Rule 424(b)(4)
                                                              File No. 333-07455

PROSPECTUS
 
                                3,200,000 SHARES
                                 TOY BIZ, INC.
        [Logo]
                              CLASS A COMMON STOCK
                            ------------------------
 
OF THE 3,200,000 SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE, OF
TOY BIZ, INC. BEING OFFERED HEREBY, 2,560,000 SHARES ARE
  BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
  UNDERWRITERS AND 640,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE
    UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
    'UNDERWRITERS.' OF THE 3,200,000 SHARES OF CLASS A COMMON STOCK BEING
     OFFERED HEREBY, 700,000 SHARES ARE BEING SOLD BY THE COMPANY AND
     2,500,000 SHARES ARE BEING SOLD BY MARVEL (AS DEFINED HEREIN), A
       SELLING STOCKHOLDER. SEE 'PRINCIPAL AND SELLING STOCKHOLDERS.' THE
       COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS  FROM THE SALE OF 
                         THE SHARES BEING SOLD BY MARVEL.
 
THE CLASS A COMMON STOCK ENTITLES ITS HOLDERS TO ONE VOTE PER SHARE, AND THE
CLASS B COMMON STOCK GENERALLY HAS TEN VOTES PER SHARE. IMMEDIATELY AFTER THIS
  OFFERING, THE CLASS B COMMON STOCK AND THE CLASS A COMMON STOCK BENEFICIALLY
  OWNED BY THE PRINCIPAL STOCKHOLDERS WILL REPRESENT APPROXIMATELY 93% OF
    THE COMBINED VOTING POWER (ASSUMING THE U.S. UNDERWRITERS'
    OVER-ALLOTMENT OPTION IS NOT EXERCISED) WITH RESPECT TO 
     SUBSTANTIALLY ALL MATTERS SUBMITTED FOR THE VOTE OF ALL STOCKHOLDERS.
 
THE CLASS A COMMON STOCK IS TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE
SYMBOL 'TBZ.' ON AUGUST 7, 1996, THE REPORTED LAST SALE PRICE OF THE CLASS A 
COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $15 5/8 PER SHARE.
 
                            ------------------------
 
         SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION
              THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
 
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
          COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. 
             ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
                            ------------------------
 
                               PRICE $15 A SHARE
 
                            ------------------------

 



                                                                   UNDERWRITING                            PROCEEDS TO
                                                 PRICE TO         DISCOUNTS AND        PROCEEDS TO           SELLING
                                                  PUBLIC          COMMISSIONS(1)        COMPANY(2)         STOCKHOLDERS
                                            ------------------  ------------------  ------------------  ------------------
                                                                                            
Per Share.................................        $15.00               $.71               $14.29              $14.29
Total(3)..................................     $48,000,000          $2,272,000         $10,003,000         $35,725,000


 
- ------------
     (1) The Company and the Selling Stockholders have agreed to indemnify the
         Underwriters against certain liabilities, including liabilities under
         the Securities Act of 1933, as amended.
     (2) Before deduction of expenses payable by the Company estimated at
         $900,000.
     (3) Isaac Perlmutter and Avi Arad, each a Selling Stockholder, have granted
         the U.S. Underwriters an option, exercisable within 30 days of the date
         hereof, to purchase up to an aggregate of 480,000 additional Shares,
         consisting of up to 384,000 Shares as to Mr. Perlmutter and 96,000
         Shares as to Mr. Arad, at the price to public less underwriting
         discounts and commissions for the purpose of covering over-allotments,
         if any. If the U.S. Underwriters exercise such option in full, the
         total price to public, underwriting discounts and commissions, proceeds
         to Company and proceeds to Selling Stockholders will be $55,200,000,
         $2,612,800, $10,003,000 and $42,584,200, respectively. See
         'Underwriters.'
 
                            ------------------------
 
    The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Kramer, Levin, Naftalis & Frankel, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about August 13, 1996 at
the office of Morgan Stanley & Co. Incorporated, New York, N. Y., against
payment therefor in immediately available funds.
 
                            ------------------------
MORGAN STANLEY & CO.
       INCORPORATED
                  CS FIRST BOSTON
                               SMITH BARNEY INC.
                                                       JEFFERIES & COMPANY, INC.
 
August 7, 1996



                                    [PHOTOS]
 
     IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
 
     DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE
ACCOUNTS OF OTHERS IN THE CLASS A COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10B-6, 10B-7, AND 10B-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.
                            ------------------------
 
     The Toy Biz logo and name are trademarks of the Company. Baby Loves to
Talk(Registered), Pretty and Me(Registered) and Jumpsie(Registered) are
registered trademarks of the Company. Baby Tumbles Surprise(Trademark), Baby So
Real(Trademark), Wild & Wacky Painter(Trademark), Pooch, the Good
Puppy(Trademark), Pretty Sparkle Dancer(Trademark), Battle Builders(Trademark),
Take Care of Me Twins(Trademark) and Caboodles(Trademark) are trademarks of the
Company. Marvel Super Heroes(Trademark), Marvel Super-Villains(Trademark),
X-Men(Registered), X-Force(Trademark), Generation X(Trademark),
Wolverine(Registered), Nightcrawler(Trademark), Colossus(Trademark),
Storm(Trademark), Cyclops(Trademark), Bishop(Registered), Gambit(Trademark),
Spider-Man(Registered), Captain America(Registered), Fantastic Four(Trademark),
Mr. Fantastic(Trademark), The Human Torch(Trademark), Invisible
Woman(Trademark), The Thing(Trademark), The Incredible Hulk(Registered),
Thor(Trademark), The Silver Surfer(Trademark), Daredevil(Trademark), Iron
Man(Registered), The Punisher(Registered), Dr. Strange(Trademark), Ghost
Rider(Trademark), Hero Caps(Registered) and Cable(Trademark) are trademarks of
Marvel Characters, Inc. and are used with permission. Bots Master(Registered) is
a registered trademark of Creativite et Developpement, a French movie and
television program producer ('C&D'). Gerber(Registered) is a registered
trademark of Gerber Products Company ('Gerber'). Coleman(Registered) is a
registered trademark of The Coleman Company, Inc. ('Coleman'). Space
Strikers(Trademark) is a registered trademark of Saban Entertainment, Inc.
('Saban'). Hercules: The Legendary Journeys(Trademark) and Xena: Warrior
Princess(Trademark) are trademarks of MCA Television Ltd., used under license by
MCA/Universal Merchandising, Inc. ('MCA/Universal'), and Flipper(Trademark)
((Copyright)Flipper) is a trademark and copyright of The Flipper Group. Disney's
The Hunchback of Notre Dame ((Copyright)Disney), Disney's Toy Story
((Copyright)Disney) and Disney's 101 Dalmatians ((Copyright)Disney), are
copyrights of The Walt Disney Company ('Disney'), and Sky Dancers(Registered)
and Dragonflyz(Trademark) are trademarks of Abrams Gentile Entertainment, Inc.
Batman(Registered) and Looney Tunes(Registered) are registered trademarks of
Warner Bros. Apple(Registered) and the Apple logo are registered trademarks of
Apple Computer, Inc. ('Apple'), registered in the United States and other
countries. Muppets Tonight(Trademark), Muppet Babies(Trademark) and Muppet
Treasure Island(Trademark) are trademarks of Jim Henson Productions, Inc.
('Henson'). NASCAR(Registered) is a registered trademark of the National
Association for Stock Car Auto Racing, Inc. ('NASCAR'). Revlon(Registered) is a
registered trademark of Revlon Consumer Products Corporation. Sony
Wonder(Registered) is a registered trademark of Sony Wonder, a division of Sony

Music Entertainment, Inc. All other trademarks appearing in this Prospectus are
the property of their respective holders.



     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN OR INCORPORATED
BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN
THE SHARES OF CLASS A COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF
OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
 
                            ------------------------
 
     For investors outside the United States: No action has been or will be
taken in any jurisdiction by the Company, any Selling Stockholder or any
Underwriter that would permit a public offering of the Class A Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company, the Selling
Stockholders and the Underwriters to inform themselves about and to observe any
restrictions as to the offering of the Class A Common Stock and the distribution
of this Prospectus.
 
     In this Prospectus references to 'dollars' and '$' are to United States
dollars, and the terms 'United States' and 'U.S.' mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
 
                            ------------------------
 
                               TABLE OF CONTENTS



                                                  PAGE
                                                  ----
                                               
Prospectus Summary.............................      4
Risk Factors...................................      9
Use of Proceeds................................     16
Price Range of Class A Common Stock............     16
Dividend Policy................................     16
Capitalization.................................     17
Selected Financial Information.................     18
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...................................     20
Business.......................................     30

Management.....................................     45
Principal and Selling Stockholders.............     48
 

                                                  PAGE
                                                  ----
                                               
Certain Transactions...........................     50
Description of Capital Stock...................     56
Shares Eligible for Future Sale................     59
Certain Federal Income Tax Consequences to
  Non-United States Holders....................     61
Underwriters...................................     63
Legal Matters..................................     66
Experts........................................     66
Additional Information.........................     66
Incorporation of Certain Information by
  Reference....................................     67
Index to Financial Statements and Financial
  Statement Schedule...........................    F-1


 
                            ------------------------
 
             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 new 'safe
harbor' for certain forward-looking statements. The factors discussed under
'Risk Factors,' among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in 'Business' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations,' filings by the
Company with the Securities and Exchange Commission (the 'Commission'), in the
Company's press releases and in oral statements made by authorized officers of
the Company. When used in this Prospectus, the words 'estimate,' 'project,'
'anticipate,' 'expect,' 'intend,' 'believe,' and similar expressions are
intended to identify forward-looking statements.
 
                                       3


                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the related notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the U.S. Underwriters' over-allotment option. See 'Underwriters.'
Unless the context otherwise requires, all references in this Prospectus to the
Company include the Company, its subsidiary and their respective predecessors,
and all references to Marvel mean Marvel Entertainment Group, Inc., a Delaware
corporation, and its subsidiaries other than the Company. The Class A Common
Stock, par value $.01 per share, of the Company (the 'Class A Common Stock') and
the Class B Common Stock, par value $.01 per share, of the Company (the 'Class B

Common Stock') are herein collectively referred to as the 'Common Stock.'
References to the 'Offering' shall refer to the offering of the Class A Common
Stock in the United States and Canada by the U.S. Underwriters and outside the
United States and Canada by the International Underwriters. References to the
'Selling Stockholders' refer to Marvel and Messrs. Perlmutter and Arad.
 
                                  THE COMPANY
 
     Toy Biz, Inc. (the 'Company') designs, markets and distributes a variety of
toys in the United States and internationally under various licenses, including
an exclusive, perpetual and royalty-free license, subject to certain limitations
(the 'Marvel License'), from Marvel, the Company's largest stockholder. The
Company also designs, markets and distributes its own line of proprietary toys.
The Company believes that the experience and creativity of its senior management
in the development and marketing of its toys afford it the ability to attract
significant licenses of popular characters and trademarks as well as prominent
inventors for the development of new licensed and proprietary toys. The Company
had net sales, operating income and net income per share of approximately $196.4
million, $47.0 million and $1.05, respectively, in 1995, reflecting significant
growth from the Company's 1991 net sales and operating income of approximately
$45.1 million and $177,000, respectively.
 
     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 believes that media events associated with Marvel Characters and other
characters on which the Company bases its toys increase overall consumer
awareness and popularity of these characters. The Company seeks to capitalize on
the popularity generated by media exposure of certain Marvel Characters, such as
Spider-Man(Registered) and X-Men(Registered), by emphasizing those characters in
its toy lines. The Spider-Man(Registered) and X-Men(Registered) Marvel
Characters are currently featured in weekly half-hour animated television
programs which have consistently been among the highest rated Saturday morning
children's programs since they began to be regularly broadcast in February 1995
and October 1992, respectively. The Spider-Man(Registered) program is also
featured in major television markets around the world. The Fantastic
Four(Trademark) and Iron Man(Registered) groups of Marvel Characters are
featured on the Marvel Action Universe, weekly, syndicated animated television
programming currently carried in over 90% of the television markets in the
United States. Avi Arad ('Mr. Arad'), one of the principal stockholders and a
Director of the Company, is the executive producer of each of these programs.
Marvel Characters are also regularly depicted in Marvel comic books.
 
     To enhance further the media exposure of the Marvel Characters, the Company
and Marvel intend to form Marvel Studios ('Marvel Studios'). The objective of
Marvel Studios is to facilitate the release of live action and animated feature
films and television programming based on the Marvel Characters in order to
create greater consumer interest in these characters and related merchandise,
including toys. The Company believes that the advertising and promotion of
feature films, as well as any films or television programming based on the
Marvel Characters, will create consumer interest in the Marvel Characters and
could create revenue opportunities for the Company by helping to generate sales
from action figures, other children's toys and other products for which the
Company holds the rights under the Marvel License. The Company intends to
invest, from time to time, up to $50 million in the aggregate in preferred

equity interests of Marvel Studios (the 'Preferred Equity Interests').  Marvel
has advised the Company that it intends to invest, from time to time, up to $50
million in the aggregate in common equity interests of Marvel Studios (the
'Common Equity Interests') funded in part with the net proceeds from the sale of
its shares of Class A Common Stock in the Offering. See 'Risk Factors--Risks
Related to Marvel Studios,' 'Use of Proceeds,' 'Business--Marvel Studios,'
'Principal and Selling Stockholders' and 'Certain Transactions--Marvel Studios.'
 
     In addition to the Marvel Characters, the Company sells toys using
well-recognized consumer brand names and popular non-Marvel Characters, the
latter including characters depicted in network, syndicated or cable 
television programs such as Hercules: The Legendary Journeys(Trademark), Xena:
Warrior Princess(Trademark), Flipper(Trademark), Muppets
 
                                       4


Tonight(Trademark) and Muppet Babies(Trademark). The Company has also obtained 
licenses to produce certain products for a number of motion pictures, including
widely-distributed, first-run feature films such as Flipper(Trademark), 
licensed by MCA/Universal, and Muppet Treasure Island(Trademark), licensed by 
Henson, for which the Company has produced mainly plush items. These motion 
pictures also include a made-for-television movie entitled Generation 
X(Trademark), which premiered in prime time on the Fox Network, for which the 
Company has manufactured and distributed mainly action figures. The Company 
has obtained licenses to produce certain products for other motion pictures 
released or planned for release by Disney and MCA/Universal Studios.
 
     The Company's toys are also designed, marketed and distributed under
well-known consumer brand names, including children's dolls and infant and
toddler teaching toys under the Gerber(Registered) trademark, a range of
tabletop pinball games licensed by Disney, electronic learning toys planned
under the Apple(Registered) trademark, a line of children's toys with a camping
and outdoor theme planned under the Coleman(Registered) trademark, and radio,
remote-controlled and motorized vehicles, as well as action figures and
interactive CD-ROM products, planned under a licensing agreement with NASCAR and
various well-known race car drivers. In addition to products designed and
produced under licenses from others, the Company also designs, produces and
distributes a line of proprietary children's toys, including Baby Tumbles
Surprise(Trademark), Baby So Real(Trademark), Wild and Wacky Painter(Trademark)
and Battle Builders(Trademark). Baby Tumbles Surprise(Trademark) was the leading
promotional doll in the United States, as measured in unit sales, in 1995.
 
     To broaden and expand further its merchandise lines and license agreements,
the Company acquired the assets of two toy-related businesses, Spectra Star,
Inc. ('Spectra Star') and Quest Aerospace Education, Inc. ('Quest'), in the
second half of 1995. Spectra Star produces kites and other products including
yo-yo's, flying discs, nap mats and kite accessories marketed under the Spectra
Star(Registered) brand name. Many of these products are sold under character
licenses, including Disney's The Hunchback of Notre Dame ((Copyright)Disney),
Disney's Toy Story ((Copyright)Disney), Disney's 101 Dalmatians
((Copyright)Disney), Sky Dancers(Registered), Dragonflyz(Trademark) and Warner
Bros.' Batman(Registered) and Looney Tunes(Registered). With the acquisition of
Spectra Star, the Company believes that it has a substantial share of the United
States kite market. Quest produces small model rockets and thereby further

augments the Company's activity toy category.
 
GROWTH STRATEGY
 
     The Company has achieved significant growth since 1991. The Company's net
sales more than quadrupled, growing from approximately $45.1 million in 1991 to
approximately $196.4 million in 1995. The Company's net sales growth has been
driven principally by growth in sales of the Company's action figure toys based
on the Marvel Characters and, more recently, by sales of the Company's
proprietary dolls and activity toys. The Company's growth strategy is to:
 
     o Continue to build on the popularity of the Marvel Characters by utilizing
       additional Marvel Characters and by expanding into new product lines in
       order to capitalize on portrayals of the Marvel Characters on television
       and in movies, comic books and other media. The Company believes that
       feature films and television programming developed by Marvel Studios will
       create additional consumer interest in the Marvel Characters and could
       create opportunities to design and market toys based on the Marvel
       Characters in these projects.
 
     o Expand its licensed product lines by targeting and obtaining licenses
       from third parties, with an emphasis on well-known consumer brand names,
       such as Gerber(Registered), Apple(Registered), Sony Wonder(Registered)
       and NASCAR(Registered), and popular characters appearing in film and
       television programs, such as the Muppets(Trademark), Flipper(Trademark),
       Hercules: The Legendary Journeys(Trademark) and Disney's The Hunchback of
       Notre Dame ((Copyright) Disney).
 
     o Diversify its proprietary product lines through the development of
       products, such as Baby Tumbles Surprise(Trademark), by the Company's
       in-house creative and technical staff and the engagement of independent
       toy inventors.
 
     o Broaden international distribution of existing and future product lines
       through the development of strategic relationships with independent
       distributors in key markets.
 
     o Pursue potential acquisitions of other toy businesses or product lines
       which are consistent with the Company's growth strategy, such as Spectra
       Star and Quest.
 

                                   BACKGROUND
 
     The Company was incorporated in Delaware on March 18, 1993 by Marvel, Isaac
Perlmutter ('Mr. Perlmutter') and Mr. Arad (together with Marvel and Mr.
Perlmutter, the 'Principal Stockholders'), as successor to Toy Biz, Inc., a
Delaware corporation incorporated in 1990 and subsequently renamed Zib Inc.
('Zib'), and its foreign sales affiliate, Toy Biz International Ltd., a Hong
Kong corporation (collectively, the 'Predecessor Company'). On March 2, 1995,
the Company completed an initial public offering (the 'IPO') of 2,750,000 shares
of Class A Common Stock. The Company's principal executive offices are located
at 333 East 38th Street, New York, New York 10016, and its telephone number is
(212) 682-4700.


 
                                  THE OFFERING
 


                                         
Class A Common Stock offered:
  Class A Common Stock offered by the
    Company...............................     700,000 Shares
  Class A Common Stock offered by
    Marvel................................   2,500,000 Shares
                                            ----------
    Total Class A Common Stock Offered....   3,200,000 Shares
    ==========
  U.S. Offering...........................   2,560,000 Shares
  International Offering..................     640,000 Shares
Common Stock to be outstanding after the
  Offering(1).............................  20,337,862 Shares of Class A Common Stock
                                             7,394,000 Shares of Class B Common Stock
                                            ----------
                                            27,731,862 Shares of Common Stock
     ==========


 
- ------------------
(1) Based on the number of shares outstanding as of June 15, 1996. Excludes an
    aggregate of 1,318,138 shares of Class A Common Stock reserved for issuance
    under the Company's 1995 Stock Option Plan (the 'Stock Option Plan') as of
    June 15, 1996, including 1,050,150 shares as to which options were then
    outstanding, of which 650,900 were exercisable on such date. Excludes 59,091
    shares of Class A Common Stock issuable upon the conversion of outstanding
    shares of Series A Preferred Stock. See 'Management's Discussion and
    Analysis of Financial Condition and Results of Operations--Liquidity and
    Capital Resources' and 'Description of Capital Stock.'
 


                                         
Use of proceeds to the Company............  The net proceeds to the Company from the issuance and sale of the
                                            700,000 shares of Class A Common Stock offered hereby by the Company
                                            (after deduction of the underwriting discount and estimated offering
                                            expenses) are estimated to be approximately $9.1 million. The Company
                                            intends to use the net proceeds to fund a portion of its $50 million
                                            capital commitment to Marvel Studios by purchasing, from time to
                                            time, Preferred Equity Interests of Marvel Studios. Pending such use,
                                            the net proceeds will be used for working capital and general
                                            corporate purposes. See 'Use of Proceeds,' 'Business--Marvel Studios'
                                            and 'Certain Transactions--Marvel Studios.' The Company will not
                                            receive any of the proceeds from the sale of the shares by the
                                            Selling Stockholders.

Voting rights.............................  The Class A Common Stock and the Class B Common Stock vote as a
                                            single class with respect to all matters submitted to a vote of
                                            stockholders, with each share of Class A Common Stock entitled to one
                                            vote and each share of Class B Common Stock entitled to ten votes.
                                            All of the Class B Common Stock is beneficially owned by Marvel. Two

                                            shares of Class B Common Stock are owned of record by voting trusts
                                            (the 'Class B Voting Trusts'), of which Mr. Perlmutter and Mr. Arad
                                            are the trustees and Marvel is the sole beneficiary. Immediately
                                            after the Offering, Marvel will have approximately 78% of the
                                            combined voting power of the Common Stock. Except with respect to
                                            voting, each class of Common Stock has identical rights. For a
                                            description of certain consent rights of holders of Class B Common
                                            Stock, see 'Certain Transactions--Stockholders' Agreement and Class B
                                            Voting Trusts' and 'Description of Capital Stock.'

New York Stock Exchange ('NYSE') symbol...  'TBZ'


 
                                  RISK FACTORS
 
    SEE 'RISK FACTORS' FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN EVALUATING AN INVESTMENT IN THE CLASS A COMMON STOCK.
 
                                       6



                    SUMMARY HISTORICAL FINANCIAL INFORMATION
 
     The following tables present summary historical combined or consolidated
financial data for the business of the Company and the Predecessor Company (see
Notes (1) and (2) below) for the three year period ended December 31, 1995,
which were derived from the audited financial statements of the Company's
business, and the three month periods ended March 31, 1995 and 1996, which were
derived from the unaudited financial statements of the Company which, in the
opinion of management of the Company, have been prepared on the same basis as
the audited combined or consolidated financial statements and include all
adjustments (consisting of normal and recurring adjustments and accruals)
necessary for a fair presentation of such information. Results for the three
months ended March 31, 1996 are not necessarily indicative of results for any
interim period or the entire year.
 
     The information in these tables is qualified by and should be read in
conjunction with the 'Selected Financial Information,' 'Management's Discussion
and Analysis of Financial Condition and Results of Operations' and the financial
statements of the Company and the Predecessor Company and notes thereto included
elsewhere in this Prospectus.
 
     For certain recent quarterly results of the Company, see 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Quarterly Results.'



                                                       YEAR ENDED DECEMBER 31,       THREE MONTHS ENDED MARCH 31,
                                                    -----------------------------    ----------------------------
                                                     1993       1994       1995                  1995
                                                    -------   --------   --------    ----------------------------
                                                              (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                                                         
STATEMENT OF OPERATIONS DATA:(1)(2)

Net sales.........................................  $89,744   $156,525   $196,395              $ 27,888
Cost of sales.....................................   41,990     73,490     88,397                13,398
                                                    -------   --------   --------            ----------
Gross profit......................................   47,754     83,035    107,998                14,490
Selling, general and administrative
  expenses(3)(4)(5)...............................   28,093     38,263     48,234                 7,717
Depreciation and amortization.....................    4,097      8,609     12,750                 1,695
Compensatory stock option(6)......................   10,909      4,091         --                    --
                                                    -------   --------   --------            ----------
Operating income..................................    4,655     32,072     47,014                 5,078
Interest expense..................................   (1,197)    (1,862)      (490)                 (413)
Other income, net.................................      559         65      1,050                   180
                                                    -------   --------   --------            ----------
Income before income taxes........................    4,017     30,275     47,574                 4,845
Income tax expense (pro forma in 1993)(7).........   (1,639)   (12,261)   (19,172)               (1,986)
                                                    -------   --------   --------            ----------
Net income........................................  $ 2,378   $ 18,014   $ 28,402              $  2,859
                                                    -------   --------   --------            ----------
                                                    -------   --------   --------            ----------
Net income per share(7)...........................  $   .09   $    .67   $   1.05              $    .11
Weighted average number of common and common
  equivalent shares outstanding (assumes
  27,000,000 shares outstanding for periods prior
  to 1995)........................................   27,000     27,000     27,115                27,000
 

 
                                                                1996
                                                    ----------------------------
 
                                                 
STATEMENT OF OPERATIONS DATA:(1)(2)
Net sales.........................................            $ 38,369
Cost of sales.....................................              19,733
                                                            ----------
Gross profit......................................              18,636
Selling, general and administrative
  expenses(3)(4)(5)...............................              11,369
Depreciation and amortization.....................               2,144
Compensatory stock option(6)......................                  --
                                                            ----------
Operating income..................................               5,123
Interest expense..................................                 (28)
Other income, net.................................                 194
                                                            ----------
Income before income taxes........................               5,289
Income tax expense (pro forma in 1993)(7).........              (2,116)
                                                            ----------
Net income........................................            $  3,173
                                                            ----------
                                                            ----------
Net income per share(7)...........................            $    .12
Weighted average number of common and common
  equivalent shares outstanding (assumes

  27,000,000 shares outstanding for periods prior
  to 1995)........................................              27,201


 



                                                                                               MARCH 31, 1996
                                                                                         --------------------------
                                                                                          ACTUAL     AS ADJUSTED(8)
                                                                                         --------    --------------
                                                                                               (IN THOUSANDS)
                                                                                               
BALANCE SHEET DATA:
Working capital.......................................................................   $ 84,007       $ 84,007
Total assets..........................................................................    133,763        142,866
Total debt............................................................................         --             --
Redeemable preferred stock(9).........................................................      1,611          1,611
Stockholders' equity..................................................................    114,637        123,740


 
                                                        (Footnotes on next page)
 
                                       7


(Footnotes from previous page)
- ------------------
(1) The combined statement of operations data for the year ended December 31,
    1993 includes the combined results for the four month period ended April 30,
    1993 of the business of the Predecessor Company, which was then wholly owned
    by Mr. Perlmutter and Toy Biz International Ltd., a Hong Kong company
    indirectly controlled by the Predecessor Company. The statement of
    operations data for the other periods represent the consolidated results of
    the Company. There was no change in the carrying value of the Company's
    assets as a result of the April 30, 1993 transaction (see Note 1 of notes to
    audited financial statements).
 
(2) The year ended December 31, 1993 includes thirteen months of results of Toy
    Biz International Ltd. as a result of changing Toy Biz International Ltd.'s
    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) During the four month period ended April 30, 1993, the Predecessor Company
    incurred approximately $259,000, in fees and commissions to an affiliate of
    Mr. Perlmutter as compensation for its assistance in establishing
    relationships with customers of the Predecessor Company. No such fees and
    commissions were incurred after April 30, 1993.
 
(4) During the four month period ended April 30, 1993, the Predecessor Company
    incurred royalties to Marvel of approximately $970,000, under a license for
    Marvel Characters. No such royalties were incurred after April 30, 1993.
    During the eight month period ended December 31, 1993 and the years ended
    December 31, 1994 and 1995, the Company reimbursed Marvel for services
    provided by Marvel or purchased from third-party providers for the Company

    of approximately $875,000, $498,000 and $306,000, respectively.
 
(5) The results for the combined year ended December 31, 1993 include
    approximately $2,000,000 of bonuses paid by the Predecessor Company to
    employees in connection with the formation of the Company.
 
(6) Represents non-cash compensation expense associated with the vesting and
    exercise of a compensatory stock option granted to Mr. Arad in connection
    with the formation of the Company.
 
(7) For the taxable periods from January 18, 1990 until April 30, 1993, the
    Predecessor Company was subject to taxation under Subchapter S of the
    Internal Revenue Code of 1986, as amended (the 'Code'). 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 these tax purposes. Provision for income taxes for a
    portion of 1993 reflects income tax expense (at an assumed effective
    combined tax rate of approximately 40%) on a pro forma basis as if the
    Predecessor Company had not been an S corporation.
 
(8) Adjusted to reflect the sale of the 700,000 shares of Class A Common Stock
    offered by the Company hereby and the application of proceeds therefrom
    (after deducting underwriting discounts and commissions and estimated
    offering expenses). Total assets as adjusted reflect application of the
    estimated net proceeds from the Offering to fund a portion of the Company's
    $50 million capital commitment to Marvel Studios by purchasing, from time to
    time, Preferred Equity Interests of Marvel Studios. Pending such use, the
    net proceeds will be used for working capital and general corporate
    purposes. Working capital as adjusted does not reflect application of any
    net proceeds from the Offering. See 'Use of Proceeds.'
 
(9) Reflects 59,091 shares of redeemable convertible Series A preferred stock,
    $.01 par value, of the Company (the 'Series A Preferred Stock') of which
    27,273 shares are held in escrow to secure indemnification obligations to
    the Company by the seller of the Spectra Star business. See 'Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations--Liquidity and Capital Resources.'
 
                                       8


                                  RISK FACTORS
 
     Prospective investors should consider carefully the following factors, in
addition to the other information contained in this Prospectus, before
purchasing the shares of Class A Common Stock offered hereby.
 
RELIANCE ON THE MARVEL LICENSE AND OTHER LICENSE AGREEMENTS
 
     The Company markets many of its products under character licenses from
others. Approximately 56% and 34% of the Company's U.S. net sales* in 1995 and
the three months ended March 31, 1996, respectively, were derived from the sale
of products based on Marvel Characters, and approximately 13% and 20% of the
Company's U.S. net sales in 1995 and the three months ended March 31, 1996,
respectively, were derived from the sale of products marketed under other

licenses. See 'Business--Licensing and Related Rights--Marvel License
Agreement.' In addition, a substantial portion of the Company's international
sales are of products based on Marvel Characters. A loss of the Marvel License
would have a material adverse effect on the Company.
 
     Although the Marvel License includes more than 3,500 Marvel Characters, a
key source of revenues for the Company since 1992 has been sales of Marvel's
X-Men(Registered) and, since late 1994, Spider-Man(Registered) action figures.
Sales of toys based on the X-Men(Registered) and Spider-Man(Registered) groups
of characters accounted for approximately 21% and 17%, respectively, of the
Company's U.S. net sales in 1995. There can be no assurance that, as existing
Marvel Character based toys mature, the Company will be able to develop new toys
whose sales levels will match or exceed the sales levels of such existing Marvel
Character based toys. See '--Changing Consumer Preferences.'
 
     The Company expects that Marvel will continue to consider various
opportunities involving the commercial exploitation of the Marvel Characters. If
such opportunities relate to the manufacture and distribution of products other
than any of the categories of toys and toy related products covered by the
Marvel License, Marvel is free to pursue such opportunities directly or with
others. There can be no assurance that Marvel will offer any such business
opportunities to the Company or that such opportunities will be offered on terms
acceptable to the Company. See 'Business--Products' and '--Licensing and Related
Rights--Other License Agreements' and 'Certain Transactions--Marvel Studios.'
 
     If Avi Arad & Associates ceases to be involved in the product development
and marketing of the licensed products, Gerber may terminate its license
agreement with the Company (the 'Gerber License') immediately. The Gerber
License, pursuant to which the Company had net sales of approximately $13.5
million in 1995, provides that in the event of any change of ownership, control
or management of the Company, without Gerber's prior written approval, Gerber
may terminate the Gerber License. Although the Company does not believe that the
Offering should be deemed to be a change in ownership of the Company within the
meaning of the Gerber License, and Gerber has not informed the Company that it
intends to terminate the Gerber License, there can be no assurance that Gerber
would not claim that its License with the Company was immediately terminable as
a result of the Offering. Termination of the Gerber License could have a
material adverse effect on the Company.
 
     In general, the Company's other license agreements have terms of one to
four years. There can be no assurance that any of the Company's license
agreements can be renewed upon their expiration, or if so, at acceptable royalty
rates, or that the Company will be able to secure licenses for additional
characters that will achieve the same degree of popularity as the Company's
existing licensed characters and third party trademarks. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations,'
'Business-- Products' and '--Licensing and Related Rights' and 'Certain
Transactions.'
 
- ------------------
* The Company computes net sales by deducting sales allowances, including
  allowances for returns, volume discounts and cooperative advertising, from its
  gross sales. The Company does not track sales allowances by product line, but
  rather accrues sales allowances as an overall percentage of gross sales. Where

  information concerning net sales by product line is provided in this
  Prospectus, the Company has estimated net sales by attributing sales
  allowances to each product line in proportion to the individual product line's
  percentage of gross sales. Sales allowances may vary as a percentage of gross
  sales due to changes in the Company's product mix, defective product
  allowances, volume discounts or other sales allowances.
 
                                       9


DEPENDENCE ON KEY PERSONNEL
 
     The Company is dependent to a substantial extent upon the expertise and
services of its senior management personnel and upon the expertise and services
of Mr. Arad, who is a Director and Principal Stockholder of and consultant to
the Company. Many of the Company's products are those in which Mr. Arad played a
significant development role. Mr. Arad is also involved in the development of,
and receives a royalty on net sales of, the Company's products based on the
Marvel Characters. The Company expects that, in connection with the formation of
Marvel Studios, Mr. Arad's consulting agreement with the Company (the
'Consulting Agreement') will be extended to expire in April 1999. Mr. Arad is
also a party to an employment agreement (the 'New World Employment Agreement')
with New World Animation, Ltd. ('New World Animation'), a media production
company affiliated with Marvel which produces television shows and films,
including television shows and films based on the Marvel Characters. In
addition, Mr. Arad is the President of Marvel Films, a unit of Marvel which
works in conjunction with New World Animation in the development of television
shows and films based on Marvel Characters. The New World Employment Agreement
expires in 1998, and Mr. Arad has the right to terminate the New World
Employment Agreement at any time. The Consulting Agreement and the New World
Employment Agreement give Mr. Arad discretion to allocate his business time
between the Company and New World Animation as Mr. Arad determines to be
appropriate. If Mr. Arad terminates the New World Employment Agreement, he will
be required to devote to the Company only the time necessary to perform the
functions required by the Consulting Agreement, but not less than one-half of
his business time. Upon such termination of the New World Employment Agreement,
he may thereafter devote the remainder of his time to any activities that he
chooses, subject only to certain restrictions on his ability to compete with the
Company. The Company expects that in connection with the formation of Marvel
Studios, the Consulting Agreement will be amended in order to permit Mr. Arad to
devote a portion of his business time to Marvel Studios and that Mr. Arad will
enter into an agreement with Marvel Studios which will reflect his new duties
and compensation with Marvel Studios, which will be substantially similar to,
and will replace, the New World Employment Agreement. The Company will have no
right to intellectual property developed by Mr. Arad while engaged in such other
activities. On July 17, 1996, New World Animation's parent company, New World
Communications Group Incorporated ('NWCG'), announced that NWCG had entered into
an agreement providing for the sale of NWCG to News Corporation (the 'NWCG
Sale'). The Company expects that prior to the NWCG Sale, Mr. Arad will have
entered into an employment agreement with Marvel Studios and that such
employment agreement will replace the New World Employment Agreement. The loss
of Mr. Arad's services or his failure to allocate sufficient time to the Company
would have a material adverse effect on the Company. See 'Certain
Transactions--Arad Consulting Agreement.' The loss of the services of any of the
Company's senior management personnel could have a material adverse effect on

the Company. The Company does not currently maintain key-man life insurance on
any of its personnel or Mr. Arad. Certain members of the Company's senior
management devote substantial amounts of time to the affairs of affiliates of
Marvel. See 'Management' and 'Certain Transactions.'
 
