UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________
Commission file number 1-13638
MARVEL ENTERPRISES, INC.
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 13-3711775
_______________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 East 40th Street, New York, NY 10016
_______________________________________________________________________________
(Address of principal executive offices) (Zip Code)
212-576-4000
________________________________________________________________________________
(Registrant's telephone number, including area code)
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [X] No [_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [_]
At May 9, 2003, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 65,611,610 shares of Common Stock.
TABLE OF CONTENTS
Page
PART I . FINANC1AL INFORMATION ................................................................... 1
Item 1. Financial Statements (unaudited) ................................................. 1
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002................................................................. 2
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Three Months Ended March 31, 2003 and 2002................................ 3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002........................................................... 4
Notes to Consolidated Financial Statements........................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ 14
General........................................................................... 14
Results of Operations............................................................. 15
Liquidity and Capital Resources................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 18
Item 4. Controls and Procedures........................................................... 19
PART II. OTHER INFORMATION.......................................................................... 20
Item 1. Legal Proceedings................................................................. 21
Item 6. Exhibits and Reports on Form 8-K.................................................. 22
SIGNATURES.......................................................................................... 23
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002............................ 24
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
1
MARVEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2003 2002
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ........................... $ 84,734 $ 53,690
Accounts receivable, net ............................ 42,500 43,420
Inventories, net .................................... 11,283 16,036
Distribution receivable from joint venture, net...... 1,679 2,102
Deferred financing costs ............................ 667 667
Prepaid expenses and other current assets ........... 5,813 6,700
--------- ---------
Total current assets ............................ 146,676 122,615
Molds, tools and equipment, net ...................... 6,474 6,997
Product and package design costs, net ................ 1,112 859
Goodwill, net ........................................ 359,070 365,604
Intangibles, net ..................................... 570 649
Accounts receivable, non current portion ............. 19,294 17,284
Deferred financing costs ............................. 3,279 3,446
Other assets ......................................... 64 65
--------- ---------
Total assets .................................... $ 536,539 $ 517,519
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 4,010 $ 11,607
Accrued expenses and other current liabilities ...... 46,723 48,371
Administration expense claims payable ............... 1,273 1,303
Unsecured creditors payable ......................... 3,042 3,034
Deferred revenue .................................... 9,670 25,696
--------- ---------
Total current liabilities ....................... 64,718 90,011
--------- ---------
Senior notes ........................................ 150,962 150,962
Accrued rent ........................................ 851 897
--------- ---------
Total liabilities ............................... 216,531 241,870
--------- ---------
Redeemable cumulative convertible
exchangeable preferred stock ................ -- 32,780
--------- ---------
Stockholders' equity
Common stock ........................................ 725 685
Additional paid-in capital .......................... 522,112 486,106
Accumulated deficit ................................. (167,361) (208,419)
Accumulated other comprehensive loss ................ (2,513) (2,548)
--------- ---------
Total stockholders' equity before treasury stock 352,963 275,824
Treasury stock ....................................... (32,955) (32,955)
--------- ---------
Total stockholders' equity ...................... 320,008 242,869
--------- ---------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity ...... $ 536,539 $ 517,519
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
2
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
Three Months
Ended March 31,
2003 2002
Net sales ...................................................... $ 87,377 $ 57,222
Cost of sales .................................................. 20,284 28,804
-------- --------
Gross profit ................................................... 67,093 28,418
Operating expenses:
Selling, general and administrative ....................... 16,359 18,111
Depreciation and amortization ............................. 843 1,031
-------- --------
Total operating expenses .................................. 17,202 19,142
Equity in net income of joint venture .......................... 4,824 --
-------- --------
Operating income ............................................... 54,715 9,276
Interest expense, net .......................................... 4,258 7,893
-------- --------
Income before income taxes ..................................... 50,457 1,383
Income tax expense ............................................. 8,236 623
-------- --------
Income before cumulative effect of change in
accounting principle ........................................... 42,221 760
Cumulative effect of change in accounting principle,
net of income tax benefit of $2.6 million ...................... -- 4,561
-------- --------
Net income (loss) .............................................. 42,221 (3,801)
Less: preferred dividend requirement ........................... 1,163 4,131
-------- --------
Net income (loss) attributable to common stock ................. $ 41,058 $ (7,932)
======== ========
Basic earnings (loss) per share before cumulative
effect of change in accounting principle ....................... $ 0.67 $ (0.10)
Cumulative effect of change in accounting principle ........... -- (0.13)
-------- --------
Basic earnings (loss) per share attributable to common stock ... $ 0.67 $ (0.23)
======== ========
Weighted average number of basic shares outstanding ............ 61,471 34,406
======== ========
Diluted earnings (loss) per share before cumulative effect of
change in accounting principle ................................. $ 0.57 $ (0.10)
Cumulative effect of change in accounting principle ............ -- (0.13)
-------- --------
Diluted earnings (loss) per share attributable to common stock . $ 0.57 $ (0.23)
======== ========
Weighted average number of diluted shares outstanding .......... 74,260 34,406
======== ========
Comprehensive income (loss)
Net income (loss) ........................................... $ 42,221 $ (3,801)
Other comprehensive income .................................. 35 164
-------- --------
Comprehensive income (loss) ................................. $ 42,256 $ (3,637)
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months
Ended March 31,
2003 2002
Cash flows from operating activities:
Net income (loss) ............................................. $ 42,221 $ (3,801)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 843 1,031
Amortization of deferred financing costs ...................... 167 2,673
Deferred income taxes ......................................... 6,534 494
Cumulative effect of change in accounting principle, net of ... -- 4,561
income tax benefit .......................................
