment fee of 3/8 of 1% per annum on the
average daily unused portion of the Amended Credit Facility. The Company had
$9.0 million in outstanding borrowings under the line of credit as of March 25,
1998. The Amended Credit Facility is scheduled to expire in February 1999.

The Amended Credit Facility contains various financial covenants, as
well as restrictions, on new indebtedness, prepaying or amending subordinated
debt, acquisitions and similar investments, the sale or transfer of assets,
capital expenditures, limitations on restricted payments, dividends, issuing
guarantees and creating liens. In addition, the Amended Credit Facility also
requires that (a) the current board of directors or successors designated by
them remain in office, (b) the Marvel License remains in effect and (c) Messrs.
Perlmutter and Arad continue to own at least 50% of the Common Stock held by
them as of February 21, 1998. The Credit facility is not guaranteed by Marvel.

For a description of the Spectra Star(R) acquisition in September 1995,
see Note 12 to the December 31, 1997 Consolidated Financial Statements included
elsewhere in this Report.

The approximately $9.1 million net proceeds to the Company from the
August 1996 public offering was intended to fund the working capital of the
Company and a portion of the Company's capital commitment to Marvel Studios, the
Company's proposed he Company has no plans to invest a material amount of funds
in Marvel Studios in the foreseeable future. The Marvel Studios joint venture
will become mooted if the Plan proposed by the Company to combine with Marvel is
consummated. See Note 8 to the December 31, 1997 Consolidated Financial
Statements included elsewhere in this report.

In 1997, the Company concluded the construction of a new manufacturing
facility in Mexico in order to expand manufacturing capacity for the Spectra
Star(R) product line. The expenditures needed in 1996 and 1997 to complete that
facility were approximately $3.3 million.

In March 1996, the Company acquired, pursuant to a put right, 53,030
shares of Series A Preferred Stock of the Company for approximately $1.4
million. In October 1997, the Company acquired, pursuant to a put right, 31,818
shares of Series A Preferred Stock of the Company for $939,000. The balance of
the shares of Series A Preferred Stock were retired in October 1997 in
conjunction with the final settlement of the acquisition of Spectra Star.

In March 1997, the Company acquired all of the assets of Colorforms
Inc. The purchase price was approximately $5.0 million, excluding fees and
expenses, consisting of approximately $2.9 million in cash paid at the closing
and the assumption of approximately $2.1 million of accounts payable and accrued
liabilities at the closing date. The Company utilized cash available under its
credit facility to finance the acquisition. The transaction was accounted for as
a purchase. The results of Colorforms are included in the Company's consolidated
financial statements from the date of acquisition.

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million due from August 1998 through May 1999. The sales price is subject to
adjustment based upon inventory levels.

The Company has determined that it will need to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The Company also has
initiated discussions with its significant suppliers, large customers and
financial institutions to ensure that those parties have appropriate plans to
remediate Year 2000 issues where their systems interface with the Company's
systems or otherwise impact its operations. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
remediate properly their computer systems.

The Company's Year 2000 initiative is being managed by a team of
internal staff and outside consultants. These activities are designed to ensure
that there is no adverse effect on the Company's core business operations and
that transactions with customers, suppliers, and financial institutions are
fully supported. The Company is well under way with these efforts, which are
scheduled to be completed in early 1999. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems and
operations rely will be converted on a timely basis and will not have a material
effect on the Company. The cost of the Year 2000 initiatives is not expected to
be material to the Company's results of operation or financial position.

The Company believes that it has sufficient funds available from cash
and cash equivalents, operating activities and borrowings under the Amended
Credit Facility to meet peak working capital needs and capital expenditure
requirements. During 1997, the maximum amount outstanding under the Credit
Facility was $12,000,000.

Proposed Combination with Marvel

Due to the significance of the Marvel license on the Company's overall
boys' toys business and the negative impact that Marvel's bankruptchad
participated in discussions concerning a number of proposed plans of
reorganization that would have resulted in a combination of the Company and
various segments of Marvel's business and that would have facilitated a
resolution of Marvel's bankruptcy proceedings. In connection with these
proposals, the Company participated in discussions with various parties
interested in the bankruptcy proceedings including Marvel, the largest holders
of the Marvel Holding Companies bonds and Marvel's senior secured creditors.
None of these discussions resulted in definitive agreements not subject to due
diligence, board approval or other contingencies which failed to occur.

The Company has proposed a plan of reorganization for Marvel which
provides for the combination of the Company and Marvel. See "Item 1. Business --
Proposed Combination with Marvel."

ITEM 7 A. 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-22. 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, 1997 Consolidated Financial Statements.

10-K 23rd Page of 63 TOC 1st Previous Next Bottom Just 23rd

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

The executive officers and Directors of the Company, their ages as of
March 25, 1998 and their positions with the Company are as follows:

[Enlarge/Download Table]

Name Age Position
---- --- --------

Joseph M. Ahearn................... 43 President, Chief Executive Officer and Director
David J. Fremed.................... 37 Chief Financial Officer and Treasurer
Alan Fine.......................... 47 Chief Operating Officer and Director
William H. Hardie, III............. 35 Executive Vice President-Business Affairs and Secretary
Avi Arad........................... 50 Director
James S. Carluccio................. 44 Director
James F. Halpin.................... 47 Director
Morton E. Handel................... 62 Director
Isaac Perlmutter................... 55 Director
Alfred A. Piergallini.............. 50 Director
Lt. Gen. Donald E. Rosenblum, Ret.. 68 Director
Paul R. Verkuil.................... 57 Director

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.

Joseph M. Ahearn has served as Chief Executive Officer and a Director
of the Company since April 1993 and as President of the Company since November
1994. From January 1990 to April 1993, Mr. Ahearn served initially as a
consultant to, and after April 1990, as an executive officer and director of the
Company's predecessor company. During such period, he served as a consultant to
other businesses affiliated with Mr. Perlmutter. From 1987 to August 1991, Mr.
Ahearn was a principal of GDL, a corporation that provides management advice and
assistance to financially distressed companies. From August 1988 to August 1991,
Mr. Ahearn, in his capacity as a principal of GDL, served as Chief Operating
Officer of Coleco Industries, Inc. and as a director or officer of various other
businesses that were the subject of bankruptcy proceedings. From 1981 to 1987,
Mr. Ahearn was employed by Touche Ross & Co., attaining the position of senior
manager. From 1976 to 1980, Mr. Ahearn served in both the audit and consulting
departments of Arthur Andersen & Co.

Avi Arad has served as a Director of and consultant to the Company
since April 1993. Mr. Arad was the President and Chief Executive Officer of New
World Animation, a media production company under common control with Marvel,
from April 1993 until February 1997 and held the same position at the Marvel
Studios division of Marvel from February 1997 until November 1997. At New World
Animation and Marvel Studios, Mr. Arad served as the Executive Producer of the
X-Men(R) and the Spider-Man(R) 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.

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During his career, Mr. Arad has designed or co-designed more than 160 toys.
Mr. Arad is also the owner of Avi Arad & Associates, a firm engaged in the
design and development of toys and the production and distribution of television
programs and is a beneficial owner in Classic Heroes, Inc.

Alan Fine was appointed as a Director in June 1997 and has served as
the Chief Operating Officer of the Company since 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.

James F. Halpin has served as a Director of the Company since March
1995. Mr. Halpin has been President, Chief Operating Officer and a director of
CompUSA Inc., a retailer of computer hardware, software, accessories and related
products, since May 1993 and Chief Executive Officer of CompUSA, Inc. since
December 1993. From 1990 to November 1992, Mr. Halpin was President of Homebase,
a home center warehouse retailer. From 1988 to 1990, Mr. Halpin was President of
BJ's Wholesale Club, a chain of club retail stores. Mr. Halpin also served as
Executive Vice President of Waban Inc., the parent of Homebase and BJ's
Wholesale Club, from 1988 to 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.

Isaac Perlmutter has served as a Director of the Company since April
1993 and he served as Chairman of the Board of Directors until March 1995. Mr.
Perlmutter purchased the Company's predecessor company from Charan Industries,
Inc. in January 1990. Mr. Perlmutter is actively involved in the management of
the affairs of the Company and has been an independent financial investor for
more than the past five years. Mr. Perlmutter is also a director of Ranger
Industries, Inc. ("Ranger"). As an independent investor Mr. Perlmutter currently
has, or has had within the past five years, controlling ownership interests in
Ranger, 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. ("Tangible Media"), a media buying and barter advertising
agency.

Alfred A. Piergallini has served as a Director of the Company since
March 1995. Mr. Piergallini has been a director of Gerber since 1989, Chairman
of the Board and Chief Executive Officer of Gerber since January 1990 and
President of Gerber since January 1993. Mr. Piergallini also served as President
of Gerber from January 1990 to May 1992. Mr. Piergallini is also a director of
Comerica, Incorporated, a financial services holding company. From February 1986
to April 1989, Mr. Piergallini was a Senior Vice President of The Carnation
Company.

Paul R. Verkuil is an attorney-at-law and Dean of the Cardozo Law
School, Yeshiva University. Mr. Verkuil served as President of the College of
William and Mary from 1985 to 1992. He has been on the faculty of the Columbia
Law School as an Adjunct Professor and on the faculty of the University of
Pennsylvania as a Visiting Professor from January 1995 to December 1995. Mr.
Verkuil served as Dean of Tulane Law School from 1978 to 1985. Mr. Verkuil also
served as the President and Chief Executive officer of the American Automobile
Association from January 1992 to December 1994. Mr. Verkuil was appointed as a
Director of the Company in July 1996. Mr. Verkuil is a director of Universal
Health Services, Inc. and previously served as a director of NationsBank of
Florida from 1992 to 1995 and of Florida Progress Corporation from 1993 to 1995.

James S. Carluccio is the Executive Vice President of Technology
Solutions Company, a systems integration consulting group, and has held that
position since January 1992. Prior to that time, Mr. Carluccio was a partner
with Andersen Consulting. Mr. Carluccio was appointed as a Director in June
1997.

Morton E. Handel is 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 since July
1997. Mr. Handel also serves as a director of CompUSA, Inc., Ithaca Industries,
Inc. and Concurrent

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Computer Corp., and was previously Chairman of the Board of Directors and
Chief Executive Officer of Coleco Industries, Inc. Mr. Handel was appointed
as a director in June 1997.

Lt. Gen. Donald E. Rosenblum, Ret. General Rosenblum was appointed as a
Director in June 1997. General Rosenblum is the President of Rosenblum &
Associates, a marketing and management consulting firm, and has held that
position since 1985. Prior to that time, General Rosenblum held various ranks
with the U.S. Army during a distinguished 33-year military career.

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.