CONCENTRATED CUSTOMER BASE
 
     Like other major toy companies, the Company is dependent upon toy retailers
and mass merchandisers to distribute its products. The retail toy business is
highly concentrated, with the top five retailers accounting for approximately
54% of the United States market for retail toy sales in 1995. The Company's five
largest customers accounted in the aggregate for approximately 84% and 72% of
the Company's U.S. gross sales in 1995 and the three months ended March 31,
1996, respectively. An adverse change in, or termination of, the Company's
relationship with one or more of its major customers could have a material
adverse effect on the Company. In recent years, the retail chain store industry,
and the toy retail industry in particular, have undergone significant
consolidation. To the extent that this consolidation continues, the Company's
distribution base could shrink, thereby concentrating an even greater percentage
of the Company's sales in a smaller number of retailers and increasing the
remaining toy retailers' ability to negotiate more favorable terms and prices
from the Company. See 'Business--Industry Background' and '--Customers,
Marketing and Distribution.'
 
                                       10


DEPENDENCE ON NON-U.S. MANUFACTURERS
 
     The Company's products are manufactured in the People's Republic of China
('China'), Mexico and the United States. International manufacturing is subject
to a number of risks, including fluctuations in currency exchange rates,
transportation delays and interruptions, political and economic disruptions, the
impositions of tariffs, import and export controls and changes in governmental
policies. While the Company has not experienced any material adverse effects due
to such risks, there can be no assurance that such events will not occur in the
future, with the result of possible increases in costs and delays of, or
interferences with, product deliveries resulting in losses of revenues and the
goodwill of the Company's customers.
 
     The Company conducts a substantial portion of its manufacturing operations
through the use of independent manufacturers located in China, none of which has
a long-term contract with the Company. China is currently accorded 'Most Favored
Nation' trading status by the United States, and products imported from China
are therefore subject to normal United States import duties. The Most Favored
Nation status of China is reviewed annually by the United States government.
Extension of that status is subject to political uncertainties. In June 1996,
China's Most Favored Nation status was extended for one year. As a result of
opposition to certain policies of the Chinese government, there has been, and in
the future may be, opposition to the extension of Most Favored Nation status for
China. If China were to lose Most Favored Nation status, the cost of importing
products from China would increase significantly, which could have a material
adverse effect on the Company.
 
     In addition, China may be subject to retaliatory trade restrictions imposed

by the United States under various provisions of the Trade Act of 1974, as
amended, including 'Super 301,' which regulates unfair trade practices, and
'Special 301,' which regulates protection of intellectual property. Super 301
authority permits the United States Trade Representative (the 'USTR') to impose
a variety of trade sanctions against a foreign nation which the USTR determines
is engaging in unfair trade practices. Special 301 authority permits the USTR to
impose a variety of trade sanctions against a foreign nation which the USTR
determines is tolerating violations of intellectual property rights.
 
     In June 1994, the USTR identified China as a priority foreign country under
Special 301 and announced an investigation of China's intellectual property
rights practices. In early February 1995, the USTR concluded that China's
intellectual property practices were unreasonable and constituted a burden on
United States commerce. Pursuant to this conclusion, the USTR announced that
duties on various products imported from China would be increased to 100% later
that month. On the day the increase was scheduled to take effect, however, the
United States and China signed an agreement on the enforcement of intellectual
property rights and the threat of sanctions was withdrawn.
 
     In May 1996, after determining that China was not enforcing crucial
portions of the 1995 agreement, the USTR announced that a retaliatory increase
in duties would go into effect on June 17, 1996, unless China began satisfactory
compliance. The sanctions, as in 1995, raised duties on various products
imported from China to 100%. Once again, the sanctions were averted when on June
17, 1996, the United States and China reached an agreement on stricter
enforcement of the 1995 agreement.
 
     There can be no assurance that future trade relations between the United
States and China will be free of punitive tariffs or of the trade disputes that
can follow the imposition of such tariffs. Although toys such as those which the
Company produces in China were not subject to the increased duties threatened in
February 1995 or May-June 1996, there is no assurance that they will be exempt
from or unaffected by duties in future sanctions. Future import quotas,
increased tariffs on goods imported from China, or other retaliatory measures
could result in significant supply disruptions or higher merchandise costs to
the Company.
 
     In the event of a disruption in China affecting the manufacture and
shipment of toys by the Company, there can be no assurance that alternate
sources of manufacturing could be arranged, or, if so, on terms acceptable to
the Company. See 'Business--Manufacturing.'
 
RAPID EXPANSION; GROWTH STRATEGY
 
     Although the Predecessor Company acquired its business in 1990, the Company
was formed by the Principal Stockholders to carry on the business of the
Predecessor Company in April 1993. In recent years, the Company has experienced
significant and rapid sales growth. A substantial portion of the Company's
revenues is generated from sales of its Marvel Character products, and in
particular, its X-Men(Registered) and Spider-Man(Registered) action 
 
                                       11




figures and, in 1995, promotional dolls and activity toys. There can be no 
assurance that the Company will be able to maintain its present level of sales 
or continue to experience sales growth. There can be no assurance that if the 
Company continues to experience sales growth it can do so without adversely 
affecting its profitability. Implementation of the Company's growth strategy 
is subject to contingencies beyond management's control, including economic 
conditions, ability to obtain licenses at a reasonable cost and competition. 
Accordingly, there can be no assurance that the Company's growth strategy will 
prove to be effective or that management's goals will be achieved. See 
'Management's Discussion and Analysis of Financial Condition and Results of 
Operations' and 'Business--Growth Strategy.'
 
CHANGING CONSUMER PREFERENCES
 
     As a result of changing consumer preferences for various toys, many
products in the toy industry are successfully marketed for a limited period,
sometimes only one or two years. The Company derives a substantial portion of
its revenues from a limited number of popular toys. In particular, the success
of the Company is dependent in large part on the continued popularity of the
X-Men(Registered), Spider-Man(Registered) and other Marvel Characters and of
action figures generally, as well as on the Company's ability to develop new
products and to secure new licenses. In 1995 and the first quarter of 1996, as
some of the Company's Marvel Character based action figures such as
X-Men(Registered) and Spider-Man(Registered) have matured, sales of such toys
have declined. There can be no assurance that such declines will not continue or
accelerate or that, as existing Marvel Character based toys mature, the Company
will be able to develop new toys whose sales levels match or exceed sales levels
of such existing Marvel Character based toys. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations' and 'Business--Products.'
 
     The success of many of the Company's products is dependent on the
popularity generated by television programs, movies and other media events.
There can be no assurance that any scheduled or anticipated television program,
movie or other media event will occur at all or result in substantial
promotional value to the Company's products. In addition, there can be no
assurance that Marvel Studios will successfully produce any films or television
programming or that, if released, any such films or television programming will
positively affect the Company's net sales or net income. See '--Risks Related to
Marvel Studios' and 'Business--Growth Strategy.'
 
RISKS RELATED TO MARVEL STUDIOS
 
     The Company intends to use the net proceeds from the issuance and sale of
the Class A Common Stock offered hereby by the Company, which are estimated to
be approximately $9.1 million, to invest, from time to time, in the Preferred
Equity Interests of Marvel Studios. The feature film and television industries
in which Marvel Studios will operate are highly competitive and involve a
substantial degree of risk. The Company has no experience in the production of
feature films or television programs and Marvel has limited experience in the
production of feature films and television programs. Although the Company and
Marvel intend to form Marvel Studios, the formation of Marvel Studios is subject
to the negotiation and execution of definitive documentation.
 

     It is anticipated that Marvel will control Marvel Studios, and therefore
Marvel Studios could take actions not approved by the Company's designees to the
governing body of Marvel Studios. The Company will not be able to control the
timing of its contributions to Marvel Studios or the projects that Marvel
Studios decides to finance. There can be no assurance that the films or
television projects which Marvel Studios will seek to produce, whether or not
successful, will result in promotional value to the Company or affect the sales
of the Company's products. Film studios and television networks often receive
merchandise participations in conjunction with the production of movie and
television projects. The Company will be obligated to reimburse Marvel Studios
for all merchandise participations for the Company's products paid by Marvel
Studios to a film studio or television network without the ability to approve
these merchandise participations. Although Marvel has advised the Company that,
for seven years from the date of formation of Marvel Studios, Marvel will grant
Marvel Studios the first opportunity to license Marvel Characters on a
royalty-free basis for use in its film and television projects, if Marvel
Studios determines not to take advantage of any such opportunities, Marvel may
seek to develop such film and television projects on its own.
 
     The Company's capital commitment to Marvel Studios will exceed its net
proceeds from the Offering. The Company intends to fund the balance of its
capital commitment from available cash. Given the start-up nature of
 
                                       12


Marvel Studios, neither the amount to be spent by Marvel Studios in the
foreseeable future nor the amount or timing of the capital contributions by the
Company or Marvel to Marvel Studios has been determined. There can be no
assurance that the Company will have sufficient cash on hand to fund its
commitment to Marvel Studios when it is required to do so. The Company's Credit
Agreement currently permits the Company to invest in Preferred Equity Interests
only an amount up to its net proceeds from the Offering plus certain other
amounts permitted pursuant to investment criteria in the Credit Agreement, to
the extent available. The Company believes it will be able to obtain consent to
fund its full commitment to Marvel Studios as those contributions are required
to be made, although there can be no assurance it will be able to do so.
Although the Company is not required, and has no present intention, to invest
more than $50 million in Marvel Studios, the Company's Board of Directors may
decide to do so in the future if investments in Marvel Studios in excess of that
amount are deemed to be in the best interests of the Company. In the event the
Company is called upon to make additional capital contributions to Marvel
Studios in excess of $50 million and its Board of Directors elects not to make
these capital contributions or the Company does not have sufficent cash to do
so, to the extent that Marvel makes its additional capital contributions to
Marvel Studios, the Company's interest in Marvel Studios will be diluted.
 
     Marvel Studios will compete for talent, creative material and financing for
its projects with other entities, many of which are larger, have more experience
in the film and television production industries and have greater financial
resources. The success of an individual feature film or television program
depends upon unpredictable and changing factors, such as consumer preferences,
distribution and promotional arrangements, ability to obtain broadcast
clearances, ability to obtain capital and critical approval. Therefore, there
can be no assurance that any of Marvel Studios' projects will result in

production and release of a feature film or television program and that, even if
produced and released, these feature films and television programs will be
successful. The rights to produce feature films based on certain of the Marvel
Characters are currently licensed to third parties. Some of those rights are in
dispute. There can be no assurance that Marvel will be able to reacquire or
restructure these rights for development by Marvel Studios or otherwise enhance
the likelihood that any such films or television programming will be produced.
There can be no assurance that the Company will receive any return on or the
principal of its investment in Marvel Studios. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources,' 'Business--Marvel Studios' and '--Growth Strategy' and 'Certain
Transactions--Marvel Studios.'
 
COMPETITION
 
     The Company competes with many larger, better capitalized toy companies in
the design and development of new toys, the procurement of licenses, adequate
retail shelf space for its products, and in the marketing and distribution of
its products. There can be no assurance that the Company will be able to compete
effectively against such companies. See 'Business--Competition.'
 
SEASONALITY
 
     Sales.  Traditionally, the Company, like the toy industry in general, has
experienced a significant seasonal pattern in sales and net income due to the
greater demand for toys during the Christmas season. During 1993, 1994 and 1995,
77%, 70% and 69%, respectively, of the Company's U.S. net sales were realized
during the months of July through December. The Company expects that its
business will continue to experience a significant seasonal pattern for the
foreseeable future. One of the Company's strategies has been to diversify its
products into toy lines other than action figures, which currently make up a
substantial portion of the Company's sales. Moreover, to the extent that the
Company diversifies into product lines which are more seasonal than action
figures, the Company's business may experience greater seasonality. See
'Business--Growth Strategy.'
 
     Working Capital.  The seasonality of the Company's business requires cash
funding of its working capital requirements to provide for increased inventory
levels and trade accounts receivable prior to the Christmas season. To build its
inventory in anticipation of the Christmas season, the Company manufactures
products and pays its suppliers throughout the year, although a majority of the
Company's shipments occur in the last five months of the year. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality.'
 
                                       13


INVENTORY MANAGEMENT
 
     Each of the Company's top five customers uses, to some extent, inventory
management systems which track sales of particular products and rely on reorders
being rapidly filled by suppliers rather than on large inventories maintained by
retailers to meet consumer demand. These systems reduce a retailer's investment
in inventory and increase pressure on suppliers like the Company to fill orders

promptly and shift a portion of the retailer's inventory risk onto the supplier.
Production of excess products by the Company to meet anticipated retailer demand
could result in markdowns and increased inventory carrying costs for the Company
on even its most popular items. In addition, if the Company fails to anticipate
the demand for products, it may be unable to provide adequate supplies of
popular toys to retailers in a timely fashion, particularly during the Christmas
season, and may consequently lose sales. See '--Seasonality' and 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
 
CONTROL BY MARVEL; STOCKHOLDERS' AGREEMENT AND CLASS B VOTING RIGHTS
 
     Marvel currently owns, and upon completion of the Offering will continue to
own, all of the outstanding shares of Class B Common Stock except for two shares
of Class B Common Stock which will be owned by the Class B Voting Trusts, and
Mr. Arad and Mr. Perlmutter will own an aggregate of approximately 67% of the
outstanding shares of Class A Common Stock. The Class A Common Stock entitles
its holders to one vote per share on all matters submitted to a vote of the
holders of the Company's Common Stock, and the Class B Common Stock generally
entitles its holders to ten votes per share on all matters submitted to the
holders of the Company's Common Stock. Each of Messrs. Arad and Perlmutter have
the right to vote the share of Class B Common Stock held by his respective Class
B Voting Trust in his absolute discretion until the termination of such trust.
Immediately following the Offering, Marvel will have approximately 78%, and the
Principal Stockholders collectively will have approximately 93%, of the combined
voting power of the outstanding shares of Common Stock, except as otherwise
provided by law. Accordingly, Marvel will continue to be able to control the
vote on all matters submitted to a vote of the holders of the Company's Common
Stock and elect the entire Board of Directors, except that Marvel intends to
maintain at least two Directors who are neither officers or directors of the
Company or its affiliates (the 'Independent Directors') and except as otherwise
provided by law. In addition, Marvel will be able to approve those matters by
written consent, without the necessity of holding a meeting of stockholders. The
Company's certificate of incorporation (the 'Certificate') provides that certain
fundamental transactions may not be consummated and the Company's Chief
Executive Officer may not be removed without the unanimous consent of the
holders of the Class B Common Stock (the 'Class B Stockholders') voting as a
class. The Principal Stockholders are parties to a stockholders' agreement (the
'Stockholders' Agreement') which provides, among other things, that they will
vote their respective shares of Common Stock to elect as Directors of the
Company (a) eight individuals designated by Marvel, including the Independent
Directors (the 'Marvel Directors'), (b) two individuals designated by Mr.
Perlmutter (the 'Perlmutter Directors') and (c) one individual designated by Mr.
Arad (the 'Arad Director'). The Credit Facility, as defined below, requires that
Marvel continue to control the Company. Control by Marvel and such rights of
unanimous consent of the Class B Stockholders may have the effect of
discouraging certain types of transactions involving an actual or potential
change of control of the Company, including sales of assets, mergers or other
business combinations. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,' 'Certain
Transactions--Stockholders' Agreement and Class B Voting Trusts' and
'Description of Capital Stock.'
 
     Certain indebtedness of Marvel and its 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.
 
INTERNATIONAL SALES
 
     The Company's international sales have increased significantly since 1994,
constituting approximately 10% and 19% of the Company's net sales in 1995 and
the three months ended March 31, 1996, respectively. As a result, the Company's
operations may be affected adversely by the disruption of trade with the
countries in which the Company's customers are located, whether as a result of
political changes or instability, war, the imposition of regulations relating to
international sales, the imposition of or increase in duties, taxes and other
charges on international sales, fluctuations in the value of the dollar against
international currencies, or restrictions on
 
                                       14


international currency transactions. See '--Dependence on Non-U.S.
Manufacturers' and 'Business-- Manufacturing.'
 
DIVIDEND POLICY
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. In addition, the Credit Facility restricts the ability of the Company to
pay dividends. See 'Dividend Policy' and 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources.'
 
SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon completion of the Offering, the Company will have a total of
20,337,862 shares of Class A Common Stock and 7,394,000 shares of Class B Common
Stock outstanding (based on the number of shares outstanding on June 15, 1996).
The 13,656,000 outstanding shares of Class A Common Stock held by Messrs.
Perlmutter and Arad and 7,394,000 shares of Class A Common Stock issuable upon
conversion of the shares of the Class B Common Stock held by Marvel and the
Class B Voting Trusts for each of Messrs. Perlmutter and Arad (in each case
after giving effect to the sale of shares offered hereunder), each of whom may
be deemed to be an 'affiliate' of the Company, will continue to be 'restricted'
securities within the meaning of Rule 144 under the Securities Act of 1933, as
amended (the 'Securities Act' or 'Act'). Generally, under Rule 144, a person,
including a person who may be deemed an 'affiliate' of the Company, who has held
restricted shares for two years may sell such shares, subject to certain volume
limitations and other restrictions, without registering them under the Act. The
Company, its directors, executive officers and the Principal Stockholders have
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated ('Morgan Stanley') on behalf of the Underwriters, they will not,
subject to certain exceptions, during the period commencing on the date hereof
and ending 90 days after the date of this Prospectus, (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, granting any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly any shares of Class A

Common Stock or any securities convertible or exchangeable for Class A Common
Stock (whether such shares or any such securities are now owned by the Company's
directors, executive officers or the Principal Stockholders or are hereafter
acquired), or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Class A Common Stock, whether any such transaction described in clause (1)
or (2) above is to be settled by delivery of Class A Common Stock or such other
securities in cash or otherwise. The foregoing restrictions shall not apply to
the sale of any shares of Class A Common Stock pursuant to this Offering or
pursuant to the Stock Option Plan or stock options outstanding as of the date of
this Prospectus. In addition, the Company's directors, executive officers and
Principal Stockholders have agreed that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, they will not during the period
commencing on the date hereof and ending 90 days after the date of this
Prospectus, make any demand for or exercise any right with respect to the
registration of any shares of Class A Common Stock or any security convertible
into or exercisable or exchangeable for Class A Common Stock. Each of the
Principal Stockholders would be entitled to sell his or its shares of Common
Stock under Rule 144, subject to those volume limitations and restrictions, and
with the consent of Morgan Stanley on behalf of the Underwriters immediately
after the Offering. Rule 144 generally also permits sales of restricted shares,
without any volume limitations, by a person who has not been an 'affiliate' of
the Company for at least three months preceding the sale of such shares and who
has held those restricted shares for at least three years. Pursuant to a
registration rights agreement with the Company (the 'Registration Rights
Agreement'), the Principal Stockholders have certain rights to require the
Company to register some or all of the shares of Class A Common Stock currently
owned or issuable upon conversion of the Class B Common Stock held by them. See
'Certain Transactions--Registration Rights Agreement' and 'Shares Eligible for
Future Sale.' No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sales, will have on
the market price of the shares of Common Stock from time to time. The sale of
substantial amounts of shares of Common Stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. See 'Shares Eligible for Future Sale.'
 
                                       15


                                USE OF PROCEEDS
 
     The Company is selling 700,000 shares of Class A Common Stock in the
Offering. The net proceeds from the issuance and sale of the 700,000 shares of
Class A Common Stock offered hereby by the Company, after deduction of the
underwriting discount and estimated Offering expenses, are estimated to be
approximately $9.1 million. The Company intends to use the net proceeds to fund
a portion of its capital commitment to Marvel Studios, by purchasing, from time
to time, Preferred Equity Interests of Marvel Studios. Pending such use, the net
proceeds will be used for working capital and general corporate purposes or will
be invested in short-term, marketable investment grade securities. The Company
intends to fund its remaining obligations to purchase Preferred Equity Interests
from available cash. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,'
'Business--Marvel Studios' and 'Certain Transactions--Marvel Studios.'
 

     The Company will not receive any proceeds from the sale of Class A Common
Stock by the Selling Stockholders.
 
                      PRICE RANGE OF CLASS A COMMON STOCK
 
     Since the IPO of the Company's Class A Common Stock at $18.00 per share in
March 1995, the Class A Common Stock has been traded on the NYSE under the
symbol 'TBZ.' The following table sets forth for the periods indicated the high
and low sale prices per share of the Class A Common Stock as reported by the
NYSE:
 



                                                                                  HIGH     LOW
                                                                                  ----     ---
                                                                                     
1995
First Quarter (March 2 to March 31)............................................   $21 1/8  $18 5/8
Second Quarter.................................................................    20 1/4  16 3/8
Third Quarter..................................................................    26 1/4  18
Fourth Quarter.................................................................    25 1/8  20 1/4
 
1996
First Quarter..................................................................    24 3/4  17 7/8
Second Quarter.................................................................    22 3/8  17 5/8
Third Quarter (through August 7)...............................................    20 1/4  15 1/2


 
     A recent reported last sale price of the Class A Common Stock as reported
on the NYSE is set forth on the cover page of this Prospectus. As of June 15,
1996, there were approximately 71 holders of record of the Class A Common Stock.
 
                                DIVIDEND POLICY
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. It is the current policy of the Company's Board of Directors (the
'Board') to retain any earnings to finance the operation and expansion of the
Company's business. The payment of any cash dividends in the future will depend
upon the Company's earnings, financial condition and capital needs and on other
factors deemed relevant by the Board. In addition, the Company's Credit Facility
restricts the ability of the Company to pay cash dividends. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
 
                                       16


                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to the sale of the 700,000 shares of
Class A Common Stock offered by the Company and the use of the net proceeds
therefrom as set forth under 'Use of Proceeds.' The information set forth below
is qualified by and should be read in conjunction with 'Management's Discussion

and Analysis of Financial Condition and Results of Operations' and the financial
statements and notes thereto.
 



                                                           MARCH 31, 1996
                                                     --------------------------
                                                      ACTUAL     AS ADJUSTED(4)
                                                     --------    --------------
                                                           (IN THOUSANDS)
                                                           
Cash and cash equivalents.........................   $  8,551       $  8,551
                                                     --------    --------------
                                                     --------    --------------
Borrowings under Credit Facility..................   $     --       $     --
                                                     --------    --------------
          Total short-term debt...................   $     --       $     --
                                                     --------    --------------
                                                     --------    --------------
Long-term debt....................................   $     --       $     --
Redeemable convertible Series A preferred stock,
  $.01 par value, 59,091 shares issued and
  outstanding convertible into 59,091 shares of
  Class A Common Stock, maximum redemption value
  $1,950,000 at August 31, 1999(1)................      1,611          1,611
Stockholders' equity:
          Preferred Stock, $.01 par value,
            25,000,000 shares authorized;
            59,091 shares issued and outstanding
            as redeemable convertible Series A
            preferred stock, $.01 par value.......         --             --
          Class A Common Stock, $.01 par value,
            100,000,000 shares authorized,
            17,134,529 issued and outstanding,
            20,334,529 shares issued and
            outstanding, as adjusted(2)(3)........        171            203
          Class B Common Stock, $.01 par value,
            20,000,000 shares authorized,
            9,894,000 issued and outstanding,
            7,394,000 shares issued and
            outstanding, as adjusted(2)...........         99             74
Additional paid-in capital........................     61,290         70,386
Retained earnings.................................     53,077         53,077
                                                     --------    --------------
          Total stockholders' equity..............    114,637        123,740
                                                     --------    --------------
            Total capitalization..................   $116,248       $125,351
                                                     --------    --------------
                                                     --------    --------------


 
- ------------------
(1) Includes 59,091 shares of Series A Preferred Stock outstanding, of which
    27,273 shares are held in escrow to secure indemnification obligations to

    the Company by the seller of the Spectra Star business.
 
(2) Excludes an aggregate of 1,321,471 shares of Class A Common Stock reserved
    for issuance under the Stock Option Plan at March 31, 1996, including
    1,068,318 shares as to which options were then outstanding of which 655,066
    options were immediately exercisable. Excludes 59,091 shares of Class A
    Common Stock issuable upon the conversion of outstanding shares of Series A
    Preferred Stock. See 'Management's Discussion and Analysis of Financial
    Condition and Results of Operations--Liquidity and Capital Resources' and
    'Description of Capital Stock.'
 
(3) As of June 15, 1996, there were 17,137,862 issued and outstanding shares of
    Class A Common Stock. As of such date, after giving effect to the Offering,
    there will be 20,337,862 shares of Class A Common Stock issued and
    outstanding.
 
(4) Stockholders' equity as adjusted reflects application of the Company's
    estimated net proceeds from the Offering to fund a portion of the Company's
    $50 million capital commitment to Marvel Studios by purchasing Preferred
    Equity Interests of Marvel Studios. Pending such use, the net proceeds will
    be used for working capital and general corporate purposes or will be
    invested in short-term, marketable investment grade securities. Cash and
    cash equivalents as adjusted does not reflect application of any net
    proceeds from the Offering. See 'Use of Proceeds.'
 
                                       17


                         SELECTED FINANCIAL INFORMATION
 
     The following tables present selected combined or consolidated financial
data for the business of the Company and the Predecessor Company (see Notes (1)
and (2) below) for the five year period ended December 31, 1995, which were
derived from audited financial statements of the Company's business, and the
three month periods ended March 31, 1995 and 1996, which were derived from the
unaudited financial statements of the Company which, in the opinion of the
management of the Company, have been prepared on the same basis as the audited
combined or consolidated financial statements and include all adjustments
(consisting of normal and recurring adjustments and accruals) necessary for a
fair presentation of such information. Results for the three months ended March
31, 1996 are not necessarily indicative of results for any interim period or the
entire year. The information in these tables should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the financial statements of the Company and the Predecessor
Company and notes thereto included elsewhere in this Prospectus.
 
     For certain recent quarterly results of the Company, see 'Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Quarterly Results.'
 



                                   PREDECESSOR COMPANY                                       COMPANY
                              ------------------------------    -----------------------------------------------------------------
                                                      FOUR       EIGHT

                                  YEAR ENDED         MONTHS      MONTHS                                        THREE MONTHS ENDED
                                 DECEMBER 31,        ENDED       ENDED          YEAR ENDED DECEMBER 31,            MARCH 31,
                              ------------------    APR. 30,    DEC. 31,    -------------------------------    ------------------
                               1991       1992        1993        1993       1993        1994        1995       1995       1996
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                                               
STATEMENT OF OPERATIONS
  DATA:(1)(2)
Net sales..................   $45,068    $57,934    $ 10,175    $ 79,569    $89,744    $156,525    $196,395    $27,888    $38,369
Cost of sales..............    22,867     29,710       5,308      36,682     41,990      73,490      88,397     13,398     19,733
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
Gross profit...............    22,201     28,224       4,867      42,887     47,754      83,035     107,998     14,490     18,636
Selling, general and
  administrative
  expenses(3)(4)(5)........    19,254     23,099       5,840      22,253     28,093      38,263      48,234      7,717     11,369
Depreciation and
  amortization.............     2,770      2,471         638       3,459      4,097       8,609      12,750      1,695      2,144
Compensatory stock
  option(6)................        --         --          --      10,909     10,909       4,091          --         --         --
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
Operating income (loss)....       177      2,654      (1,611)      6,266      4,655      32,072      47,014      5,078      5,123
Interest expense...........      (655)    (1,294)       (476)       (721)    (1,197)     (1,862)       (490)      (413)       (28)
Other income, net..........        39        120         237         322        559          65       1,050        180        194
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
Income (loss) before income
  taxes....................      (439)     1,480      (1,850)      5,867      4,017      30,275      47,574      4,845      5,289
Income tax (expense)
  benefit (pro forma in
  1991, 1992, four months
  ended April 30, 1993 and
  combined year ended
  December 31, 1993)(7)....       176       (592)        740      (2,379)    (1,639)    (12,261)    (19,172)    (1,986)    (2,116)
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
Net income (loss)..........   $  (263)   $   888    $ (1,110)   $  3,488    $ 2,378    $ 18,014    $ 28,402    $ 2,859    $ 3,173
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
                              -------    -------    --------    --------    -------    --------    --------    -------    -------
Net income per share(7)....   $    --    $    --    $     --    $    .13    $   .09    $    .67    $   1.05    $   .11    $   .12
Weighted average number of
  common and common
  equivalent shares
  outstanding (assumes
  27,000,000
  shares outstanding for
  periods prior to 1995)...        --         --          --      27,000     27,000      27,000      27,115     27,000     27,201


 



                                    PREDECESSOR COMPANY                                      COMPANY
                                  -----------------------             ------------------------------------------------------
                                       DECEMBER 31,                            DECEMBER 31,                   MARCH 31,
                                  -----------------------             -------------------------------    -------------------
                                   1991            1992                1993        1994        1995       1995        1996

                                  -------         -------             -------    --------    --------    -------    --------
                                      (IN THOUSANDS)                                      (IN THOUSANDS)
                                                                                               
BALANCE SHEET DATA:
Working capital (deficit)......   $(1,010)        $  (844)            $24,780    $ 39,839    $ 85,174    $68,184    $ 84,007
Total assets...................    26,525          28,852              56,877     104,723     152,218     98,764     133,763
Borrowings under credit
  facility.....................        --              --               4,500      21,500          --         --          --
Due to stockholders and
  affiliated companies.........    16,255          13,407              15,746      16,845          --         --          --
Redeemable preferred
  stock(8).....................        --              --                  --          --       3,016         --       1,611
Stockholders' equity...........     1,908           2,384              16,283      38,416     111,332     85,420     114,637


 
                                                        (Footnotes on next page)
 
                                       18


(Footnotes from previous page)
- ------------------
(1) The years ended December 31, 1991 and 1992 and the four month period ended
    April 30, 1993 represent 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. The eight month period ended December 31, 1993, and the
    years ended December 31, 1994 and 1995 and the three-month periods ended
    March 31, 1995 and 1996 represent the consolidated results of the Company.
    There was no change in the carrying value of the Company's assets 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 and the year ended December 31,
    1993 include five months and thirteen months, respectively, 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) During the years ended December 31, 1991 and 1992 and the four month period
    ended April 30, 1993, the Predecessor Company accrued approximately
    $4,151,000, $1,026,000 and $259,000, respectively, in fees and commissions
    to an affiliate of Mr. Perlmutter as compensation for its assistance in
    establishing relationships with customers of the Predecessor Company. No
    such fees and commissions were incurred after April 30, 1993.
 
(4) During the years ended December 31, 1991 and 1992 and the four month period
    ended April 30, 1993, the Predecessor Company accrued royalties to Marvel of
    approximately $1,820,000, $812,000 and $970,000, respectively, under a
    license for Marvel Characters. No such royalties were incurred after April
    30, 1993. During the eight month period ended December 31, 1993 and the
    years ended December 31, 1994 and 1995, the Company reimbursed Marvel for
    services provided by Marvel or purchased from third-party providers for the
    Company of approximately $875,000, $498,000 and $306,000, respectively.

 
(5) The results for the four month period ended April 30, 1993 and combined year
    ended December 31, 1993 include approximately $2,000,000 of bonuses paid by
    the Predecessor Company to employees in connection with the formation of the
    Company.
 
(6) Represents non-cash compensation expense associated with the vesting and
    exercise of a compensatory stock option granted to Mr. Arad in connection
    with the formation of the Company.
 
(7) For the taxable periods until April 30, 1993, the Predecessor Company was
    subject to taxation under Subchapter S of the Code. 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 these tax purposes. Provision for income taxes for the
    aforementioned periods reflects income tax (expense) 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.
 
(8) Reflects 59,091 shares of Series A Preferred Stock outstanding, of which
    27,273 shares are held in escrow to secure indemnification obligations to
    the Company by the seller of the Spectra Star business. See 'Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations--Liquidity and Capital Resources.'
 
                                       19



                    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 financial statements and the notes thereto, included
elsewhere in this Prospectus.
 
OVERVIEW
 
     The Company designs, markets and distributes a variety of toys in the
United States and internationally under various licenses, including an
exclusive, perpetual and royalty-free license, subject to certain limitations,
from Marvel, the Company's largest stockholder. The Company also designs,
markets and distributes its own line of proprietary toys. The Company believes
that the experience and creativity of its senior management in the development
and marketing of its toys afford it the ability to attract significant licenses
of popular characters and trademarks as well as prominent inventors for the
development of new licensed and proprietary toys.
 
     As a result of changing consumer preferences, many of the Company's
products are successfully marketed for only a limited period. In addition, the
success of many of the Company's products is dependent on the popularity
generated by television programs and other media events featuring the characters
on which those products are based. The Company's product mix, therefore, tends
to change frequently as the Company attempts to adapt to these changing
preferences and the changing popularity resulting from these media events.

 
     The Company has achieved significant growth since 1991. The Company's net
sales more than quadrupled, growing from approximately $45.1 million in 1991 to
approximately $196.4 million in 1995. At the same time, the Company's operating
income increased from approximately $177,000 in 1991 to approximately $47.0
million in 1995. The Company's growth in the years 1992 through 1994 was largely
attributable to increased sales of X-Men(Registered) and, in late 1994,
Spider-Man(Registered) action figures. In 1995, the Company experienced
increased sales in its line of proprietary dolls, due largely to the
introduction of Baby Tumbles Surprise(Trademark), and the Company's sales of
Marvel Characters products remained relatively constant, reflecting increased
sales of Spider-Man(Registered) and other Marvel action figures. In 1995 and the
first quarter of 1996, as some of the Company's Marvel Character based action
figures such as X-Men(Registered) and Spider-Man(Registered) have matured, sales
of such toys have declined. There can be no assurance that such declines will
not accelerate or continue. These declines were more than offset by increased
revenues from the Company's other products including activity toys, a result of
its acquisition of Spectra Star, and girls' toys, reflecting the success of its
Baby Tumbles Surprise(Trademark) promotional doll.
 