Equity in net income from joint venture ....................... (4,824) --
Changes in operating assets and liabilities:
Accounts receivable ........................................ (1,090) (15,382)
Inventories ................................................ 4,753 (19)
Distributions received from joint venture .................. 5,247 --
Prepaid expenses and other current assets .................. 887 6,303
Other assets ............................................... 1 3,235
Accounts payable, accrued expenses and other current
liabilities .............................................. (9,257) 4,148
Deferred revenue ........................................... (16,026) (141)
-------- --------
Net cash provided by operating activities ...................... 29,456 3,102
-------- --------
Cash flows from investing activities:
Payment of administrative claims and unsecured claims, net . (22) 118
Purchases of molds, tools and equipment .................... (24) (228)
Expenditures for product and package design costs .......... (469) (382)
Other intangibles .......................................... -- (1)
-------- --------
Net cash used in investing activities ........................... (515) (493)
-------- --------
Cash flows from financing activities:
Deferred financing costs ................................... -- (196)
Exercise of warrants ....................................... 905 --
Exercise of stock options .................................. 1,198 653
-------- --------
Net cash provided by financing activities ....................... 2,103 457
-------- --------
Net increase in cash and cash equivalents ...................... 31,044 3,066
Cash and cash equivalents, at beginning of period ............... 53,690 21,591
-------- --------
Cash and cash equivalents, at end of period ..................... $ 84,734 $ 24,657
======== ========
Supplemental disclosures of cash flow information:
Interest paid during the period ............................. $--- $ 9,149
Income taxes, paid during the period ........................ 240 319
Non-cash transactions:
Preferred stock dividends ................................... 1,163 4,131
Conversion of preferred stock to common stock ............... 33,943 1,420
Warrants issued in connection with credit facility .......... -- 2,567
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Marvel
Enterprises, Inc. and its subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions 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. The Consolidated Statements of Operations and
Comprehensive Income (Loss) and the Consolidated Statements of Cash Flows for
the three months ended March 31, 2003 are not necessarily indicative of those
for the full year ending December 31, 2003. For further information on the
Company's historical financial results, refer to the Consolidated Financial
Statements and Notes thereto contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
2. SIGNIFICANT ACCOUNTING POLICIES
SFAS 148 - Accounting for Stock Based Compensation - On December 31, 2002,
the Financial Accounting Standards Board ("FASB") issued SFAS 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), which
provided alternative methods of transition to the fair value method of
accounting for stock-based compensation of SFAS 123 "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS No. 148, also amended the disclosure provisions
of SFAS 123 and Accounting Principles Board ("APB") Opinion No. 28, "Interim
Financial Reporting," to require disclosure in the summary of significant
accounting policies of the effects of an entity's accounting policy with respect
to stock-based compensation on reported net income and earnings per share in
annual and interim statements.