David J. Fremed has served as the Chief Financial Officer and Treasurer
of the Company since October 1996 and Vice President/Controller of the Company
since 1990. From 1986 to 1990, Mr. Fremed served as Controller of Admerex
International, Inc. From 1984 to 1986, Mr. Fremed served as Assistant Controller
of Albert Frank-Guenther Law, Inc., a subsidiary of Foote, Cone & Belding. From
1981 to 1984, Mr. Fremed served in the audit department of Arthur Andersen & Co.

William H. Hardie, III was the Executive Vice President, Business
Affairs and Secretary of Fleer/SkyBox International, a subsidiary of Marvel,
from May 1995 through September 1997. From January 1991 to May 1995, Mr. Hardie
was an associate at Jones, Walker, Waechter, Poitevant, Carrere & Denegre in New
Orleans, Louisiana.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities ("10% stockholders"), to file reports of ownership
and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange
Commission and the NYSE. Officers, directors and 10% stockholders are required
to furnish the Company with copies of all Forms 3, 4 and 5 they file.

Based solely on the Company's review of the copies of such forms it has
received and written representations from certain reporting persons that they
were not required to file Form 5's for a specified fiscal year, the Company
believes that all of its officers, directors and 10% Stockholders complied with
all filing requirements applicable to them with respect to transactions during
1997, other than the following:

(i) a Form 3 was filed by William H. Hardie, III in February
1998 that reported his status, as of September 1, 1997, as Executive
Vice President of the Company. Mr. Hardie's Form 3 should have been
filed in September 1997. Mr. Hardie owned no stock in the Company on
September 1, 1997, and the number of transactions that he has not
reported on a timely basis is zero;

(ii) a Form 4 was filed by Isaac Perlmutter in February 1998
that reported, among other things, three purchases (totaling 12,500
shares) of Class A Common Stock of the Company made by an affiliate of
Mr. Perlmutter's in the last two days of December 1997. A Form 4
reporting those three transactions should have been filed in January
1998.

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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
Officer of the Company and the four most highly paid executive officers earning
over $100,000, other than the Chief Executive Officer, who served as executive
officers of the Company as of December 31, 1997 (the "Named Executive
Officers"), for services rendered in all capacities to the Company and its
subsidiaries during such period.

Summary Compensation Table

[Enlarge/Download Table]

----------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
----------------------------------------------------------------------------------------------------------------------------
Securities Underlying
Name and Principal Position Year Salary($) Bonus($) Options(#)
--------------------------- ---- -------- -------- ----------

Joseph M. Ahearn 1997 $500,000 $150,000 --
President and Chief Executive 1996 350,000 150,000 --
Officer 1995 350,000 -- 280,000(1)

Daniel J. Werther(2) 1997 $132,364 -- --
Executive Vice President and 1996 300,000 25,000 --
Senior Legal Officer 1995 252,000 25,000 75,000

Andrew R. Gatto(3) 1997 $212,562 -- --
Executive Vice President - 1996 275,000 50,000 --
Marketing 1995 126,923 30,000 30,000

Alan Fine(4) 1997 $400,000 $302,816 --
Chief Operating Officer 1996 253,846 117,858 30,000
-- -- -- --

David J. Fremed 1997 $165,000 $40,000 --
Chief Financial Officer 1996 140,000 25,000 --
-- -- -- --
-----------------------------

(1) Includes options for 250,000 shares granted in March 1995 after
consummation of the Company's IPO and options for 30,000 shares granted
in December 1995 in lieu of $150,000 non-discretionary cash bonus
payable pursuant to the terms of Mr. Ahearn's employment agreement with
the Company.

(2) Mr. Werther terminated his employment with the Company in May 1997.

(3) Mr. Gatto commenced employment with the Company in July 1995 and terminated
his employment with the Company in October 1997.

(4) Mr. Fine commenced employment with the Company in May 1996.

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Stock Option Plan

The Company did not grant any stock options during 1997 to the
Company's Chief Executive Officer or to the Named Executive Officers.

The following chart shows the number of exercisable and unexercisable
stock options held by the Chief Executive Officer and by the other Named
Executive Officers. None of the Named Executive Officers exercised stock options
during 1997. Based upon the December 31, 1997, New York Stock Exchange (the
"NYSE") closing price per share of Class A Common Stock of $7.75, none of the
Options held by the Named Executive Officers were considered in-the-money.

Year End 1997 Options

Number of Securities
Underlying Unexercised
Options/SARs at Year
End #(1)
----------------------

Name Exercisable Unexercisable
---- ----------- -------------

Joseph M. Ahearn 280,000 --

Alan Fine 20,000 10,000

David J. Fremed 30,000 --

----------
(1) Represents shares underlying stock options; none of the executive officers
hold SARs.

Employment Agreements

During 1997 the Company was a party to an employment agreement with
each of Joseph M. Ahearn, Andrew R. Gatto and Alan Fine which governed,
respectively, Mr. Ahearn's employment as President and Chief Executive Officer,
Mr. Gatto's employment as Executive Vice President - Marketing and Mr. Fine's
employment as Chief Operating Officer. Mr. Gatto terminated his employment with
the Company in October 1997. Mr. Ahearn's employment agreement expired on
December 31, 1997, in accordance with its terms and Mr. Ahearn and the
Compensation Committee of the Board have elected to defer discussions regarding
the renewal of his contract until a resolution of the Marvel bankruptcy has been
reached.

Employment Agreement with Mr. Ahearn: Under his employment agreement,
Mr. Ahearn received a base salary, subject to discretionary increases, of
$350,000. Mr. Ahearn was entitled to an annual non-discretionary bonus of
$150,000. The employment agreement further provided for the payment of
discretionary bonuses and participation in the Company's Stock Option Plan as
determined by the Board of Directors. Mr. Ahearn also received a $1,000 monthly
automobile allowance and was entitled to participate in employee benefit plans
generally available to the Company's employees.

Employment Agreement with Mr. Gatto: Under his employment agreement,
Mr. Gatto received a base salary, subject to discretionary increases, of
$275,000. Mr. Gatto was entitled to an annual non-discretionary bonus of
$50,000. The employment agreement further provided for the payment of
discretionary bonuses and participation in the Company's Stock Option Plan as
determined by the Board of Directors. Mr. Gatto also received a $1,000

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monthly automobile allowance and was entitled to participate in employee benefit
plans generally available to the Company's employees.

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 December 31, 1999. Under his
employment agreement, Mr. Fine receives a base salary, subject to discretionary
increases, of $400,000. Mr. Fine is entitled to an annual non-discretionary
bonus based on a formula for FOB sales. The employment agreement further
provides for the payment of discretionary bonuses and participation in the
Company's Stock Option Plan as determined by the Board of Directors. Mr. Fine
also receives a $1,000 monthly automobile allowances and is entitled to
participate in employee benefit plans generally available to the Company's
employees.

Mr. Fine's employment agreement provides that, in the event of
termination other than for cause, Mr. Fine is entitled to his salary and car
allowance earned through the date of termination and thereafter for a period up
to twelve months. Mr. Fine is also entitled to the pro rata portion of his
annual bonus earned through the date of termination.

Each of the employment agreements with Messrs. Ahearn, Gatto and Fine
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, the
employees agreed during their employment, and for one year thereafter, not to
engage in any competitive business activity.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information, as of March 25,
1998, with respect to the shares of Common Stock beneficially owned by (a) each
person known by the Company to be the beneficial owner of 5% or more of the
outstanding Common Stock, (b) each Director of the Company and (c) all Directors
and executive officers of the Company as a group.

Class A Common Stock(1)
----------------------------------

Number of Shares
Beneficially Owned
----------------------------------
Five Percent Stockholders, Percent of
Directors and Executive Officers Number Class
--------------------------------------- --------------- ---------------

Marvel Characters, Inc................ 7,394,000 26.6%
c/o Marvel Entertainment
Group, Inc.
387 Park Avenue South
New York, New York 10016

Avi Arad (2).......................... 4,150,000 15.0%
1698 Post Road East
Westport, Connecticut 06880

Isaac Perlmutter (3).................. 9,539,500 34.4%
P.O. Box 1028
Lake Worth, Florida 33460-1028

Joseph M. Ahearn (4).................. 280,100 *
David J. Fremed (5)................... 30,000 *
James F. Halpin....................... 5,000 *
Alfred A. Piergallini................. 4,000 *
Paul R. Verkuil....................... 2,000 *
James S. Carluccio.................... 0 *
Morton E. Handel...................... 1,000 *
Donald E. Rosenblum................... 0 *
William H. Hardie, III................ 0 *
Alan Fine (5)......................... 20,000 *
All executive officers and Directors
as a group (12 persons)(6).......... 14,031,600 50.6%

--------------------------
* Less than 1%.

(1) There are no longer any shares of Class B Common Stock outstanding. In
accordance with the Stockholders' Agreement, each share of Class B
Common Stock held by Marvel, was converted into a share of Class A
Common Stock as a result of the change of control at Marvel no later
than June 20, 1997. The enforceability of the conversion provisions of
the Stockholders' Agreement has been disputed by the Chapter 11
Trustee. See "Item 1. Business Change in Control." and "Item 3. - Legal
Proceedings."

(2) Mr. Arad is also a Director of the Company.

(3) Mr. Perlmutter is also a Director of the Company. Represents shares of
Class A Common Stock owned by (i) Zib, Inc., formerly Toy Biz, Inc., a
Delaware corporation incorporated in 1990, which is owned entirely by
the Isaac Perlmutter T.A. trust, a revocable trust established by Mr.
Perlmutter, (ii) The Laura and Isaac Perlmutter Foundation Inc. and
(iii) Object Trading Corp. Mr. Perlmutter is the sole beneficiary of
the trust during his lifetime and may revoke the trust at any time and
he and his wife serve as trustees of the trust. Mr. Perlmutter is the
sole stockholder of the Foundation and Object Trading Corp.

(4) Includes 280,000 shares of Class A Common Stock subject to employee
options granted pursuant to the Stock Option Plan which are immediately
exercisable or exercisable within 60 days.

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(5) Represents shares of Class A Common Stock subject to employee options
granted pursuant to the Stock Option Plan which are immediately
exercisable or exercisable within 60 days.

(6) Includes 330,000 shares of Class A Common Stock subject to employee
options granted pursuant to the Stock Option Plan which are immediately
exercisable or exercisable within 60 days.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Because Marvel and various of its affiliates are the subject of
petitions for reorganization under Chapter 11, agreements described below to
which Marvel or those affiliates are parties which are determined by the
District Court to be executory contracts may be subject to rejection in the
Marvel bankruptcy cases.