     The Company computes net sales by deducting sales allowances, including
allowances for returns, volume discounts and cooperative advertising, from its
gross sales. Once percentage allowances are agreed upon with the Company's
customers for these matters, the Company allows customers to deduct these
percentage allowances from remittances. In the case of cooperative advertising,
the Company selectively monitors customer performance to determine fulfillment,
but does not verify that customers fulfill their commitments in all cases. The
Company does not track any of its sales allowances by product line, but rather
accrues sales allowances as an overall percentage of gross sales. Where
information concerning net sales by product line is provided in this Prospectus,
the Company has estimated net sales by attributing sales allowances to each
product line in proportion to the individual product line's percentage of gross
sales. Sales allowances have varied as a percentage of gross sales due to
changes in the Company's product mix, defective product allowances, volume
discounts or other sales allowances. Among the years ended December 31, 1993,
1994 and 1995, the most significant variation in sales allowances occurred in
1993, when a significant increase in sales allowances resulted primarily from
the introduction of new products in 1993 which had a higher defective return
experience than the Company's overall defective return experience in 1994 and
1995.
 
     The Company capitalizes expenditures for molds, tools and equipment and
product and package design costs incurred in the development of its products
('Capitalized Product Costs'). See note 1 of notes to financial statements
appearing elsewhere in this Prospectus. The Company amortizes Capitalized
Product Costs over the anticipated three year useful life of its products. Due
to changing consumer preferences and the introduction of competing products, the
Company has discontinued certain products in the first or second year following
their introduction, leading to write-offs of related unamortized Capitalized
Product Costs. As a result of the product discontinuations noted above, the 
Company had accelerated write-offs of Capitalized Product Costs of 
 
                                       20



approximately $754,000, $1.3 million and $1.9 million in 1993, 1994 and 1995, 
respectively. Because the Company writes off any remaining related unamortized 
Capitalized Product Costs when it discontinues a product, the Company expects 
to continue to experience write-offs of varying magnitude in future periods.
 
     On September 11, 1995, the Company acquired certain assets and assumed
certain liabilities of Spectra Star. On November 29, 1995, the Company acquired
certain assets and assumed certain liabilities of Quest. See '--Liquidity and
Capital Resources.'
 
     The Company expects that its gross profit as a percentage of net sales will
decline in the future because of an increased proportion of international sales,
a decreased proportion of sales of action figures and potential sales under the
Company's planned F.O.B. program. The Company's international sales historically
have been made at lower gross margins than its U.S. sales. However,
international sales are subject to lower operating expenses in certain
instances. For example, the Company does not generally incur any advertising or
commission expense on its international sales. Therefore, the Company believes
that international sales contribute to operating income at a rate approximately
the same as U.S. sales. The Company's sales of action figures, which the Company
believes benefit from high consumer demand during periods of positive media
exposure, historically have been made at higher gross margins than the Company's
other product categories. The Company anticipates that products sold under its
F.O.B. program will be made at lower gross margins for the same reasons as its
international sales. The Company believes that products sold through its planned
F.O.B. program will involve little advertising, inventory carrying costs or
accounts receivable risk. As a result, the Company believes that while gross
margins may be lower on sales of products sold through the F.O.B. program, a
greater proportion of gross margin dollars may be contributed to operating
income. See 'Business--Customers, Marketing and Distribution.'
 
     The Company's selling, general and administrative expenses increased during
1995 and the first three months of 1996 as a percentage of net sales. The
Company believes a higher level of selling, general and administrative expenses
is likely to continue. The higher level reflects the increasing portion of net
sales which are derived from non-Marvel licenses, and are subject to royalty
expense, the Company's acquisition of Spectra Star which, as a manufacturing
operation, has a higher level of selling, general and administrative expenses
than the other operations of the Company, and the Company's continuing
expenditures on sales and administrative infrastructure to support future growth
in the Company's operations.
 
     To enhance further the media exposure of the Marvel Characters, the Company
and Marvel intend to form Marvel Studios. The objective of Marvel Studios is to
facilitate the release of live action and animated feature films and television
programming based on the Marvel Characters in order to create greater consumer
interest in these characters and related merchandise, including toys. The
Company believes that the advertising and promotion of feature films, as well as
any films or television programming based on the Marvel Characters, will create
consumer interest in the Marvel Characters and could create revenue
opportunities for the Company by helping to generate sales from action figures,
other children's toys, and other products for which the Company holds the rights
under the Marvel License. The Company intends to invest, from time to time, up
to $50 million in the aggregate in Preferred Equity Interests of Marvel Studios.

Marvel has advised the Company that it intends to invest, from time to time, up
to $50 million in the aggregate in the Common Equity Interests of Marvel Studios
funded in part with the net proceeds from the sale of its shares of Class A
Common Stock in the Offering. In addition, the Company will be obligated to
reimburse Marvel Studios for all merchandise participations for the Company's
products paid by Marvel Studios to a film studio or television network without
the ability to approve these merchandise participations. See 'Risk
Factors--Risks Related to Marvel Studios,' 'Use of Proceeds,' '--Liquidity and
Capital Resources,' 'Business--Marvel Studios' and 'Certain Transactions--Marvel
Studios.'
 
                                       21


SEASONALITY
 
     Because of greater retail demand for toy products during the Christmas
season, the toy industry generally is highly seasonal in nature. The Company has
experienced this seasonal pattern in its sales and profitability. The following
table illustrates the seasonality of the Company's U.S. net sales by quarter for
1993, 1994, 1995 and the first three months of 1996. See '--Recent Quarterly
Results.'
 
                           U.S. NET SALES BY QUARTER
 



                           1993                      1994                      1995               1996
                   ---------------------     ---------------------     ---------------------     ------
QUARTER            AMOUNT     PERCENTAGE     AMOUNT     PERCENTAGE     AMOUNT     PERCENTAGE     AMOUNT
- ---------------    ------     ----------     ------     ----------     ------     ----------     ------
                                                  (DOLLARS IN MILLIONS)
                                                                            
1st............    $ 7.0            9%       $16.5           12%       $26.9           15%       $31.2
2nd............     11.8           14         25.6           18         27.7           16
3rd............     25.0           31         33.2           23         49.7           28
4th............     36.9           46         67.4           47         71.5           41
                   ------         ---        ------         ---        ------         ---
Total..........    $80.7          100%       $142.7         100%       $175.8         100%
                   ------         ---        ------         ---        ------         ---
                   ------         ---        ------         ---        ------         ---


 
     The Company expects that its business will continue to experience a
significant seasonal pattern for the foreseeable future, although the Company's
acquisition in September 1995 of Spectra Star's kite business, which typically
experiences a seasonal pattern of greater sales during the first three months of
the year, may, to some limited extent, offset the Company's traditional
seasonality. There can be no assurance that such offset will occur.
 
RECENT QUARTERLY RESULTS
 
     On July 24, 1996, the Company announced results for the three months ended
June 30, 1996. The Company announced that net sales increased to $45.8 million
in the three months ended June 30, 1996 compared to $30.4 million in the three

months ended June 30, 1995 and that net income increased to $4.6 million or $.17
per share compared to $4.3 million or $.16 per share in the three months ended
June 30, 1995.
 
     The Company's net sales increased as a result of the continued success of
the Company's promotional dolls and activity toys in domestic markets and boys'
action figure toys in international markets. These combined increases more than
offset decreases in U.S. sales of boys' action figures. Gross profit increased
by 24% to $22.9 million compared to $18.4 million in the three months ended June
30, 1995. Operating expenses increased compared to the three months ended June
30, 1995 due to the development and marketing of the Company's expanded product
line, the bulk of which is planned to be shipped in the second half of 1996.
 
     U.S. promotional doll sales increased to $11.3 million compared to $1.7
million in the three months ended June 30, 1995 due to continued strong sales of
the Company's Baby Tumbles Surprise(Trademark) promotional doll and shipments of
new items in the Company's 1996 promotional doll line. U.S. sales of activity
toys increased to $3.1 million compared to $888,000 in the three months ended
June 30, 1995 due to continued sales of Spectra Star(Registered) brand kites.
International sales increased to $13.3 million compared to $2.7 million in the
three months ended June 30, 1995 primarily due to expanded sales of
Spider-Man(Registered) and Hercules: The Legendary Journeys(Trademark) action
figures and related toys, as distribution of the U.S. television series based on
those characters continues to spread to additional world markets.
 
                                       22


     The following table sets forth certain unaudited consolidated financial
data of the Company for the three months ended June 30, 1995 and 1996:
 



                                                                       THREE MONTHS
                                                                      ENDED JUNE 30,
                                                               ---------------------------
                                                              1995                      1996
                                                     ----------------------    ----------------------
                                                                      (IN THOUSANDS,
                                                                  EXCEPT PER SHARE DATA)
                                                                         
Net sales.........................................          $ 30,435                  $ 45,814
Cost of sales.....................................            12,015                    22,939
                                                          ----------                ----------
  Gross profit....................................            18,420                    22,875
                                                          ----------                ----------
Operating expenses:
  Selling, general and administrative.............             9,145                    12,961
  Depreciation and amortization...................             2,294                     2,442
                                                          ----------                ----------
     Total operating expenses.....................            11,439                    15,403
                                                          ----------                ----------
Operating income..................................             6,981                     7,472
Interest (income), net............................              (346)                     (184)
                                                          ----------                ----------

  Income before provision for income taxes........             7,327                     7,656
Provision for income taxes........................             3,004                     3,062
                                                          ----------                ----------
  Net income......................................          $  4,323                  $  4,594
                                                          ----------                ----------
                                                          ----------                ----------
Net income per share..............................          $    .16                  $    .17
                                                          ----------                ----------
                                                          ----------                ----------
Weighted average number of common and common
  equivalent shares outstanding...................            27,000                    27,134
                                                          ----------                ----------
                                                          ----------                ----------


 
RESULTS OF OPERATIONS
 
     The following table sets forth for the periods indicated certain income and
expense items expressed as a percentage of net sales for such periods.
 
                            PERCENTAGE OF NET SALES
 



                                                                   THREE MONTHS
                                           YEAR ENDED DECEMBER     ENDED MARCH
                                                   31,                 31,
                                          ----------------------  --------------
                                           1993    1994    1995    1995    1996
                                          ------  ------  ------  ------  ------
                                                           
Net sales...............................  100.0%  100.0%  100.0%  100.0%  100.0%
Cost of sales...........................   46.8    47.0    45.0    48.0    51.4
                                          ------  ------  ------  ------  ------
  Gross profit..........................   53.2    53.0    55.0    52.0    48.6
                                          ------  ------  ------  ------  ------
Selling, general and administrative
  expenses..............................   31.3    24.4    24.6    27.7    29.6
Depreciation and amortization...........    4.6     5.5     6.5     6.1     5.6
Compensatory stock option...............   12.1     2.6      --      --      --
                                          ------  ------  ------  ------  ------
  Total operating expenses..............   48.0    32.5    31.1    33.8    35.2
                                          ------  ------  ------  ------  ------
Operating income........................    5.2    20.5    23.9    18.2    13.4
Interest expense........................   (1.3)   (1.2)    (.2)   (1.5)    (.1)
Other income, net.......................     .6      --      .5      .7      .5
                                          ------  ------  ------  ------  ------
Income before income taxes..............    4.5    19.3    24.2    17.4    13.8
Income tax expense (pro forma in
  1993).................................    1.8     7.8     9.7     7.1     5.5
                                          ------  ------  ------  ------  ------
  Net income............................    2.7%   11.5%   14.5%   10.3%    8.3%
                                          ------  ------  ------  ------  ------
                                          ------  ------  ------  ------  ------



 
                                       23


THREE MONTHS ENDED MARCH 31, 1996 AND 1995
 
     The Company's net sales increased approximately 38% to approximately $38.4
million for the first quarter of 1996 from approximately $27.9 million in the
first quarter of 1995. The Company analyzes net sales utilizing the following
categories: boys', girls', infant/preschool, activity, discontinued items and
international as set forth in the table below.
 



                                                     THREE MONTHS
                                                     ENDED MARCH
                                                         31,
                                                    --------------
                                                     1995    1996
                                                    ------  ------
                                                    (IN MILLIONS)
                                                      
U.S. Net Sales by Product Category
  Boys'...........................................  $21.0   $12.7
  Girls'..........................................    1.0     7.5
  Infant/Preschool................................    2.0     1.3
  Activity........................................    1.6     9.3
  Discontinued Items..............................    1.3      .4
                                                    ------  ------
     Total U.S. Net Sales.........................   26.9    31.2
International Sales...............................    1.0     7.2
                                                    ------  ------
     Total Net Sales..............................  $27.9   $38.4
                                                    ------  ------
                                                    ------  ------


 
     Sales in the activity toys category had a net increase of approximately
$7.7 million in the first quarter of 1996, due primarily to kite sales from the
new Spectra Star division offset in part by decreases in sales of pinball games
and Hero Caps(Registered). Sales in the girls' toys category increased
approximately $6.5 million in the first quarter of 1996, due to continued strong
sales of the Company's Baby Tumbles Surprise(Trademark) promotional doll, as
well as the introduction of the Company's Take Care of Me Twins(Trademark) and
Flipper(Registered) products. These combined increases more than offset the net
decrease of $8.3 million in U.S. sales of boys' action figures. The decrease in
U.S. sales of boys' action figures resulted from decreases in sales of
X-Men(Registered), Spider-Man(Registered), Iron Man(Registered) and Fantastic
Four(Registered) action figures, partially offset by sales of the Company's new
Hercules: The Legendary Journeys(Trademark) line. Sales of action figures in the
1995 period benefitted from the introduction of the Iron Man(Registered) and
Fantastic Four(Registered) lines and the continued rollout of the
Spider-Man(Registered) line, which was introduced in the fourth quarter of 1994.
On a worldwide basis, sales of boys' toys were relatively unchanged, since the

substantial increase in international sales is comprised largely of boys'
products. The Company's sales of Marvel Characters products on a worldwide basis
remained relatively constant in the first quarter of 1996 versus the first
quarter of 1995, as increased sales in Spider-Man(Registered) action figures
offset decreased sales in X-Men(Registered) products.
 
     Gross profit increased approximately 29% to approximately $18.6 million for
the first quarter of 1996 from approximately $14.5 million in the first quarter
of 1995. Gross profit as a percentage of net sales decreased to approximately
49% in the first quarter of 1996 from approximately 52% in the first quarter of
1995 due to changes in the Company's product mix and the effect of a higher
percentage of international sales, which typically have a lower gross margin
than U.S. sales.
 
     Selling, general and administrative expenses increased approximately 47% to
approximately $11.4 million (approximately 30% of net sales) in the first
quarter of 1996 from approximately $7.7 million (approximately 28% of net sales)
in the first quarter of 1995. The increase of $3.7 million was due to increased
royalties, advertising and miscellaneous selling and administrative expenses as
a result of sales growth, and additional salaries and consulting expense
attributable to the Company's expanded product lines.
 
     Depreciation and amortization expense increased approximately 26% to
approximately $2.1 million in the first quarter of 1996 from approximately $1.7
million in the first quarter of 1995. The increase was due primarily to
increased amortization of product tooling costs resulting from increased
investment in product tooling to support the Company's growth and expanded
product lines.
 
     The Company had net interest income of approximately $166,000 for the first
quarter of 1996, compared with net interest expense of approximately $233,000
for the first quarter of 1995. This represents net improvement of approximately
$399,000, due primarily to repayment of indebtedness with a portion of the
proceeds of the IPO and net interest income on the balance of these proceeds.
 
                                       24


     Income before taxes increased approximately 9% to approximately $5.3
million for the first three months of 1996 from approximately $4.8 million for
the first three months of 1995. Slightly less than half of the Company's income
before taxes for this period was attributable to sales of Spectra
Star(Registered) products.
 
     Provision for income taxes increased from approximately $2.0 million for
the first three months of 1995 to approximately $2.1 million for the first three
months of 1996, while the effective tax rate decreased from 41% for the first
three months of 1995 to 40% for the first three months of 1996 due to a change
in the allocation of state and local taxes as a result of the Spectra Star
acquisition.
 
     As a result of the above, net income increased to approximately $3.2
million in the first quarter of 1996 from approximately $2.9 million in the
first quarter of 1995.
 

YEARS ENDED DECEMBER 31, 1995 AND 1994
 
     The Company's net sales increased approximately 25% to approximately $196.4
million for 1995 from approximately $156.5 million in 1994. Substantially all of
the increase in net sales resulted from sales of new products. Spectra Star,
which was acquired in the second half of 1995, produced net sales of $4.6
million. Net sales for these periods by the Company's product categories are set
forth in the table below:
 



                                                       YEAR ENDED
                                                      DECEMBER 31,
                                                    ----------------
                                                     1994     1995
                                                    -------  -------
                                                    (IN MILLIONS)
                                                       
U.S. Net Sales by Product Category
  Boys'...........................................  $110.4   $105.5
  Girls'..........................................    12.7     37.7
  Infant/Preschool................................     7.3     13.5
  Activity........................................     6.1     15.5
  Discontinued Items..............................     6.2      3.6
                                                    -------  -------
     Total U.S. Net Sales.........................   142.7    175.8
International Sales...............................    13.8     20.6
                                                    -------  -------
     Total Net Sales..............................  $156.5   $196.4
                                                    -------  -------
                                                    -------  -------


 
     U.S. sales of boys' toys decreased approximately $4.9 million, as the
introduction of new lines of action figures, such as Iron Man(Registered),
Fantastic Four(Registered), Ghost Rider(Registered) and Hercules(Registered) and
the growth in sales of the Company's Spider-Man(Registered) line was more than
offset by the decrease in sales of the Company's X-Men(Registered) line.
However, as a category, total worldwide net sales of boys' toys were relatively
unchanged, since the substantial increase in international sales is comprised
largely of boys' products.
 
     U.S. sales of girls' toys increased approximately $25.0 million due to the
successful introduction of Baby Tumbles Surprise(Trademark), which was the
leading promotional doll in the U.S. based on unit volume in 1995, as well as
the national introduction of Baby So Real(Trademark) and Pooch, the Good
Puppy(Trademark) in 1995, offset by a decrease in sales of Jumpsie(Registered)
and Caboodles(Trademark) products. Sales in the activity toy category increased
approximately $9.4 million from 1994 to 1995 with the introduction of the Wild &
Wacky Painter(Trademark) and, to a lesser extent, a CD-ROM-based product and the
initial sales of kites and other toys under the Spectra Star(Registered) brand.
The infant/preschool category increased from approximately $7.3 million in U.S.
net sales in 1994 to approximately $13.5 million in 1995, due to the continued
expansion of the Company's infant/preschool line under the Gerber License.

 
     Gross profit increased approximately 30% to approximately $108.0 million in
1995 from approximately $83.0 million in 1994. Gross profit as a percentage of
net sales increased from approximately 53% in 1994 to approximately 55% in 1995
due to additional sublicensing revenues and improved product margins, offset in
part by the effect of a higher percentage of international sales, which
typically have a lower gross margin than U.S. sales.
 
     Selling, general and administrative expenses increased approximately 26% to
approximately $48.2 million (approximately 25% of net sales) in 1995 from
approximately $38.3 million (approximately 24% of net sales) in 1994. The
increase of approximately $10.0 million was due to increased advertising,
royalties and miscellaneous selling and administrative expenses, which increased
as a result of sales growth, and additional salaries and consulting expense
attributable to the Company's expanded product lines.

                                       25


 
     Depreciation and amortization expense increased to approximately $12.8
million in 1995 from approximately $8.6 million in 1994. This increase was
primarily attributable to increased amortization of product tooling costs
resulting from increased investment in product tooling to support the Company's
growth and expanded product line.
 
     In connection with the formation of the Company, Mr. Arad was granted an
option (the 'Arad Stock Option'), providing Mr. Arad with the right to acquire
10% of the common stock of the Company at a price substantially below the
appraised value of the Company's common stock at that time. The Company
recognized approximately $4.1 million in 1994 as a non-recurring, non-cash
compensation expense related to the Arad Stock Option. The amount by which the
appraised value of the shares of stock issuable on exercise of the Arad Stock
Option exceeded the exercise price of the Arad Stock Option was treated as
compensation expense and amortized from the date of grant in 1993 through March
1994. See 'Certain Transactions--Formation Agreement.'
 
     The Company had net interest income of approximately $560,000 for 1995,
compared with net interest expense of approximately $1.8 million for 1994. This
represents a net improvement of approximately $2.4 million due primarily to
decreased borrowings and the temporary investment of excess cash generated from
operating activities and net proceeds raised in the IPO.
 
     Income before taxes increased to approximately $47.6 million in 1995 from
approximately $30.3 million in 1994.
 
     Provision for income taxes increased from approximately $12.3 million in
1994 to approximately $19.2 million in 1995, while the effective tax rate
decreased from 40.5% in 1994 to 40.3% in 1995 due to a change in the allocation
of state and local taxes as a result of the Spectra Star acquisition.
 
     As a result of the above, net income increased to approximately $28.4
million in 1995 from approximately $18.0 million in 1994.
 
YEARS ENDED DECEMBER 31, 1994 AND 1993

 
     The operating results for the year ended December 31, 1993 include the
consolidated results of four months of U.S. operations of the Predecessor
Company and eight months of operations of the Company. In addition, the
operating results for 1993 include five months of international operations of a
Hong Kong corporation which was the Predecessor Company's international sales
affiliate, and eight months of operations of the Company's wholly-owned
international sales subsidiary. The sales and operating results of such
affiliate for the month of December 1992 were not significant.
 
     The Company's net sales increased approximately 74.4% to approximately
$156.5 million for 1994 from approximately $89.7 million for 1993. Substantially
all of the increase in net sales resulted from increased unit volume,
principally as a result of increased sales of products based on Marvel
Characters. Net sales for these periods by the Company's product categories are
set forth in the table below:
 



                                                       YEAR ENDED
                                                      DECEMBER 31,
                                                    ----------------
                                                     1993     1994
                                                    -------  -------
                                                     (IN MILLIONS)
                                                       
U.S. Net Sales by Product Category
  Boys'...........................................  $63.7    $110.4
  Girls'..........................................   16.4     12.7
  Infant/Preschool................................     --      7.3
  Activity........................................     .3      6.1
  Discontinued Items..............................     .3      6.2
                                                    -------  -------
     Total U.S. Net Sales.........................   80.7    142.7
International.....................................    9.0     13.8
                                                    -------  -------
     Total Net Sales..............................  $89.7    $156.5
                                                    -------  -------
                                                    -------  -------


 
     The increase in the Company's U.S. net sales resulted primarily from
increased sales of the Company's boys' toys and continued growth in sales of
X-Men(Registered) action figures. The increase in boys' products also reflected 
a significant benefit from the introduction of the Company's 
Spider-Man(Registered) line of toys in late 1994, which more than offset
decreases in sales of certain non-licensed boys' toys. The Company believes that
the increase in U.S. 
 
                                       26


sales of X-Men(Registered) action figures was attributable
to the increased popularity of the X-Men(Registered) characters generally, which
resulted in part from the popularity of the X-Men(Registered) animated

television series and the expansion of the Company's X-Men(Registered) product
line. Similarly, the increase in the Company's international sales was primarily
the result of increased international sales of the X-Men(Registered) action
figures following the introduction of the X-Men(Registered) animated television
show in various international markets. The Company believes that sales of its
Spider-Man(Registered) product line were enhanced by the debut of the
Spider-Man(Registered) animated television series on the Fox Children's Network
in November 1994.
 
     The Company experienced decreased sales of girls' toys due primarily to the
discontinuation of its Pretty and Me(Registered) and Baby Loves to
Talk(Registered) products, which had reached the end of their product life
cycles, partially offset by the introduction of the Company's
Jumpsie(Registered) product. Infant/preschool product sales represent initial
shipments of pre-school products under the Gerber License which began in the
third quarter of 1994. The increase in sales of activity toys was primarily
related to the introduction of the Company's Mighty Morphin Power
Rangers(Registered) pinball games. The increase in sales of discontinued items
was attributable to sales of carryover inventory of the discontinued products
mentioned above, as well as sales of the Company's Nature's Nursery(Registered)
product line which was introduced and discontinued in 1994.
 
     Gross profit increased approximately 74% to approximately $83.0 million in
1994 from approximately $47.8 million in 1993. Gross profit as a percentage of
net sales remained relatively constant at approximately 53% for both 1994 and
1993 as increased sales of the Company's X-Men(Registered) and Spider-
Man(Registered) action figures, which have higher gross margins, were offset by
the discontinuation and close-out of certain products in 1994, as described
above, as well as the introduction of the Company's line of Gerber(Registered)
infant and toddler products, which have lower gross margins than the Company's
other product categories.
 
     Selling, general and administrative expenses increased approximately 36% to
approximately $38.3 million (approximately 24% of net sales) in 1994 from
approximately $28.1 million (approximately 31% of net sales) in 1993. This
increase was due to increased advertising expense, royalties, warehousing and
miscellaneous selling and administrative expenses, which increased as a result
of sales growth, and additional salaries and consulting expense attributable to
the need for additional personnel and services to support the Company's expanded
product line. Included in selling, general and administrative expenses during
1993 are commissions paid to Mr. Perlmutter and royalties paid to Marvel. These
combined payments totaled approximately $1.2 million in 1993, with no further
expenses incurred after April 1993. Also included in selling, general and
administrative expenses in 1993 are bonuses totalling approximately $2.0 million
paid to certain executives of the Company in connection with the formation of
the Company.
 
     Depreciation and amortization expense increased to approximately $8.6
million in 1994 from approximately $4.1 million in 1993. This increase was
primarily attributable to increased amortization of product tooling costs
resulting from increased investment in product tooling to support the Company's
growth and expanded product line.
 
     The Company recognized approximately $4.1 million in 1994 and $10.9 million

in 1993 as a nonrecurring non-cash compensation expense related to the Arad
Stock Option.
 
     Net interest expense increased to approximately $1.8 million in 1994 from
approximately $1.2 million in 1993. This increase resulted from additional
borrowings used to finance the growth of the Company's business and higher
interest rates on the Company's borrowings.
 
     Income before taxes increased to approximately $30.3 million in 1994 from
approximately $4.0 million in 1993.
 
     Provision for income taxes increased substantially from approximately $2.4
million, or 59% of income before income taxes in 1993, to approximately $12.3
million, or 40.5% of income before taxes in 1994. In connection with its
formation in April 1993, the Company changed its status from an S corporation to
a C corporation. The Company's effective tax rate in 1993 was higher than it
would have been if the Company had been a C corporation for the entire 1993 
period, as the Company was unable to record a tax benefit for losses incurred 
by the Company during the first four months of 1993 when the Company was an S 
corporation.
 
     As a result of the above, net income increased to approximately $18.0
million in 1994 from approximately $2.4 million (pro forma) in 1993.
 
                                       27


 
BACKLOG
 
     Customer open orders were approximately $7.4 million on March 31, 1996,
compared with $6.2 million on March 31, 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's operating activities (used) or provided net cash of
approximately ($2.1 million), ($1.5 million) and $35.5 million in 1993, 1994 and
1995, respectively.
 
     Net cash used by operating activities was approximately $7.4 million in the
first quarter of 1996, while net cash provided by operating activities was
approximately $14.3 million in the first quarter of 1995. The net decrease in
net cash provided by operating activities resulted primarily from higher sales
in late 1995 and in the first quarter of 1996, the receivables of which, due to
industry dating practices in 1995/1996, were not due as of March 31, 1996. The
decrease in the Company's current liabilities from December 31, 1995 to March
31, 1996 is due to the payment, pursuant to normal trade terms, of liabilities
related to the Company's fourth quarter 1995 product shipments.
 
     Cash used in investing activities in 1993, 1994 and 1995 was approximately
$7.4 million, $17.2 million and $25.1 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.
Included in the $25.1 million in 1995 was approximately $9.0 million in
available cash used for the acquisition of Spectra Star and Quest.

 
     Cash provided by financing activities in 1993, 1994 and 1995 was
approximately $11.9 million, $18.1 million and $8.0 million, respectively. In
1995, cash provided by financing activities consisted principally of net
proceeds from the IPO of $44.1 million, offset by the repayment of notes to Mr.
Perlmutter and Marvel, which totalled approximately $15.1 million, and by
repayments of funds previously borrowed under the Credit Facility, as defined
below, with the balance used for working capital and general corporate purposes.
 
     On March 2, 1995, the Company completed the IPO by issuing 2,750,000 shares
of its Class A Common Stock at $18 per share. The net proceeds to the Company of
$44.1 million, after deducting fees and expenses, were used to pay outstanding
amounts due under subordinated notes which totalled approximately $15.1 million
in principal and approximately $2.0 million in interest, with the balance used
for working capital and general corporate purposes.
 
     In March 1995, the Company entered into a three year $30 million revolving
line of credit with a syndicate of banks for which Chemical Bank serves as
administrative agent (the 'Credit Facility'). Substantially all of the assets of
the Company were pledged to secure borrowings under this Credit Facility.
Borrowings under the Credit Facility bear interest at either Chemical Bank's
alternate base rate or at the Eurodollar rate plus the applicable margin. The
applicable margin is 3/4 of 1% to 1% to be determined based on the Company's
financial performance. The 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
Credit Facility. The Company had no outstanding indebtedness under the line of
credit as of June 30, 1996.
 
     The 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. The Credit Facility also requires an annual reduction, of
outstanding borrowings to zero for a period of 45 consecutive days, commencing
during the first six months of each calendar year. In addition, the Credit
Facility also requires that Marvel continue to control the Company and that the
Marvel License remain in effect.
 
     Certain indebtedness of Marvel and of 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.

     On September 11, 1995, the Company acquired certain assets and assumed
certain liabilities of Spectra Star. The purchased assets are comprised of the
kite and toy manufacturing, and design and marketing businesses of Spectra Star.
The consideration for the acquisition included: (a) payment by the Company of an
amount not to exceed the sum of $9.2 million to satisfy liabilities of Spectra
Star; (b) the issuance by the Company of a 
 
                                       28


maximum of 130,303 shares of Series A Preferred Stock (the 'Series A Preferred 
Stock') with a maximum redemption value of $4.3 million, with each share 

convertible at any time after March 10, 1996 into one fully paid and 
non-assessable share of Class A Common Stock; (c) a three-year earnout not to 
exceed $900,000 based upon the Company's sales of certain products acquired 
in the acquisition; and (d) $400,000 in cash. Of the 130,303 shares of Series A
Preferred Stock issuable in connection with the Spectra Star acquisition, 
112,121 shares were issued at the closing of the acquisition and 18,182 shares 
will be issued upon the acquisition of Spectra Star's manufacturing facility 
in San Luis, Mexico. See 'Use of Proceeds,' 'Business--General,' '--Properties'
and 'Description of Capital Stock.'
 
     The acquisition was financed by the Company's cash on hand and the issuance
of the Series A Preferred Stock. As of December 31, 1995, the Company used
approximately $8.8 million of cash to satisfy Spectra Star's liabilities and
recognized approximately $9.6 million in goodwill from the acquisition. On March
18, 1996, 53,030 shares of the Series A Preferred Stock were acquired by the
Company for approximately $1.4 million upon exercise of a contractual put right.
Holders of Series A Preferred Stock have the right, subject to certain
conditions, to require, on one occasion, the Company to register under the
Securities Act shares of Class A Common Stock issuable upon conversion of their
Series A Preferred Stock. In addition, the holders of Series A Preferred Stock
have certain rights to participate in registrations by the Company of its Class
A Common Stock.
 
     The purchase price for Quest, including cash payments and assumption of
liabilities, totaled approximately $400,000. The Company utilized available cash
to finance the acquisition of Quest.
 
     In connection with the Company's investment in Marvel Studios, the Company
will be required to purchase Preferred Equity Interests from time to time of up
to $50 million in the aggregate to finance the operations of Marvel Studios. The
net proceeds to the Company from the Offering are intended to be used to fund a
portion of such amounts, with any remaining capital calls to be funded from
available cash. Given the start-up nature of Marvel Studios, neither the amount
to be spent by Marvel Studios in the foreseeable future nor the amount or timing
of the capital contributions by the Company or Marvel to Marvel Studios has been
determined. Neither the Company nor Marvel expects the capital calls for Marvel
Studios to exceed the Company's available cash. The Company's Credit Agreement
currently permits the Company to invest in Preferred Equity Interests an amount
up to its net proceeds from the Offering plus certain other amounts permitted
pursuant to investment criteria in the Credit Agreement, to the extent
available. The Company believes it will be able to obtain consent to fund its
full commitment to Marvel Studios as those contributions are required to be
made, although there can be no assurance it will be able to do so. Pending
capital calls, the Company will use the net proceeds from the Offering for
working capital and general corporate purposes. See 'Use of Proceeds,'
'Business--Marvel Studios,' and '--Growth Strategy' and 'Certain
Transactions--Marvel Studios.'
 
     The seasonal nature of the Company's business causes its working capital
needs and, thus, the Company's need for borrowed funds to be highest during the
months of October and November. The Company believes that the net proceeds of
the Offering, pending investment in Marvel Studios, net cash provided by
operating activities and available borrowings under the Credit Facility will be
sufficient to meet the Company's peak working capital needs and capital

expenditure requirements, including the Company's capital commitments to Marvel
Studios, for the foreseeable future.
 
     The Company expects that capital expenditures during 1996, principally for
molds, tools and equipment, will be approximately $17 million and that these
expenditures will be funded by net cash provided by operating activities.
 
     As part of the Company's growth strategy, it evaluates potential
acquisitions of other toy businesses or product lines which the Company believes
will complement its existing business. As of the date of this Prospectus, the
Company has no present understanding or agreement with respect to any
acquisitions. In connection with any future acquisition opportunities, the
Company may incur additional debt or issue additional equity or debt securities
depending on market conditions and other factors. See 'Use of Proceeds' and
'Business--Growth Strategy.'
 
INFLATION
 
     The Company does not believe that the relatively moderate rates of
inflation in the United States in recent years have had a significant effect on
its operations.
 
                                       29


 
                                   BUSINESS
 
GENERAL
 
     The Company designs, markets and distributes a variety of toys in the
United States and internationally under various licenses, including an
exclusive, perpetual and royalty-free license, subject to certain limitations,
from Marvel, the Company's largest stockholder. The Company also designs,
markets and distributes its own line of proprietary toys. The Company believes
that the experience and creativity of its senior management in the development
and marketing of its toys afford it the ability to attract significant licenses
of popular characters and trademarks as well as prominent inventors for the
development of new licensed and proprietary toys. The Company had net sales,
operating income and net income per share of approximately $196.4 million, $47.0
million and $1.05, respectively, in 1995, reflecting significant growth from the
Company's 1991 net sales and operating income of approximately $45.1 million and
$177,000, respectively.
 
     The Marvel License permits the Company to produce a broad range of toys
based on Marvel's more than 3,500 characters. The Company believes that media
events associated with Marvel Characters and other characters on which the
Company bases its toys increase overall consumer awareness and popularity of
these characters. The Company seeks to capitalize on the popularity generated by
media exposure of certain Marvel Characters, such as Spider-Man(Registered) and
X-Men(Registered), by emphasizing those characters in its toy lines. The
Spider-Man(Registered) and X-Men(Registered) Marvel Characters are currently
featured in weekly half-hour animated television programs which have
consistently been among the highest rated Saturday morning children's programs
since they began to be regularly broadcast in February 1995 and October 1992,
respectively. The Spider-Man(Registered) program is also featured in major

television markets around the world. The Fantastic Four(Trademark) and Iron
Man(Registered) groups of Marvel Characters are featured on the Marvel Action
Universe, weekly, syndicated animated television programming currently carried
in over 90% of the television markets in the United States. Mr. Arad is the
executive producer of each of these programs. Marvel Characters are also
regularly depicted in Marvel comic books. See '--Marvel Studios.'
 
     In addition to the Marvel Characters, the Company sells toys using
well-recognized consumer brand names and popular non-Marvel Characters, the
latter including characters depicted in network, syndicated or cable television
programs such as Hercules: The Legendary Journeys(Trademark), Xena: Warrior
Princess(Trademark), Flipper(Trademark), Muppets Tonight(Trademark) and Muppet
Babies(Trademark). The Company has also obtained licenses to produce certain
products for a number of motion pictures, including widely-distributed, first-
run feature films such as Flipper(Trademark), licensed by MCA/Universal, and
Muppet Treasure Island(Trademark), licensed by Henson, for which the Company has
produced mainly plush items. These motion pictures also include a
made-for-television movie entitled Generation X(Trademark), which premiered in
prime time on the Fox Network, for which the Company has manufactured and
distributed mainly action figures. The Company has obtained licenses to produce
certain products for other motion pictures released or planned for release by
Disney and MCA/Universal.
 
     The Company's toys are also designed, marketed and distributed under
well-known consumer brand names, including children's dolls and infant and
toddler teaching toys under the Gerber(Registered) trademark, a range of
tabletop pinball games licensed by Disney, electronic learning toys planned
under the Apple(Registered) trademark, a line of children's toys with a camping
and outdoor theme planned under the Coleman(Registered) trademark, and radio,
remote-controlled and motorized vehicles, as well as action figures and
interactive CD-ROM products planned under a licensing agreement with NASCAR and
various well-known race car drivers. In addition to products designed and
produced under licenses from others, the Company also designs, produces and
distributes a line of proprietary children's toys, including Baby Tumbles
Surprise(Trademark), Baby So Real(Trademark), Wild and Wacky Painter(Trademark)
and Battle Builders(Trademark). Baby Tumbles Surprise(Trademark) was the leading
promotional doll in the United States, as measured in unit sales, in 1995.
 
     To broaden and expand further its merchandise lines and license agreements,
the Company acquired two toy-related businesses, Spectra Star and Quest, in the
second half of 1995. Spectra Star produces kites and other products including
yo-yo's, flying discs, nap mats and kite accessories marketed under the Spectra
Star(Registered) brand name. Many of these products are sold under character
licenses, including Disney's The Hunchback of Notre Dame ((Copyright)Disney),
Disney's Toy Story ((Copyright)Disney), Disney's 101 Dalmatians 
((Copyright)Disney), Sky Dancers(Registered), Dragonflyz(Trademark) and Warner 
Bros.' Batman(Registered) and Looney Tunes(Registered). With the
acquisition of Spectra Star, the 
 
                                       30


Company believes that it has a substantial share of the United States kite 
market. Quest produces small model rockets under the Quest(Trademark) trademark
and thereby further augments the Company's activity toy category.

 
MARVEL STUDIOS
 
     To enhance further the media exposure of the Marvel Characters, the Company
and Marvel intend to form Marvel Studios. The objective of Marvel Studios is to
facilitate the release of live action and animated motion pictures and
television programming based on the Marvel Characters in order to create greater
consumer interest in these characters and related merchandise, including toys.
The Company believes that the advertising and promotion of feature films, as
well as any films or television programming based on the Marvel Characters, will
create consumer interest in the Marvel Characters and could create revenue
opportunities for the Company by helping to generate sales from action figures,
other children's toys and other products for which the Company holds the rights
under the Marvel License. The Company believes that the popularity of the
X-Men(Registered) and Spider-Man(Registered) animated Saturday morning shows
have resulted in significant increases in U.S. net sales by the Company of
X-Men(Registered) and Spider-Man(Registered) toys. Since the introduction of the
X-Men(Registered) animated television program in 1992, the Company's U.S. net
sales of X-Men(Registered) toys totaled approximately $169.6 million through
March 31, 1996. The Company's Spider-Man(Registered) product line, introduced in
conjunction with Spider-Man(Registered) animated television show in the fourth
quarter of 1994, has generated U.S. net sales of $55.2 million from the fourth
quarter of 1994 through the first quarter of 1996. Certain television projects
in which Marvel is currently engaged, including the program featuring The
Incredible Hulk(Trademark) and the programming to be developed by the Fox
Children's Network ('FCN'), as discussed below, are expected to be assigned to
Marvel Studios. See '--Growth Strategy.'
 
     The Company believes that Marvel Studios will facilitate the release of
motion pictures and television programming based on Marvel Characters by giving
Marvel Studios greater control over the development of such projects compared to
the present practice of only licensing the use of Marvel Characters in a film or
television project to an unrelated third party. There are typically four stages
of development of a television program or feature film: (i) development, which
generally includes script writing and marketing a property to a production
studio; (ii) pre-production, which is the planning, budgeting, staffing and
general preparation stage prior to filming; (iii) production or principal
photography, which is the filming and daily operational activities associated
with filming; and (iv) post-production, which includes, among other things,
final editing, compositing and audio mixing of production, ultimately leading to
the delivery of a completed project to an exhibitor or network. Marvel Studios
is expected to facilitate the process by acting as the executive producer and
developing a 'package' which includes phases (i) and possibly (ii), including
the creation of a screenplay, development of the script, creation of a budget,
and possibly engaging a director and casting one or more principal actors. Once
'packaged,' Marvel Studios intends to sell the package to major studios and
networks for production and release.
 
     In certain instances, in order to develop a film or television project,
Marvel Studios may also enter phase (iii) or (iv) above and may co-finance or
solely finance a movie project, but will seek to offset its expenditures by
preselling certain rights, such as international distribution, merchandising
and/or home video rights. It is expected that Marvel Studios will not finance a
movie project unless it believes the revenue opportunities for the Company and

Marvel merit production and release. In addition, in certain circumstances
Marvel Studios is likely to co-finance and may solely finance the production of
television programming.
 
     The Company and Marvel expect Marvel Studios to utilize the experience that
the Company and Marvel have developed over the years in licensing the Marvel
Characters for television and film projects and capitalizing on related toy
sales. Mr. Arad, an executive producer of the highly rated X-Men(Registered) and
Spider-Man(Registered) Saturday morning television shows, is expected to be the
creative head of Marvel Studios and an executive producer of all film and
television projects of Marvel Studios. The rights to produce feature films based
on certain of the Marvel Characters are currently licensed to third parties.
Some of those rights are in dispute. There can be no assurance that Marvel will
be able to reacquire or restructure these rights for development by Marvel
Studios or otherwise enhance the likelihood that any such films or television
programming will be produced.
     The Company intends to invest, from time to time, up to $50 million in the
aggregate in Preferred Equity Interests of Marvel Studios. Marvel has advised
the Company that it intends to invest, from time to time, up to $50 million in
the aggregate in Common Equity Interests of Marvel Studios funded in part with
the net proceeds 
 
                                       31


from the sale of its shares of Class A Common Stock in the Offering. Pending 
such use, Marvel will use its net proceeds from the Offering to repay debt and 
for working capital and general corporate purposes. The Preferred Equity 
Interests will represent 25% of the equity of Marvel Studios with the Common 
Equity Interests held by Marvel representing 75% of the equity. The Preferred 
Equity Interests will participate in any distribution of income in proportion 
to its equity interest and will participate in any distribution in connection 
with a dissolution or liquidation and will have a preference on dissolution or 
liquidation equal to the amount of the Company's investment. The capital 
contributions of Marvel and the Company will be made in equal amounts. Although 
the Company is not required, and has no present intention, to invest greater 
than $50 million in Marvel Studios, the Company's Board of Directors may decide 
to do so in the future if investments in Marvel Studios in excess of that 
amount are deemed to be in the best interests of the Company. The governing body
of Marvel Studios will be comprised of three Marvel designees and two designees
of the Company. Action of the governing body of Marvel Studios will require the
affirmative vote of three designees, except that the vote of at least one
designee of the Company will be required whenever the sum of the net worth of
Marvel Studios plus the amount of the unfunded capital commitments of the
Company and Marvel falls below $50 million. Marvel has advised the Company that,
for seven years from the date of formation of Marvel Studios, Marvel will grant
to Marvel Studios the first opportunity to license Marvel Characters on a
royalty-free basis for use in its film and television projects. If Marvel
Studios determines not to take advantage of any such opportunities, Marvel may
seek to develop such film and television projects on its own. See 'Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources' and 'Certain Transactions--Marvel
Studios.'
 
GROWTH STRATEGY

 
     The Company's net sales growth has been driven principally by growth in
sales of the Company's action figure toys based on the Marvel Characters and,
more recently, proprietary dolls and activity toys. The Company's growth
strategy is to:
 
     o CONTINUE TO BUILD ON THE POPULARITY OF THE MARVEL CHARACTERS BY UTILIZING
       ADDITIONAL MARVEL CHARACTERS AND BY EXPANDING INTO NEW PRODUCT LINES IN
       ORDER TO CAPITALIZE ON PORTRAYALS OF THE MARVEL CHARACTERS ON TELEVISION
       AND IN MOVIES, COMIC BOOKS AND OTHER MEDIA. THE COMPANY BELIEVES THAT
       FEATURE FILMS AND TELEVISION PROGRAMMING DEVELOPED BY MARVEL STUDIOS WILL
       CREATE ADDITIONAL CONSUMER INTEREST IN THE MARVEL CHARACTERS AND COULD
       CREATE OPPORTUNITIES TO DESIGN AND MARKET TOYS BASED ON THE MARVEL
       CHARACTERS IN THESE PROJECTS.
 
     The Company believes that media events associated with the Marvel
Characters increase overall consumer awareness and popularity of these
characters. The Company intends to continue to develop its Marvel Character
product base by introducing additional Marvel Characters and product lines to
take advantage of publicity provided to the Marvel Characters by Marvel's comic
books, animated television programs and other media events. The Company's
planned investment in Marvel Studios is intended to promote this strategy.
 
     For example, the X-Men(Registered) and Spider-Man(Registered) lines of
Marvel Characters are currently featured in weekly half-hour animated television
programs carried on FCN. Since they began to be regularly broadcast in October
1992 and February 1995, respectively, the X-Men(Registered) and
Spider-Man(Registered) television programs have consistently been among the
highest rated Saturday morning children's programs. The Spider-Man(Registered)
program is also featured in major television markets around the world. In
anticipation of the premiere of the Spider-Man(Registered) animated television
show, the Company introduced a line of Spider-Man(Registered) related products
in October 1994. The Fantastic Four(Trademark) and Iron Man(Registered) groups
of Marvel Characters are featured as half-hour segments on the Marvel Action
Universe in over 90% of the television markets in the United States. Product
lines based on the Fantastic Four(Trademark) and Iron Man(Registered) groups of
Marvel Characters were released by the Company in late 1994 in conjunction with
the premiere of the Marvel Action Universe. The Company believes that the
success of these programs has been an important factor in supporting U.S. net
sales of products utilizing the Marvel Characters. The Company believes that
feature films and television programming developed by Marvel Studios will create
additional consumer interest and opportunities to capitalize on portrayals of 
Marvel Characters in such projects. See 'Business-- Marvel Studios' and 'Certain
Transactions--Marvel Studios.'
 
     Marvel is currently engaged in certain other television projects, including
an animated series featuring The Incredible Hulk(Registered), which is expected
to be broadcast on the United Paramount Network ('UPN') beginning in 

                                       32


the fall of 1996. Marvel has advised the Company that it currently expects 
the net production costs of such series for the fall of 1996 to be approximately
$4 million, and such costs would be partially offset by any sales of video

cassettes or international distribution rights to the series. Additional
television projects include programming to be developed by FCN, pursuant to its
recently announced arrangement with Marvel. Under the terms of the arrangement,
FCN, a leading children's programming service in the United States, will have
the exclusive television and distribution rights, subject to certain
limitations, to The Silver Surfer(Trademark), Daredevil(Trademark) and Captain
America(Registered) and certain other designated Marvel Characters. Pursuant to
the agreement, FCN has committed to fund the development of at least seven
Marvel Characters over the next seven years of which the first two projects are
expected to be The Silver Surfer(Trademark) and Captain America(Registered) with
at least one of these projects to debut on FCN beginning in the fall of 1997 as
a 13 episode series. FCN has also committed to produce a minimum of 52 episodes
of programming based on a minimum of four Marvel Characters during the seven
year term of the agreement. Marvel expects to reimburse FCN a portion of its
production costs. The arrangements with FCN and UPN are expected to be assigned
by Marvel to Marvel Studios.
 
     A number of additional entertainment projects featuring the Marvel
Characters are in various stages of development. In July 1996, Marvel announced
the formation of Marvel Online, a license and joint venture with America Online,
Inc., which is intended to develop interactive on-line comics, CD-ROMs and
merchandise related to the Marvel Characters. In June 1994, Marvel announced
several new projects involving the use of the Marvel Characters. At that time,
Marvel announced an agreement with Acclaim Entertainment, Inc. ('Acclaim')
whereby Acclaim purchased rights from Marvel to develop interactive
entertainment software based on several Marvel Characters. Marvel also has
licensed to MCA/Universal Studios exclusive use of its characters for theme
parks. MCA/Universal Studios is initially developing a theme park featuring,
among others, the Marvel Characters at Universal Studios Florida. Additionally,
Marvel entered into a joint venture with Robert Earl and Keith Barish, founders
of the Planet Hollywood restaurant chain, to develop a chain of restaurants
based on the Marvel Characters. However, there can be no assurance that any of
these projects will be completed, or if so, in the form currently contemplated.
 
     o EXPAND ITS LICENSED PRODUCT LINES BY TARGETING AND OBTAINING LICENSES
       FROM THIRD PARTIES, WITH AN EMPHASIS ON WELL-RECOGNIZED CONSUMER BRAND
       NAMES, SUCH AS GERBER(REGISTERED), APPLE(REGISTERED), SONY
       WONDER(REGISTERED) AND NASCAR(REGISTERED), AND POPULAR CHARACTERS
       APPEARING IN FILM AND TELEVISION PROGRAMS, SUCH AS THE
       MUPPETS(TRADEMARK), FLIPPER(TRADEMARK), HERCULES: THE LEGENDARY
       JOURNEYS(TRADEMARK) AND DISNEY'S THE HUNCHBACK OF NOTRE DAME
       ((COPYRIGHT)DISNEY).
 
     The Company has used its success as a marketer of Marvel licensed products
as a means of attracting other non-Marvel licenses, such as its licenses from
Gerber, Apple, MCA/Universal, NASCAR, Sony Wonder, Disney and Henson (owner of
the Muppets(Trademark)). The Company intends to seek new third party licenses to
broaden its toy lines and to enter new product categories. By continuing to
pursue a variety of third party licenses, the Company hopes to benefit its
future business in two ways: by adding licensed products that allow the Company
to develop products based on an established brand name, and by adding highly
promotional licenses which can be exploited for potentially greater but more
volatile sales.
 

     o DIVERSIFY ITS PROPRIETARY PRODUCT LINES THROUGH THE DEVELOPMENT OF
       PRODUCTS, SUCH AS BABY TUMBLES SURPRISE(TRADEMARK), BY THE COMPANY'S
       IN-HOUSE CREATIVE AND TECHNICAL STAFF AND THE ENGAGEMENT OF INDEPENDENT
       TOY INVENTORS.
 
     The Company's objective of diversifying into a broad range of product
categories has historically focused on licensed items. The Company has typically
introduced only a limited number of products, such as My Pal 2(Registered), Baby
Loves to Talk(Registered), Pretty and Me(Trademark), Jumpsie(Registered), Baby
Tumbles Surprise(Trademark) (the leading promotional doll in the United States,
as measured in unit sales in 1995), Baby So Real(Trademark), Wild & Wacky
Painter(Trademark) and Pooch, the Good Puppy(Trademark) which are proprietary to
the Company and not based on third party character licenses. The Company
believes that proprietary products can provide significant visibility to the 
Company among consumers, toy retailers and other toy industry professionals. 
The Company intends to continue to target the introduction of approximately 
three to five of these items each year.
 
                                       33


     o BROADEN INTERNATIONAL DISTRIBUTION OF EXISTING AND FUTURE PRODUCT LINES
       THROUGH THE DEVELOPMENT OF STRATEGIC RELATIONSHIPS WITH INDEPENDENT
       DISTRIBUTORS IN KEY MARKETS.
 
     The Company's international sales have grown approximately 49% from
approximately $14 million in 1994 to approximately $21 million in 1995. The
Company believes that markets outside the United States continue to present
significant opportunities, particularly in sales of its products based on the
Marvel Characters, as animated television series based on the Marvel Characters
are introduced in international television markets and as United States toy
retailers expand abroad. Currently, the Spider-Man(Registered) animated
television show is aired in major television markets around the world. The Iron
Man(Registered) and Fantastic Four(Registered) animated television programs air
in selected non-U.S. markets. Historically, the Company's international sales
have been at lower gross margins than its U.S. sales. However, certain expenses
are generally lower on international sales than on U.S. sales. For example, the
Company does not generally incur any advertising or commission expense on its
international sales. Therefore, the Company believes that these sales contribute
to net income at a rate approximately the same as U.S. sales. The Company is
currently seeking to expand its distribution in key international markets
through independent distributors.
 
     o PURSUE POTENTIAL ACQUISITIONS OF OTHER TOY BUSINESSES OR PRODUCT LINES
       WHICH ARE CONSISTENT WITH THE COMPANY'S GROWTH STRATEGY, SUCH AS SPECTRA
       STAR OR QUEST.
 
     As part of the Company's growth strategy, it evaluates potential
acquisitions of other toy businesses or product lines which the Company believes
will complement its existing business, such as Spectra Star and Quest. As of the
date of this Prospectus, the Company has no understanding or agreement with
respect to any acquisitions. In connection with any future acquisition
opportunities, the Company may incur debt or issue debt or additional equity
securities depending on market conditions and other factors.
 

     There can be no assurance that the Company will successfully implement all
or any part of its growth strategy.
 
INDUSTRY BACKGROUND
 
     According to the Toy Manufacturers of America, Inc. ('TMA'), an industry
trade group, total U.S. shipments of toys, excluding video games, were
approximately $13.4 billion in 1995. This represented an approximately 3%
increase from 1994. Retail sales of non-video game toys also increased during
this period. In 1995, sales by retailers of non-video toys rose to an estimated
$17.4 billion, which represented an approximately 6.7% increase over retail
sales in 1994.
 
     In recent years, leading toy retailers have gained significant market
share. They generally feature a large selection of toys, some at discount
prices, and maintain lean inventories to reduce their own inventory risk.
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.
 
     According to the TMA, the United States is the world's largest toy market,
followed by Japan and Western Europe. The Company believes that the
international markets continue to represent a significant opportunity for
expansion. Large American toy manufacturers (such as Hasbro, Mattel and Tyco)
hold dominant market shares in many international countries, although their
market shares are lower outside the United States. While the Company has
historically realized lower gross margins on international sales of its toys,
the selling, general and administrative expenses associated with those
international sales are typically less than those expenses associated with U.S.
sales.
 
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. See '--Licensing
and Related Rights.' The Company's product categories consist of boys', girls',
infant/preschool and activity. The chart below sets forth both U.S. net sales
for each of these lines, as well as U.S. net sales for discontinued items and
international sales:
 
                                       34 


                         NET SALES BY PRODUCT CATEGORY
 



                                                              THREE MONTHS
                                                                 ENDED
                                  YEAR ENDED DECEMBER 31,      MARCH 31,
                                 -------------------------   --------------
                                 1993      1994      1995     1995    1996
                                 -----    ------    ------   ------  ------

                                               (IN MILLIONS)
                                                      
Boys'.........................   $63.7    $110.4    $105.5   $21.0   $12.7
Girls'........................    16.4      12.7      37.7     1.0     7.5
Infant/Preschool..............      --       7.3      13.5     2.0     1.3
Activity......................      .3       6.1      15.5     1.6     9.3
Discontinued Items............      .3       6.2       3.6     1.3      .4
                                 -----    ------    ------   ------  ------
  Total U.S. Net Sales........    80.7     142.7     175.8    26.9    31.2
International Sales...........     9.0      13.8      20.6     1.0     7.2
                                 -----    ------    ------   ------  ------
  Total Net Sales.............   $89.7    $156.5    $196.4   $27.9   $38.4
                                 -----    ------    ------   ------  ------
                                 -----    ------    ------   ------  ------


 
  Boys' Products
 
     Boys' products consist of Marvel Character as well as other licensed
character action figures. The Marvel License includes more than 3,500 Marvel
Characters, all of which are available to the Company for toy development. The
Company expects that Marvel will continue to be an extensive source of popular
characters for toy production. To date, the segment of the Marvel Universe that
has been most successfully developed by the Company is the X-Men(Registered)
group of Marvel Characters, consisting of over 300 characters. The Company
believes that the popularity of the X-Men(Registered) is primarily a result of
that group's long-standing success as a comic book title, as well as the success
of FCN's animated X-Men(Registered) television show. The Company has taken
advantage of the growth of the X-Men(Registered) group of characters by
introducing new assortments of action figures, playsets and vehicles.
 
     The Spider-Man(Registered) product line capitalizes on the animated
television series which is broadcast on FCN as a weekly Saturday morning
television show. The toy line supporting Spider-Man(Registered) is broad,
consisting of various assortments of action figures in different size ranges,
along with vehicles and playsets. The Company also markets boys' toys based on
characters portrayed in the Marvel-related Iron-Man(Registered) and Fantastic
Four(Trademark) syndicated television programs. In 1995, the Company introduced
a line of Ghost Rider(Trademark) action figures and accessories in reaction to
expanding consumer preferences within the Marvel Universe of characters. In 1996
the Company introduced Generation X(Trademark) action figures and plans to
introduce a line of The Incredible Hulk(Registered) and Venom(Registered) action
figures in the second half of 1996.
 
     The Company's boys' business is also comprised of other non-Marvel
Character genres supported by television advertising and broadcasts. In 1995,
the Company began to produce a line of action figures and playsets based on
characters portrayed in the Hercules: The Legendary Journeys(Trademark) and
Xena: Warrior Princess(Trademark) syndicated television programs. The Company
intends to introduce a line of construction and vehicle playsets under the
Battle Builders(Trademark) brand.
 
  Girls' Products
 

     Girls' products consist largely of proprietary items. The Company's girls
business has continued to thrive with the introduction in 1995 of several dolls
at price points designed to attract a variety of potential consumers. Baby
Tumbles Surprise(Trademark), which has been newly expanded into a line of
related products, was the leading promotional doll in the United States, as
measured in unit sales in 1995. The Company has marketed Baby So Real(Trademark)
and Pooch, the Good Puppy(Trademark), both of which received advertising support
and considerable consumer demand.
 
     Because of the Company's marketing success in the doll category, the
Company has continued to attract new doll concepts from third-party inventors.
Both Baby Tumbles Surprise(Trademark) and Baby So Real(Trademark), Bendy
Wendy(Trademark) and Take Care of Me Twins(Trademark) are products of such
third-party inventors.
 
  Infant/Preschool Products
 
     Based on the name recognition and the goodwill associated with the
Gerber(Registered) name, in the fall of 1994, the Company began to produce a
line of dolls, as well as infant and toddler learning toys with the
Gerber(Registered) trademark and/or the famous trademark Gerber(Registered) 
baby face icon. The preschool line consists of dolls with the famous 
trademarked baby face, which are manufactured with different features in a 
variety of sizes to attain a variety of price points, and electronic and 
non-electronic learning toys which are designed to help an infant's cognitive
 
                                       35


development. The preschool category is competitive at the retail level, and 
the Company began in 1995 to ship sufficient quantities of Gerber(Registered) 
product to begin to achieve considerable shelf space. The Company plans to 
continue to expand the line with new and a rotating series of dolls and 
learning toys each year.
 
  Activity Products
 
     The Company augmented its activity toy business with the acquisition of the
kite, outdoor and flying toy businesses of Spectra Star. The Spectra
Star(Registered) brand name accounts for a substantial share of the United
States kite business, and depends on license-driven products. The Company's kite
licenses relate to a variety of motion picture and television programs from such
licensors as Disney, MCA/Universal and Warner Bros. Under the Marvel License,
the Company also manufactures kite products drawing upon popular Marvel
Character groups. The Company also introduced in 1995 in its activity toy
category a line of CD-ROM comic books for each of the X-Men(Registered),
Spider-Man(Registered), Iron Man(Registered) and Fantastic Four(Trademark)
Marvel Characters. The Company's activity toy products also include the
Quest(Trademark) model rocketry toys associated with the business acquired from
Quest. The Company also introduced in 1995 a proprietary activity toy, the Wild
& Wacky Painter(Trademark), which met with a favorable retail reaction in 1995.
The Company plans to introduce a line of pinball games related to various Disney
movies, as well as a line of multi-activity game tables.
 
LICENSING AND RELATED RIGHTS

 
     In carrying out its business strategy, the Company continuously monitors
the introduction of licensable properties and intends to pursue 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 1995, 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. Other
licenses, referred to as 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 the payment of
non-refundable advances or guaranteed minimum 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
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 trademarks will produce marketing value for the toy products. There can
be no assurance that product produced under the licenses acquired by the Company
will obtain significant market acceptance.
 
     Royalties paid by the Company to licensors and inventors typically range
from 4% to 14% of net sales, with certain products, such as electronic products,
generally having higher royalty rates. In certain cases the Company may pay both
character and inventor royalties for the same item. Most licenses extend for one
to four years and are renewable at the option of the Company subject to the
satisfaction of minimum guaranteed payments or the attainment of certain sales
levels during the initial term of the license. As of December 31, 1995, the
Company was obligated to make an aggregate of approximately $1.5 million in
payments of guaranteed royalties under these licenses in 1996 and approximately
an additional $5.4 million thereafter. In addition, certain license agreements
require the Company to fulfill minimum royalty obligations in order to maintain
or renew the license agreements. The Company's license agreements with Gerber
and Coleman require the Company to expend certain amounts on promotion of
licensed products. The Company's royalty expense in 1995 was approximately $10.3
million. In the future, royalty rates and minimum guaranteed payments may
increase or decrease depending upon various competitive forces in the toy 
industry. The Marvel License is royalty-free. The Company's license agreements 
also generally include quality control and cross indemnity provisions and in 
some instances terminate at the option of the licensor upon a change in control 
of the Company.
 
                                       36



 
  Marvel License Agreement
 
     In connection with the formation of the Company, Marvel granted the Company
the Marvel License, an exclusive, perpetual and royalty-free license to
manufacture and distribute a broad range of toys based upon the Marvel
Characters 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(Registered) trademark. The Marvel License currently covers more than
3,500 different Marvel Characters, including: Marvel Super Heroes(Trademark),
X-Men(Registered) and X-Force(Trademark) (including Wolverine(Registered),
Nightcrawler(Trademark), Colossus(Trademark), Storm(Trademark),
Cyclops(Trademark), Bishop(Registered) and Gambit(Trademark));
Spider-Man(Registered); Captain America(Registered); Fantastic Four(Trademark)
(including Mr. Fantastic(Trademark), The Human Torch(Trademark), Invisible
Woman(Trademark) and The Thing(Trademark)); The Incredible Hulk(Registered);
Thor(Trademark); The Silver Surfer(Trademark); Daredevil(Trademark); Iron
Man(Registered); The Punisher(Registered); Dr. Strange(Trademark); Ghost
Rider(Trademark); Cable(Trademark) and the other Marvel Characters. The Marvel
License authorizes the Company to produce various specified categories of toys
and toy-related products, including action figures and accessories, dolls,
dress-up play items and play sets, costumes (other than Halloween costumes),
pre-school products, board and other games, puzzles, model kits, outdoor toys
and Hero Caps(Registered) (a game similar to pogs). Among the products not
included in the Marvel License are video games. The Marvel License extends in
perpetuity unless terminated as described below and does not require the payment
of royalties.
 
     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 the licensed products.
 
     The Marvel License provides that the licensed products produced by the
Company shall be suitable in style, appearance and quality as determined by
Marvel. The Marvel License further provides that the Company submit for approval
rough designs, concepts, pre-production sketches and models of licensed
products. The Marvel License also contains customary cross-indemnification
provisions.
 
     If the Company fails to substantially attain its annual 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 reasonably determines.
 
     Under separately negotiated sublicense agreements, the Company has granted
to various third parties sublicenses to sell and distribute certain toys based
upon the Marvel Characters. Typically, these sublicenses are for specified
articles, such as children's costumes, board games or plush items, and are based
upon a limited group of Marvel Characters. The Company typically grants a
sublicensee the right to sell and distribute its defined set of licensed
articles in a particular territory, which is often a single country, for a

limited time period, which is typically one to two years, in return for royalty
payments. Most of the Company's sublicense agreements contain minimum royalty
guarantees due over the term of the sublicense agreements. These sublicense
agreements also typically contain quality control and cross indemnification
provisions. Revenue derived from the Company's sublicense arrangements was
approximately $800,000 in 1994 and approximately $3.3 million in 1995.
 
  Other License Arrangements with Marvel
 
     Marvel has licensed the Company to use the Marvel Characters in the
production of bicycle safety helmets. The license agreement provides that Marvel
is entitled to receive royalty payments based on the Company's net sales of
bicycle helmets and provides for a guaranteed minimum royalty. The Company is
not currently producing bicycle safety helmets.
 
     The Company expects that Marvel will continue to consider various
opportunities involving the commercial exploitation of the Marvel Characters.
Under the Marvel License, if such opportunities relate to the manufacture and
distribution of any of the categories of toys and toy related products covered
by the Marvel License, those opportunities can be pursued commercially only by
the Company. On the other hand, if such opportunities relate to the manufacture 
and distribution of other types of products, Marvel is free to pursue such 
opportunities directly or with others. However, while Marvel is under no 
obligation to do so, Marvel may offer any of these business opportunities to 
the Company. The terms of any arrangement with regard to these business 
opportunities would be subject to negotiation between the Company and Marvel. 
There can be no assurance that Marvel will offer any business opportunities not 
covered by the Marvel License to the Company or that such opportunities will be 
offered on terms acceptable to the Company.

                                       37


 
     The Marvel License extends only to the specified categories of toys and toy
related products covered thereby, and Marvel is free to pursue directly or with
others business opportunities involving the commercial exploitation of the
Marvel Characters in connection with the manufacture and distribution of other
types of products. See 'Certain Transactions.'
 
  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. See 'Certain
Transactions.'
 
  Gerber License Agreement
 
     The Gerber License grants the Company an exclusive license to use the

Gerber(Registered) trademark in connection with the manufacture and distribution
of dolls and infant and toddler learning toys. The Gerber License extends until
December 31, 1997. The Gerber License provides for a royalty on net sales of the
licensed products, 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.
Although the Company does not believe that the Offering should be deemed to be a
change in ownership of the Company within the meaning of the Gerber License, and
Gerber has not informed the Company that it intends to terminate the Gerber
License, there can be no assurance that Gerber would not claim that its license
with the Company was immediately terminable as a result of the Offering.
Termination of the Gerber License could have a material adverse effect on the
Company.
 
  Other License Agreements
 
     The Company is a party to a license agreement with Coleman, an affiliate of
the Company (the 'Coleman License'), which grants the Company a license to
utilize the Coleman(Registered) trademark in connection with the manufacture,
distribution and sale of certain children's toys in the United States and
Canada. The Coleman License expires December 31, 1997, subject to a three-year
extension upon certain conditions. The Coleman License provides that the Company
will pay Coleman a royalty on net sales of the Coleman licensed products and
guarantees to Coleman certain minimum annual royalties. The Coleman License
provides that the Company shall not act as a licensee of directly competitive
goods on behalf of a third-party licensor. However, nothing in the Coleman
License restricts the Company's right to buy, manufacture, import, sell or deal
in merchandise other than Coleman licensed products. The Coleman License
contains customary cross indemnification provisions. Coleman is an affiliate of
Marvel.
 
     The Company is also a party to various license agreements with Disney which
grant the Company licenses to utilize certain of Disney's copyrights and
trademarks in connection with the manufacture, distribution and sale of certain
children's toys, mainly in the United States. Licensed products include pinball
games, kites, kite accessories, yo-yos, flying disks and tops. The licenses with
Disney, most of which extend through early 1998, allow the use of various
characters portrayed in Disney's The Hunchback of Notre Dame
((Copyright)Disney), Disney's Toy Story ((Copyright)Disney) and Disney's 101
Dalmatians ((Copyright)Disney) motion pictures and other well-known Disney
characters such as Mickey Mouse ((Copyright)Disney), Minnie Mouse
((Copyright)Disney) and Donald Duck ((Copyright)Disney). The Disney license
agreements obligate the Company to pay to Disney royalties on net sales of the
Disney licensed products and guarantee to Disney certain minimum payments.

     The Company has obtained other licenses for the use of well-known
trademarks on kites and related Spectra Star(Registered) products. A license
agreement with Abrams Gentile Entertainment, Inc. ('AGE') grants the Company an
exclusive license, subject to certain limitations, to use the name, designs and
likenesses of Sky Dancers(Registered) and Dragonflyz(Trademark) in connection
with the manufacture, sale and distribution of kites, kite accessories and other
toys in the United States, Canada and Mexico. The license agreement, which

expires in December 1997, obligates the Company to pay AGE a royalty on net
sales of the licensed products.
 
     Under a master merchandising license agreement with MCA/Universal the
Company has obtained an exclusive license, subject to certain limitations, to
use Hercules: The Legendary Journeys(Trademark) and Xena: Warrior
 
                                       38


Princess(Trademark) in connection with the manufacture and distribution of a
variety of toys. The license agreement also grants the Company the option to
acquire the toy licensing rights to theatrical motion pictures based upon
Hercules: The Legendary Journeys(Trademark) and Xena: Warrior
Princess(Trademark). This license is worldwide except for Japan and certain
other markets. The license agreement also grants the Company an exclusive
license, subject to certain limitations, to manufacture and distribute a variety
of toys based on the television and motion picture productions of
Flipper(Trademark). The license for Flipper(Trademark) products covers the
United States and certain other countries, including Canada, the United Kingdom
and France. The MCA/Universal license agreement, which expires in December 1998,
obligates the Company to pay MCA/Universal a royalty on wholesale sales of the
licensed products and guarantees to MCA/Universal certain minimum payments.
 