Marvel License Agreements

In connection with the formation of the Company, Marvel granted the
Company the Marvel License, an exclusive, perpetual and paid up license to
manufacture and distribute a broad range of toys based upon characters owned by
Marvel and properties in which it owns copyrights, trademarks or tradenames. The
Marvel License covers all characters (including the associated copyrights and
trademarks) owned by Marvel and disseminated under the Marvel Comics trademark.

The Company and Marvel have entered into an exclusive license agreement
pursuant to which Marvel may use the Toy Biz trademark on online services and
electronic networks, including the Internet. The license is limited to
Marvel-related products of the Company. Marvel paid the Company $500,000 for
such license.

The Company also distributed certain products through a wholly owned
subsidiary of Marvel engaged in the distribution of products to certain comic
book retailers. During the years ended December 31, 1995, 1996 and 1997, the
Company's sales to that subsidiary totaled $1,616,000, $324,000 and $0,
respectively.

License With Avi Arad

Avi Arad & Associates ("Associates"), of which Mr. Arad is the sole
proprietor, and the Company are parties to a license agreement which amended the
licenses between Associates and the Predecessor Company outstanding at the time
of the Company's formation and which governs the licensing of new material to
the Company by Associates thereafter. The license agreement provides that
Associates is entitled to receive royalty payments on net sales of Marvel
character-based toys and on net sales of non-Marvel based toys of which Arad is
the inventor of record. In no event, however, may the total royalties payable to
Associates during any calendar year exceed $7.5 million. Mr. Arad has agreed
that he was not entitled to receive royalties based on sales in 1996 of certain
Marvel character-based toys which were developed independently of Arad in 1996.
The Company accrued royalties to Mr. Arad for toys he invented or designed of
$1,848,000 and $3,624,000 during the years ended December 31, 1996 and 1997,
respectively. At December 31, 1996 the Company had a receivable from Mr. Arad
for $505,000 related to reimbursement of expenses which was subsequently
collected.

Marvel Services Arrangement

In connection with the IPO, the Company and Marvel entered into a
services agreement (the "Services Agreement") governing the provision by Marvel
of services to the Company. Under the Services Agreement, upon

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request by the Company and acceptance by Marvel, Marvel provides certain
management, consulting and administrative services and certain services
purchased from third party providers, including legal and accounting services.
The Company is obligated to reimburse Marvel for the costs of such services. The
Services Agreement automatically renews for successive one-year terms unless
terminated upon 120 days' notice. Marvel is under no obligation to provide
services under the Services Agreement. The Company accrued for the account of,
or reimbursed Marvel for, approximately $262,000 and $141,000 for 1996 and 1997,
respectively. The Company has not requested services under the Services
Agreement since June 1997.

Stockholders' Agreement and Class B Common Stock

In connection with the IPO, Marvel, Mr. Perlmutter, two affiliates of
Mr. Perlmutter through which Mr. Perlmutter held his shares of Class A Common
Stock, Mr. Arad and the Company entered into the Stockholders' Agreement which
provided, among other things, that Marvel and its permitted transferees (in this
case, Characters) ("Permitted Transferees"), if any, Perlmutter and Arad would
vote their respective shares of common stock of the Company to elect as
directors of the Company (i) eight persons designated by Characters, (ii) two
persons designated by Perlmutter and (iii) one person designated by Arad. The
Stockholders' Agreement also permitted certain pledges of Class B Common Stock
owned by Marvel and its Permitted Transferees.

The Stockholders' Agreement provided that, if Marvel ceased to be
controlled by Mr. Perelman, Characters would be obligated to convert its shares
of Class B Common Stock into Class A Common Stock, unless Mr. Perlmutter and Mr.
Arad consented to those shares remaining Class B Common Stock. The Stockholders'
Agreement provided that it would terminate upon, among other events, the
conversion into Class A Common Stock of the Class B Common Stock held by
Characters pursuant to a change in control of Marvel. The Company contends that,
under the Stockholders' Agreement, the loss of control of Marvel by Mr. Perelman
in the Marvel bankruptcy proceedings triggered the conversion of the shares of
Class B Common Stock held by Characters into an equal number of shares of Class
A Common Stock and that the effect of that conversion was to reduce the voting
power of Characters as a stockholder of the Company from approximately 78.4% to
approximately 26.6% and to terminate the Stockholders' Agreement. See "Item 1.
Business -- Change of Control".

Company Registration Rights Agreement

The Company is a party to a registration rights agreement (the "Company
Registration Rights Agreement") with Marvel, Arad and Perlmutter, pursuant to
which they and certain of their transferees each have the right, subject to
certain conditions, to require the Company to register under the Securities Act,
all or any portion of the shares of Class A Common Stock held by them on two
occasions. In addition, Marvel, Arad, Perlmutter and certain of their
transferees have certain rights to participate in such registrations and in
other registrations by the Company of its Class A Common Stock. The Company is
obligated to pay any expenses incurred in connection with such registrations,
except for underwriting discounts and commissions attributable to the shares of
Class A Common Stock sold by stockholders pursuant to such registrations.

Tangible Media Advertising Services

Tangible Media, a corporation which is wholly owned by Perlmutter, acts
as the Company's media consultant in placing the Company's advertising and, in
connection therewith, receives certain fees and commission based on the cost of
the placement of such advertising. Tangible Media is compensated solely as a
consultant on an event-by-event basis with no written arrangements in place. It
is expected that Tangible Media, upon request, will continue to arrange for the
placement for the Company's advertising. The Company retains the services of a
non-affiliated media consulting agency on matters of advertising creativity.
Tangible Media received payments of fees and commissions totaling approximately
$965,000 and $1,274,000 in 1996 and 1997, respectively.

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Employee, Office Space and Overhead Cost Sharing Arrangements

Under expense sharing arrangements with Tangible Media, Classic Heroes,
REC Sound and Marvel Software, affiliated companies owned by Perlmutter in the
case of Tangible Media, Classic Heroes and REC Sound, or owned equally by Marvel
and the Company in the case of Marvel Software (collectively, the "Affiliates"),
the Company and the Affiliates have shared certain space at the Company's
principal executive offices and related overhead expenses. Since 1994, Tangible
Media and the Company have been, and until the end of 1995 Classic Heroes and
REC Sound were, 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 this agreement, Tangible Media is currently 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 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 received net reimbursements from one of the Affiliates of
approximately $245,000 for 1996 and paid approximately $38,000 to this Affiliate
in 1997 under this Agreement.

Showroom Sharing Arrangement

Under an expense sharing arrangement with Marvel, Classic Heroes and
REC Sound (the "Showroom Affiliates"), the Company and the Showroom Affiliates
have shared showroom space and related overhead expenses. Since 1995, Marvel and
the Company have been, and until the end of 1995 Classic Heroes and REC Sound
were, parties to a showroom space sharing agreement (the "Showroom Sharing
Agreement"). Under the Showroom Sharing Agreement, Marvel is currently obligated
to reimburse the Company for 30% of the rent paid under the lease for the
showroom space, which obligations reflect the percentage of floor space occupied
by Marvel. The agreement also requires Marvel to reimburse the Company for any
related overhead expenses comprised of commercial rent tax, repair and
maintenance costs and telephone and facsimile service, in proportion to their
percentage occupancy, except that overhead expenses which inure to the benefit
of a single party shall be reimbursed entirely by such party. The agreement has
a term which is coterminous with the term of the Company's lease for the
showroom space. The Company was reimbursed approximately $47,000 in 1996 under
the Showroom Sharing Agreement and accrued approximately $26,000 as being due
from Marvel for 1997.

Marvel Studios

The Company and Marvel formed Marvel Studios with the objective of
facilitating the release of live action and animated motion pictures and
television programming and other media based on the Marvel Characters in order
to create greater consumer interests in these characters and related
merchandise. The Company believes that any feature film or television
programming, theatrical productions or other media and any advertising and
promotion associated with such media will create consumer interest in the Marvel
Characters and revenue opportunities for the Company's licensing and toy
businesses. The rights to produce certain feature films based on certain of the
Marvel Characters are currently licensed to third parties. The approximately
$9.1 million net proceeds to the Company from its 1996 public offering was
intendedal commitment to Marvel Studios. At this time, the Company has no plans
to invest a material amount of funds in Marvel Studios until the resolution of
Marvel's bankruptcy proceeding. The Marvel Studios joint venture will become
mooted if the Plan proposed by the Company to combine with Marvel is
consummated. Marvel has asserted that the Company has breached its obligation to
fund Marvel Studios. See "Item 3. Legal Proceedings."

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Other Agreements with Affiliates

The Company was a party to a license agreement entered into in
September 1994 with Coleman, an affiliate of the Company, pursuant to which the
Company licensed certain Coleman trademarks. The license terminated during 1997.

The Company was a party to a license agreement entered into in July
1995 with Revlon Consumer Products Corporation, an affiliate of the Company,
pursuant to which the Company licenses certain Revlon Consumer Products
Trademarks. The license terminated during 1997.

The Company believes that the terms of the foregoing transactions are
no less favorable than could be obtained by the Company from unrelated parties
on an arm's-length basis.

Proxy and Stock Option Agreements

Mr. Perlmutter and certain of his affiliates (the "Perlmutter Group")
and Mr. Arad have entered into proxy and stock option agreements with the
Consenting Lenders (the "Proxy and Stock Option Agreements"). In the following
discussion of the Proxy and Stock Option Agreements, the term "Stockholder"
means the Perlmutter Group or Mr. Arad, pursuant to the respective Proxy and
Stock Option Agreement of each.

In each Proxy and Stock Option Agreement, the Stockholders have agreed
to vote all shares of Class A Common Stock held beneficially or of record by
them (i) in favor of the Merger and of any other action necessary or appropriate
to effect the Merger; (ii) in favor of the other transactions contemplated by
the Master Agreement and the Plan or of any other action necessary or
appropriate to effect the Master Agreement and the Plan; (iii) against any
action or agreement that would result in a material breach or default by the
Company of the Master Agreement or the Plan; or (iv) against any action or
agreement that would, directly or indirectly, interfere with the Merger or with
the confirmation of the Plan. See "Item 1. Business -- Proposed Combination with
Marvel."

The Proxy and Stock Option Agreements require each Stockholder not to
(i) dispose of any of the Stockholder's shares of Class A Common Stock; (ii)
grant any additional proxies; (iii) support any plan of reorganization other
than the Plan; (iv) take any action inconsistent with the Stockholder's
obligations under the Proxy and Stock Option Agreement; (v) acquire any claim
against or interest in the Marvel Debtors; or (vi) take any action that would
cause the Company to materially breach the Master Agreement.

Under each Proxy and Stock Option Agreement, the Consenting Lenders
have the option (the "Option") to purchase all (but not less than all) of the
Stockholders' shares of Class A Common Stock if (i) the Master Agreement is
terminated because of a material breach by the Company or (ii) the Stockholder
materially breaches the Proxy and Stock Option Agreement. The purchase and sale
price of the Class A Common Stock pursuant to the Option is $4.00 per share.