     In 1995, the Company entered into a license agreement with Henson, pursuant
to which the Company has begun to produce various plush items related to the
Henson Muppet Treasure Island(Trademark) motion picture. Under this license, the
Company has rights to manufacture various toy products based upon the new Henson
network television program Muppets Tonight(Trademark) and the existing Henson
Muppet Babies(Trademark) animated cable television program. The Henson license
agreement, which expires in December 1997, obligates the Company to pay to
Henson a royalty on net sales of the Henson licensed products and guarantees to
Henson certain minimum payments.
 
     The Company is a party to license agreements with other licensors granting
rights to use characters or recognized consumer trademarks or brand names in the
manufacture, distribution and sale of other children's toys. Such licensors
include Apple, NASCAR, Saban, Sony Wonder and Revlon Consumer Products
Corporation.
 
     The Company's license agreement with Apple grants the Company a license to
use the Apple(Registered) name and logo in the United States, Canada and Mexico
in connection with the manufacture, distribution and sale of certain electronic
learning aids and games for preschool children.
 
     The Company's license agreement with NASCAR grants the Company a license to
use the NASCAR(Registered) name and trademark in the United States and Canada in
connection with the manufacture, sale and distribution of certain toys including
motorized plastic vehicles and ride-on vehicles.
 
     The Company's license agreement with Saban Merchandising, Inc., and Saban
International N.V. grants the Company the right to use the title, logo and
characters from the television series 'Space Strikers' in connection with the
manufacture, distribution and sale of certain toys, including dolls, action
figures and kites.

 
     The Company's license agreement with Sony Wonder, a division of Sony Music
Entertainment, Inc., grants the Company the right to use the characters and
marks from animated, public domain audiovisual productions such as 'The Jungle
King,' 'Pocahontas' and 'Noah's Ark' in connection with the manufacture,
distribution and sale in the United States and Canada of CD-ROMs.
 
     The Company's license agreement with Revlon Consumer Products Corporation,
an affiliate of the Company, grants the Company the right to use the
Revlon(Registered) trademark on girls' dolls and play sets.
 
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.
However, the Company believes that the loss of the rights to the 
X-Men(Registered) or Spider-Man(Registered) trademarks or copyrights or of
intellectual property rights for a significant number of its more popular
products could have a material adverse effect on the Company. See '--Licensing
and Related Rights.'
 
DESIGN AND DEVELOPMENT
 
     The Company's new toy products generally begin with the origination of a
toy concept by Mr. Arad or another member of the Company's 22-person product
development staff or through submissions by third parties. With the assistance
of outside artists, sculptors and engineers, the Company's product development
staff creates sketches and three-dimensional models of each proposed toy. If
made under license, the Company also solicits any required approvals from the
licensor for the product and the packaging. If the proposed product is a
 
                                       39


mechanical toy, the development team then prepares a working prototype and, in
many cases, a demonstration film showing the toy in operation. The time from
concept to production of a new toy can range from six to eighteen months,
depending on product complexity.
 
     The reactions of the Company's principal retail customers to the new toy
are generally solicited on an informal basis throughout the development process,
and on a more formal basis once the prototype or demonstration film has been
prepared. The Company also uses consumer focus groups to gauge market place
acceptance. Before investing in production of a proposed new toy, the Company
solicits pre-production commitments from retailers through its sales staff and
independent manufacturer's representatives and also gauges the interest of
retailers expressed at U.S. and international toy trade shows. If the Company
obtains sufficient indications of interest, including possibly pre-production
purchase orders from retailers, the Company arranges for tools and molds to be

made by manufacturers in the Far East so that production can begin.
 
MANUFACTURING
 
     The Company relies on independent parties in China to manufacture a
substantial portion of its products. The remainder of its products are
manufactured in the United States or Mexico. Decisions related to the Company's
choice of manufacturer are based on price, quality of merchandise, reliability,
and the ability of a manufacturer to meet the Company's timing requirements for
delivery. The Company is not a party to long-term contractual or other
arrangements with any manufacturer. The Company participates in electronic data
interchange programs maintained by certain of its largest customers, which
allows the Company to monitor actual store inventories and thereby to schedule
its production to meet anticipated re-orders. There can be no assurance,
however, that anticipated re-orders will, in fact, materialize.
 
     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 and at reasonable prices. However, there can be no assurance that, in
the event of a disruption in the Company's supply of raw materials, the Company
could obtain these resources in a timely manner or at all.
 
     According to the TMA, approximately 75% of the toys sold in the United
States are manufactured, either in whole or in part, overseas. Of that amount a
majority are produced in China. In 1995, a substantial portion of the Company's
products were manufactured in China. As a matter of policy, the Company uses
several different manufacturers. The Company has concentrated its production
with a limited number of major Chinese manufacturers. As a result of this
concentration, the Company believes that each of these manufacturers derives a
significant portion of its business from the Company. This concentration
reflects the Company's strategy of selecting manufacturers at which the
Company's product volume qualifies the Company as a significant customer. While
the Company is not dependent on any single manufacturer in China to supply it
with products, the Company would be affected by political or economic
disruptions affecting businesses in China generally. The Company believes that
alternate sources of manufacturing are available outside China, although there
can be no assurance that these alternate sources will prove to be adequate or
available on acceptable terms.
 
     In June 1996, the United States extended China's 'Most Favored Nation'
status for one year. Most Favored Nation status allows products imported into
the United States from China to be accorded normal import duties. The loss of
Most Favored Nation status by China would result in a substantial increase in
import duty for the Company's products produced there and imported into the
United States, which could materially affect the Company's business.

     In addition, China may be subject to retaliatory trade restrictions imposed
by the United States under various provisions of the Trade Act of 1974, as
amended, including 'Super 301,' which regulates unfair trade practices, and
'Special 301,' which regulates protection of intellectual property. Super 301
authority permits the USTR to impose a variety of trade sanctions against a

foreign nation which the USTR determines is engaging in unfair trade practices.
Special 301 authority permits the USTR to impose a variety of trade sanctions
against a foreign nation which the USTR determines is tolerating violations of
intellectual property rights.
 
     In May 1996, after determining that China was not enforcing crucial
portions of its February 1995 intellectual property rights agreement with the
United States, the USTR announced that sanctions would go into effect on June
17, 1996, unless China began satisfactory compliance. The sanctions, which were
to raise duties on various products imported from China to 100%, were averted
when on June 17, 1996, the United States and 
 
                                       40


China reached an agreement on stricter enforcement of the 1995 agreement. 
Although toys such as those which the Company produces in China were not 
subject to the increased duties threatened in May-June 1996, there can be no 
assurance that they will be exempt from or unaffected by duties in future 
sanctions. Future import quotas, increased tariffs on goods imported from 
China, or other retaliatory measures could result in significant supply 
disruptions or higher merchandise costs to the Company. Other toy companies 
which obtain products from China would also be affected by such a change. The 
ultimate impact on the Company from such a change in trade status would depend 
on several factors, including the Company's ability to procure alternative 
manufacturing sources outside of China and its ability to pass resultant cost 
increases to its customers as product price increases.
 
     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 actively quality control on behalf of the
Company. The Company uses an affiliate of Acts Testing Labs (H.K.) Ltd. to
provide testing services for the limited amount of product currently produced in
the United States.
 
     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 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(Registered) products are manufactured mainly in
Mexico. Pursuant to an agreement with the former owner of Spectra Star's
business, the Company reimburses all of the operating costs incurred in the
manufacture of Spectra Star(Registered) products at the former owner's Mexican
facility. The Company is required to purchase that facility. See '--Properties.'
While it expects to maintain a consistent level of manufacturing in Mexico, due
to capacity constraints of the Mexican facility, the Company does not currently

view manufacturing at that facility as an alternative to manufacturing in China.
See '--Properties.'
 
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 90% of the
Company's net sales in 1995.
 
     The following table sets forth information concerning the Company's net
sales in the United States and internationally:
 
                                   NET SALES
 



                                                                                                            THREE MONTHS
                                                                       YEAR ENDED DECEMBER 31,             ENDED MARCH 31,
                                                                       -----------------------    ---------------------------------
                                                                       1993     1994     1995          1995              1996
                                                                       -----   ------   ------    ---------------   ---------------
                                                                                              (IN MILLIONS)
                                                                                                     
U.S. Net Sales......................................................   $80.7   $142.7   $175.8         $26.9             $31.2
International Sales.................................................     9.0     13.8     20.6           1.0               7.2
                                                                       -----   ------   ------        ------            ------
Total...............................................................   $89.7   $156.5   $196.4         $27.9             $38.4
                                                                       -----   ------   ------        ------            ------
                                                                       -----   ------   ------        ------            ------



  U.S. Sales
 
     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 are 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, which customers accounted in the aggregate for approximately 84% and 72%
of the Company's U.S. gross sales in 1995 and the three months ended March 31,
1996.
 
     The Company maintains a 19-person sales and marketing staff and retains
various independent manufacturers' sales representative organization in the
United States. The Company's senior management utilize sales representatives, as
well as in-house sales and marketing personnel, to facilitate its general sales
strategy. 
 
                                       41



Sales representatives utilized by the Company are paid by commissions and 
bonuses, which aggregated approximately .7% of U.S. net sales in 1995. The

Company also directly introduces and markets to customers new products and
extensions to previously marketed product lines by participating in the major
trade shows in New York City, Hong Kong and Europe and through a showroom
maintained by the Company in New York City.
 
     The Company does not sell its products on consignment and, in lieu of
accepting returns of merchandise from retailers who are unable to resell the
quantity of products which they have purchased from the Company, the Company
occasionally offers credits and other concessions to assist those retailers.
 
     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.
 
  International Sales
 
     The Company believes international markets represent a significant
opportunity for future expansion. The Company's products are sold outside the
United States through independent distributors by its Hong Kong subsidiary. 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. In 1995 and the three months ended March 31, 1996, the
Company's international sales accounted for approximately 10% and 19%,
respectively, of the Company's net sales. Sales in non-U.S. countries are made
directly by the Company's Hong Kong subsidiary to independent distributors, some
of which are licensees that have acquired international distribution rights in
respect of categories of products which the Company has the right to distribute
in the U.S. International distributors ordinarily retain their own sales
representatives. The Company currently retains approximately ten international
distributors to market its products internationally. The Company retains an
independent firm in Hong Kong to oversee the shipment of the Company's
international sales. For further information with respect to net sales,
operating income and assets associated with the Company's Hong Kong subsidiary,
see note 2 of notes to the financial statements.
 
     The non-U.S. countries in which the Company markets products principally
include the United Kingdom, Italy, France, Australia, Japan, Germany, Brazil and
Canada. Sales by the Company to international customers are ordinarily effected
in United States dollars and are secured by letters of credit. Accordingly, the
Company's revenues are not ordinarily affected by fluctuations in monetary rates
overseas. The United States dollar value in relation to other currencies,
however, may have a positive or negative impact on sales in foreign countries,
depending on the relationship of the respective currencies. Each international
distributor purchases and maintains its own inventory of the Company's products.
 
  F.O.B. Program
 
     The Company has hired three individuals with the intent of developing an
F.O.B. line which will supplement the Company's other products. Many major toy
companies develop a product line to be offered to their customers on a
free-on-board ('F.O.B.') basis. Sales made on an F.O.B. basis are usually
delivered dockside at the product's point of origin, with the purchaser assuming
the costs of transportation, duties and warehousing at the ultimate destination.

Products sold on an F.O.B. basis are typically complementary to a company's
domestic product lines but are not in direct competition with them. For example,
if a company were to sell a fashion doll through its regular product line, it
might choose to offer accessories for these dolls on an F.O.B. basis. The nature
of these items, and the fact that they are offered on an F.O.B. basis, is
intended to allow toy companies to sell these products with lower tooling and 
development costs, direct advertising and inventory and receivables risk than 
their standard lines. As a result, toy companies seek to sell F.O.B. products 
at lower prices, resulting in improved margins for their customers. The Company 
estimates that it will incur incremental costs in 1996 in conjunction with the 
implementation of the F.O.B. line. No sales on an F.O.B. basis are anticipated 
in 1996.
 
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 in order to coordinate its
promotional efforts with those of its retailers. The Company believes that
television programs underlying various Company product lines increase exposure
and awareness without 
 
                                       42



increased advertising expenditures by the Company. In addition, the Company 
has also found that the exposure of its toy characters on television such as 
Spider-Man(Registered), X-Men(Registered), Fantastic Four(Trademark) and Iron 
Man(Registered) can significantly increase sales of the Company's products. 
The Company believes that feature films and television programming developed 
by Marvel Studios may create additional consumer interest in Marvel Characters 
and could generate revenue from sales of toys based on Marvel Characters in
these projects. The Company's position as a licensee, in many cases, permits it
to  gain favorable media exposure from advertising and other media events 
commissioned by its licensors. The Company 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. See 'Certain 
Transactions--Tangible Media Advertising Consultant' and '--Government
Regulations; Insurance.' 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., Tyco Toys, Inc., Playmates, Inc.
and Bandai, Co., Ltd., and the Company considers Just Toys, Inc., Lewis Galoob
Toys, Inc., Happiness Express Inc., Irwin Toy Limited, 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 will enable the Company to compete
successfully. However, there can be no assurance that the Company will compete
effectively against its competitors.
 
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 'Consumer Commission') to
protect children from hazardous toys and other articles. The Consumer Commission
has the authority to exclude from the market articles which are found to be
hazardous and can require a manufacturer to repurchase such toys under certain
circumstances. Similar laws exist in some states and cities in the United States
and 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 Company's business exposes it to potential product liability risks which are
inherent in the design, marketing and sale of children's products. With respect
to the manufacture of model rockets by the Company's Quest division, the Company
is subject to regulations, including the rules enforced by the Bureau of
Alcohol, Tobacco and Firearms and state and local fire ordinances. 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 June 28, 1996, the Company had 126 employees, of whom 61 were based
at the Company's New York office, 37 were based at the Company's Arizona
facilities and 28 were based at the Company's Hong Kong office. In total, 70
employees are involved in the manufacturing or creative process, while the
balance of employees are involved in sales, marketing, finance or administrative
functions. The employees based in Hong Kong are principally engaged in
engineering, administrative, packaging and quality control activities.
 
PROPERTIES
 
     The Company's principal executive offices and showroom are located in New
York City where the Company occupies approximately 17,000 square feet of office
space pursuant to a lease that expires in April 1997. Under a lease that expires
in 2004, the Company also maintains a showroom at the Toy Center Building in 
 
                                       43


New York City, where the Company leases approximately 5,200 square feet of 
display and office space. The Company also leases approximately 80,000 square 
feet of warehouse space in Yuma, Arizona. In connection with the Company's 
acquisition of Spectra Star, the Company is required to purchase from a 

subsidiary of Spectra Star the 70,000 square foot manufacturing facility in San 
Luis, Mexico that the Company currently utilizes to manufacture Spectra 
Star(Registered) products. The purchase price of that facility will be 18,182 
shares of Series A Preferred Stock. The Company leases approximately 2,500 
square feet of manufacturing facilities in Yuma, Arizona, which are utilized to 
manufacture the Company's Quest(Trademark) products. 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. See 
'Management's Discussion and Analysis of Results of Operations and Financial 
Condition--Liquidity and Capital Resources,' 'Description of Capital Stock' and 
'Certain Transactions.'
 
LEGAL PROCEEDINGS
 
     On February 14, 1994, Robert A. McDarren and Barry Y. Piels (the
'Plaintiffs') filed a complaint in the United States District Court for the
Southern District of New York against the Company, the Predecessor Company,
Marvel and Mr. Perlmutter. The complaint as amended alleges that the Predecessor
Company violated a settlement agreement under which the Predecessor Company
agreed, among other things, to use its best efforts to help the Plaintiffs
obtain certain product molds and product licenses from Marvel. Marvel was
subsequently dismissed from the action. Mr. Perlmutter agreed, pursuant to the
formation and contribution agreement (the 'Formation Agreement'), dated March
19, 1993, relating to the Company's formation, to indemnify the Company against
any liability, including reasonable legal fees and disbursements of defending
litigation, arising out of preclosing liabilities of the Predecessor Company,
including this litigation. On April 7, 1995, the court denied the Company's
motion, and the Plaintiffs' cross-motion, for summary judgment. Accordingly, the
case stands ready for trial, although no trial date has yet been set by the
Court. The Plaintiffs seek up to $100,000,000 in compensatory and punitive
damages, as well as injunctive relief. Although there can be no assurances, the
Company believes that the ultimate outcome of the suit will not have a material
adverse effect on the Company because the Company believes that it has
meritorious defenses. In addition, Mr. Perlmutter has agreed to indemnify the
Company against any liability in connection with such action pursuant to the
Formation Agreement.
 
     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 in that action, which was served on March 19, 1996, alleges that GDL
is entitled to receive 10% of the capital stock of the Predecessor Company
pursuant to an alleged 1990 agreement between GDL and Mr. Perlmutter and seeks
money damages based on the value of 10% of the Company's Class A Common Stock
beneficially owned by Mr. Perlmutter, as well as other consideration received by
him, and a variety of equitable remedies. Mr. Perlmutter has denied all of the
material allegations made in support of GDL's claims, and pursuant to the
Formation Agreement, agreed to indemnify the Company in respect to any liability
arising from GDL's claims. The Company has moved to dismiss GDL's amended
complaint for failure to state a cause of action. The Company does not believe
that any of the claims made against it will have a material adverse effect on
its financial position because it believes that all of the claims against it are
without merit and because of the indemnity provided to it in the Formation

Agreement. From 1987 to 1991, Mr. Ahearn was a principal of GDL. See
'Management.'

     The Company is involved in various 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.
 
                                       44


                                   MANAGEMENT
 
EXECUTIVE OFFICERS AND DIRECTORS
 
     The executive officers and Directors of the Company, their ages as of June
28, 1996 and their positions with the Company are as follows:
 



NAME                                          AGE   POSITION
- -------------------------------------------   ---   -------------------------------------------
                                              
Ronald O. Perelman.........................   53    Chairman of the Board of Directors and
                                                      Director
Joseph M. Ahearn...........................   41    President, Chief Executive Officer and
                                                      Director
Bobby G. Jenkins...........................   34    Chief Financial Officer, Treasurer and
                                                      Director
Daniel J. Werther..........................   35    Executive Vice President, Senior Legal
                                                      Officer and Secretary
Andrew R. Gatto............................   48    Executive Vice President, Marketing
Avi Arad...................................   48    Director
William C. Bevins..........................   50    Director
Donald G. Drapkin..........................   48    Director
Isaac Perlmutter...........................   53    Director
Terry C. Stewart...........................   50    Director
James F. Halpin............................   44    Director
Alfred A. Piergallini......................   49    Director
Lynn Schenk................................   51    Director
Paul R. Verkuil............................   56    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. Pursuant to a stockholders' agreement
discussed below, Messrs. Perelman, Bevins, Drapkin, Stewart, Jenkins, Halpin,
Piergallini and Ms. Schenk are the designees of Marvel Characters, Messrs.
Perlmutter and Ahearn are the designees of Mr. Perlmutter and Mr. Arad is the
designee of Mr. Arad. See 'Certain Transactions.'
 
     Ronald O. Perelman has been Chairman of the Board and a Director of the
Company since March 1995. Mr. Perelman has been Chairman of the Board and Chief
Executive Officer of MacAndrews & Forbes and various affiliates since 1980. Mr.

Perelman is Chairman of the Board of Andrews Group Incorporated ('Andrews
Group'), Consolidated Cigar Corporation ('Consolidated Cigar'), Mafco
Consolidated Group Inc. ('Mafco Consolidated'), Mafco Worldwide Corporation
('Mafco Worldwide'), Marvel, Meridian Sports Incorporated ('Meridian'), NWCG and
Power Control Technologies Inc. ('PCT') and is Chairman of the Executive
Committee of Revlon, Inc. and Revlon Consumer Products Corporation. Mr. Perelman
is a director of the following corporations which file reports pursuant to the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'): Andrews Group,
Coleman, Coleman Holdings Inc., Coleman Worldwide Corporation, Consolidated
Cigar, First Nationwide Bank, A Federal Savings Bank, First Nationwide Holdings
Inc., First Nationwide (Parent) Holdings Inc., Mafco Worldwide, Marvel, Marvel
Holdings Inc. ('Marvel Holdings'), Marvel (Parent) Holdings Inc. ('Marvel
Parent'), Marvel III Holdings Inc. ('Marvel III'), Meridian, NWCG, NWCG Holdings
Corporation, New World Television, Incorporated ('New World Television'), PCT,
Revlon, Inc., Revlon Consumer Products Corporation and Revlon Worldwide
Corporation ('Revlon Worldwide').
 
     William C. Bevins has been a Director of the Company since April 1993. Mr.
Bevins has been a director of Marvel since 1989, Chief Executive Officer of
Marvel since 1991 and President of Marvel since November 1994. Mr. Bevins has
been President and Chief Executive Officer of Andrews Group since 1988 and NWCG
since 1994 and Executive Vice President of MacAndrews Holdings since 1988. Mr.
Bevins also is a director of
 
                                       45


Andrews Group, Marvel Holdings, Marvel Parent, Marvel III, NWCG, NWCG Holdings
Corporation and New World Television. Mr. Bevins was a director and Chief
Financial & Administrative Officer of Turner Broadcasting System, Inc. for more
than five years prior to 1988.
 
     Donald G. Drapkin has been a Director of the Company since April 1993. Mr.
Drapkin has been a director of Marvel since 1991. He has been Vice Chairman and
a director of MacAndrews & Forbes and Vice Chairman of various of its affiliates
since 1987. Mr. Drapkin also is a director of the following corporations which
file reports pursuant to the Exchange Act: Andrews Group, Coleman, Coleman
Holdings Inc., Coleman Worldwide Corporation, Marvel, Marvel Holdings, Marvel
Parent, Marvel III, Revlon, Revlon Products, Revlon Worldwide, The Claridge
Hotel and Casino Corporation, Algos Pharmaceutical Corporation and VIMRx
Pharmaceuticals Inc. Mr. Drapkin was a partner at the law firm of Skadden, Arps,
Slate, Meagher & Flom for more than five years prior to March 1987.
 
     Terry C. Stewart has been a Director of the Company since April 1993. Mr.
Stewart has been a director of Marvel since 1991 and an Executive Vice President
of Marvel since January 1996. Mr. Stewart joined Marvel in 1989 as Executive
Vice President, Development and served as President and Chief Operating Officer
from September 1990 to July 1994, Vice Chairman from March 1995 to December 1995
and President and Chief Operating Officer, Marvel Comics from July 1994 until
March 1995. From 1984 to 1989, Mr. Stewart was Vice President-Business
Development at Combustion Engineering.
 
     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 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. As an independent investor Mr. Perlmutter currently
has, or has had within the past five years, controlling ownership interests in
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.) ('Job Lot'), a discount oriented retail chain, Tangible
Media, a media buying and barter advertising agency, and REC Sound Incorporated,
a distributor of licensed novelty electronics, and is also the majority
stockholder of Classic Heroes, Inc., a distributor of apparel manufactured under
licenses from Marvel and others.
 
     Avi Arad has served as a Director of and consultant to the Company since
April 1993. Mr. Arad has been the President and Chief Executive Officer of New
World Animation, a media production company under common control with Marvel,
since April 1993 where he has served as the Executive Producer of the
X-Men(Registered) and the Spider-Man(Registered) animated TV series currently
carried on FCN and the Fantastic Four(Trademark) and Iron Man(Registered)
animated syndicated programs. Mr. Arad has been a toy inventor and designer for
more than 20 years for major toy companies including Mattel Inc., Hasbro, Inc.
and Tyco Toys, Inc. During his career, Mr. Arad has designed or co-designed more
than 160 toys. Mr. Arad is also the owner of Avi Arad & Associates, 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.
 
     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.
 
     Bobby G. Jenkins has served as Chief Financial Officer and Treasurer of the
Company since November 1994 and as a Director of the Company since March 1995.
Mr. Jenkins has been Executive Vice President and Chief Financial Officer of
Marvel since December 1993. From 1992 until he joined Marvel, Mr. Jenkins was
Assistant Vice President-Finance of Turner Broadcasting System, Inc., and, for
more than five years prior thereto, he was associated with Price Waterhouse,
where he last served as Senior Audit Manager.
 
                                       46


     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.
 
     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.
 
     Lynn Schenk has served as a Director of the Company since March 1995. Ms.
Schenk is a senior consultant to the law firm of Baker & McKenzie. Ms. Schenk
served in the United States House of Representatives as Congresswoman
representing the 49th Congressional District in the State of California from
January 1993 to January 1995. During her term in the House of Representatives,
Ms. Schenk served on the Energy and Commerce Committee and the Merchant Marine
and Fisheries Committee. Ms. Schenk served as the State of California's
Secretary of Business, Transportation and Housing prior to 1983. From 1983 until
her election to Congress, Ms. Schenk was in private law practice in California
and served as an independent consultant with the law firm of Lorenz, Alhadeff,
Lundin & Oggel to various public and private businesses with respect to
government relations. From 1985 to 1993, Ms. Schenk served as a director of Long
Beach Bank F.S.B.
 
     Paul R. Verkuil, an attorney-at-law, has been Professor Emeritus of the
College of William and Mary since 1992 where he previously served as President
from 1985 to 1992. Mr. Verkuil has been on the faculty of the Columbia Law
School as an Adjunct Professor since January 1996 and was previously 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 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.
 
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.
 
     Daniel J. Werther has served as Executive Vice President, Senior Legal
Officer and Secretary of the Company since April 1993. Mr. Werther has also
served as Senior Vice President of Andrews Group since February 1993. From April
1991 to February 1993, Mr. Werther was a senior associate in the law firm of
Klehr, Harrison, Harvey, Branzburg & Ellers in Philadelphia, Pennsylvania. Prior
to that time, Mr. Werther was an associate in the law firm of Obermayer,
Rebmann, Maxwell & Hippel in Philadelphia, Pennsylvania.

 
     Andrew R. Gatto has served as Executive Vice President--Marketing since
July 1995. Prior to joining the Company, Mr. Gatto served as the President of
the Buddy-L Toys Division of SLM Inc. from December 1994 through July 1995,
having been hired as work out specialist while such firm was the subject of
bankruptcy proceedings. From June 1990 through November 1994, he served as a
consultant to and later as President of Play-Tech, Inc., a manufacturer of
learning aid toys. Prior thereto, Mr. Gatto served as Executive Vice President
of Universal Match Box Group, Ltd., a toy manufacturer.
 
                                       47


                       PRINCIPAL AND SELLING STOCKHOLDERS
 
     The following table sets forth certain information, as of June 15, 1996,
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) the Selling Stockholders, (c) each Director of the Company and
(d) all Directors and executive officers of the Company as a group, and as
adjusted at that date to reflect the sale of the shares of Common Stock offered
hereby:
 


    CLASS B
                                                 CLASS A COMMON STOCK COMMON STOCK
                              -----------------------------------------------------------    ----------------------
                                     SHARES                                SHARES
                                  BENEFICIALLY                          BENEFICIALLY               NUMBER OF
                                      OWNED                                 OWNED                    SHARES
                                PRIOR TO OFFERING                      AFTER OFFERING             BENEFICIALLY
FIVE PERCENT STOCKHOLDERS,    ---------------------                 ---------------------            OWNED              PERCENT OF
   SELLING STOCKHOLDERS,                    PERCENT     SHARES                    PERCENT    ----------------------    TOTAL VOTING
  DIRECTORS AND EXECUTIVE                     OF         BEING                      OF        BEFORE        AFTER      POWER AFTER
         OFFICERS               NUMBER       CLASS      OFFERED       NUMBER       CLASS     OFFERING     OFFERING       OFFERING
- ---------------------------   ----------    -------    ---------    ----------    -------    ---------    ---------    ------------
                                                                                               
Ronald O. Perelman(1) .....    9,894,000      36.6%    2,500,000     7,394,000      26.7%    9,894,000(2) 7,394,000        78.4%
  35 East 62nd Street
  New York, New York 10021
Avi Arad(3) ...............    4,150,000      24.2%       --         4,150,000      20.4%            1(4)         1(4)      4.4%
  1698 Post Road East
  Westport, Connecticut
  06880
Isaac Perlmutter(5) .......    9,506,000      55.5%       --         9,506,000      46.7%            1(6)         1(6)     10.1%
  P.O. Box 1028
  Lake Worth,
  Florida 33460-1028
Joseph M. Ahearn(7) .......      176,766       1.0%       --           176,766         *        --           --               *
  333 East 38th Street
  New York, New York 10016
Bobby G. Jenkins(8) .......       33,333         *        --            33,333         *        --           --               *
  333 East 38th Street
  New York, New York 10016
William C. Bevins..........       10,000         *        --            10,000         *        --           --               *

Donald G. Drapkin(9).......       12,000         *        --            12,000         *        --           --               *
Terry C. Stewart...........        1,000         *        --             1,000         *        --           --               *
James F. Halpin............        5,000         *        --             5,000         *        --           --               *
Alfred A. Piergallini......        4,000         *        --             4,000         *        --           --               *
Lynn Schenk................        1,000         *        --             1,000         *        --           --               *
Paul R. Verkuil............        2,000         *        --             2,000         *        --           --               *
Andrew R. Gatto(8).........       20,000         *        --            20,000         *        --           --               *
Daniel J. Werther(8) ......       50,000         *        --            50,000         *        --           --               *
  333 East 38th Street
  New York, New York 10016
All executive officers and
  Directors as a group (14
  persons)(10).............   23,865,099      87.4%    2,500,000    21,365,099      76.3%    9,894,000    7,394,000        93.0%


 
- ------------------
 * Less than 1%.
 
(1) Represents shares of Class A Common Stock issuable upon the conversion of
    Class B Common Stock owned by Marvel Characters, Inc., a wholly owned
    subsidiary of Marvel Entertainment Group, Inc. At March 29, 1996, Marvel had
    101,790,657 shares of common stock outstanding, of which 81,618,392 shares
    (approximately 80%) were indirectly owned through wholly owned subsidiaries
    by Mafco Holdings, which is wholly owned by Mr. Perelman. At March 29, 1996,
    78,007,725 shares of common stock of Marvel indirectly held by Mafco
    Holdings were pledged to secure indebtedness of certain affiliates of
    Marvel.
 
(2) Includes two shares of Class B Common Stock held by the Class B Voting
    Trusts. Marvel is the sole beneficiary of each of the Class B Voting Trusts.
 
                                              (Footnotes continued on next page)
 
                                       48


(Footnotes continued from previous page)
(3) Mr. Arad is a Director, Principal Stockholder and Selling Stockholder of the
    Company. See 'Management.' If the U.S. Underwriters exercise their
    over-allotment option in full, the shares beneficially owned after the
    Offering by Mr. Arad would be 4,054,000 or 19.9% of the class after the
    Offering.
 
(4) Includes one share of Class B Common Stock held by the Class B Voting Trust
    of which Mr. Arad is the sole trustee.
 
(5) Represents Class A Common Stock owned by Zib, formerly Toy Biz Inc., a
    Delaware corporation incorporated in 1990, which is owned entirely by the
    Isaac Perlmutter T.A., a revocable trust established by Mr. Perlmutter. Mr.
    Perlmutter is the sole beneficiary of the trust during his lifetime and may
    revoke the trust at any time. Mr. Perlmutter and his wife serve as the
    trustees of such trust. If the U.S. Underwriters exercise their
    over-allotment option in full, the shares beneficially owned after the
    Offering by Mr. Perlmutter would be 9,122,000 or 44.9% of the class after
    the Offering.

 
(6) Includes one share of Class B Common Stock held by the Class B Voting Trust
    of which Mr. Perlmutter is the sole trustee.
 
(7) Includes 176,666 shares of Class A Common Stock subject to stock options
    granted pursuant to the Stock Option Plan which are immediately exercisable.
 
(8) Represents shares of Class A Common Stock subject to Stock Options granted
    pursuant to the Stock Option Plan which are immediately exercisable.
 
(9) Represents shares held in trusts for the benefit of Mr. Drapkin's children
    for which Mr. Drapkin disclaims beneficial ownership.
 
(10) Includes 280,099 shares of Class A Common Stock subject to Stock Options
     granted pursuant to the Stock Option Plan. If the U.S. Underwriters
     exercise their over-allotment option in full, the executive officers and
     Directors as a group will own 20,885,099 shares of Class A Common Stock or
     74.6% of the class after the Offering.
 
                                       49


                              CERTAIN TRANSACTIONS
 
FORMATION AGREEMENT
 
     The Company was formed on April 30, 1993 upon consummation of the Formation
Agreement dated March 19, 1993 among the Company, Marvel, Mr. Perlmutter, Mr.
Perlmutter's personal trust, the Predecessor Company (wholly owned by Mr.
Perlmutter) and Mr. Arad. The Formation Agreement governed the contributions of
cash and assets to the capital of the Company made by certain of the parties
thereto and the initial issuance of shares of the Company's capital stock.
Pursuant to the Formation Agreement, Marvel received 46% of the Company's
capital stock in exchange for a capital contribution of $500,000, a loan in the
original principal amount of $7.5 million, which was evidenced by a promissory
note (the 'Marvel Note') in the original principal amount of $7.5 million on
April 30, 1993 and the grant by Marvel of the Marvel License to the Company.
Pursuant to the terms of the Formation Agreement, the principal amount of the
Marvel Note was subsequently adjusted to $8.5 million. On March 3, 1995, the
Company paid the entire principal amount and accrued interest outstanding on the
Marvel Note, $9.6 million.
 
     Pursuant to the Formation Agreement, the Predecessor Company received 44%
of the Company's capital stock. In exchange therefor, Mr. Perlmutter caused the
Predecessor Company to transfer all of its assets to the Company, subject to the
assumption by the Company of certain specified liabilities totalling $16,662,000
which were owed to Mr. Perlmutter and Tot Funding Corp., an affiliate of Mr.
Perlmutter. All outstanding amounts owed pursuant to the Formation Agreement
have been repaid by the Company to Mr. Perlmutter.
 
     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 and the Arad Stock
Option. Mr. Arad also agreed to enter into the Arad Consulting Agreement (as
described below) and the Master License Agreement (as described below). Mr. Arad

exercised the Arad Stock Option on June 30, 1994. The Company agreed to loan Mr.
Arad (an 'Option Loan') an amount necessary to allow Mr. Arad to pay any
additional taxes and interest and penalties assessed by taxing authorities as a
result of disputes as to the fair market value of the shares underlying the Arad
Stock Option on the date the option was exercised. Each Option Loan shall extend
for three years and shall bear interest equal to the interest rate on the
Company's primary line of credit. Mr. Arad must also secure each Option Loan
with a pledge of shares of Common Stock having a market value substantially
greater than the amount of the loan.
 
     In connection with the Formation Agreement, the assets of a Hong Kong
corporation which was the Predecessor Company's international sales affiliate
were contributed for no consideration to the Predecessor Company and were in
turn contributed by the Predecessor Company to the Company.
 