Agreements Relating to the Purchase of Preferred Shares

On November 19, 1997, Zib Inc. (an entity wholly-owned by Mr.
Perlmutter), Dickstein Partners, Inc. ("Dickstein") and the Company entered into
an agreement in the form of a commitment letter (the "Commitment Letter")
relating to the purchase of 8% Preferred Stock of the Company by Zib Inc. and
Dickstein as investors ("New Preferred Stock Investors"). On that same day, Mr.
Perlmutter, Mr. Arad, and Joseph M. Ahearn executed a related letter agreement
(the "Letter Agreement") addressed to Dickstein.

The Commitment Letter provides that Zib Inc. has committed to purchase
600,000 shares, and Dickstein has committed to purchase 300,000 shares, of the
8% Preferred Stock of the Combined Company to be issued in connection with the
proposed combination of the Company and Marvel pursuant to the Plan (the
"Merger") and the

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Company has agreed to sell those shares to the New Investors. The purchase price
is $90,000,000, or $100 per share. Zib Inc. is permitted to assign its rights
under the Commitment Letter without the Company's consent. In consideration of
the New Preferred Stock Investors' commitment, the Company has agreed that if
the Company and Marvel consummate any of certain transactions (generally
consisting of mergers other than the Merger contemplated by the Plan; each is
referred to as an "Alternative Transaction") where the holders of the
outstanding Class A Common Stock of the Company receive consideration in excess
of $9.625 per share of Class A Common Stock, then Dickstein shall be entitled to
be paid an alternative transaction fee (the "Alternative Transaction Fee") by
the Company. The Alternative Transaction Fee is to be equal to the product of
(a) the lesser of (x) $3.00 (appropriately adjusted for any recapitalization of
the Company) and (y) the amount by which the consideration per share of Class A
Common Stock received by Company stockholders in that Alternative Transaction
exceeds $9.625, (b) 10.39 (appropriately adjusted for any recapitalization of
the Company) and (c) the number of shares of 8% Preferred Stock to be pAny
Alternative Transaction Fee that becomes payable in respect of an Alternative
Transaction announced or consummated prior to the later of September 21, 1998
and the termination of the Master Agreement will not be in excess of $8,000,000
and any Alternative Transaction Fee which becomes payable in respect of an
Alternative Transaction which is announced and consummated after the later of
September 21, 1998 and the termination of the Master Agreement will not be in
excess of $4,000,000 (with certain exceptions). No Alternative Transaction Fee
is payable by the Company in respect of an Alternative Transaction which occurs
after a final and non-appealable determination of any court that the board of
directors of the Company which approved the Master Agreement was not at such
time the duly authorized board of the Company, or which results in a change in
the identity of the majority of directors of the Company (a "Final Change in
Control").

The Commitment Letter provides that the Company will not at any time
prior to the termination of the Master Agreement, with certain exceptions,
consent to any material change in the Plan or withdraw or otherwise terminate
the Plan for the purpose of submitting an alternative plan of reorganization or
consummating an Alternative Transaction without the prior written consent of the
New Preferred Stock Investors having committed to purchase 80% of the shares of
8% Preferred Stock to be purchased by the New Preferred Stock Investors.
Additionally, the Company will not at any time prior to the termination of the
Master Agreement implement the transactions contemplated by the Master Agreement
or any similar transactions without permitting the New Preferred Stock Investors
to purchase the 8% Preferred Stock on the terms provided in the Commitment
Letter.

The Letter Agreement provides that Mr. Perlmutter and Mr. Arad are
severally obligated to pay a cash fee (the "Substitute Fee") to Dickstein if (a)
a Final Change in Control (as defined above) shall occur and, but for the Final
Change of Control, Dickstein would be entitled under the terms of the Commitment
Letter to receive an Alternative Transaction Fee, (b) a court order, preventing
the Company from consummating the Plan and based on a contention that the board
of directors of the Company which approved the Master Agreement was not duly
authorized, shall prevent the payment of the Alternative Transaction Fee in
accordance with the terms of the Commitment Letter where Dickstein is otherwise
entitled under the terms of the Commitment Letter to receive an Alternative
Transaction Fee or (c) a Marvel Board Change (defined generally as a time where
persons designated by Marvel and not approved by Dickstein or Zib Inc. become a
majority of the directors of the Company) occurs and the Alternative Transaction
Fee is not paid when due. The Substitute Fee is equal to ten percent (10%) of
the product of (a) the number of Company Shares owned, directly or indirectly,
by each of Messrs. Perlmutter and Arad as of the date of the Letter Agreement
and (b) the amount by which (i) the consideration per share received by holders
of Common Stock in the Alternative Transaction exceeds (ii) $9.00. No Substitute
Fee, however, shall be payable by Mr. Perlmutter or Mr. Arad in respect of any
shares sold upon exercise of the Option granted by him in the Proxy and Stock
Option Agreements. The Letter Agreement also provides that each of Mr.
Perlmutter, Mr. Arad, and Mr. Ahearn shall use his reasonable best efforts,
subject to his fiduciary duties as a director and/or officer of the Company, to
cause the Company to comply with the terms of the Commitment Letter irrespective
of any judicial determination as to the authorized composition of the Company's
board of directors.

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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
33.

(b) Reports on Form 8-K.

1. The Registrant filed a Current Report on Form 8-K,
dated as of October 16, 1997 and filed on October 16,
1997.

2. The Registrant filed a Current Report on Form 8-K,
dated as of November 24, 1997 and filed on November
24, 1997.

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EXHIBIT INDEX

Exhibit No.
-----------

2.1 Amended and Restated Asset Purchase Agreement, dated
August 17, 1995, between the Company and Spectra Star,
Inc., as amended by the First, Second, Third, Fourth and
Fifth Amendments thereto. (Incorporated by reference to
Exhibits 2.1, 2.2, 2.3 2.4 and 2.5 to the Company's Current
Report on Form 8-K, filed with the Commission on September
26, 1995.)

Restated Certificate of Incorporation. (Incorporated
by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.)

3.2 Certificate of Designation of Series A Preferred Stock of
Toy Biz, Inc. (Incorporated by reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K, filed with the
Commission on September 26, 1995.)

3.3 Bylaws (as restated and amended). (Incorporated by
reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1995.)

4.1 Specimen Copy of Stock Certificate for shares of Class A
Common Stock. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1, File No.
33-87268.)

9.1 Voting Trust Agreement, dated as of March 2, 1995, by
and among Marvel Entertainment Group, Inc., Avi Arad
and the Company. (Incorporated by reference to
Exhibit 9.1 to the Company's Registration Statement
on Form S-1, File No. 33- 87268.)

9.2 Voting Trust Agreement, dated as of March 2, 1995, by
and among Marvel Entertainment Group, Inc., Isaac
Perlmutter and the Company. (Incorporated by
reference to Exhibit 9.2 to the Company's
Registration Statement on Form S-1, File No.
33-87268.)

10.1 Stockholders' Agreement, dated as of March 2, 1995,
by and among the Company, Isaac Perlmutter T.A.,
Marvel Entertainment Group, Inc., Avi Arad and Zib
Inc. (Incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.)

10.2 Registration Rights Agreement, dated as of March 2,
1995, by and among the Company, Marvel Entertainment
Group, Inc., and Isaac Perlmutter and Avi Arad.
(Incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.)

10.3 Assignment and Assumption of Sublease by and between
Job Lot of West 45th St., Inc. and the Company, as
amended by First Amendment of Sublease, dated May 26,
1994, by and between Kallir, Philips, Ross, Inc. and
the Company; Agreement of Sublease, dated May 6,
1991, by and between Kallir, Philips, Ross, Inc. and
Job Lot of West 45th St., Inc.; Agreement of
Sublease, dated January 1989, by and between 673
First Realty Company and Kallir, Philips, Ross, Inc.
(Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, File
No. 33- 87268.)

10.4 Lease, dated December 3, 1993, by and between 200
Fifth Avenue Associates and the Company.
(Incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, File
No. 33-87268.)

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Exhibit No.
-----------

10.5 Sublease, dated December 19, 1996, by and between
Gruner & Jahr USA Publishing and the Company. (Incorporated
by reference to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.)

10.6 Letter Agreement, effective March 1, 1994, by and between
Regal West Warehouse Trucking and the Company.
(Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1, File No. 33-87268.)

10.7 Credit Agreement, dated as of February 22, 1995 among the
Company, the Banks (as defined therein) and Chemical Bank
as administrative agent for the Banks, as amended by First
Amendment and Consent Number 1, dated as of August 29,
1995. (Incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 and Exhibit 10.7 to the Company's
Current Report on Form 8-K filed on September 26, 1995.)

10.8 License Agreement, dated April 30, 1993, by and between the
Company and Marvel Entertainment Group, Inc., as amended by
Amendments thereto, dated December 1, 1994, and February
22, 1995. (Incorporated by reference to Exhibits 10.9 and
10-9(b) to the Company's Registration Statement on Form S-
1, File No. 33-87268 and to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1995.)

10.9 License Agreement, dated July 1, 1994, between Marvel
Entertainment Group, Inc. and the Company. (Incorporated by
reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1, File No. 33-87268.)

10.10 License Agreement, dated March 1, 1993, by and between the
Company 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
Company'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.)

10.11 Distribution Agreement, dated July 29, 1993, by and between
the Company and Tyco Industries, Inc. (Incorporated by
reference to Exhibit 10.17 to the Company's Registration
Statement on Form S-1, File No. 33-87268.)

10.12 Services Agreement, dated as of March 2, 1995, by and
between the Company and Marvel Entertainment Group, Inc.
(Incorporated by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)

10.13 Showroom Sharing Agreement, dated as of March 2, 1995, by
and among the Company, Marvel Entertainment Group, Inc.,
Classic Heroes, Inc. and REC Sound Incorporated.
(Incorporated by reference to Exhibit 10.20 to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)

10.14 Master License Agreement, dated as of April 30, 1993,
between Avi Arad & Associates and the Company.
(Incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)

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Exhibit No.
-----------

10.15 Amended and Restated Consulting Agreement by and between
the Company and Avi Arad, as amended and restated as of
March 2, 1995. (Incorporated by reference to Exhibit 10.22
to the Company's Registration Statement on Form S-1, File
No. 33-87268.)*

10.16 Amended and Restated Employment Agreement between New World
Animation, Ltd. and Avi Arad. (Incorporated by reference to
Exhibit 10.23 to the Company's Registration Statement on
Form S-1, File No. 33-87268.)

10.17 Stock Option Agreement, dated as of April 30, 1993, between
the Company and Avi Arad as amended. (Incorporated by
reference to Exhibits 10.25, 10.26 and 10.26(b) to the
Company's Registration Statement on Form S-1, File No. 33-
87268.)

10.18 Employment Agreement, by and between Joseph M. Ahearn and
the Company. (Incorporated by reference to Exhibit 10.27 to
the Company's Registration Statement on Form S-1, File No.
33-87268.)*

10.19 Employment Agreement, by and between Andrew R. Gatto
and the Company. (Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form
10-K, filed on April 1, 1995.)*

10.20 Employment Agreement, by and between Alan Fine and
the Company. (Incorporated by reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.)*

10.21 1995 Stock Option Plan. (Incorporated by reference to
Exhibit 10.30 to the Company's Registration Statement on
Form S-1, File No. 33-87268.)*

10.22 Registration Rights Agreement, dated September 11,
1995, by and between the Company and Spectra Star,
Inc. (Incorporated by reference to Exhibit 10.8 to
the Company's Current Report on Form 8-K, filed on
September 26, 1995.)

10.23 Option Agreement, dated September 11, 1995, by and
between the Company and Spectra Star, Inc.
(Incorporated by reference to Exhibit 10.9 to the
Company's Current Report on Form 8-K, filed on
September 26, 1995.)

10.24 Purchase and Option Agreement, dated September 11, 1995, by
and between the Company, Frank Alonso, Jr. and Estrella
Maquiladoras, S.A. DE C.V. (Incorporated by reference to
Exhibit 10.10 to the Company's Current Report on Form 8-K,
filed on September 26, 1995.)

10.25 Maquila and Technical Assistance Agreement, dated
September 11, 1995, by and between the Company and
Estrella Maquiladoras, S.A. DE C.V. (Incorporated by
reference to Exhibit 10.11 to the Company's Current
Report on Form 8-K, filed on September 26, 1995.)

10.26 Amended and Restated Master Agreement, dated as of November
19, 1997, by and among the Company, certain secured
creditors of Marvel and certain secured creditors of Panini
Spa and Amendments 1 and 2 thereto.

10.27 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).

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Exhibit No.
-----------

10.28 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).

10.29 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).

10.30 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).

10.31 Second Amended Joint Plan of Reorganization filed with
the United States Bankruptcy Court for the District of
Delaware on March 12, 1998 by the secured lenders of Marvel
and the Registrant.

21.1 Subsidiaries of the Company.

23 Consent of Accountants.

27 Financial Data Schedule.

* Management contract or compensatory plan or arrangement.

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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.

TOY BIZ, INC.

By: /s/ Joseph M. Ahearn
-------------------------------------
Joseph M. Ahearn
President and Chief Executive Officer

Date: March 31, 1998

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.

[Enlarge/Download Table]

Signature Title Date
--------- ----- ----

/s/ Isaac Perlmutter Director March 31, 1998
---------------------------
Isaac Perlmutter

/s/ Joseph Ahearn President, Chief Executive Officer and
---------------------------
Joseph M. Ahearn Director (principal executive officer) March 31, 1998

/s/ David J. Fremed Chief Financial Officer and Treasurer March 31, 1998
---------------------------
David J. Fremed (principal financial and accounting officer)

/s/ Avi Arad Director March 31, 1998
---------------------------
Avi Arad

/s/ Morton E. Handel Director March 31, 1998
---------------------------
Morton E. Handel

/s/ James S. Carluccio Director March 31, 1998
---------------------------
James S. Carluccio

/s/ Donald E. Rosenblum Director March 24, 1998
---------------------------
Donald E. Rosenblum

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[Download Table]

Signature Title Date
--------- ----- ----

/s/ James F. Halpin Director March 31, 1998
---------------------------
James F. Halpin

/s/ Alan Fine Chief Operating Officer and Director March 31, 1998
------------------------
Alan Fine

/s/ Alfred A. Piergallini Director March 23, 1998
------------------------
Alfred A. Piergallini

/s/ Paul R. Verkuil Director March 31, 1998
------------------------
Paul R. Verkuil

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INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

Page
----

Report of Independent Auditors.........................................F-2

Consolidated Balance Sheets as of December 31, 1996
and December 31, 1997.................................................F-3

Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997......................................F-4

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997......................................F-5

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997......................................F-6

Notes to Consolidated Financial Statements.............................F-7

Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts......................F-22

All other schedules prescribed by the accounting regulations of the
Commission are not required or are inapplicable and therefore have been
omitted.

F-1

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REPORT OF INDEPENDENT AUDITORS

The Stockholders of Toy Biz, Inc.

We have audited the accompanying consolidated balance sheets of Toy Biz, Inc.
and subsidiaries as of December 31, 1996 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at item 14(a). The 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Toy Biz, Inc. and
subsidiaries at December 31, 1996 and 1997 and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, based upon our audits, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.

ERNST & YOUNG LLP

New York, New York
March 9, 1998, except as to Note 7
as to which the date is March 25, 1998

F-2

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TOY BIZ, INC.
CONSOLIDATED BALANCE SHEETS

[Enlarge/Download Table]

December 31, December 31,
1996 1997
------------------ ------------------
(In thousands, except per share data)

ASSETS
Current Assets:
Cash and cash equivalents........................................... $6,022 $7,596
Accounts receivable, net (Note 3)................................... 95,591 50,395
Inventories, net (Note 3)........................................... 20,935 22,685
Assets held for resale (Note 10).................................... - 4,136
Income tax receivable (Note 6)...................................... - 17,542
Deferred income taxes (Notes 1 and 6)............................... 6,173 7,494
Prepaid expenses and other.......................................... 6,067 6,584
-------- --------

Total current assets............................................. 134,788 116,432

Molds, tools and equipment, net (Note 3).............................. 17,680 17,013
Product and package design costs, net (Note 3)........................ 9,283 7,616
Goodwill and other intangibles, net (Note 3).......................... 9,981 9,305
-------- --------

Total assets..................................................... $171,732 $150,366
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:

Accounts payable.................................................... $10,237 $ 5,354
Accrued expenses and other (Note 3)................................. 22,359 25,031
Borrowings under credit facility.................................... - 12,000
-------- --------

Total current liabilities........................................ 32,596 42,385
-------- --------

Redeemable preferred stock (Note 12).................................. 1,681 -
-------- --------

Stockholders' equity (Notes 8 and 9)

Preferred Stock, $.01 par value, 25,000,000 shares authorized,
none issued)..................................................... - -
Class A common stock, $.01 par value, 100,000,000 shares
authorized, 20,348,794 issued and outstanding at 12/31/96
and 27,746,127 issued and outstanding as of 12/31/97............. 203 277
Class B common stock, $.01 par value, 20,000,000 shares
authorized, 7,394,000 issued and outstanding at 12/31/96
and none issued and outstanding as of 12/31/97................... 74 -
Additional paid-in capital.......................................... 70,587 70,578
Retained earnings................................................... 66,591 37,126
-------- --------

Total stockholders' equity....................................... 137,455 107,981
-------- --------

Total liabilities and stockholders' equity....................... $171,732 $150,366
======== ========

See Notes to Consolidated Financial Statements.

F-3

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TOY BIZ, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
1995 1996 1997
--------------------------------------------------------------
(In thousands, except per share data)

Net sales.............................................. $196,395 $221,624 $150,812
Cost of sales.......................................... 88,397 116,455 106,951
--------- --------- ---------
Gross profit...................................... 107,998 105,169 43,861

Operating expenses:

Selling, general and administrative.................. 48,234 61,876 72,081
Depreciation and amortization........................ 12,750 16,078 21,068
-------- -------- --------
Total expenses.................................... 60,984 77,954 93,149
-------- -------- --------

Operating income (loss)................................ 47,014 27,215 (49,288)

Interest expense....................................... (490) (112) (776)
Other income, net...................................... 1,050 708 414
-------- --------- ---------
Income (loss) before income taxes.................... 47,574 27,811 (49,650)

Income taxes (benefit) (Note 6)...................... 19,172 11,124 (20,185)
-------- -------- ---------

Net income (loss)................................. $28,402 $16,687 ($29,465)
======= ======= =========

Basic and dilutive net income (loss) per share......... $1.05 $0.61 ($1.06)

Weighted average number of common and
common equivalent shares outstanding (in
thousands).......................................... 27,115 27,366 27,746

See Notes to Consolidated Financial Statements.

F-4

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TOY BIZ, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

[Enlarge/Download Table]

ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ --------- ---------- -------
(In thousands)

Balance at December 31, 1994......................... -- 16,914 21,502 38,416
Proceeds from initial public offering................ $270 43,875 -- 44,145
Exercise of stock options............................ -- 411 -- 411
Accretion of redeemable preferred stock.............. -- (42) -- (42)
Net income for 1995.................................. -- -- 28,402 28,402
---- ------- ------- --------
Balance at December 31, 1995......................... 270 61,158 49,904 111,332
Proceeds from secondary offering..................... 7 9,096 -- 9,103
Exercise of stock options............................ -- 438 -- 438
Accretion of redeemable preferred stock.............. -- (105) -- (105)
Net income for 1996.................................. -- -- 16,687 16,687
---- ------- ------- --------
Balance at December 31, 1996......................... 277 70,587 66,591 137,455
Exercise of stock options............................ -- 62 -- 62
Accretion of redeemable preferred stock.............. -- (71) -- (71)
Net (loss) for 1997.................................. -- -- (29,465) (29,465)
---- ------- ------- --------
Balance at December 31, 1997......................... $277 $70,578 $37,126 $107,981
==== ======= ======= ========

See Notes to Consolidated Financial Statements.