     In connection with the formation of the Company, Marvel granted to the
Company the Marvel License, pursuant to which the Company obtained an exclusive,
perpetual and royalty-free license, subject to certain limitations, to produce
certain categories of toys based on the Marvel Characters. Also in connection
with the formation of the Company, Mr. Arad and the Company entered into the
Master License Agreement which amended the licenses then outstanding from Mr.
Arad to the Company and provided for the licensing thereafter of new material by
Mr. Arad to the Company. The Master License Agreement provides that Mr. Arad is
entitled to receive royalty payments of 4% of the Company's net sales (6% of net
sales FOB a manufacturing source in the Orient) for toys based on the Marvel
Characters and royalty payments in a negotiated amount of up to 5% of the
Company's net sales (7.5% of net sales FOB a manufacturing source in the Orient)
for toys which are not based on the Marvel Characters, of which, in each case,
Mr. Arad is the inventor of record. In no event however, may the total royalties
payable to Mr. Arad with respect to any calendar year exceed $7.5 million. See
'Business--Licensing and Related Rights--Marvel License Agreement' and
'--Licensing and Related Rights--Master License Agreement.'
 
     Pursuant to the Formation Agreement, Mr. Perlmutter agreed to indemnify the
Company against any liability, including reasonable fees and disbursements in
defending litigation, arising out of pre-closing liabilities of the Predecessor
Company.
 
                                       50


ARAD CONSULTING AGREEMENT
 
     Mr. Arad is a party to a Consulting Agreement with the Company, which
expires April 30, 1998, to provide consulting services as an independent
contractor in connection with the operation of the business of the Company. The
Company expects that, in connection with the formation of Marvel Studios, the
Consulting Agreement will be extended to expire in April 1999. The Consulting
Agreement entitles Mr. Arad to compensation in the amount of $375,000 per year
and reimbursement of reasonable out-of-pocket expenses incurred in performance
of his duties, in addition to certain other benefits. The Consulting Agreement
permits Mr. Arad to perform his duties under the New World Employment Agreement,
to serve as President of Marvel Films, and to devote up to ten hours per month
to work relating to certain toys previously designed by Mr. Arad and licensed to
other toy companies (the 'Prior Commitments'). Under the Consulting Agreement

and the New World Employment Agreement, Mr. Arad, at his discretion, may
allocate his business time between the Company and New World Animation as he
determines to be appropriate. The Consulting Agreement restricts Mr. Arad's
ability to compete with the Company for one year after he ceases to be engaged
by the Company if a termination results from a breach by Mr. Arad of the
Consulting Agreement.
 
     Except as to inventions developed by Mr. Arad under the New World
Employment Agreement, during participation in work permitted under the
Consulting Agreement related to the Prior Commitments, or licensed by Mr. Arad
to the Company under the Master License Agreement, the Consulting Agreement
provides that all creations and inventions developed or conceived by Mr. Arad
during the consulting period, and for the one-year non-compete period, if
applicable, belong to and will be owned exclusively by the Company. In addition,
Mr. Arad is obligated to assign to the Company all of his interest in those
creations or inventions developed either alone or in conjunction with others.
Although the Company has not obtained insurance on Mr. Arad's life, Mr. Arad is
required under the terms of the Consulting Agreement to take all actions
necessary for the Company to obtain insurance on his life for the benefit of the
Company if requested by the Company.
 
     If Mr. Arad terminates the New World Employment Agreement, he will be
required to devote to the Company only the time necessary to perform the
functions required by the Consulting Agreement, but not less than one-half of
his business time. The Company expects that in connection with the formation of
Marvel Studios the Consulting Agreement will be amended in order to permit Mr.
Arad to devote a portion of his business time to Marvel Studios, and that Mr.
Arad will enter into an agreement with Marvel Studios which will reflect his new
duties and compensation with Marvel Studios and will be substantially similar
to, and will replace, the New World Employment Agreement. See '--New World
Employment Agreement.'
 
NEW WORLD EMPLOYMENT AGREEMENT
 
     Mr. Arad is employed as New World Animation's President and Chief Executive
Officer under the New World Employment Agreement. The New World Employment
Agreement, which expires on April 30, 1998, subject to earlier termination by
Mr. Arad at any time, permits Mr. Arad to perform his obligations under the
Consulting Agreement and to devote up to ten hours per month to the Prior
Commitments. Mr. Arad receives a salary of $375,000 per year from New World
Animation in addition to certain other employee benefits. Mr. Arad is also
entitled to receive a fee ranging from $7,500 to $10,000 per episode for
television projects and from $100,000 to $250,000 for made-for-television movies
based on Marvel Characters. Under the Consulting Agreement and the New World
Employment Agreement, Mr. Arad may allocate his business time as he determines
to be appropriate between the Company and New World Animation. The New World
Employment Agreement also provides that the restrictions on other employment by
Mr. Arad continue for one year after he ceases to be engaged by New World
Animation if a termination results from a breach by Mr. Arad of the New World
Employment Agreement. Except as to inventions developed by Mr. Arad under the
Consulting Agreement, during participation in work permitted under the New World
Employment Agreement related to the Prior Commitments or licensed by Mr. Arad to
the Company, all intellectual property developed by Mr. Arad during the term of
the New World Employment Agreement and during the one-year non-compete period,

if applicable, shall belong to and will be owned exclusively by New World
Animation. Mr. Arad may terminate the New World Employment Agreement at any
time. If Mr. Arad terminates the New World Employment Agreement, he may
thereafter devote the remainder of his time to any activities that he chooses,
subject only to certain restrictions on his ability to compete with the Company.
The Company will have no right to intellectual property developed by Mr. Arad
while engaged in such other activities. Mr. Arad also serves as the President of
 
                                       51


Marvel Films, a unit of Marvel which works in conjunction with New World
Animation. Mr. Arad receives no additional compensation for serving as President
of Marvel Films. The Company expects that in connection with the formation of
Marvel Studios, Mr. Arad will enter into an agreement with Marvel Studios which
will reflect his new duties and compensation with Marvel Studios and will be
substantially similar to, and will replace, the New World Employment Agreement.
The Company expects that prior to the NWCG Sale, Mr. Arad will have entered into
an employment agreement with Marvel Studios and that such employment agreement
will replace the New World Employment Agreement.
 
MARVEL SERVICES ARRANGEMENT
 
     Since the formation of the Company, from time to time, Marvel has furnished
to the Company, upon request, (i) certain management, consulting and
administrative services ('Marvel Employee Services') and (ii) certain services
purchased from third party providers, including legal and accounting services
('Third Party Services'). The Company has reimbursed Marvel for the costs of
Marvel Employee Services according to the portion of the salary earned by
Marvel's employees for time devoted to the Company's affairs. The Company has
reimbursed Marvel for costs of Third Party Services according to the portion of
the obligations to third party service providers which is allocable to services
purchased for and provided to the Company based on the actual costs to Marvel of
providing such services and the out-of-pocket expenses incurred in providing
such services. 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 request by the
Company and acceptance by Marvel, Marvel provides Marvel Employee Services and
Third Party Services to the Company. Under the Services Agreement, the Company
is obligated to reimburse Marvel for the costs of Marvel Employee Services
according to the portion of the salary earned by Marvel's employees for time
devoted to the Company's affairs and the Company is obligated to reimburse
Marvel for costs of Third Party Services according to the portion of the
obligations to third party service providers which is allocable for services
purchased for and provided to the Company based on the actual costs to Marvel of
providing such services and the out-of-pocket expenses incurred in providing
such services. The Services Agreement has a term of one year and will be
automatically renewed 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 believes, however, that if Marvel declined to
provide any such services or if the Services Agreement were terminated, the
Company could obtain comparable services from other sources although the cost to
the Company might exceed the cost to the Company under the Services Agreement.
The Company accrued or reimbursed to Marvel approximately $875,000, $498,000 and
$306,000 for 1993, 1994 and 1995, respectively, for Marvel Employee Services and

Third Party Services.
 
STOCKHOLDERS' AGREEMENT AND CLASS B VOTING TRUSTS
 
     In connection with the closing of the IPO, Marvel, Mr. Perlmutter, Zib, the
Perlmutter Trust (Mr. Perlmutter, Zib and Perlmutter Trust collectively, the
'Perlmutter Parties'), Mr. Arad and the Company entered into a stockholders'
agreement (the 'Stockholders' Agreement'), which provides, among other things,
that Marvel and its permitted transferees (generally entities which are
affiliates of Marvel) ('Permitted Transferees'), if any, Mr. Perlmutter and Mr.
Arad will vote their respective shares of Common Stock to elect as directors of
the Company (i) eight persons designated by Marvel, (ii) two persons designated
by Mr. Perlmutter and (iii) one person designated by Mr. Arad. The Stockholders'
Agreement also permits certain pledges of Class B Common Stock owned by Marvel
and its Permitted Transferees.
 
     The Stockholders' Agreement provides that, upon a change of control of
Marvel, Marvel is obligated to convert its shares of Class B Common Stock into
Class A Common Stock, unless Mr. Perlmutter and Mr. Arad consent to such shares
remaining Class B Common Stock. The Stockholders' Agreement terminates upon the
mutual agreement of the parties thereto or upon the sale of all or substantially
all of the assets of the Company, and also will terminate as to any share of
Class B Common Stock when such share is converted into a share of Class A Common
Stock or when there are no shares of Class B Common Stock outstanding, including
as a result of conversion of all of the Class B Common Stock into Class A Common
Stock.
 
     Each of Messrs. Perlmutter and Arad is the sole trustee of a Class B Voting
Trust in which Marvel had deposited one share of Class B Common Stock. Marvel is
the sole beneficiary of each of the Class B Voting
 
                                       52


Trusts. Each of Messrs. Perlmutter and Arad has the right to vote the share of
Deposited Stock held by his respective Class B Voting Trust in his absolute
discretion until the termination of such trust. As discussed below, Marvel
subsequently transferred its ownership interest in the Deposited Stock to a
Permitted Transferee.
 
     The rights and obligations of Messrs. Perlmutter and Arad under the
Stockholders' Agreement cease, and the Class B Voting Trusts of which they are
the trustees will terminate and the shares of Deposited Stock held by such
trusts will be distributed to Marvel, upon the occurrence of certain events,
including a reduction in their holdings of Common Stock below specified amounts
of Common Stock. In addition, each Class B Voting Trust terminates if either Mr.
Perlmutter or Mr. Arad attempts to transfer or dispose of his respective right
to vote the Deposited Stock subject to the Class B Voting Trust of which he is
trustee or any interest therein.
 
REGISTRATION RIGHTS AGREEMENT
 
     The Company is a party to the Registration Rights Agreement with the
Principal Stockholders, pursuant to which each of the Principal Stockholders and
certain transferees of Common Stock held by the Principal Stockholders (the

'Holders') 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, or, in the case of Marvel, issuable upon conversion
of its Class B Common Stock (each, a 'Demand Registration'), on two occasions.
In addition, the Holders have certain rights to participate in the Demand
Registrations and other registrations by the Company of its Class A Common Stock
(each, a 'Piggyback Registration'). The Selling Stockholders are participating
in the Offering as a Piggyback Registration. The Company is obligated to pay any
expenses incurred in connection with a Demand Registration or a Piggyback
Registration, except for underwriting discounts and commissions attributable to
the shares of Class A Common Stock sold by such Holders.
 
ALL AMERICAN AGREEMENT
 
     The Company, All American Television, Inc. ('All American'), Creativite et
Developpement ('C&D') and Avi Arad & Associates, a business of which Mr. Arad is
the sole owner (Avi Arad & Associates, together with C&D, the 'Producers') were
parties to an agreement (the 'Production Agreement') with respect to the
financing, co-production and distribution of an animated television series
entitled 'The Bots Master(Registered)' (the 'Series'). The Company guaranteed to
the Producers the receipt of a minimum amount from All American's exploitation
of the Series. On December 27, 1995, by agreement between the parties, the
Company's liability under the Production Agreement was terminated in exchange
for a $350,000 payment to C&D.
 
MARVEL STUDIOS
 
     In connection with the formation of Marvel Studios, each of Marvel and the
Company will subscribe to invest from time to time up to $50 million in the
aggregate to fund the operations of Marvel Studios. Such investments will be
made in equal amounts by each of Marvel and the Company. Marvel will acquire,
for its investment, 100% of the Common Equity Interests of Marvel Studios and
the Company will acquire Preferred Equity Interests. The Preferred Equity
Interests will participate in any distribution of income in proportion to its
equity interest and will participate in any distribution in connection with a
dissolution or liquidation and will have a preference on dissolution or
liquidation equal to the amount of the Company's investment. The Preferred
Equity Interests will be non-voting except as described below.
 
     It is expected that, for seven years from the date of formation of Marvel
Studios, Marvel will give Marvel Studios the first opportunity to license Marvel
Characters on a royalty-free basis for use in its film and television projects.
If Marvel Studios determines not to take advantage of any such opportunities,
Marvel may seek to develop such film and television projects on its own. Film
studios and television networks often receive merchandise participations in
conjunction with the production of movie and television projects. The Company
will be obligated to reimburse Marvel Studios for all merchandise participations
for the Company's products paid by Marvel Studios to a film studio or television
programmer without the ability to approve these participations. Certain
television projects in which Marvel is currently engaged, including the program
featuring The Incredible Hulk(Trademark) and the programming to be developed by
FCN, are expected to be assigned to Marvel Studios.
 
                                       53



     The governing body of Marvel Studios will be comprised of three Marvel
designees and two designees of the Company. Action of the governing body of
Marvel Studios will require the affirmative vote of three designees, except that
the vote of at least one designee of the Company will be required whenever the
sum of the net worth of Marvel Studios plus the amount of the unfunded capital
commitments of the Company and Marvel falls below $50 million. Accordingly,
Marvel Studios may generally take actions not approved by the Company's
designees to the governing body of Marvel Studios. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources,' 'Business--Marvel Studios' and '-- Growth Strategy.'
 
TANGIBLE MEDIA ADVERTISING CONSULTANT
 
     Tangible Media, a corporation 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. Tangible Media received payments of fees and
commissions totalling approximately $618,000, $859,000 and $970,000 in 1993,
1994 and 1995, respectively. 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 for advice on matters of advertising
creativity.
 
EMPLOYEE, OFFICE SPACE AND OVERHEAD COST SHARING ARRANGEMENTS
 
     Under expense sharing arrangements with Tangible Media, Classic Heroes, REC
Sound, Marvel Software and Job Lot, affiliated companies controlled by Mr.
Perlmutter in the case of Tangible Media, Classic Heroes, REC Sound and Job Lot,
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 (the 'Executive
Offices') and related office overhead expenses. See 'Business-- Properties.'
Prior to the assumption of the sublease for the Executive Offices by the Company
in 1994, rental costs for the office space were paid at cost to Job Lot of West
45th St., Inc., an affiliate under common control with Job Lot which was the
prior sublessor of the property. Prior to 1995, costs associated with such
employee salaries were allocated based on the number of hours worked; rental
costs for the shared office space have been allocated in proportion to the
percentage of space occupied; and the costs of overhead expenses (such as
maintenance costs and telephone charges) were allocated according to the same
percentages, except that the entire cost of expenses which have inured solely to
the benefit of a single party have been allocated to such party. Since 1995,
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 (the 'Providing Party') may through its
employees provide services to another party (the 'Receiving Party') upon
request, whereupon the Receiving Party 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 to the Receiving

Party. Under this agreement, Tangible Media is currently obligated to reimburse
the Company for 15% 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 lease for the Executive Offices. The Company received net
reimbursements from the Affiliates of approximately $40,000, $154,000 and
$355,000 for 1993, 1994 and 1995, respectively. See 'Business--Licensing and
Related Rights--Marvel License Agreement.'
 
     The Company anticipates that in the future the Company may share space,
related overhead and employees with other affiliates of Mr. Perlmutter or
Marvel, although there are no present understandings or arrangements with regard
to the foregoing.
 
                                       54


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. See 'Business--Properties.'
Until 1995, rental costs for the shared space were allocated based upon the
percentage of space occupied and the related overhead expenses were allocated
according to the same percentages, except that the entire cost of expenses which
have inured solely to the benefit of a single party have been allocated to such
party. 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 $53,000 under
the Showroom Sharing Agreement in 1995.
 
COLEMAN LICENSE AGREEMENT
 
     The Company is a party to a license agreement entered into in September
1994 with Coleman, an affiliate of the Company, pursuant to which the Company
licenses certain Coleman(Registered) trademarks. See 'Business--Licensing and
Related Rights--Other License Agreements.'
 
REVLON LICENSE AGREEMENT
 
     The Company is 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. See

'Business--Licensing and Related Rights--Other License Agreements.'
 
HELMET LICENSE FROM MARVEL
 
     The Company and Marvel have entered into a license pursuant to which the
Company may use the Marvel Characters in the production of bicycle safety
helmets. See 'Business--Licensing and Related Rights--Other License Arrangements
with Marvel.'
 
CD-ROM PROJECT
 
     The Company and Marvel have entered into an arrangement pursuant to which
the Company may develop CD-ROM based adaptations of Marvel comic books. The
arrangement provides that the Company and Marvel will share the costs and
proceeds associated with the production and sale of such CD-ROMs.
 
DISTRIBUTION THROUGH MARVEL SUBSIDIARY
 
     The Company distributes certain products through a wholly owned subsidiary
of Marvel engaged in the distribution of products to certain comic book
retailers. During the year ended December 31, 1995, the Company's sales to that
subsidiary totalled $1,616,000.
 
TRADEMARK LICENSE TO MARVEL
 
     The Company and Marvel have entered into an exclusive license agreement
pursuant to which Marvel may use the Toy Biz(Trademark) trademark on online
services and electronic networks, including the Internet. The license is limited
to Marvel related products of the Company. Marvel has agreed to pay the Company
$500,000 for such license. Such payments are to be made over time as Marvel
receives payments from a licensee.
 
                            ------------------------
 
                                       55


     The Company believes that the terms of each of the foregoing transactions
between the Company, on the one hand, and the Principal Stockholders and their
respective affiliates, on the other hand, are no less favorable than could be
obtained by the Company from unrelated parties on an arm's-length basis.
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The authorized capital stock of the Company consists of 100,000,000 shares
of Class A Common Stock, 20,000,000 shares of Class B Common Stock and
25,000,000 shares of preferred stock, par value $.01 per share ('Preferred
Stock'). As of June 15, 1996, there were 17,137,862 shares of Class A Common
Stock issued and outstanding, 9,894,000 shares of Class B Common Stock issued
and outstanding and 59,091 shares of Series A Preferred Stock issued and
outstanding. The following summary description of the capital stock of the
Company is qualified in its entirety by reference to the Certificate and By-laws
(the 'By-laws'), a copy of each of which is incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus forms a part.
 

COMMON STOCK
 
     Dividends.  Holders of record of shares of Common Stock on the record date
fixed by the Company's Board are entitled to receive such dividends as may be
declared by the Board out of funds legally available for such purpose, subject
to the rights of the holders of any series of Preferred Stock. No dividends may
be declared or paid in cash or property on any share of any class of Common
Stock, however, unless simultaneously the same dividend is declared or paid on
each share of the other classes of Common Stock except that if dividends are
declared that are payable in Common Stock or options or warrants to purchase
Common Stock or securities convertible into or exchangeable for Common Stock, a
like dividend or other distribution will also be paid on Class B Common Stock or
Class A Common Stock, as the case may be, in an equal amount per share, provided
that, for this purpose, if shares of Class A Common Stock, or options or
warrants to purchase Class A Common Stock or securities convertible into or
exchangeable for Class A Common Stock, are paid on Class A Common Stock and
shares of Class B Common Stock or options or warrants to purchase Class B Common
Stock or securities convertible into or exchangeable for Class B Common Stock,
are paid on Class B Common Stock, in an equal amount per share of Class A Common
Stock and Class B Common Stock, such dividend or other distribution will be
deemed to be a like dividend or other distribution. See 'Dividend Policy.'
 
     Voting Rights.  Holders of shares of Common Stock vote as a single class on
all matters submitted to a vote of the stockholders, with each share of Class A
Common Stock entitled to one vote and each share of Class B Common Stock
entitled to ten votes, except as otherwise provided by law. The Certificate
provides that the following transactions require the unanimous consent of the
Class B Stockholders voting as a class: (i) the sale of the Company as an
entirety, or the sale of all or substantially all of the assets of the Company;
(ii) the issuance by the Company of shares of the capital stock or any other
equity securities or equity equivalents of the Company, except for offerings in
connection with an acquisition by the Company and offerings in connection with
an employee benefit plan of the Company; (iii) paying any dividend or other
distribution, or redeeming, repurchasing or otherwise acquiring any of the
securities of the Company; (iv) amendments to the Certificate or Bylaws; or (v)
transactions between the Company and any of the Principal Stockholders or their
affiliates. The Certificate also provides that the Company's chief executive
officer may not be removed without the unanimous consent of the Class B
Stockholders, voting as a class.
 
     Pursuant to the Stockholders' Agreement, the Principal Stockholders have
agreed to vote their shares of Common Stock for the election as Directors of the
Company the Marvel Directors, the Perlmutter Directors and the Arad Director.
Holders of Common Stock are not entitled to cumulate votes in the election of
Directors. See 'Certain Transactions--Stockholders' Agreement and Class B Voting
Trusts.'
 
PREFERRED STOCK
 
  General
 
     The 24,940,909 authorized and unissued shares of Preferred Stock may be
issued with such designations, preferences, limitations and relative rights as
the Company's Board may authorize, including, but not limited to: (i) the

distinctive designation of each series and the number of shares that will
constitute such series; (ii) the voting rights, if any, of shares of such
series; (iii) the dividend payable on the shares of such series, any
restriction, limitation or condition upon the payment of such dividends, whether
dividends shall be cumulative,
 
                                       56


and the dates on which dividends are payable; (iv) the prices at which, and the
terms and conditions on which, the shares of such series may be redeemed, if
such shares are redeemable; (v) the purchase or sinking fund provisions, if any,
for the purchase or redemption of shares of such series; (vi) any preferential
amount payable upon shares of such series in the event of the liquidation,
dissolution or winding-up of the Company or the distribution of its assets; and
(vii) the prices or rates of conversion at which, and the terms and conditions
on which, the shares of such series may be converted into other securities, if
such shares are convertible. Although the Company has no present intention to
issue Preferred Stock, other than 18,182 shares of Series A Preferred Stock to
be used to purchase Spectra Star's manufacturing facility, the issuance of
Preferred Stock, or the issuance of rights to purchase such shares, could
discourage an unsolicited acquisition proposal.
 
  Series A Preferred Stock
 
     In connection with the Spectra Star acquisition, the Company issued to
Spectra Star 112,121 shares of Series A Preferred Stock, of which 59,091 shares
were outstanding as of June 15, 1996. The Series A Preferred Stock has no voting
rights, except with respect to any amendment to the Certificate of Designation
(the 'Certificate of Designation'), under which the Series A Preferred Stock was
issued, or as expressly required by applicable law in connection with an
amendment of any of the provisions of the Certificate of Designation which would
alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect them adversely, including any amendment to the
Certificate to increase the number of shares of Series A Preferred Stock
issuable by the Company. Any matter requiring the consent of the holders of
Series A Preferred Stock (the 'Series A Holders'), in addition to requiring the
consent of the Series A Holders with such number of shares of Series A Preferred
Stock as may be required by applicable law, also requires the consent of the
holders of a majority of the shares of Series A Preferred Stock held by each of
the two shareholders of Spectra Star at the time of the Spectra Star acquisition
and their transferees (collectively the 'Series A Shareholder Groups').
 
     The Series A Shareholder Groups have the right to require the Company,
prior to consummating any of the following corporate actions, to place into
escrow an amount equal to the redemption price as of August 31, 1999 of the
Series A Preferred Stock then outstanding and held by members of such requesting
Shareholder Group:
 
     (a) the creation and issuance of classes or other series of preferred stock
         senior to the Series A Preferred Stock with respect to the distribution
         of assets upon liquidation, dissolution or winding up and having an
         aggregate liquidation preference in excess of $25 million for any one
         outstanding class or series or $50 million in the aggregate for all
         outstanding classes or series; or

 
     (b) any merger or consolidation of the Company with another corporation, or
         sale, lease or conveyance (other than by mortgage or pledge) of all or
         substantially all of the Company's properties or business in exchange
         for securities of a corporation other than the Company, if the shares
         of Series A Preferred Stock are to be exchanged for securities of such
         other corporation, unless the terms of the merger, consolidation, sale,
         lease or conveyance require that the Holders receive securities of such
         other corporation having at least the same material terms as the Series
         A Preferred Stock.
 
     Each Series A Shareholder Group also has the right to require the Company
to redeem all (but not a part) of the issued and outstanding shares of Series A
Preferred Stock held by members of that Series A Shareholder Group. If any
Series A Shareholder Group has elected the escrow right referenced above, but
has not exercised the redemption right, all of the issued and outstanding shares
of Series A Preferred Stock held by members of that Shareholder Group shall be
redeemed by the Company on August 31, 1999, and those shares shall not be deemed
to be outstanding after such date. The redemption price of the Series A
Preferred Stock equalled $27.66 per share as of June 30, 1996 and increases
monthly at a rate equal to approximately 5.3% per year, to a maximum redemption
price of $33.00 per share at August 31, 1999. All shares of Series A Preferred
Stock redeemed or purchased by the Company shall be retired and cancelled and
shall be restored to the status of authorized but unissued shares of Preferred
Stock, without designation as to series.
 
     In the event of a liquidation of the Company, Series A Holders are entitled
to a liquidation preference equal to the redemption price as of the liquidation
date. Each share of Series A Preferred Stock is convertible at the option of the
holder thereof into one share of Class A Common Stock of the Company, subject to
customary anti-dilution adjustments.
 
                                       57


BOARD OF DIRECTORS
 
     The Certificate provides that the Board consists of twelve Directors. All
Directors will be elected by the holders of the Class A and Class B Common
Stock, voting as a class, and the Stockholders Agreement provides that eight
Directors will be the Marvel Directors, two Directors will be the Perlmutter
Directors and one Director will be the Arad Director.
 
SECTIONS 203 AND 228 OF THE DELAWARE GENERAL CORPORATION LAW
 
     Generally, Section 203 of the Delaware General Corporation Law (the 'DGCL')
prohibits a publicly-held Delaware corporation from engaging in a broad range of
'business combinations' with an 'interested stockholder' (defined generally as a
person owning 15% or more of a corporation's outstanding voting stock) for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless (i) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
the corporation, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns

at least 85% of the outstanding voting stock of the corporation (excluding
shares owned by directors who are also officers of the corporation or shares
held by employee stock plans that do not provide employees with the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender offer or exchange offer), or (iii) on or after such date on
which such person became an interested stockholder the business combination is
approved by the board and authorized at an annual or special meeting, and not by
written consent, by the affirmative vote of at least 66 2/3% of the outstanding
voting stock excluding shares owned by the interested stockholder. The
restrictions of Section 203 do not apply, among other reasons, if a corporation,
by action of its stockholders, adopts an amendment to its certificate of
incorporation or By-laws expressly electing not to be governed by Section 203,
provided that, in addition to any other vote required by law, such amendment to
the certificate of incorporation or By-laws must be approved by the affirmative
vote of a majority of the shares entitled to vote. Moreover, an amendment so
adopted is not effective until twelve months after its adoption and does not
apply to any business combination between the corporation and any person who
became an interested stockholder of such corporation on or prior to such
adoption. The Certificate and By-laws do not currently contain any provisions
electing not to be governed by Section 203 of the DGCL.
 
     Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the Common Stock that often result from takeover attempts.
 
     Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
does not contain a provision to the contrary. The Certificate contains no such
provision, and therefore Principal Stockholders holding a majority of the voting
power of the Common Stock are able to approve a broad range of corporate actions
requiring stockholder approval without the necessity of holding a meeting of
stockholders.
 
INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     The By-laws provide that the Company shall indemnify and hold harmless any
Director, officer or incorporator of the Company and any person serving at the
request of the Company as a director, officer, incorporator, employee, partner,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including an employee benefit plan) from and against any and
all expenses (including counsel fees and disbursements), judgments, fines
(including excise taxes assessed on a person with respect to an employee benefit
plan), and amounts paid in settlement that may be imposed upon or incurred by
him or her in connection with, or as a result of, any proceeding, whether civil,
criminal, administrative or investigative (whether or not by or in the right of
the Company), in which he or she may become involved, as a party or otherwise,
by reason of the fact that he or she is or was such a Director, officer or
incorporator of the Company or is or was serving at the request of the Company
as a director, officer, incorporator, employee, partner, trustee or agent of

another corporation, partnership, joint venture, trust or other enterprise
(including an employee benefit plan), whether or
 
                                       58


not he or she continues to be such at the time such expenses and judgments,
fines and amounts paid in settlement shall have been imposed or incurred, to the
fullest extent permitted by the laws of the State of Delaware, as they may be
amended from time to time. Such right of indemnification shall inure whether or
not the claim asserted is based on matters which antedate the adoption of the
By-laws. Such right of indemnification shall continue as to a person who has
ceased to be a Director, officer or incorporator and shall inure to the benefit
of the heirs and personal representatives of such a person. The indemnification
provided by the By-laws shall not be deemed exclusive of any other rights which
may be provided now or in the future under any provision currently in effect or
hereafter adopted of the Certificate, by any agreement, by vote of stockholders,
by resolution of Directors, by provision of law or otherwise. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to Directors of the Company pursuant to the foregoing provision, or
otherwise, the Company has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
 
     Section 145 of the DGCL permits the Company to, and the By-laws provide
that the Company shall, indemnify any Director or officer of the Company against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with any action, suit
or proceeding brought by reason of the fact that such person is or was a
Director or officer of the Company, if such person acted in good faith and in a
manner that he or she reasonably believed to be in or not opposed to the best
interest of the Company and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful. In a
derivative action, i.e., one by or in the right of the Company, indemnification
may be made for expenses actually and reasonably incurred by any Director or
officer in connection with the defense or settlement of an action or suit, only
if such person has acted in good faith and in a manner that he or she reasonably
believed to be in or not opposed to the best interests of the Company, except
that no indemnification shall be made if such person shall have been adjudged to
be liable to the Company, unless and only to the extent that the Delaware Court
of Chancery or the court in which the action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, the defendant is fairly and reasonably entitled
to indemnity for such expenses which the Delaware Court of Chancery or such
other court shall deem proper. Section 145 of the DGCL permits the Company to,
and the By-laws provide that the Company shall, pay expenses (including
attorneys' fees) incurred in defending any civil, criminal, administrative or
investigative action, suit or proceeding in advance of its final disposition
upon receipt by the Company of an undertaking, by or on behalf of the Director
or officer, to repay all amounts so advanced if it is ultimately determined that
such Director or officer is not entitled to indemnification.
 
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
 
     The Certificate limits personal liability for Directors to the fullest

extent permitted under the DGCL. Section 102(b)(7) of the DGCL permits a
corporation to eliminate or limit the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL relating to unlawful dividends, stock
purchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. The Company currently maintains director
and officer liability insurance.
 
TRANSFER AGENT AND REGISTRAR
 
     The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
     Upon completion of the Offering, the Company will have outstanding
20,337,862 shares of Class A Common Stock and 7,394,000 shares of Class B Common
Stock (based on the number of shares outstanding as of June 15, 1996), assuming
no exercise of outstanding options. Of these shares, the 3,200,000 shares of
Class A Common Stock sold in the Offering will be freely tradable without
restriction under the Securities Act, unless purchased by 'affiliates' of the
Company as that term is defined in Rule 144 promulgated under the Securities
Act. In addition, the 13,656,000 outstanding shares of Class A Common Stock held
by Messrs. Perlmutter and Arad after the Offering, assuming no exercise of the
U.S. Underwriters' over-allotment option, and the 7,394,000
 
                                       59


shares of Class A Common Stock issuable upon conversion of shares of the Class B
Common Stock held by Marvel and the Class B Voting Trusts, respectively, are
eligible for resale in the public market, subject to certain volume and other
restrictions under Rule 144 and the 'lock-up' discussed below, immediately after
the Offering.
 
     In general, under Rule 144 as currently in effect, a person, including an
'affiliate' of the Company, (or persons whose shares are required to be
aggregated) who has beneficially owned his or its restricted securities for a
period of two years from the later of the date such securities were acquired
from the Company or (if applicable) the date they were acquired from an
'affiliate' is entitled to sell, within any three month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
Class A Common Stock (approximately 203,379 shares immediately after completion
of this Offering assuming no exercise of the U.S. Underwriters' over-allotment
option) or the average weekly reported trading volume of the Class A Common
Stock during the four calendar weeks preceding the date on which notice of such
sales is given, provided certain manner of sale and notice requirements and
requirements as to the availability of current public information concerning the
Company are satisfied. Affiliates of the Company must comply with the
restrictions and requirements of Rule 144, other than the two-year holding
period requirement, in order to sell shares of Common Stock that are not

'restricted securities' (such as shares acquired by affiliates in this
Offering). Under Rule 144(k), a person who is not deemed an 'affiliate' of the
Company at any time during the three months preceding a sale by him, and who has
beneficially owned shares of Common Stock that were not acquired from the
Company or an 'affiliate' of the Company within the previous three years, would
be entitled to sell such shares without regard to volume limitations, manner of
sale provisions, notification requirements or the availability of current public
information concerning the Company. As defined in Rule 144, an 'affiliate' of an
issuer is a person that directly or indirectly through the use of one or more
intermediaries controls, or is controlled by, or is under common control with,
such issuer.
 
     Notwithstanding the foregoing, the Company and its directors, executive
officers and Principal Stockholders have agreed that, subject to certain
limitations, without the prior written consent of Morgan Stanley on behalf of
the Underwriters, they will not, during the period commencing on the date hereof
and ending 90 days after the date of this Prospectus, (1) offer, pledge, sell,
contract-to-sell, sell any option or contract-to-purchase, purchase any option
or contract-to-sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Class A
Common Stock or any securities convertible, exercisable or exchangeable for
Class A Common Stock (whether such shares or any such securities are now owned
or are hereafter acquired), or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Class A Common Stock, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of Class A Common Stock or
such other securities in cash or otherwise. The foregoing restrictions shall not
apply to the sale of any shares of Class A Common Stock pursuant to this
Offering or pursuant to the Stock Option Plan or stock options outstanding as of
the date of this Prospectus. In addition, the Company's directors, executive
officers and Principal Stockholders have agreed that, without the prior written
consent of Morgan Stanley on behalf of the Underwriters, they will not during
the period commencing on the date hereof and ending 90 days after the date of
this Prospectus, make any demand for or exercise any right with respect to the
registration of any shares of Class A Common Stock or any security convertible
into or exercisable or exchangeable for Class A Common Stock. See
'Underwriters.' As a result of these contractual restrictions, notwithstanding
possible earlier eligibility for sale under the provisions of Rule 144, shares
subject to lock-up agreements may not be sold by the Principal Stockholders
until the agreements expire, without the prior written consent of Morgan
Stanley. Subject in the case of affiliates to the volume limitations described
above and the 'lock-up,' all of the shares of Class A Common Stock beneficially
owned by Messrs. Perlmutter and Arad and all of the shares of Class A Common
Stock issuable upon conversion of Class B Common Stock owned by Marvel are
eligible for sale in the public market. See 'Underwriters.'
 