F-5

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TOY BIZ, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

[Enlarge/Download Table]

YEARS ENDED DECEMBER 31,
1995 1996 1997
-----------------------------------------------------
(In thousands)

Net income (loss)................................................ $28,402 $16,687 ($29,465)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................................ 12,750 16,078 20,168
Deferred income taxes........................................ 696 (2,032) (1,321)
Changes in operating assets and liabilities:
Accounts receivable........................................ (11,260) (20,843) 45,076
Inventories................................................ 1,130 (3,740) (2,452)
Income tax receivable...................................... -- -- (17,542)
Prepaid expenses and other................................. (2,378) (1,591) (581)
Other assets............................................... (17) (283) (127)
Accounts payable........................................... 3,656 1,407 (4,883)
Accrued expenses and other................................. 2,028 (6,838) 2,851
Due to affiliates.......................................... 517 -- --
------- -------- --------
Net cash provided by (used in) operating activities.............. 35,524 (1,155) 11,724
------- -------- --------

Cash flow used in investing activities:
Purchases of molds, tools and equipment........................ (9,591) (15,352) (11,748)
Expenditures for product and package
design costs................................................. (6,545) (8,213) (4,969)
Acquisition of Spectra Star, Quest and Colorforms.............. (9,004) -- (4,556)
-------- -------- --------
Net cash used in investing activities.......................... (25,140) (23,565) (21,273)
-------- -------- --------

Cash flow from financing activities:
Payment of notes to stockholder................................ (15,119) -- --
Exercise of stock option....................................... 411 438 62
Net (repayments) borrowings under credit agreement............. (21,500) -- 12,000
Redemption of Preferred Stock.................................. -- (1,440) (939)
Proceeds from initial public offering.......................... 44,166 -- --
Proceeds from additional public offering....................... -- 9,260 --
------- -------- -------
Net cash provided by financing activities........................ 7,958 8,258 11,123
------- -------- -------
Net increase (decrease) in cash and cash equivalents............. 18,342 (16,462) 1,574
Cash and cash equivalents at beginning of year................... 4,142 22,484 6,022
------- ------- -------
Cash and cash equivalents at end of year......................... $22,484 $ 6,022 $ 7,596
======= ======= =======

Supplemental disclosure of cash flow information:
Interest paid during the period................................ $ 2,335 $ 149 $ 820
Net income taxes paid (recovered) during the year.............. 16,410 16,156 (476)
Other non-cash transactions:
Issuance of preferred stock for Spectra Star,
including accretion of preferred dividend of $42
for 1995, $105 for 1996 and $71 for 1997 (See Note 12)......... 3,016 105 71

See Notes to Consolidated Financial Statements.

F-6

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1997

1. Summary of Significant Accounting Policies

Description of Business

Toy Biz, Inc. ("Toy Biz" or the "Company") was formed on April 30, 1993
pursuant to a Formation and Contribution Agreement ("Formation Agreement"),
entered into by the Predecessor Company, Mr. Isaac Perlmutter (the sole
stockholder of the Predecessor Company), Marvel Entertainment Group, Inc.
("Marvel") and Avi Arad ("Mr. Arad"). The Predecessor Company had been Marvel's
largest toy licensee. Toy Biz 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 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 the Company for 44% of Toy Biz'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). Marvel made a capital contribution of
$500,000 for 46% of the Company's capital stock and a loan, in the form of a
note, of $8,507,000. In addition, Marvel granted the Company an exclusive,
perpetual and paid-up license to design and distribute toys based on Marvel
characters. Pursuant to the Formation Agreement, in exchange for the
contribution to the Company of his interests in certain license agreements with
the Company and cash, Mr. Arad received 10% of the Company's capital stock. In
addition, the Company granted Mr. Arad the Arad Stock Option (the "Option") to
acquire an additional 10% of the Company's capital stock. Mr. Arad also agreed
to enter into the Arad Consulting Agreement and the Master License Agreement.

Basis of Presentation

The consolidated financial statements include the accounts of the
Company and its subsidiaries in Hong Kong and Mexico. 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 and other sales allowances, and doubtful accounts, and the realizability
of inventories, molds, tools and equipment, and product and package design
costs. Actual results could differ from those estimates.

F-7

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

1. Summary of Significant Accounting Policies--(Continued)

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

Inventories

Inventories are valued at the lower of cost (first-in, first-out
method) or market.

Molds, Tools, and Equipment

Molds, tools and equipment are stated at cost less accumulated
depreciation and amortization. The Company owns the molds and tools used in
production of the Company's products by third-party manufacturers. At December
31, 1997, 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
over a three year period (the estimated life) for molds and tooling costs and
over the useful life for furniture and fixtures and office equipment. On an
ongoing basis the Company reviews the lives and carrying value of molds and
tools based on the sales and operating results of the related products. If the
facts and circumstances suggest a change in useful lives or an impairment in the
carrying value, the useful lives are adjusted and unamortized costs are written
off accordingly. Write-offs, in excess of normal amortization, which are
included in depreciation and amortization on the accompanying Consolidated
Statements of Income for the years ended December 31, 1995, 1996 and 1997 were
approximately $636,000, $364,000 and $2,174,000, 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, 1997, certain of these costs related to products that were not
yet in production or were not yet being sold by the Company. For financial
reporting purposes, depreciation and amortization of product and package design
is computed by the straight-line method over a three year period (the estimated
life). On an ongoing basis the Company reviews the useful lives and carrying
value of product and package design costs based on the sales and operating
results of the related products. If the facts and circumstances suggest a change
in useful lives or an impairment in the carrying value, the useful lives are
adjusted and unamortized costs are written off accordingly. Write-offs, in
excess of normal amortization, which are included in depreciation and
amortization on the accompanying Consolidated Statements of Income, for the
years ended December 31, 1995, 1996 and 1997 were approximately $1,276,000,
$1,164,000 and $1,230,000, respectively.

F-8

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

1. Summary of Significant Accounting Policies--(Continued)

Goodwill and Other Intangibles

Goodwill and other intangibles are stated at cost less accumulated
amortization. Goodwill is amortized over 40 years and other intangibles are
amortized over 3 years. For the years ended December 31, 1995, 1996 and 1997,
amortization of goodwill was $68,000, $245,000 and $299,000, respectively.

Research and Development

Research and development ("R&D") costs are charged to operations as
incurred. For the years ended December 31, 1995, 1996 and 1997, R&D expenses
were $4,980,000, $5,298,000 and $4,599,000, 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. Income from distribution fees 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. For the years ended December 31,
1995, 1996 and 1997, distribution fees and sub-licensing revenues were
$5,730,000, $13,637,000 and $3,265,000, respectively.

Advertising Costs

Advertising production costs are expensed when the advertisement is
first run. Media advertising costs are expensed on the projected unit of sales
method during interim periods. For the years ended December 31, 1995, 1996 and
1997, advertising expenses were $18,864,000, $25,471,000 and $27,910,000
respectively. At December 31, 1996 and 1997, the Company had incurred $433,000
and $420,000 respectively, of prepaid advertising costs, principally related to
production of advertisement that will be first run in fiscal 1997 and 1998,
respectively.

Royalties

Minimum guaranteed royalties, as well as royalties in excess of minimum
guarantees, are expensed based on sales of related products. The realizability
of minimum guarantees paid is evaluated by the Company based on the projected
sales of the related products.

Income Taxes

The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and the tax bases of
assets and liabilities and are measured using tax rates and laws that are
scheduled to be in effect when the differences are scheduled to reverse.

F-9

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

1. Summary of Significant Accounting Policies--(Continued)

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. Translations
adjustments, which were not material, arising from the use of differing exchange
rates are included in the results of operations.

Income (Loss) Per Share

In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share ("Statement 128"). Statement 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Net income (loss) per common share is
computed by dividing net income (loss), less the amount applicable to preferred
dividends, by the weighted average common and common equivalent shares
outstanding during the year. All income (loss) per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements.

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.

2. Sales to Major Customers and International Operations

The Company primarily sells its merchandise to major retailers,
principally throughout the United States. Credit is extended based on an
evaluation of the customer's financial condition, and, generally, collateral is
not required. Credit losses are provided for in the financial statements and
consistently were within management's expectation until the recent Marvel
bankruptcy and concerns among retailers about the future of the Marvel brand.

During the year ended December 31, 1995, three customers accounted for
approximately 29%, 19% and 12% of total net sales. During the year ended
December 31, 1996, two customers accounted for approximately 23% and 18% of
total net sales. During the year ended December 31, 1997, three customers
accounted for approximately 22%, 15% and 12% of total net sales.

F-10

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

2. Sales to Major Customers and International Operations (Continued)

The Company's Hong Kong subsidiary supervises the manufacturing of the
Company's products in China and sells such products internationally. All sales
are made F.O.B. Hong Kong against letters of credit. During the years ended
December 31, 1995, 1996 and 1997, international sales were approximately 11%,
20% and 22%, respectively, of total net sales. During those periods, the Hong
Kong operations reported operating income of approximately $6,642,000,
$18,880,000 and $5,868,000 and income before income taxes of $6,721,000,
$19,079,000 and $6,102,000, respectively. At December 31, 1996 and 1997 the
Company had assets in Hong Kong of approximately $29,342,000 and $28,660,000,
respectively, and the Hong Kong subsidiary represents $24,785,000 and
$26,670,000, respectively, of the Company's consolidated retained earnings.

F-11

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

3. Details of Certain Balance Sheet Accounts
(in thousands)

[Enlarge/Download Table]

December 31,
1996 1997
------------------ ------------------

Accounts receivable, net, consists of the following:

Accounts receivable.................................................. $110,932 $80,212
Less allowances for:
Doubtful accounts.................................................. (485) (430)
Advertising, markdowns, returns, volume discounts and other........ (14,856) (29,387)
------------------ ------------------
Total............................................................ $95,591 $50,395
================== ==================

Inventories, net, consist of the following:

Finished goods....................................................... $16,918 $17,518
Component parts, raw materials and work-in-process................... 4,017 5,167
------------------ ------------------
Total............................................................ $20,935 $22,685
================== ==================

Molds, tools and equipment, net, consists of the following:

Molds, tools and equipment........................................... $23,055 $26,873
Office equipment and other........................................... 4,092 7,539
Less accumulated depreciation and amortization....................... (9,467) (17,399)
------------------ ------------------
Total............................................................ $17,680 $17,013
================== ==================

Product and package design costs, net, consists of the following:

Product design costs................................................. $10,047 $11,113
Package design costs................................................. 3,612 4,404
Less accumulated amortization........................................ (4,376) (7,901)
------------------ ------------------
Total............................................................ $9,283 $ 7,616
================== ==================

Goodwill and other intangibles, net, consists of the following:

Goodwill............................................................. $9,815 $ 9,453
Patents and other intangibles........................................ 692 818
Less accumulated amortization........................................ (526) (966)
------------------ ------------------
Total............................................................ $9,981 $ 9,305
================== ==================

Accrued expenses and other consists of the following:

Accrued advertising costs............................................ $7,330 $11,544
Accrued royalties.................................................... 180 2,228
Income taxes payable................................................. 4,343 3,495
Deferred income...................................................... 134 315
Other accrued expenses............................................... 10,372 7,449
------------------ ------------------
Total............................................................ $22,359 $25,031
================== ==================

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

4. Related Party Transactions

Interest expense on notes payable to stockholders amounted to
approximately $235,000 for the year ended December 31, 1995 and was added to the
notes.

Marvel provides 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 $306,000, $262,000 and $141,000 for the years ended December 31,
1995, 1996 and 1997, respectively. At December 31, 1996 and 1997, the Company
had a receivable from Marvel of $165,000 and $94,000, respectively.

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, 1995,
1996 and 1997 the Company paid fees and commissions to the affiliate totaling
approximately $970,000, $965,000 and $1,274,000, respectively, relating to such
advertisements.

The Company sold merchandise totaling $1,616,000 and $324,000 to a
subsidiary of Marvel during the years ended December 31, 1995 and 1996,
respectively. Related receivables were $207,000 as of December 31, 1996. These
amounts were subsequently collected.

The Company accrued royalties to Mr. Arad for toys he invented or
designed of $5,734,000, $1,848,000 and $3,624,000 during the years ended
December 31, 1995, 1996 and 1997, respectively. At December 31, 1996 the Company
had a receivable from Mr. Arad for $505,000 related to reimbursement of expenses
which was subsequently collected.

The Company shares office space and certain general and administrative
costs with affiliated entities. Rent received from affiliates for the years
ended December 31, 1995, 1996 and 1997 was $172,000, $109,000 and $116,000 ,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

5. Commitments and Contingencies

Leases: The Company is a party to various noncancellable operating
leases involving office and warehouse space expiring on various dates from
November 18, 1999 through March 31, 2006. The leases are subject to escalations
based on cost of living adjustments and tax allocations. Minimum future
obligations on these leases are as follows:

1998 $ 692,000
1999 703,000
2000 418,000
2001 172,000
2002 172,000
Thereafter 253,000
----------
$2,410,000
==========

Rent expense amounted to approximately $522,000, $788,000 and
$1,220,000 for the years ended December 31, 1995, 1996 and 1997, respectively.

The Company is a party to various royalty agreements with future
guaranteed payments through 2000. Minimum future obligations are as follows:

1998 $2,234,000
1999 1,357,000
2000 150,000
----------
$3,741,000
==========

Legal Matters: On December 28, 1995 G.D.L. Management Incorporated
("GDL") commenced an action against the Company, Mr. Perlmutter and the
Predecessor Company in the Supreme Court of the State of New York, County of New
York. The amended complaint alleged that GDL was entitled to receive ten percent
of the capital stock of the Predecessor Company pursuant to a 1990 agreement
between GDL and Mr. Perlmutter and sought money damages based on the value of
ten percent of the Company's Class A Common Stock beneficially owned by Mr.
Perlmutter and a variety of equitable remedies. The action was settled by Mr.
Perlmutter and GDL without liability to the Company in December 1997.

On June 23, 1997, the Company, Zib Inc., Isaac Perlmutter T.A., Isaac
Perlmutter and Avi Arad commenced adversary proceedings in the United States
Bankruptcy Court for the District of Delaware in the Marvel bankruptcy cases
against Marvel, Marvel Characters, Inc. and one of Marvel's parents, Marvel
Holdings Inc., for a declaration that the Class B Common Stock owned of record
by Characters converted to Class A Common Stock on or before June 20, 1997, and
that the incumbent board of the Company is the Company's duly constituted board
and for an injunction enjoining the Marvel defendants from interfering with the
proper and orderly functioning of the Company's incumbent board of directors.
The District Court held a hearing on the Company's request for summary judgment
in its favor on these claims on March 12, 1998. On March 30, 1998, the District
Court granted the Company's motion for summary judgment and directed the entry
of a judgment declaring that as a result of the June 20, 1997 change of control
of Marvel, the Class B Common Stock owned by Characters converted, as of that
date, into Class A Common Stock.

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On October 30, 1997, Marvel and its subsidiaries filed an action
against the Company, its directors and a number of other defendants in the
United States District Court for the District of Delaware. The complaint against
the Company and its directors alleges that the Company and its directors have
breached their fiduciary duty to Marvel, as a minority stockholder in Toy Biz,
and have otherwise wrongfully acted, in putting forward the reorganization
proposal to combine the Company and Marvel and thereby conclude Marvel's
bankruptcy proceedings and by refusing to recognize Marvel's designees to the
Company's board of directors. The complaint also alleges that the Company's
proposed reorganization plan violates certain provisions of the bankruptcy code
and is therefore invalid. The complaint further alleges that the Company has
breached an agreement with Marvel by failing to contribute any amounts to the
operations of Marvel Studios. Finally, the complaint alleges that the Company
has wrongfully interfered with Marvel's efforts to negotiate with the Marvel
secured lenders for the resolution of the bankruptcy proceedings. On December 8,
1997, the Company and its directors filed a motion to dismiss various claims
asserted against them in this action. That motion has not yet been scheduled for
hearing. The Company believes that the action was not properly commenced and
that the claims against it and the Company's directors are without merit and the
Company intends to defend this action vigorously.

The Company is involved in various other legal proceedings arising in
the normal course of business. The Company believes that the final outcome of
these proceedings will not have a material adverse effect on the Company's
results of operations or financial position.

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

6. Income Taxes

The provision (benefit) for income taxes for the years ended December
31, 1995, 1996 and 1997 is summarized as follows:

[Download Table]

1995 1996 1997
---- ---- ----

Current:

Federal $15,429,000 $ 8,474,000 ($19,196,000)
State 1,923,000 1,943,000 (191,000)
Foreign 1,124,000 2,739,000 523,000
----------- ------------ -------------
$18,476,000 $ 13,156,000 ($18,864,000)

Deferred:

Federal $ 543,000 ($ 1,586,000) $ 1,287,000
State 153,000 ( 446,000) (2,608,000)
----------- ------------ -------------
696,000 ( 2,032,000) (1,321,000)
----------- ------------ -------------

Provision (benefit) for income
taxes $19,172,000 $11,124,000 ($20,185,000)
=========== ============ =============

The differences between statutory Federal income tax rate and the
effective tax rate for the years ended December 31, 1995, 1996 and 1997 are
attributable to the following:

[Download Table]

1995 1996 1997
---- ---- ----

Federal income tax provision computed at the
statutory rate 35.0% 35.0% 35.0%

State taxes, net of Federal income tax effect 5.3% 5.0% 5.7%
---- ---- ----
40.3% 40.0% 40.7%
==== ====== ====

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets at December 31, 1996 and 1997
are as follows:

[Download Table]

1996 1997
---- ----

Allowance for future returns, other sales adjustments
and doubtful accounts and other matters $1,620,000 $ 2,767,000
Inventory valuation 2,861,000 2,447,000
Depreciation 1,762,000 (247,000)
Amortization (70,000) (293,000)
State and local NOL carryforward - 2,820,000
----------- ----------
$6,173,000 $7,494,000
=========== ==========

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At December 31, 1997, the Company has a net operating loss carryforward
of approximately $34.1 million for state and local income tax purposes. Such
carryforward expires in various jurisdictions in years 2003 through 2012. The
1997 provision reflects full benefit for such losses.

7. Credit Facility

The Amended Credit Facility contains various financial covenants, as
well as restrictions, on new indebtedness, prepaying or amending subordinated
debt, acquisitions and similar investments, the sale or transfer of assets,
capital expenditures, limitations on restricted payments, dividends, issuing
guarantees and creating liens. In addition, the Credit Facility also requires
that (a) the current board of directors or successors designated by them remain
in office, (b) the toy license agreement between the Company and Marvel remains
in effect and (c) Messrs. Perlmutter and Arad continue to own at least 50% of
the Common Stock held by them as of February 21, 1998. The Credit Facility is
not guaranteed by Marvel.

Certain indebtedness of Marvel and Marvel's direct and indirect parent
companies impose restrictions that limit the ability of Marvel and its
subsidiaries, including the Company, to incur debt, make restricted payments,
enter into transactions with affiliates and sell or transfer assets.

The interest rate for borrowing as of December 31, 1996 and 1997 was
8.25% and 8.5%, respectively and the weighted average interest rate for 1996 and
1997 was 8.27% and 8.44%, respectively. The maximum amounts outstanding during
1996 and 1997 were $4,000,000 and $12,000,000, respectively. The amount
available under the Credit Facility at December 31, 1997 was $0. The Credit
Facility requires the Company to pay a commitment fee of 3/8 of 1% per annum on
the unused portion. Proceedings in the Marvel bankruptcy have resulted in a
change in control in the Company which, prior to the most recent amendment,
could have caused the Credit Facility to terminate. In addition, the Company did
not reduce its borrowings to zero for a period of 45 consecutive days commencing
during the first six months of 1997 and the Company did not satisfy certain of
the financial covenants that were previously applicable under the Credit
Facility. As a result of these circumstances, on October 21, 1 Bank agreed that
the Company would not seek to borrow additional funds under the Credit Facility
and the banks agreed not to demand immediate repayment of the amounts
outstanding.

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

8. Capital Stock Structure

In addition to Class A and Class B common stock shown on the
accompanying balance sheet, the Company has authorized 25,000,000 shares of
preferred stock, par value $.01.

The Class A Common Stock has ten votes (super-voting rights) for each
share outstanding for most matters brought to a vote of the stockholders; where
as Class A Common Stock has only one vote per share on such matters. In
connection with the Marvel bankruptcy and a related change in control of Marvel,
the Class B Common Stock held by Marvel was automatically converted into equal
number of shares of Class A Common Stock and Marvel's voting power was reduced
from 78.4% to 26.6% for matters brought to a vote of the stockholders. Certain
creditors of Marvel are disputing the automatic conversion of the Class B Common
Stock to Class A Common Stock. See Note 5.

On March 2, 1995, the Company completed an initial public offering (the
"Offering") by issuing 2,750,000 new shares of its Class A Common Stock at
$18.00 per share. The net proceeds of the Offering to the Company ($44,145,000)
were used to repay notes payable to the principal shareholders and to increase
working capital. As part of the Offering, Mr. Arad sold 700,000 shares of Class
A Common Stock owned by him to pay taxes due in connection with the exercise of
a stock option.

On August 13, 1996, the Company completed an additional public offering
by issuing 700,000 new shares of Class A Common Stock at $15.00 per share. As
part of such offering, Marvel Entertainment Group, Inc. ("Marvel"), a principal
stockholder, also sold 2,500,000 shares of Class A Common Stock. The Company
originally intended to use the net proceeds from the sale of the new shares of
Class A Common Stock, of approximately $9.1 million, after deducting fees and
expenses, to fund a portion of its capital commitment to Marvel Studios ("Marvel
Studios"), an entity to be formed with Marvel to facilitate the development of
television programming, feature films and other media and theatrical productions
based on Marvel characters. At this time, the Company has no plans to invest a
material amount of funds in Marvel Studios until the resolution of Marvel's
bankruptcy proceedings. (See Note 5) The nused for working capital and general
corporate purposes.

9. Stock Options

The Company's 1995 Stock Option Plan (the "Plan) provides for the
issuance of Stock Options ("Options") and Stock Appreciation Rights ("SAR's")
for up to 1,350,000 shares of the Company's Class A Common Stock at fair market
value at the time of grant. One-third of the Options become exercisable at the
date of the grant (the "Grant Date"), and the balance of the Options become
exercisable in equal increments on the first and second anniversaries of the
Grant Date. No SAR's have been granted and Options with respect to 670,987
shares are available for future grants.