     Pursuant to the Registration Rights Agreement, the Principal Stockholders
have certain rights to require the Company to register some or all of the shares
of Class A Common Stock held by them, including shares of Class A Common Stock
issuable upon the conversion of Class B Common Stock. Holders of shares of
Series A Preferred Stock have certain rights to require the Company to register
some or all of the shares of Class A Common Stock issuable upon the conversion
of Series A Preferred Stock held by them. See 'Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital

Resources' and 'Certain Transactions--Registration Rights Agreement.'
 
                                       60


                           CERTAIN FEDERAL INCOME TAX
                   CONSEQUENCES TO NON-UNITED STATES HOLDERS
 
GENERAL
 
     The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a holder who is not a United States person (a 'Non-U.S. Holder'). For
this purpose, the term 'United States person' is defined as any person who is a
citizen or resident of the United States, a corporation or a partnership or
other entity created or organized in the United States or under the laws of the
United States or of any state, or an estate or trust whose income is includible
in gross income for United States federal income tax purposes regardless of
source. This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with international, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances, or to certain types of Non-U.S. Holders which may be
subject to special treatment under United States federal income tax laws (for
example, insurance companies, tax-exempt organizations, financial institutions
or broker-dealers). Furthermore, this discussion is based on provisions of the
Code, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly with retroactive effect. Each
prospective purchaser of Common Stock is advised to consult a tax advisor with
respect to current and possible future tax consequences of acquiring, holding
and disposing of Common Stock as well as any tax consequences that may arise
under the laws of any U.S. state, municipality or other taxing jurisdiction.
 
     An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during the three-year period ending in the
current calendar year (counting for such purposes all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year). Resident aliens
are subject to U.S. federal tax as if they were U.S. citizens.
 
DIVIDENDS
 
     The Company has never paid cash dividends on its Common Stock and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. It is the current policy of the Board to retain any earnings to finance
the operation and expansion of the Company's business. The payment of any cash
dividends in the future will depend upon the Company's earnings, financial
condition and capital needs and on other factors deemed relevant by the Board.
In addition, the Company's Credit Facility restricts the ability of the Company
to pay cash dividends. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,' 'Price
Range of Class A Common Stock' and 'Dividend Policy.' In the event, however,
that dividends are paid on shares of Common Stock, dividends paid to a Non-U.S.

Holder of Common Stock will be subject to withholding of United States federal
income tax at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty, unless the dividends are effectively connected with the
conduct of a trade or business of the Non-U.S. Holder within the United States
and the Non-U.S. Holder provides the payor with proper documentation or, if a
tax treaty applies, the dividends are attributable to a U.S. permanent
establishment of the Non-U.S. Holder. In order to claim the benefit of an
applicable tax treaty rate, a Non-U.S. Holder may be required to file with the
Company or its dividend paying agent a reduced treaty rate certificate.
Dividends that are effectively connected with the conduct of a trade or business
within the United States or, if a tax treaty applies, are attributable to such a
United States permanent establishment, are subject to United States federal
income tax on a net income basis (that is, after allowance for applicable
deductions) at applicable graduated individual or corporate rates. Any such
effectively connected dividends received by an international corporation may,
under certain circumstances, be subject to an additional 'branch profits tax' at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
 
     Under current United States Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under proposed United States Treasury
 
                                       61


regulations not currently in effect, however, a Non-U.S. Holder of Common Stock
who wishes to claim the benefit of an applicable treaty rate would be required
to satisfy applicable certification and other requirements.
 
     A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the 'IRS').
 
GAIN ON DISPOSITION OF COMMON STOCK
 
     A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i)(a) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States or (b) if a treaty applies,
the gain is attributable to a United States permanent establishment of the
Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an individual and
holds the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the sale or other disposition
and certain other conditions are met, (iii) the Company is or has been a 'U.S.
real property holding corporation' for United States federal income tax purposes
within the preceding five years, or (iv) the Non-U.S. Holder is subject to tax
pursuant to certain provisions of the Code applicable to expatriates. The
Company believes that it has not been and is not currently, and does not
anticipate becoming, a 'U.S. real property holding corporation' for United
States federal income tax purposes.

 
     If an individual Non-U.S. Holder falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale under
regular graduated United States federal income tax rates. If an individual Non-
U.S. Holder falls under clause (ii) above, such individual generally will be
subject to a flat 30% tax on the gain derived from a sale, which may be offset
by certain United States capital losses (notwithstanding the fact that such
individual is not considered a resident of the United States). Thus, Non-U.S.
Holders who have spent (or expect to spend) 183 days or more in the United
States in the taxable year in which they contemplate a sale of Common Stock are
urged to consult their tax advisors as to the tax consequences of such sale.
 
     If a Non-U.S. Holder that is an international corporation falls under
clause (i) above, it generally will be taxed on its net gain under regular
graduated United States federal income tax rates and, in addition, will be
subject to the branch profits tax equal to 30% of its 'effectively connected
earnings and profits' within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
 
FEDERAL ESTATE TAX
 
     Common Stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
 
     The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends. These information reporting requirements apply even if
withholding was not required because the dividends were effectively connected
with a trade or business in the United States of the Non-U.S. Holder or
withholding was reduced or eliminated by an applicable income tax treaty. Copies
of the information returns reporting such dividends and withholding may be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides or is established under the provisions of an applicable income tax
treaty or agreement.
 
     United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting requirements)
generally will not apply to dividends paid to Non-U.S. Holders outside the
United States that are either subject to the 30% withholding discussed above or
that are not so subject because a tax treaty applies that reduces or eliminates
such 30% withholding. In that regard, under temporary United States Treasury
regulations, backup withholding will not apply to dividends paid on Common Stock
to a Non-U.S. Holder at an address
 
                                       62


outside the United States unless the payor has knowledge that the payee is a
United States person. Backup withholding and information reporting generally
will apply to dividends paid to addresses inside the United States on shares of

Common Stock to beneficial owners that are not 'exempt recipients' and that fail
to provide in the manner required certain identifying information.
 
     In general, backup withholding and information reporting will not apply to
a payment of the proceeds of a sale of Common Stock by or through a
international office of a broker. If, however, such broker is, for United States
federal income tax purposes, a U.S. person, a controlled international
corporation, or a foreign person that derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States, such payments will not be subject to backup withholding but will be
subject to information reporting, unless (i) such broker has documentary
evidence in its records that the beneficial owner is a Non-U.S. Holder and
certain other conditions are met, or (ii) the beneficial owner otherwise
establishes an exemption. Temporary Treasury regulations provide that the
Treasury is considering whether backup withholding should be required in such
circumstances. Under proposed Treasury regulations not currently in effect,
backup withholding will not apply to such payments absent actual knowledge that
the payee is a United States person.
 
     Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder, or otherwise establishes an exemption. Any amounts withheld
under the backup withholding rules will be allowed as a refund or a credit
against such holder's U.S. federal income tax liability provided the required
information is furnished to the IRS.
 
                                  UNDERWRITERS
 
     Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof (the 'Underwriting Agreement'), the U.S. Underwriters
named below, for whom Morgan Stanley & Co. Incorporated, CS First Boston
Corporation, Smith Barney Inc. and Jefferies & Company, Inc. are serving as U.S.
Representatives, have severally agreed to purchase, and the Company and Selling
Stockholders have agreed to sell to them, and the International Underwriters
named below, for whom Morgan Stanley & Co. International Limited, CS First
Boston Limited, Smith Barney Inc. and Jefferies International Limited are
serving as International Representatives, have severally agreed to purchase, and
the Company and Selling Stockholders have agreed to sell to them, the respective
number of shares of the Class A Common Stock set forth opposite the names of
such Underwriters below:
 



                                                 NUMBER
NAME                                            OF SHARES
- ---------------------------------------------   ---------
                                             
U.S. Underwriters:
  Morgan Stanley & Co. Incorporated..........     534,000
  CS First Boston Corporation................     533,000
  Smith Barney Inc...........................     533,000
  Jefferies & Company, Inc...................     180,000
  Advest, Inc................................      30,000

  Bear, Stearns & Co. Inc....................      60,000
  William Blair & Company, L.L.C.............      30,000
  The Buckingham Research Group
     Incorporated............................      60,000
  Burnham Securities Inc.....................      30,000
  Cowen & Company............................      30,000
  Dain Bosworth Incorporated.................      30,000
  Donaldson, Lufkin & Jenrette Securities
     Corporation.............................      60,000
  A.G. Edwards & Sons, Inc...................      60,000
  EVEREN Securities, Inc.....................      30,000
  Furman Selz LLC............................      30,000
  Goldman, Sachs & Co........................      60,000
  McDonald & Company Securities, Inc.........      30,000
  Merrill Lynch, Pierce, Fenner & Smith
     Incorporated............................      60,000


 
                                       63





                                                 NUMBER
NAME                                            OF SHARES
- ---------------------------------------------   ---------
                                             
  Pryor, McClendon, Counts & Co., Inc........      30,000
  Rauscher Pierce Refsnes, Inc...............      30,000
  The Seidler Companies, Incorporated........      30,000
  Tucker Anthony Incorporated................      30,000
  Wasserstein Perella Securities, Inc........      60,000
                                                ---------
  Subtotal...................................   2,560,000
                                                ---------
 
International Underwriters:
  Morgan Stanley & Co. International
     Limited.................................     163,000
  CS First Boston Limited....................     163,000
  Smith Barney Inc...........................     163,000
  Jefferies International Limited............      51,000
  BNP Capital Markets Limited................      25,000
  HSBC Investment Bank Asia Limited..........      25,000
  ING Bank N.V...............................      25,000
  Nomura International plc...................      25,000
                                                ---------
  Subtotal...................................     640,000
                                                ---------
Total........................................   3,200,000
                                                ---------
                                                ---------


 
     The U.S. Underwriters and the International Underwriters are collectively

referred to as the 'Underwriters,' and the U.S. Representatives and
International Representatives are collectively referred to as the
'Representatives.' The Underwriting Agreement provides that the obligations of
the several Underwriters to pay for and accept delivery of the shares of Class A
Common Stock offered hereby are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Class A Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
such shares are taken.
 
     Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any U.S. Shares (as defined below) for the account of
anyone other than a United States or Canadian Person (as defined below) and (ii)
it has not offered or sold, and will not offer or sell, directly or indirectly,
any U.S. Shares or distribute any prospectus relating to the U.S. Shares outside
the United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement Between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any International Shares (as defined below)
for the account of any United States or Canadian Person and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
International Shares or distribute any prospectus relating to the International
Shares within the United States or Canada or to any United States or Canadian
Person. The foregoing limitations do not apply to stabilization transactions or
to certain other transactions specified in the Agreement Between U.S. and
International Underwriters. As used herein, 'United States or Canadian Person'
means any national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other entity organized
under the law of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is otherwise not a United States or Canadian Person. All
shares of Class A Common Stock to be purchased by the U.S. Underwriters and the
International Underwriters under the Underwriting Agreement are referred to
herein as the U.S. Shares and the International Shares, respectively.
 
     Pursuant to the Agreement Between U.S. and International Underwriters,
sales may be made between the U.S. Underwriters and International Underwriters
of any number of shares of Class A Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares sold shall be the price to public set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
 
                                       64


     Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has agreed
not to offer or sell, any shares of Class A Common Stock, directly or
indirectly, in any province or territory of Canada in contravention of the
securities laws thereof and has represented that any offer or sale of Class A
Common Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in which

such offer or sale is made. Each U.S. Underwriter has further agreed to send to
any dealer who purchases from it any shares of Class A Common Stock a notice
stating in substance that, by purchasing such Class A Common Stock, such dealer
represents and agrees that it has not offered or sold, and will not offer or
sell, directly or indirectly, any of such Class A Common Stock in any province
or territory of Canada or to, or for the benefit of, any resident of any
province or territory of Canada in contravention of the securities laws thereof
and that any offer or sale of Class A Common Stock in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made, and that
such dealer will deliver to any other dealer to whom it sells any of such Class
A Common Stock a notice to the foregoing effect.
 
     Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that: (i) it has not
offered or sold and will not offer or sell any shares of Class A Common Stock in
the United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or agent)
for the purpose of their business or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulation 1995 (the
'Regulations'); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares of Class A Common Stock in,
from or otherwise involving the United Kingdom and (iii) it has only issued or
passed on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the shares of Class A
Common Stock if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
or is a person to whom such document may otherwise lawfully be issued or passed
on.
 
     The Underwriters initially propose to offer part of the Class A Common
Stock directly to the public at the price to public set forth on the cover page
hereof and part to certain dealers at a price which represents a concession not
in excess of $.43 per share under the public offering price. Any Underwriter may
allow, and such dealers may reallow, a concession not in excess of $.10 per
share to other Underwriters or to certain other dealers. After the initial
offering of the Class A Common Stock, the offering price and other selling terms
may from time to time be varied by the Representatives.
 
     Pursuant to the Underwriting Agreement, Mr. Perlmutter and Mr. Arad have
granted to the U.S. Underwriters an option, exercisable for 30 days from the
date of this Prospectus, to purchase up to 480,000 additional shares of Class A
Common Stock, consisting of up to 384,000 shares as to Mr. Perlmutter and 96,000
shares as to Mr. Arad, at the price to public set forth on the cover page
hereof, less underwriting discounts and commissions. The U.S. Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, made in connection with the Offering. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to the total number of shares of Class A Common Stock
offered by the U.S. Underwriters hereby.

 
     Notwithstanding the foregoing, the Company and its directors, executive
officers, and Principal Stockholders have agreed that, subject to certain
limitations, without the prior written consent of Morgan Stanley on behalf of
the Underwriters, they will not, during the period commencing on the date hereof
and ending 90 days after the date of this Prospectus, (1) offer, pledge, sell,
contract-to-sell, sell any option or contract-to-purchase, purchase any option
or contract-to-sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly any shares of Class A
Common Stock or any securities convertible or exchangeable for Class A Common
Stock (whether such shares or any such securities are now owned by the Company's
directors, executive officers or Principal Stockholders, or are hereafter
acquired), or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Class A Common Stock, whether any such transaction described in clause (1)
or (2) above is to be settled by delivery of Class A Common Stock or such other
securities in cash or otherwise. The foregoing
 
                                       65


sentence shall not apply to the sale of any shares of Class A Common Stock
pursuant to the Offering or pursuant to the Stock Option Plan or stock options
outstanding as of the date of this Prospectus. In addition, the Company's
directors, executive officers and Principal Stockholders have agreed that,
without the prior written consent of Morgan Stanley on behalf of the
Underwriters, they will not during the period commencing on the date hereof and
ending 90 days after the date of this Prospectus, make any demand for or
exercise any right with respect to the registration of any shares of Class A
Common Stock or any security convertible into or exercisable or exchangeable for
Class A Common Stock.
 
     The Company, the Selling Stockholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
 
                                 LEGAL MATTERS
 
     The legality of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company by Battle Fowler LLP. Certain legal
matters for the Underwriters will be passed on by Kramer, Levin, Naftalis &
Frankel.
 
                                    EXPERTS
 
     The combined financial statements and schedule of the Predecessor Company
for the four months ended April 30, 1993, and the consolidated financial
statements and schedule of the Company for the eight months ended December 31,
1993 and as of and for the years ended December 31, 1994 and 1995, appearing
elsewhere in this Prospectus and Registration Statement, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement and are included in
reliance upon such report, given upon the authority of such firm as experts in
accounting and auditing.
 

                             ADDITIONAL INFORMATION
 
     The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the 'Exchange Act'), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company can be inspected without charge at the office of the Commission at the
Public Reference Section located at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511, and copies thereof may be obtained from the
Commission upon payment of the prescribed fees. The Commission also maintains a
site on the World Wide Web, the address of which is http://www.sec.gov, that
contains reports, proxy and information statements and other information
regarding issuers, such as the Company, that file electronically with the
Commission. Such reports, proxy statements and other information concerning the
Company can also be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, N.Y. 10005, on which the Company's Class A Common Stock
is traded.
 
     The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form S-3 (of which this Prospectus is a part) under
the Securities Act with respect to the Class A Common Stock offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
and the exhibits and schedules thereto. For further information with respect to
the Company and the Class A Common Stock offered hereby, reference is made to
the Registration Statement and such exhibits and schedules. The Registration
Statement and the Exhibits thereto may be inspected without charge at the office
of the Commission at the Public Reference Section located at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and copies
thereof may be obtained from the Commission upon payment of the prescribed fees.
The Commission also maintains a site on the World Wide Web, the address of which
is http://www.sec.gov, that
 
                                       66


contains reports, proxy and information statements and other information
regarding issuers, such as the Company, that file electronically with the
Commission.
 
               INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
 
     The following documents filed with the Commission are incorporated in this
Prospectus by reference:
 
          (i) the Company's Annual Report on Form 10-K for the fiscal year ended
     December 31, 1995;

 
          (ii) the Company's Quarterly Report on Form 10-Q for the fiscal
     quarter ended March 31, 1996; and
 
          (iii) the Company's Current Report on Form 8-K dated July 24, 1996.
 
     All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act, prior to the termination of the
Offering, shall be deemed incorporated by reference in this Prospectus and to be
a part of this Prospectus from the date of the filing of such reports. The
Company hereby undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, on the written or oral request of
any such person, a copy of any or all of the information that has been
incorporated by reference in this Prospectus (not including exhibits to the
information that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates). Requests for such copies should be directed to Toy Biz, Inc., 333
East 38th Street, New York, New York 10016, Attention: Daniel J. Werther.
 
     Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
 
                                       67


                                 TOY BIZ, INC.
                         INDEX TO FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULE
 



                                                                         PAGE
                                                                         ----
                                                                      
Report of Independent Auditors........................................    F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995..........    F-3
Statements of Operations for the Four Months Ended April 30, 1993,
  the Eight Months Ended December 31, 1993 and the Years Ended
  December 31, 1994 and 1995..........................................    F-4
Statements of Stockholders' Equity for the Four Months Ended
  April 30, 1993, the Eight Months Ended December 31, 1993
  and the Years Ended December 31, 1994 and 1995......................    F-5
Statements of Cash Flows for the Four Months Ended April 30, 1993,
  the Eight Months Ended December 31, 1993 and the Years Ended
  December 31, 1994 and 1995..........................................    F-6
Notes to Financial Statements.........................................    F-7
Condensed Consolidated Balance Sheets as of
  December 31, 1995 and March 31, 1996 (unaudited)....................   F-18
Condensed Consolidated Statements of Income for the three months
  ended March 31, 1995 and 1996 (unaudited)...........................   F-19

Condensed Consolidated Statements of Cash Flows for the three months
  ended March 31, 1995 and 1996 (unaudited)...........................   F-20
Notes to Condensed Consolidated Financial Statements (unaudited)......   F-21


 
     All other schedules prescribed by the accounting regulations of the
Commission are not required or are inapplicable and therefore have been omitted.
 
                                      F-1



                         REPORT OF INDEPENDENT AUDITORS
 
The Stockholders of Toy Biz, Inc.
 
We have audited the accompanying consolidated balance sheets of Toy Biz, Inc.
and subsidiary as of December 31, 1995 and 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the eight
months ended December 31, 1993 and the years ended December 31, 1994 and 1995.
We have also audited the combined statements of operations, stockholders' equity
and cash flows of the predecessor company for the four months ended April 30,
1993. Our audits also included the financial statement schedule. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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
subsidiary at December 31, 1994 and 1995 and the consolidated results of their
operations and their cash flows for the eight months ended December 31, 1993 and
the years ended December 31, 1994 and 1995 and the combined results of
operations and cash flows of the predecessor company for the four months ended
April 30, 1993 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
 
                                          ERNST & YOUNG LLP
 
February 5, 1996, except for Note 5,

as to which the date is March 19, 1996
New York, New York
 
                                      F-2


                                 TOY BIZ, INC.

                          CONSOLIDATED BALANCE SHEETS
 



                                                              DECEMBER 31,
                                                         ----------------------
                                                            1994        1995
                                                         ----------  ----------
                                                         (IN THOUSANDS, EXCEPT
                                                              SHARE DATA)
                                                               
                        ASSETS
Current assets:
  Cash and cash equivalents............................  $  4,142    $ 22,484
  Accounts receivable, net (Note 3)....................    62,785      74,748
  Inventories (Note 3).................................    15,552      17,195
  Deferred income taxes (Notes 1 and 6)................     4,837       4,141
  Prepaid expenses and other...........................     1,985       4,476
                                                         ----------  ----------
     Total current assets..............................    89,301     123,044
  Molds, tools and equipment, net (Note 3).............     8,867      12,102
  Product and package design costs, net (Note 3).......     6,238       6,971
  Goodwill and other intangibles, net (Note 3).........       317      10,101
                                                         ----------  ----------
     Total assets......................................  $104,723    $152,218
                                                         ----------  ----------
                                                         ----------  ----------
         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable.....................................  $  5,174    $  8,830
  Accrued expenses and other (Note 3)..................    22,788      29,040
  Borrowings under credit facility.....................    21,500          --
                                                         ----------  ----------
     Total current liabilities.........................    49,462      37,870
Notes payable--stockholders (Notes 1 and 4)............    16,845          --

                                                         ----------  ----------
     Total liabilities.................................    66,307      37,870
                                                         ----------  ----------
Redeemable convertible Series A preferred stock........        --       3,016
                                                         ----------  ----------
Stockholders' equity (Note 8):
  Preferred Stock, $.01 par value (after the conversion
     25,000,000 shares authorized; 112,121 shares
     issued as redeemable convertible Series A
     preferred stock, $.01 par value at 12/31/95)......        --          --
  Class A common stock, $.01 par value, 100,000,000
     shares authorized, 14,356,000 issued and
     outstanding at 12/31/94 and 17,126,130 issued and
     outstanding at 12/31/95...........................        --         171
  Class B common stock, $.01 par value, 20,000,000
     shares authorized, 9,894,000 issued and
     outstanding at 12/31/94 and at 12/31/95...........        --          99
  Additional paid-in capital...........................    16,914      61,158
  Retained earnings....................................    21,502      49,904

                                                         ----------  ----------
     Total stockholders' equity........................    38,416     111,332
                                                         ----------  ----------
     Total liabilities and stockholders' equity........  $104,723    $152,218
                                                         ----------  ----------
                                                         ----------  ----------


 
                       See Notes to Financial Statements.
                                      F-3


                                 TOY BIZ, INC.
                            STATEMENTS OF OPERATIONS
 



                                   PREDECESSOR
                                     COMPANY        EIGHT MONTHS
                                   FOUR MONTHS         ENDED         YEAR ENDED      YEAR ENDED
                                 ENDED APRIL 30,    DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                      1993              1993            1994            1995
                                 ---------------    ------------    ------------    ------------
                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                                        
Net sales.....................       $10,175          $ 79,569        $156,525        $196,395
Cost of sales.................         5,308            36,682          73,490          88,397
                                 ---------------    ------------    ------------    ------------
  Gross profit................         4,867            42,887          83,035         107,998
                                 ---------------    ------------    ------------    ------------
 
Operating expenses:
  Selling, general and
     administrative...........         5,840            22,253          38,263          48,234
  Depreciation and
     amortization.............           638             3,459           8,609          12,750
  Compensatory stock option...            --            10,909           4,091              --
                                 ---------------    ------------    ------------    ------------
     Total operating
       expenses...............         6,478            36,621          50,963          60,984
                                 ---------------    ------------    ------------    ------------
Operating income (loss).......        (1,611)            6,266          32,072          47,014
Interest expense..............          (476)             (721)         (1,862)           (490)
Other income, net.............           237               322              65           1,050
                                 ---------------    ------------    ------------    ------------
     Income (loss) before
       income taxes...........        (1,850)            5,867          30,275          47,574
Income taxes (Note 6).........            10             2,379          12,261          19,172
                                 ---------------    ------------    ------------    ------------
     Net income (loss)........       ($1,860)         $  3,488        $ 18,014        $ 28,402
                                 ---------------    ------------    ------------    ------------
                                 ---------------    ------------    ------------    ------------
Net income (loss) per share...       ($  .07)         $    .13        $    .67        $   1.05
Weighted average number of
  common and common equivalent

  shares outstanding (in
  thousands) (assumes 27,000
  shares outstanding for
  periods prior to 1995)......        27,000            27,000          27,000          27,115


 
                       See Notes to Financial Statements.
                                      F-4


                                 TOY BIZ, INC.
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 



                                                     ADDITIONAL
                                           COMMON     PAID-IN      RETAINED
                                           STOCK      CAPITAL      EARNINGS     TOTAL
                                           ------    ----------    --------    --------
                                                          (IN THOUSANDS)
                                                                   
Capital contributions...................      --      $  1,886           --    $  1,886
Compensatory stock option...............      --        10,909           --      10,909
Net income May 1 to December 31, 1993...      --            --     $  3,488       3,488
                                           ------    ----------    --------    --------
Balance at December 31, 1993............      --        12,795        3,488      16,283
Compensatory stock option...............      --         4,091           --       4,091
Exercise of stock option (Note 9).......      --            28           --          28
Net Income..............................      --            --       18,014      18,014
                                           ------    ----------    --------    --------
Balance at December 31, 1994............      --        16,914       21,502      38,416
Proceeds from initial public offering...    $270        43,875           --      44,145
Exercise of stock option................      --           411           --         411
Accretion of redeemable preferred
  stock.................................      --           (42)          --         (42)
Net income..............................      --            --       28,402      28,402
                                           ------    ----------    --------    --------
Balance at December 31, 1995............    $270      $ 61,158     $ 49,904    $111,332
                                           ------    ----------    --------    --------
                                           ------    ----------    --------    --------


 



                                                     ADDITIONAL
                                           COMMON     PAID-IN      RETAINED
                                           STOCK      CAPITAL      EARNINGS    TOTAL
                                           ------    ----------    --------    ------
PREDECESSOR COMPANY
- ----------------------------------------
                                                         (IN THOUSANDS)
                                                                   
Balance at December 31, 1992............    $ 10          --        $2,374     $2,384
Net loss January 1 to April 30, 1993....      --          --        (1,860)    (1,860)
                                           ------    ----------    --------    ------

Balance at April 30, 1993 before
  contribution..........................      10          --           514        524
Contribution of intercompany amount to
  equal transfer of net assets
  to new company........................      --        $862            --        862
                                           ------    ----------    --------    ------
Balance at April 30, 1993 after
  contribution..........................    $ 10        $862        $  514     $1,386
                                           ------    ----------    --------    ------
                                           ------    ----------    --------    ------


 
                       See Notes to Financial Statements.
                                      F-5




                                 TOY BIZ, INC.
                            STATEMENTS OF CASH FLOWS
 



                                           PREDECESSOR
                                             COMPANY
                                           FOUR MONTHS    EIGHT MONTHS
                                              ENDED          ENDED         YEAR ENDED      YEAR ENDED
                                            APRIL 30,     DECEMBER 31,    DECEMBER 31,    DECEMBER 31,
                                              1993            1993            1994            1995
                                           -----------    ------------    ------------    ------------
                                                                 (IN THOUSANDS)
                                                                              
Cash flow from operating activities:
  Net income (loss).....................     ($1,860)       $  3,488        $ 18,014        $ 28,402
  Adjustments to reconcile net income
     (loss) to net cash provided by
     operating activities:
     Depreciation and amortization......         638           3,459           8,609          12,750
     Provision for deferred income
       taxes............................          --          (7,648)          2,811             696
     Compensatory stock option..........          --          10,909           4,091              --
     Changes in operating assets and
       liabilities:
       Accounts receivable..............       6,040         (20,930)        (34,571)        (11,260)
       Inventories......................       1,101             132          (9,913)          1,130
       Prepaid expenses and other.......         902          (1,215)          1,431          (2,378)
       Other assets.....................         (41)           (649)            449             (17)
       Accounts payable.................      (3,499)          2,372           2,399           3,656
       Accrued expenses and other.......      (6,836)         12,689           5,215           2,049
       Due to affiliates................        (757)           (417)             --             517
                                           -----------    ------------    ------------    ------------
Net cash (used in) provided by operating
  activities............................      (4,312)          2,190          (1,465)         35,545
                                           -----------    ------------    ------------    ------------
Cash flow from investing activities:
  Purchases of molds, tools and
     equipment..........................        (930)         (2,416)        (10,862)         (9,591)
  Expenditures for product and package
     design costs.......................      (1,731)         (2,349)         (6,369)         (6,545)
  Acquisition of Spectra Star and
     Quest..............................          --              --              --          (9,004)
                                           -----------    ------------    ------------    ------------
Net cash used in investing activities...      (2,661)         (4,765)        (17,231)        (25,140)
                                           -----------    ------------    ------------    ------------
Cash flow from financing activities:
  Capital contributions.................          --             500              --              --
  Issuance of notes to stockholder......          --           8,252              --              --
  Payment of notes to stockholder.......          --          (8,752)             --         (15,119)
  Exercise of stock option..............          --              --              28             411
  Net borrowings under credit

     agreement..........................          --           4,500          17,000         (21,500)
  Borrowings from stockholder and
     affiliates.........................      15,817              --           1,099              --
  Repayments to stockholder and
     affiliates.........................      (8,386)             --              --              --
  Proceeds from initial public
     offering...........................          --              --              --          44,145
                                           -----------    ------------    ------------    ------------
Net cash provided by financing
  activities............................       7,431           4,500          18,127           7,937
                                           -----------    ------------    ------------    ------------
Net increase (decrease) in cash and cash
  equivalents...........................         458           1,925            (569)         18,342
Cash and cash equivalents at beginning
  of period.............................       2,328           2,786           4,711           4,142
                                           -----------    ------------    ------------    ------------
Cash and cash equivalents at end of
  period................................     $ 2,786        $  4,711        $  4,142        $ 22,484
                                           -----------    ------------    ------------    ------------
Supplemental disclosure of cash flow
  information:
  Interest paid during the period.......     $     2        $    537        $    624        $  2,335
  Income taxes paid during the period...          --           8,689           5,878          16,410
Other non-cash transactions:
  Exchange of assets for common stock
     (Note 1)...........................          --           1,386              --              --
  Issuance of preferred stock for
     Spectra Star, including accretion
     of preferred dividend of $42 (See
     Note 11)...........................          --              --              --           3,016


 
                       See Notes to Financial Statements.
                                      F-6


                                 TOY BIZ, INC.
                         NOTES TO FINANCIAL STATEMENTS
                               DECEMBER 31, 1995
 
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, principally in
the United States (See Note 2), boys', girls', infant/preschool and activity
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 royalty-free 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 (see Note 9 regarding
the Option and its subsequent exercise). Mr. Arad also agreed to enter into the
Arad Consulting Agreement and the Master License Agreement.
 
     Financial statements for periods prior to April 30, 1993 are those of the
Predecessor Company and its historical cost basis has been retained. Since
Marvel and Mr. Arad are considered to be promoters of Toy Biz and its public
offering, their licenses have been valued at their cost.
 
  Basis of Presentation
 
     The combined financial statements for the four month period ended April 30,
1993 represent the combined results of the Predecessor Company and Toy Biz
International Ltd., a Hong Kong company indirectly controlled by the Predecessor
Company. The consolidated financial statements as of and for the eight months
ended December 31, 1993 and as of and for the years ended December 31, 1994 and
1995 include the accounts of the Company and its subsidiary in Hong Kong. Upon
consolidation or combination, all significant intercompany accounts and
transactions are eliminated.
 
     The four month period ended April 30, 1993 includes five months of results
of Toy Biz International Ltd. as a result of changing Toy Biz International
Ltd.'s year end from November 30 to December 31.
 
     Certain amounts included in prior year financial statements have been
reclassified to conform with 1995 presentation.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The principal areas of judgment relate to provisions for
 
                                      F-7



                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
 
  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, 1995, 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 Statements of Operations for the four month
period ended April 30, 1993, the eight month period ended December 31, 1993 and
the years ended December 31, 1994 and 1995 were approximately $0, $339,000,
$461,000, and $636,000, 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 development
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, 1995, 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 Statements of Operations, for the four month
period ended April 30, 1993, the eight month period ended December 31, 1993 and
the years ended December 31, 1994 and 1995 were approximately $0, $415,000,
$807,000, and $1,276,000, respectively.
 
                                      F-8


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
  Goodwill and Other Intangibles
 
     Goodwill is amortized over 40 years and other intangibles are amortized
over 17 years.
 
  Research and Development
 
     Research and development ('R&D') costs are charged to operations as
incurred. For the four month period ended April 30, 1993, the eight month period
ended December 31, 1993 and the years ended December 31, 1994 and 1995, R&D
expenses were $250,000, $1,169,000, $2,829,000, and $4,980,000 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 licensing of the Company's
products and trade names is recorded in sales at the time they are available to
the licensee and collection is reasonably assured. For the four month period
ended April 30, 1993, the eight month period ended December 31, 1993 and the
years ended December 31, 1994 and 1995, licensing revenues were $0, $0, $782,000
and $3,268,000, 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 four month period ended April 30, 1993, the
eight month period ended December 31, 1993 and the years ended December 31, 1994
and 1995, advertising expenses were $161,000, $9,834,000, $15,667,000 and
$18,864,000, respectively. At December 31, 1994 and 1995, the Company had
incurred $10,000 and $474,000, respectively, of prepaid advertising costs,
principally related to production of advertisements that will arise in fiscal
1995 and 1996, 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
 
     Through April 30, 1993, the Predecessor Company was subject to taxation
under Subchapter S of the Internal Revenue Code of 1986, as amended.
Consequently, the Predecessor Company was not subject to Federal and certain
state income taxes as the stockholder included the results of the Predecessor
Company's operations in his income for tax purposes.
 
     Effective May 1, 1993, the Company adopted 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.
 
     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. Deferred taxes are provided to
the extent that income for financial and tax purposes is not the same.
 
                                      F-9


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
  Foreign Currency Translation
 
     The financial position and results of operations of the Company's Hong Kong
subsidiary are measured using the U.S. dollar as the functional currency. Assets
and liabilities are translated at the exchange rate in effect at year-end.
Income statement accounts and cash flows are translated at the average rate of
exchange prevailing during the period. Translation adjustments, which were not
material, arising from the use of differing exchange rates are included in the
results of operations.
 
  Income Per Share
 
     Net income per common share is computed by dividing net income, less the
amount applicable to preferred dividends, by the weighted average common and
common equivalent shares outstanding during the year. When diluted, common stock
equivalents are included as stock equivalents using the treasury method.
 
  Impact of Recently Issued Accounting Standards
 
     In March 1995, the Financial Accounting Standards Board ('FASB') issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment

are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement No. 121 in the first quarter of 1996 and,
based on current circumstances, does not believe that there will be any effect
on amounts reported.
 