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
(FAS 123). Accordingly, no compensation expense has been recognized for the
stock option plans. For 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:

1995 1996 1997
---- ---- ----
(in thousands except per share data)

Pro forma net income (loss).............. $25,433 $15,195 ($29,816)
Pro forma net income (loss) per share.... $0.94 $0.55 ($1.08)
================================================================================

The fair value for each option grant 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 from 5.26% to 7.19%; no dividend yield; expected volatility of .354 and
expected lives of three to five years.

The Black Scholes 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, option valuation models require 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 models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

[Enlarge/Download Table]

1996 1997
----------------------------------- -----------------------------------
Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price
------- -------------- ------- --------------

Outstanding at beginning of year............ 995,602 18.183 1,120,885 18.002
Granted..................................... 195,250 17.111 -- --
Exercised................................... 22,664 18.000 3,333 18.000
Forfeited................................... 47,303 18.119 484,666 18.115
Outstanding at end of year.................. 1,120,885 18.002 632,886 17.916
Exercisable at end of year.................. 691,211 18.089 577,295 18.035
Weighted-average fair value of
options granted during the year............. 6.15 --

Exercise prices for options outstanding as of December 31, 1997 ranged from
$15.00 to $22.625.

10. Assets Held for Resale

On March 25, 1997, the Company acquired all of the assets of Colorforms
Inc. The purchase price was approximately $5.0 million, excluding fees and
expenses, consisting of approximately $2.9 million in cash paid at the closing
and the assumption of approximately $2.1 million of accounts payable and accrued
liabilities at the closing date. The Company utilized cash available under its
credit facility to finance the acquisition. The transaction was

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accounted for as a purchase. The results of Colorforms are included in the
Company's consolidated financial statements from the date of acquisition.

During 1997 the Company concluded that Colorforms did not fit the
Company's long-term strategy and the Company decided to dispose of this
operation. On January 30, 1998, the Company sold Colorforms for approximately
$4.35 million, of which $3.0 million was paid in cash with a promissory note
representing the remainder of $1.35 million due in August 1998 through May 1999.
The sales price is subject to adjustment based upon inventory levels. As of
December 31, 1997, assets held for resale are $4,136,000.

11. Quarterly Financial Data (unaudited)

Summarized quarterly financial information for the years ended December 31, 1996
and 1997 is as follows (dollars in thousands, except per share data):

[Enlarge/Download Table]

1996 1997
---------------------------------------------- -------------------------------------------
Quarter Ended March 31 June 30 September December 31 March 31 June 30 September December 31
30 30
---------------------------------------------- -------------------------------------------

Net Sales $38,369 $45,814 $83,437 $54,004 $34,414 $34,452 $40,765 $41,181
Gross Profit 18,636 22,875 42,988 20,670 14,513 12,195 10,245 6,908
Operating income (loss) 5,123 7,472 18,884 (4,264) 765 (8,676) (18,505) (22,872)
Net income (loss) 3,173 4,594 11,417 (2,497) 475 (5,266) (11,219) (13,455)
Net income (loss) per
share $0.12 $0.17 $0.42 ($0.09) $0.02 ($0.19) ($0.41) ($0.48)
Weighted average number
of common and common
equivalent shares out-
standing (in thousands) 27,201 27,134 27,398 27,761 27,756 27,746 27,746 27,746

The income (loss) per common share computation for each quarter and the year are
separate calculations. Accordingly, the sum of the quarterly income (loss) per
common share amounts may not equal the income (loss) per common share for the
year.

The fourth quarter of 1996 and 1997 includes pretax adjustments of $3,250,000
and $7,762,000 related to year end audit adjustments which were not previously
estimable. The Company believes most of these adjustments relate to the Marvel
bankruptcy and concerns among retailers about the future of the Marvel brand.

12. Acquisition

On September 11, 1995, pursuant to an Asset Purchase Agreement dated as
of August 17, 1995, as amended, between the Company and Spectra Star, Inc.
("Spectra Star"), the Company acquired certain assets and assumed certain
liabilities of Spectra Star (the "Acquisition"). Spectra Star is the leading
U.S. manufacturer and marketer of children's and performance kites. They also
manufacture other toy and recreation products, many of which feature popular
children's entertainment characters. The purchase price, including estimated
fees related to the Acquisition, totaled approximately $13.6 million, consisting
of approximately $10.6 million of cash and assumed liabilities and a maximum of
130,303 shares of Series A Preferred Stock (the "Preferred Stock") with a
maximum redemption value of $4.3 million. The Preferred Stock was convertible at
any time after March 10, 1996 at the option of the holders into 130,303 shares
of Class A Common Stock or cash at the then present value of the Preferred
Stock. During the year ended December 31, 1996, 53,030 shares of the Preferred
Stock were redeemed for $1.4 million and during the year ended December 31,
1997, 31,818 shares of the Preferred Stock were redeemed for $939,000. The
balance of the shares of Preferred Stock were retired in connection with the
final settlement of the

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TOY BIZ, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

December 31, 1997

12. Acquisition (Continued)

acquisition of Spectra Star. The Company utilized available cash to finance the
Acquisition and to redeem the Preferred Stock. The Acquisition was accounted for
using the purchase method of accounting.

13. Combination with Marvel

Due to the significance of the Marvel license on the Company's overall
boys' toys business and the negative impact that Marvel's bankruptcy has had on
such business during 1997, the Company had participated in discussions
concerning a number of proposed plans of reorganization that would have resulted
in a combination of the Company and various segments of Marvel's business and
that would have facilitated a resolution of Marvel's bankruptcy proceedings. In
connection with these proposals, the Company participated in discussions with
various parties interested in the bankruptcy proceedings including Marvel, the
largest holders of the Marvel Holding Companies bonds and Marvel's senior
secured creditors. None of these discussions resulted in definitive agreements
not subject to due diligence, board approval or other contingencies which failed
to occur.

On October 8, 1997, the Company and certain creditors of Marvel
announced a further proposal for the combination of the Company and Marvel (the
"Combined Company"). In connection with the Joint Plan of Reorganization
proposing the combination of the Company and Marvel (as since amended, the
"Plan"), the Company stockholders, other than Marvel Characters, Inc., currently
would receive approximately 41% of the common stock of the Combined Company
(assuming the conversion of all preferred stock but not assuming any exercise of
warrants) and the senior secured creditors of Marvel would receive a combination
of cash and common and preferred securities issued by the Combined Company which
(under the same assumptions) would represent approximately 40% of the common
stock of the Combined Company. An investor group, in which Mr. Perlmutter is
expected to be a participant, would purchase securities that (under the same
assumptions) would represent approximately 19% of the common stock of the
Combined Company. The Plan is being proposed by in excess of two-thirds in
amount of Marvel's senior secured lenders and is supported by the Official
Committee of the Unsecured Creditors of Marvel. Consummation of the Plan is
subject to a number of conditions including approval of the Company's
stockholders and the District Court. A hearing has been ordered by the District
Court for May 4, 1998, to consider a motion by the Company to confirm the Plan.
The Company currently anticipates that a meeting of the stockholders of the
Company will be held in the second quarter of 1998 for the purpose of
considering and voting upon approval of the Plan.

In connection with any such meeting, the Company will distribute
separate proxy materials describing the transactions contemplated by the Plan
and the other circumstances in connection therewith. As part of the agreements
setting forth the terms of the Plan, Messrs. Perlmutter and Arad have agreed to
vote all shares of Common Stock owned by them in favor of the Plan.

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TOY BIZ, INC.

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

[Enlarge/Download Table]

Balance Charged to Sales Charged to Balance
at Beginning or Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- ------------ ----------------- --------- ---------- ---------

Year Ended December 31, 1995,
Allowances included in Accounts
Receivable, Net:

Doubtful accounts $ 516,000 $ 443,000 (1) -- $ 443,000 $ 516,000

Advertising, markdowns, 9,753,000 21,682,000 (2) -- 20,680,000 10,755,000
returns, volume discounts,
and other

Year Ended December 31, 1996,
Allowances included in Accounts
Receivable, Net:

Doubtful accounts 516,000 -- (1) -- 31,000 485,000

Advertising, markdowns, 10,755,000 39,317,000 (2) -- 35,216,000 14,856,000
returns, volume discounts,
and other

Year Ended December 31, 1997,
Allowances included in Accounts
Receivable, Net:

Doubtful accounts 485,000 -- -- 55,000 430,000

Advertising, markdowns, 14,856,000 55,746,000 (2) -- 41,215,000 29,387,000
returns, volume discounts,
and other

----------
(1) Charged to costs and expenses.

(2) Charged to sales.

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10-K Filing	Date	First	Last	Other Filings

	1/1/93	17
	3/1/93	37
	3/18/93	4
	4/30/93	17	48
	7/29/93	37
	12/3/93	36
	12/31/93	17
	3/1/94	37
	5/26/94	36
	7/1/94	37
	12/1/94	37
	12/31/94	17	46
	2/22/95	37
	3/2/95	36	59
	3/31/95	36	37
	4/1/95	38
	4/5/95	37
	6/30/95	37
	8/17/95	36	61
	8/29/95	37
	9/11/95	38	61
	9/26/95	36	38
	12/28/95	15	55
	12/31/95	17	63
	3/10/96	61
	8/13/96	59
	12/19/96	37
	12/27/96	5		8-K
	12/31/96	17	63	10-K405, NT 10-K, SC 13D/A
	3/25/97	60
	6/20/97	5	55
	6/23/97	5	55
	9/1/97	25
	10/7/97	5	13
	10/8/97	13	62
	10/16/97	35		8-K, SC 13D
	10/21/97	20	58
	10/30/97	5	56
	11/19/97	33	39
	11/24/97	35	39	8-K
	12/8/97	5	56
For The Period Ended	12/31/97	1	63
	1/30/98	21	61
	2/21/98	21	58
	3/9/98	43
	3/12/98	15	55
	3/23/98	41
	3/24/98	40
	3/25/98	1	58
	3/30/98	6	55
Filed On / Filed As Of	3/31/98	40	41	10-Q
	5/4/98	13	62
	6/1/98	14
	6/10/98	14
	7/14/98	14
	7/25/98	14
	9/21/98	34
	11/20/98	14
	11/18/99	55
	12/31/99	10	28	10-K
	3/31/06	55		10-Q

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Marvel Entertainment/Inc · 10-K · For 12/31/97

Filed On 3/31/98 · SEC File 1-13638 · Accession Number 940180-98-359

﻿Annual Report — Form 10-KFiling Table of Contents

﻿10-K — Annual ReportDocument Table of Contents

Dates Referenced Herein and Documents Incorporated By Reference

Annual Report — Form 10-K
Filing Table of Contents

10-K — Annual Report
Document Table of Contents