     In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 125,
Accounting for Stock Issued to Employees, in accounting for stock-based
compensation issued to employees. The Statement allows for a fair value based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value based
accounting for those arrangements. These disclosure requirements are effective
for fiscal years beginning after December 15, 1995, or upon initial adoption of
the statement, if earlier. The Company continues to evaluate the provisions of
Statement No. 123 and has not determined whether it will adopt the recognition
and measurement provisions of that Statement, which the Company expects would
result in increased compensation expense in future periods.
 
2. SALES TO MAJOR CUSTOMERS AND CREDIT RISK
 
     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 have
been within management's expectation.
 
     During the four month period ended April 30, 1993, three customers
accounted for approximately 32%, 16% and 13% of total net sales. During the
eight month period ended December 31, 1993, three customers accounted for
approximately 31%, 16% and 16% of total net sales. During the year ended
December 31, 1994, three customers accounted for approximately 31%, 18% and 13%
of total net sales. During the year ended December 31, 1995, three customers
accounted for approximately 29%, 18% and 12% of total net sales.
 
     The Company's Hong Kong subsidiary supervises the manufacturing of the
Company's products in China and also sells such products internationally, as did
the Predecessor Company's Hong Kong affiliate. All sales are made F.O.B. Hong
Kong against letters of credit. During the four month period ended April 30,
1993, the eight
 
                                      F-10


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
2. SALES TO MAJOR CUSTOMERS AND CREDIT RISK--(CONTINUED)
month period ended December 31, 1993 and the years ended December 31, 1994 and
1995, international sales were approximately 8%, 10%, 9%, and 11%, respectively,
of total net sales. During those periods, the Hong Kong operations reported

operating income (loss) of approximately $(168,000), $1,185,000, $3,009,000 and
$6,642,000 respectively. At December 31, 1994 and 1995 the Company had assets in
Hong Kong of approximately $5,840,000, and $13,915,000, respectively, and the
Hong Kong subsidiary represents $3,644,000 and $9,277,000, respectively, of the
Company's consolidated retained earnings.
 
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
 
     Accounts receivable, net, consists of the following:
 



                                                  DECEMBER 31,
                                           --------------------------
                                              1994           1995
                                           -----------    -----------
                                                    
Accounts Receivable.....................   $73,054,000    $86,019,000
Less allowances for:
  Doubtful accounts.....................      (516,000)      (516,000)
  Advertising, markdowns, returns,
     volume discounts and other.........    (9,753,000)   (10,755,000)
                                           -----------    -----------
Total...................................   $62,785,000    $74,748,000
                                           -----------    -----------
                                           -----------    -----------


 
     Inventories consist of the following:
 



                                                  DECEMBER 31,
                                           --------------------------
                                              1994           1995
                                           -----------    -----------
                                                    
Finished goods, net.....................   $14,830,000    $13,504,000
Component parts, raw materials and
  work-in-process.......................       722,000      3,691,000
                                           -----------    -----------
Total...................................   $15,552,000    $17,195,000
                                           -----------    -----------
                                           -----------    -----------


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



                                                  DECEMBER 31,
                                           --------------------------
                                              1994           1995
                                           -----------    -----------

                                                    
Molds, tools and equipment..............   $14,182,000    $20,921,000
Office equipment and other..............     1,160,000      1,628,000
Less accumulated depreciation and
  amortization..........................    (6,475,000)   (10,447,000)
                                           -----------    -----------
Total...................................   $ 8,867,000    $12,102,000
                                           -----------    -----------
                                           -----------    -----------


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



                                                  DECEMBER 31,
                                           --------------------------
                                              1994           1995
                                           -----------    -----------
                                                    
Product design costs....................   $ 8,285,000    $ 9,854,000
Package design costs....................     3,002,000      3,675,000
Less accumulated amortization...........    (5,049,000)    (6,558,000)
                                           -----------    -----------
Total...................................   $ 6,238,000    $ 6,971,000
                                           -----------    -----------
                                           -----------    -----------


 
                                      F-11


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS--(CONTINUED)
     Goodwill and other intangibles, net, consists of the following:
 



                                                  DECEMBER 31,
                                           --------------------------
                                              1994           1995
                                           -----------    -----------
                                                    
Goodwill................................   $        --    $ 9,815,000
Patents and other intangibles...........       350,000        409,000
Less accumulated amortization...........       (33,000)      (123,000)
                                           -----------    -----------
Total...................................   $   317,000    $10,101,000
                                           -----------    -----------
                                           -----------    -----------


 

     Accrued expenses and other consists of the following:
 



                                                  DECEMBER 31,
                                           --------------------------
                                              1994           1995
                                           -----------    -----------
                                                    
Accrued advertising costs...............   $ 7,429,000    $ 9,459,000
Accrued royalties.......................     3,224,000      3,956,000
Income taxes payable....................     5,223,000      7,374,000
Deferred income.........................       720,000        179,000
Other accrued expenses..................     6,192,000      8,072,000
                                           -----------    -----------
Total...................................   $22,788,000    $29,040,000
                                           -----------    -----------
                                           -----------    -----------


 
4. RELATED PARTY TRANSACTIONS
 
     The notes payable-stockholders were paid with proceeds from the Initial
Public Offering (the 'Offering'). Interest accrued at the prime rate, as
defined, and was payable at maturity. Interest expense on the notes amounted to
approximately $626,000 for the eight month period ended December 31, 1993 and
$1,099,000 and $235,000 for the years ended December 31, 1994 and 1995,
respectively and was added to the notes.
 
     During the four month period ended April 30, 1993, the Company accrued
$970,000 of royalties to Marvel for a license relating to Marvel Characters. No
such royalties were incurred after April 30, 1993.
 
     Marvel provides certain 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 $875,000 for the eight months ended December 31, 1993, and $498,000
and $306,000 for the years ended December 31, 1994 and 1995 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 four month period ended April 30,
1993, the eight month period ended December 31, 1993 and the years ended
December 31, 1994 and 1995 the Company paid fees and commissions to the
affiliate totalling approximately $36,000, $582,000, $859,000, and $970,000
respectively, relating to such advertisements.
 
     During the four month period ended April 30, 1993, the Company sold
merchandise to an entity controlled by Mr. Perlmutter aggregating $618,000.
Related receivables were $328,000 as of December 31, 1993. This amount was
subsequently collected.
 
     The Company sold merchandise to a subsidiary of Marvel totalling $429,000

and $1,616,000 for the years ended December 31, 1994 and 1995, respectively.
Related receivables were $121,000 and $945,000 as of December 31, 1994 and 1995,
respectively. These amounts were subsequently collected.
 
                                      F-12


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
4. RELATED PARTY TRANSACTIONS--(CONTINUED)
     Included in interest expense for the four month period ended April 30,
1993, is approximately $380,000, accrued to Mr. Perlmutter or entities wholly
owned by Mr. Perlmutter.
 
     During the four month period ended April 30, 1993, Mr. Perlmutter received
approximately $259,000 as compensation for his assistance in establishing
relationships with significant customers of the Company. These amounts were paid
to another entity wholly owned by Mr. Perlmutter and are included in selling,
general and administration expenses. No such fees were incurred after April 30,
1993.
 
     During the four month period ended April 30, 1993, the eight month period
ended December 31, 1993 and the years ended December 31, 1994 and 1995, the
Company accrued royalties to Mr. Arad for toys he invented or designed of
$257,000, $4,063,000, $6,541,000, and $5,734,000 respectively.
 
     Advances to fund the initial operations of an affiliated entity amounted to
approximately $394,000 at December 31, 1993. During 1994, additional advances of
approximately $591,000 were made and the Company was subsequently reimbursed for
all advances.
 
     The Company shares office space and certain general and administrative
costs with affiliated entities. The Company paid rent to the affiliated entity;
however, this was not subject to a formal sublease agreement. In 1994, the lease
was amended and the Company became the lessee. Rent paid to the affiliated
entity amounted to approximately $164,000 and $128,000 for the years ended
December 31, 1993, and 1994, respectively. Rent received from affiliates was
$155,000 and $172,000 for the years ended December 31, 1994 and 1995,
respectively. While certain costs are not allocated among the entities, the
Company believes that it bears its proportionate share of these costs.
 
     The results for the four month period ended April 30, 1993 are net of
approximately $2,000,000 of bonuses paid by the Predecessor Company to employees
in connection with the formation of the Company.
 
5. COMMITMENTS AND CONTINGENCIES
 
     Leases: The Company is a party to various noncancelable operating leases
involving office and warehouse space expiring on various dates through April 30,
2004. The leases are subject to escalations based on cost of living adjustments
and tax allocations. Minimum future obligations on these leases are as follows:
 



                                        
1996....................................   $  718,000
1997....................................      281,000
1998....................................      135,000
1999....................................      151,000
2000....................................      151,000
Thereafter..............................      502,000
                                           ----------
                                           $1,938,000
                                           ----------
                                           ----------


 
     Rent expense amounted to approximately $59,000 and $163,000 for the four
month and eight month periods ended April 30, 1993 and December 31, 1993,
respectively, and $406,000, and $522,000 for the years ended December 31, 1994
and 1995, respectively.
 
     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 in that action, which was served on March 19, 1996, alleges
that GDL is entitled to receive ten percent of the capital stock of the
Predecessor Company pursuant to an alleged 1990 agreement between GDL and Mr.
Perlmutter and seeks money damages based on the value of ten percent of the
Company's Class A Common Stock beneficially owned by Mr. Perlmutter, as well as
other consideration
 
                                      F-13


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
received by him, and a variety of equitable remedies. Mr. Perlmutter has denied
all of the material allegations made in support of GDL's claims, and pursuant to
the Formation Agreement, agreed to indemnify the Company in respect to any
liability arising from GDL's claims. The Company intends to move to dismiss
GDL's amended complaint for failure to state a cause of action. The Company does
not believe that any of the claims made against it will have a material adverse
effect on its financial position because it believes that all of the claims
against it are without merit and because of the indemnity provided to it in the
Formation Agreement.
 
     The Company is also involved in various legal proceedings arising in the
normal course of business. Management believes that the final outcome of these
proceedings will not have a material adverse effect on the Company's financial
position.
 
6. INCOME TAXES
 
     The provision (benefit) for income taxes for the eight month period ended
December 31, 1993 and the years ended December 31, 1994 and 1995 is summarized

as follows:
 



                                    1993           1994           1995
                                 -----------    -----------    -----------
                                                      
Current:
  Federal.....................   $ 7,538,000    $ 7,222,000    $15,429,000
  State.......................     2,183,000      2,225,000      1,923,000
  Foreign.....................       306,000          3,000      1,124,000
                                 -----------    -----------    -----------
                                  10,027,000      9,450,000     18,476,000
                                 -----------    -----------    -----------
Deferred:
  Federal.....................    (5,963,000)     2,192,000        543,000
  State.......................    (1,685,000)       619,000        153,000
                                 -----------    -----------    -----------
                                  (7,648,000)     2,811,000        696,000
                                 -----------    -----------    -----------
Provision for income taxes....   $ 2,379,000    $12,261,000    $19,172,000
                                 -----------    -----------    -----------
                                 -----------    -----------    -----------


 
     The differences between the statutory federal income tax rate and the
effective tax rate for the eight months ended December 31, 1993 and the years
ended December 31, 1994 and 1995 are attributable to the following:
 



                                           1993      1994      1995
                                           ----      ----      ----
                                                      
Federal income tax provision computed at
  the statutory rate....................   35.0%     35.0%     35.0%
State taxes, net of Federal income tax
  effect................................    5.5       5.5       5.3
                                           ----      ----      ----
Effective rate..........................   40.5%     40.5%     40.3%
                                           ----      ----      ----
                                           ----      ----      ----


 
     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, 1994 and 1995 are as follows:
 



                                              1994          1995
                                           ----------    ----------
                                                   

Allowance for future returns, other
  sales allowances and doubtful accounts
  and other allowances..................   $2,398,000    $1,377,000
Inventory valuation.....................    1,633,000     1,842,000
Depreciation............................      806,000       983,000
Amortization............................           --       (61,000)
                                           ----------    ----------
                                           $4,837,000    $4,141,000
                                           ----------    ----------
                                           ----------    ----------


 
                                      F-14


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
7. CREDIT FACILITY
 
     The Company has a $30,000,000 revolving credit facility (the 'Facility')
with a syndicate of banks with Chemical Bank as administrative agent. The
Facility matures on February 21, 1998; however, the Company may voluntarily
reduce the commitment from time to time with appropriate notice to the
administrative agent for the syndicate of banks. Borrowings under the Facility
are collateralized by substantially all Company assets. Borrowings under the
Facility bear interest at either Chemical Bank's alternate base rate or at the
Eurodollar rate plus the applicable margin (as defined).
 
     The 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. The credit facility also requires an annual reduction, commencing January
1, 1996, of outstanding borrowings to zero for a period of 45 consecutive days,
commencing during the first six months of each calendar year. In addition, the
credit facility also requires that (a) Marvel continue to control, as defined,
the Company and (b) the toy license agreement between the Company and Marvel
remain in effect. The credit facility is not guaranteed by Marvel.
 
     The interest rate for borrowing as of December 31, 1994 and 1995 was 8.5%
and the weighted average interest rate for 1994 and 1995 was 8.4% and 8.8%,
respectively. The maximum amounts outstanding during 1994 and 1995 were
$23,500,000 and $21,500,000, respectively. The amount available under the
Facility at December 31, 1995 was $30,000,000. The Facility requires the Company
to pay a commitment fee of 3/8 of 1% per annum on the average daily unused
portion.
 
8. CAPITAL STOCK STRUCTURE AND STOCK OPTION PLAN
 
     In addition to Class A and Class B common stock shown on the accompanying
balance sheet, the Company has authorized 2,500 shares of preferred stock, par
value $.01.
 

     In December, 1994, the Company's Board of Directors approved the
authorization of Class A Common Stock and Class B Common Stock and the
conversion of each share of the Company's former Class A common stock into 9,700
shares of its newly created Class B Common Stock and of each share of its former
Class B and C common stock into 9,700 shares of its newly created Class A Common
Stock, to be effected simultaneously with the closing of the Offering of the
Company's Class A Common Stock.
 
     Two shares of the outstanding Class B Common Stock are owned of record by
voting trusts of which Messrs. Perlmutter and Arad are trustees and Marvel is
the sole beneficiary. Each of Messrs. Perlmutter and Arad will have the right to
vote the share of Class B Common Stock held by voting trust in his absolute
discretion until the termination of such trust. Certain fundamental transactions
will require the unanimous consent of the holders of Class B Common Stock voting
as a class.
 
     The Class B Common Stock has ten votes for each share outstanding for most
matters brought to a vote of the stockholders; whereas, the Class A Common Stock
has only have one vote per share on such matters.
 
     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. See Note 9.
 
     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.
During 1995, the Company granted Options for 1,049,000
 
                                      F-15


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
8. CAPITAL STOCK STRUCTURE AND STOCK OPTION PLAN--(CONTINUED)
shares of its Class A Common Stock at prices ranging from $18.00 to $22.625, of
which Options for 20,130 shares were exercised and Options for 33,268 shares
were cancelled. At December 31, 1995, Options for 995,602 and 329,187 shares
were outstanding and exercisable, respectively. No SAR's have been granted and
Options with respect to 334,268 shares are available for future grants.
 
9. STOCK OPTION AGREEMENT
 
     Pursuant to the Formation Agreement executed by the Company, Mr. Arad
received the Option to acquire an additional pre-conversion 278 shares of the
Company's Class C common stock at $100 per share. The Option, which expires

April 30, 1998, was exercisable contingent upon the Company achieving certain
operating results, as defined. At the end of 1993, it became evident that the
operating results necessary for the Option to become exercisable would, in all
likelihood, be achieved sometime in 1994. Therefore, the Company amended the
Option so that it became exercisable March 31, 1994. Based on an independent
appraisal of the value of the Option, the Company charged operations for the
last quarter of 1993 $10,909,000 for this compensatory stock option and
operations for the three month period ended March 31, 1994 with the remainder of
the value of the Option ($4,091,000). The appraisal of the value of the Option,
performed in April, 1994, determined the value of the shares issuable on
exercise of the Option to be $6.19 per share. The appraisal applied market
multiples of 1994 earnings estimates of publicly traded companies considered to
be comparable to the Company to the Company's 1994 projected earnings and
considered the Company's dependence on Mr. Arad and the illiquid nature of the
shares subject to the Option.
 
     On June 30, 1994, Mr. Arad exercised the stock option described above. In
connection with that exercise, the Company agreed to loan Mr. Arad (the 'Option
Loan') an amount necessary to allow Mr. Arad to pay the incremental Federal,
state and local income tax liability that he incurred as a result of the vesting
and exercise of the Option. The Company advanced Mr. Arad $10,000 in 1994 under
the Option Loan. Mr. Arad repaid the $10,000 advance under the Option Loan upon
the consummation of the Offering and the pledge was released at that time. See
Note 8.
 
                                      F-16


                                 TOY BIZ, INC.
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
                               DECEMBER 31, 1995
 
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
     Summarized quarterly financial information for the years ended December 31,
1994 and 1995 is as follows (dollars in thousands, except per share data):
 



                                              1994                                           1995
                          --------------------------------------------   --------------------------------------------
QUARTER ENDED             MARCH 31  JUNE 30  SEPTEMBER 30  DECEMBER 31   MARCH 31  JUNE 30  SEPTEMBER 30  DECEMBER 31
- ------------------------- --------  -------  ------------  -----------   --------  -------  ------------  -----------
                                                                                  
Net Sales................ $18,136   $28,099    $ 41,308      $68,982     $27,888   $30,435    $ 58,687      $79,385
Gross Profit.............  10,836    14,912      21,226       36,061      14,490    18,420      32,227       42,861
Operating income.........     481     6,065      11,377       14,149       5,078     6,981      15,789       19,166
Net income...............     106     3,288       6,346        8,274       2,859     4,323       9,480       11,740
Net income per share..... $    --   $   .12    $    .24      $   .31     $   .11   $   .16    $    .35      $   .43
Weighted average number
  of common and common
  equivalent shares
  outstanding (in
  thousands)(2)..........  27,000    27,000      27,000       27,000      27,000    27,000      27,193       27,199



 
- ------------------
(1) The first quarter of 1994 includes a charge of $4,091,000 with respect to a
stock option. (See Note 9)
 
(2) Assumes 27,000,000 common and common equivalent shares outstanding for
periods prior to 1995.
 
(3) Certain amounts included in 1994 Financial Statements have been reclassified
to conform with 1995 presentation.
 
11. 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. Spectra Star
also manufactures 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 is
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. The present value of the Preferred Stock issued was
approximately $3.0 million as of December 31, 1995. The Company utilized
available cash to finance the Acquisition.
 
     The Acquisition was accounted for using the purchase method of accounting.
Based on a preliminary allocation of purchase price, the fair value of the
assets acquired is summarized below.
 


                                             
     Current assets..........................   $ 3,470
     Noncurrent assets.......................       521
     Intangibles.............................     9,566
                                                -------
                                                $13,557
                                                -------
                                                -------


 
     The following unaudited pro forma consolidated financial information gives
effect to the Acquisition as if it occurred at the beginning of the periods
presented. These pro forma results include certain adjustments, such as
increased amortization, decreased interest expense and the elimination of a
discontinued product line, and are not necessarily indicative of what results
would have been had the Acquisition occurred at the beginning of the respective
periods.
 




                                           FOR THE YEARS ENDED DECEMBER
                                                 ----------------
                                                       1994
                                           ----------------------------
                                        
Net sales...............................             $173,548
Net income..............................             $ 16,500
Net income per share....................             $    .60


 
                                      F-17


                                 TOY BIZ, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 



                                                     DECEMBER 31,     MARCH 31,
                                                        1995*           1996
                                                     ------------    -----------
                                                                     (UNAUDITED)
                                                               
                      ASSETS
Current Assets:
  Cash and cash equivalents.......................     $ 22,484       $   8,551
  Accounts receivable, net........................       74,748          66,382
  Inventories.....................................       17,195          14,698
  Deferred income taxes...........................        4,141           4,141
  Prepaid expenses and other......................        4,476           7,750
                                                     ------------    -----------
     Total current assets.........................      123,044         101,522
Mold, tools and equipment, net....................       12,102          13,333
Product and package design costs, net.............        6,971           8,778
Goodwill and other intangibles, net...............       10,101          10,130
                                                     ------------    -----------
     Total assets.................................     $152,218       $ 133,763
                                                     ------------    -----------
                                                     ------------    -----------
       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable................................     $  8,830       $   4,309
  Accrued expenses and other......................       29,040          13,206
                                                     ------------    -----------
     Total current liabilities....................       37,870          17,515
                                                     ------------    -----------
     Total liabilities............................       37,870          17,515
                                                     ------------    -----------
Redeemable preferred stock........................        3,016           1,611
                                                     ------------    -----------
Stockholders' equity:
  Common stock....................................          270             270
  Additional paid-in capital......................       61,158          61,290

  Retained earnings...............................       49,904          53,077
                                                     ------------    -----------
     Total stockholders' equity...................      111,332         114,637
                                                     ------------    -----------
     Total liabilities and stockholders' equity...     $152,218       $ 133,763
                                                     ------------    -----------
                                                     ------------    -----------


 
- ------------------
 
* Derived from the audited Financial Statements for the year ended December 31,
1995.
 
     The accompanying Notes to Condensed Consolidated Financial Statements
                   are an integral part of these statements.
                                      F-18


                                 TOY BIZ, INC.
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
 



                                                        THREE MONTHS
                                                      ENDED MARCH 31,
                                                     ------------------
                                                      1995       1996
                                                     -------    -------
                                                        (UNAUDITED)
                                                          
Net sales.........................................   $27,888    $38,369
Cost of sales.....................................    13,398     19,733
                                                     -------    -------
  Gross profit....................................    14,490     18,636
                                                     -------    -------
Operating expenses:
  Selling, general and administrative.............     7,717     11,369
  Depreciation and amortization...................     1,695      2,144
                                                     -------    -------
     Total operating expenses.....................     9,412     13,513
                                                     -------    -------
Operating income..................................     5,078      5,123
Interest (income) expense, net....................       233       (166)
                                                     -------    -------
  Income before provision for income taxes........     4,845      5,289
Provision for income taxes........................     1,986      2,116
                                                     -------    -------
  Net income......................................   $ 2,859    $ 3,173
                                                     -------    -------
                                                     -------    -------
Net income per share..............................   $  0.11    $  0.12
                                                     -------    -------
                                                     -------    -------

Weighted average number of common and common
  equivalent shares outstanding...................    27,000     27,201
                                                     -------    -------
                                                     -------    -------


 
     The accompanying Notes to Condensed Consolidated Financial Statements
                   are an integral part of these statements.
                                      F-19


                                 TOY BIZ, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 



                                                        THREE MONTHS
                                                      ENDED MARCH 31,
                                                     ------------------
                                                      1995       1996
                                                     -------    -------
                                                        (UNAUDITED)
                                                          
Cash flow from operating activities:
  Net income......................................   $ 2,859    $ 3,173
                                                     -------    -------
Adjustments to reconcile net income to net cash
  provided by operating activities:
  Depreciation and amortization...................     1,695      2,144
  Changes in assets and liabilities:
     Decrease in accounts receivable, net.........    27,303      8,366
     Decrease in inventories......................     2,666      2,497
     Increase in prepaid expenses and other.......    (2,453)    (3,274)
     Decrease in accounts payable.................    (3,511)    (4,521)
     Decrease in accrued expenses and other.......   (14,215)   (15,834)
                                                     -------    -------
Net cash provided by (used in) operating
  activities......................................    14,344     (7,449)
                                                     -------    -------
Cash flow from investing activities:
  Purchases of molds, tools and equipment.........    (1,867)    (2,588)
  Expenditures for product and package design
     costs........................................    (1,613)    (2,525)
  Other investments...............................       (29)       (98)
                                                     -------    -------
Net cash used in investing activities.............    (3,509)    (5,211)
                                                     -------    -------
Cash flow from financing activities:
  Redemption of preferred stock...................        --     (1,440)
  Exercise of stock options.......................        --        167
  Proceeds from initial public offering...........    45,527         --
  Net repayments under credit agreement...........   (21,500)        --
  Notes payable--stockholders.....................   (15,119)        --
                                                     -------    -------

Net cash provided by (used in) financing
  activities......................................     8,908     (1,273)
                                                     -------    -------
Net increase (decrease) in cash and cash
  equivalents.....................................    19,743    (13,933)
Cash and cash equivalents at beginning of
  period..........................................     4,142     22,484
                                                     -------    -------
Cash and cash equivalents at end of period........   $23,885    $ 8,551
                                                     -------    -------
                                                     -------    -------
Supplemental disclosures of cash flow information:
  Interest paid during the period.................   $ 2,278    $    28
  Income taxes paid during the period.............   $ 5,885    $ 6,979
Other non-cash transactions:
  Accretion of preferred dividend.................        --    $    35


 
  The accompanying Notes to Condensed Consolidated Financial Statements are an
                       integral part of these statements.
                                      F-20


                                 TOY BIZ, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
 
     The accompanying unaudited condensed consolidated financial statements of
Toy Biz, Inc. and its subsidiary (collectively, the 'Company') have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instruction to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and footnotes thereto contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995, as filed with the
Securities and Exchange Commission.
 
2. INITIAL PUBLIC OFFERING AND CAPITAL STOCK
 
     On March 2, 1995, the Company completed an initial public offering ('IPO')
by issuing 2,750,000 new shares of its Class A Common Stock ('Common Stock') at
$18 per share. The net proceeds to the Company of $44,145, after deducting fees
and expenses, were used to pay outstanding amounts due under subordinated notes
which totalled $15,119 in principal and $1,961 in interest, with the balance
used for working capital and general corporate purposes.
 
3. 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'). The purchase price, including
fees related to the Acquisition, totalled approximately $13.6 million,
consisting of approximately $10.6 million of cash and assumed liabilities and
the issuance of 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 is 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. On March 18, 1996, 53,030 share of the
Preferred Stock were redeemed for cash at an aggregate present value of
approximately $1.4 million. The present value of the remaining Preferred Stock
was approximately $1.6 million as of March 31, 1996. The Company utilized
available cash to finance the Acquisition and the redemption of the Preferred
Stock.
 
     The Acquisition was accounted for using the purchase method of accounting.
Based on a preliminary allocation of purchase price, the fair value of the
assets acquired is summarized below.
 


                                   
     Current assets................   $ 3,470
     Noncurrent assets.............       521
     Intangibles...................     9,566
                                      -------
                                      $13,557
                                      -------
                                      -------


 
     The following unaudited pro forma consolidated financial information gives
effect to the Acquisition as if it occurred at the beginning of the period
presented. These pro forma results include certain adjustments, such as
increased amortization, decreased interest expense and the elimination of a
discontinued product line, and are not
 
                                      F-21


                                 TOY BIZ, INC.
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
3. ACQUISITION--(CONTINUED)
necessarily indicative of what results would have been had the Acquisition
occurred at the beginning of the period.
 



                                                THREE MONTHS ENDED
                                                  MARCH 31, 1995
                                                ------------------
                                             

     Net sales...............................        $ 38,718
     Net income..............................        $  4,424
     Net income per share....................        $    .16


 
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
 



                                                     DECEMBER 31,    MARCH 31,
                                                         1995          1996
                                                     ------------    ---------
                                                               
Accounts receivable, net:
  Accounts receivable.............................     $ 86,019       $71,823
  Less allowances.................................      (11,271)       (5,441)
                                                     ------------    ---------
     Total........................................     $ 74,748       $66,382
                                                     ------------    ---------
                                                     ------------    ---------
Inventories:
  Finished goods, net.............................     $ 13,504       $11,651
  Component parts, raw materials and
     work-in-process..............................        3,691         3,047
                                                     ------------    ---------
     Total........................................     $ 17,195       $14,698
                                                     ------------    ---------
                                                     ------------    ---------
Goodwill and other intangibles, net:
  Goodwill........................................     $  9,815       $ 9,815
  Patents and other intangibles...................          409           507
  Less accumulated amortization...................         (123)         (192)
                                                     ------------    ---------
     Total........................................     $ 10,101       $10,130
                                                     ------------    ---------
                                                     ------------    ---------
Accrued expenses and other:
  Accrued advertising costs.......................     $  9,459       $ 1,723
  Accrued royalties...............................        3,956         2,158
  Income taxes payable............................        7,374         2,495
  Accrued inventory purchases.....................        4,694         3,658
  Other accrued expenses..........................        3,557         3,172
                                                     ------------    ---------
     Total........................................     $ 29,040       $13,206
                                                     ------------    ---------
                                                     ------------    ---------


 
5. EARNINGS PER SHARE
 
     Earnings per share have been computed based on the weighted average number
of common and common equivalent shares assuming 27 million shares were
outstanding during the period prior to the IPO in March, 1995.
 

                                      F-22


 
                                                                    SCHEDULE II
 
                                  TOY BIZ INC.
                       VALUATION AND QUALIFYING ACCOUNTS
 



                                        BALANCE       CHARGED TO SALES    CHARGED TO                     BALANCE
                                      AT BEGINNING      OR COSTS AND        OTHER                        AT END
                                       OF PERIOD          EXPENSES         ACCOUNTS     DEDUCTIONS      OF PERIOD
                                      ------------    ----------------    ----------    -----------    -----------
                                                                                        
DESCRIPTION
Year Ended December 31, 1993,
  Allowances included in Accounts
  Receivable, Net:
  Doubtful accounts................    $   971,000      $     73,000(1)       --        $    53,000    $   991,000
  Advertising, markdowns, returns,
     volume discounts and other....      4,246,000        12,829,000(2)       --          8,545,000      8,530,000
 
Year Ended December 31, 1994,
  Allowances included in Accounts
  Receivable, Net:
  Doubtful accounts................        991,000            30,000(1)       --            505,000        516,000
  Advertising, markdowns, returns,
     volume discounts and other....      8,530,000        15,493,000(2)       --         14,270,000      9,753,000
 
Year Ended December 31, 1995,
  Allowances included in Accounts
  Receivable, Net:
  Doubtful accounts................        516,000           443,000(1)       --            443,000        516,000
  Advertising, markdowns, returns,
     volume discounts and other....      9,753,000        21,682,000(2)       --         20,680,000     10,755,000


 
- ------------------
(1) Charged to costs and expenses.
 
(2) Charged to sales.
 
                                      F-23




                                   [PHOTOS]




                                    [LOGO]



PROSPECTUS                                                           [ALTERNATE]
 
                                3,200,000 SHARES
                                 TOY BIZ, INC.
        [Logo]                CLASS A COMMON STOCK
                            ------------------------
 
OF THE 3,200,000 SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE, OF
 TOY BIZ, INC. BEING OFFERED HEREBY, 640,000 SHARES ARE BEING OFFERED INITIALLY
  OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS AND
   2,560,000 SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND
    CANADA BY THE U.S. UNDERWRITERS. SEE 'UNDERWRITERS.' OF THE 3,200,000
     SHARES OF CLASS A COMMON STOCK BEING OFFERED HEREBY, 700,000 SHARE 
      ARE BEING SOLD BY THE COMPANY AND 2,500,000 SHARES ARE BEING SOLD
       MARVEL (AS DEFINED HEREIN), A SELLING STOCKHOLDER. SEE 'PRINCIPAL
        AND SELLING STOCKHOLDERS.' THE COMPANY WILL NOT RECEIVE ANY
         OF THE PROCEEDS FROM THE SALE OF THE SHARES BEING SOLD BY 
                                 MARVEL.
 
THE CLASS A COMMON STOCK ENTITLES ITS HOLDERS TO ONE VOTE PER SHARE, AND THE
 CLASS B COMMON STOCK GENERALLY HAS TEN VOTES PER SHARE. IMMEDIATELY AFTER 
  THIS OFFERING, THE CLASS B COMMON STOCK AND THE CLASS A COMMON STOCK 
   BENEFICIALLY OWNED BY THE PRINCIPAL STOCKHOLDERS WILL REPRESENT 
    APPROXIMATELY 93% OF THE COMBINED VOTING POWER (ASSUMING THE U.S.
     UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED) WITH 
       RESPECT TO SUBSTANTIALLY ALL MATTERS SUBMITTED FOR THE 
                     VOTE OF ALL STOCKHOLDERS.
 
  THE CLASS A COMMON STOCK IS TRADED ON THE NEW YORK STOCK EXCHANGE UNDER THE
         SYMBOL 'TBZ.' ON AUGUST 7, 1996, THE REPORTED LAST SALE PRICE
               OF THE CLASS A COMMON STOCK ON THE NEW YORK STOCK
                        EXCHANGE WAS $15 5/8 PER SHARE.
 
                            ------------------------
 
         SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION
              THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
 
                            ------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
    EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
       SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
          COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF 
             THIS PROSPECTUS. ANY REPRESENTATION TO THE 
                 CONTRARY IS A CRIMINAL OFFENSE.
 
                            ------------------------
 
                               PRICE $15 A SHARE
                            ------------------------
 




                                                  UNDERWRITING                            PROCEEDS TO
                                PRICE TO         DISCOUNTS AND        PROCEEDS TO           SELLING
                                 PUBLIC          COMMISSIONS(1)        COMPANY(2)         STOCKHOLDERS
                           ------------------  ------------------  ------------------  ------------------
                                                                           
Per Share................        $15.00               $.71               $14.29              $14.29
Total(3).................     $48,000,000          $2,272,000         $10,003,000         $35,725,000


 
- ------------
     (1) The Company and the Selling Stockholders have agreed to indemnify the
         Underwriters against certain liabilities, including liabilities under
         the Securities Act of 1933, as amended.
     (2) Before deduction of expenses payable by the Company estimated at
         $900,000.
     (3) Isaac Perlmutter and Avi Arad, each a Selling Stockholder, have granted
         the U.S. Underwriters an option, exercisable within 30 days of the date
         hereof, to purchase up to an aggregate of 480,000 additional Shares,
         consisting of up to 384,000 Shares as to Mr. Perlmutter and 96,000
         Shares as to Mr. Arad, at the price to public less underwriting
         discounts and commissions for the purpose of covering over-allotments,
         if any. If the U.S. Underwriters exercise such option in full, the
         total price to public, underwriting discounts and commissions, proceeds
         to Company and proceeds to Selling Stockholders will be $55,200,000,
         $2,612,800, $10,003,000 and $42,584,200, respectively. See
         'Underwriters.'
                            ------------------------
 
     The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Kramer, Levin, Naftalis & Frankel, counsel for the Underwriters. It is
expected that delivery of the Shares will be made on or about August 13, 1996 at
the office of Morgan Stanley & Co. Incorporated, New York, N. Y., against
payment therefor in immediately available funds.
                            ------------------------
 
MORGAN STANLEY & CO.
   INTERNATIONAL
            CS FIRST BOSTON
                      SMITH BARNEY INC.
                                 JEFFERIES INTERNATIONAL LIMITED
 
August 7, 1996