In accordance with the provisions of SFAS 148, the Company has elected to
continue to account for its stock options under APB Opinion No. 25, ''Accounting
for Stock Issued to Employees'' (''APB 25'') and related interpretations. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on date of grant, no
compensation expense is recognized. For the purposes of SFAS 148 pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods. The Company's pro forma information follows:
Three Months Ended
March 31,
---------------------------
2003 2002
(in thousands, except
per share data)
Net income (loss), as reported ................................................. $ 42,221 $ (3,801)
Net income (loss) attributable to common stock, as reported .................... 41,058 (7,932)
Net income (loss) per share attributable to common stock - basic, as reported... 0.67 (0.23)
Net income (loss) per share attributable to common stock - diluted, as reported. 0.57 (0.23)
Stock based employee compensation cost, net of tax, if SFAS 123 was applied .... 1,396 648
Pro forma net income (loss) .................................................... 40,825 (4,449)
Pro forma net income (loss) attributable to common stock ....................... 39,662 (8,580)
Pro forma net income (loss) per share attributable to common stock - basic ..... 0.65 (0.25)
Pro forma net income (loss) per share attributable to common stock - diluted ... $ 0.55 $ (0.25)
5
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
March 31, 2003
(unaudited)
The fair value for each option grant under the stock option plans was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the various grants made during
2000 are: risk free interest rates ranging from 6.12% to 6.72%; no dividend
yield; expected volatility of 0.550; and expected life of three years. The
weighted average assumptions for the 2001 grants are: risk free interest rates
ranging from 2.91% to 4.90%; no dividend yield; expected volatility of 0.920;
and expected life of three years. The weighted average assumptions for the 2002
grants are: risk free interest rates ranging from 3.19% to 4.92%; no dividend
yield; expected volatility of 0.83; and expected life of five years. The
weighted average assumptions for the 2003 grants are: risk free interest rates
ranging from 2.91% to 3.17%; no dividend yield; expected volatility of 0.776;
and expected life of five years. The Black Scholes option pricing model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, the option
valuation model requires the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The effects of applying SFAS 123 for providing pro forma disclosures are
not likely to be representative of the effects on reported net income in future
periods.
6
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
March 31, December 31,
2003 2002
(in thousands)
Accounts receivable, net, consist of the following:
Accounts receivable .......................................... $ 60,198 $ 62,835
Less allowances
Doubtful accounts ......................................... (7,458) (7,459)
Advertising, markdowns, returns, volume, discounts
and other ................................................. (10,240) (11,956)
--------- ---------
Total ..................................................... $ 42,500 $ 43,420
========= =========
Inventories, net, consist of the following:
Toys:
Finished goods ............................................. $ 2,330 $ 7,566
Component parts, raw materials and work-in-process ......... 70 706
--------- ---------
Total toys ................................................. 2,400 8,272
Publishing:
Finished goods ............................................. 2,190 1,786
Editorial and raw materials ................................ 6,693 5,978
--------- ---------
Total publishing ........................................... 8,883 7,764
--------- ---------
Total ...................................................... $ 11,283 $ 16,036
========= =========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment .................................. $ 4,991 $ 4,971
Office equipment and other .................................. 11,461 11,676
Less accumulated depreciation and amortization .............. (9,978) (9,650)
--------- ---------
Total ..................................................... $ 6,474 $ 6,997
========= =========
Product and package design costs, net, consists of the following:
Product design costs ........................................ $ 3,090 $ 2,720
Package design costs ........................................ 1,237 1,138
Less accumulated amortization ............................... (3,215) (2,999)
--------- ---------
Total ..................................................... $ 1,112 $ 859
========= =========
Goodwill, net, consists of the following:
Goodwill ..................................................... $ 435,369 $ 441,903
Less accumulated amortization ................................ (76,299) (76,299)
--------- ---------
Total ..................................................... $ 359,070 $ 365,604
========= =========
Intangibles, net, consists of the following:
Patents ...................................................... $ 3,186 $ 3,186
Intangibles .................................................. 1,263 1,264
Less accumulated amortization ................................ (3,879) (3,801)
--------- ---------
Total ..................................................... $ 570 $ 649
========= =========
Accrued expenses and other:
Accrued advertising costs .................................... $ 5 $ 3,009
Royalties .................................................... 13,837 12,800
Inventory purchases .......................................... 4,616 4,130
Income taxes payable ......................................... 3,593 2,218
Bonuses ...................................................... 2,211 4,302
MEG acquisition accruals ..................................... 1,161 1,184
Accrued expenses-Fleer sale including pension benefits ....... 4,938 4,982
Pre-acquisition litigation charge ............................ -- 3,000
Litigation and legal accruals ................................ 4,676 4,564
Interest expense ............................................. 5,496 926
Other accrued expenses ....................................... 6,190 7,256
--------- ---------
Total .................................................. $ 46,723 $ 48,371
========= =========
7
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
4. DEBT FINANCING
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 ("the Securities Act") pursuant to Rule 144A under the
Securities Act. On August 20, 1999, the Company completed an exchange offer
under which it exchanged virtually all of those senior notes, which contained
restrictions on transfer, for an equal principal amount of registered,
transferable senior notes (the "Senior Notes"). The Senior Notes are due June
15, 2009 and bear interest at 12% per annum payable semi-annually on June 15th
and December 15th. The Senior Notes may be redeemed beginning June 15, 2004 for
a redemption price of 106% of the principal amount, plus accrued interest. The
redemption price decreases 2% each year after 2004 and will be 100% of the
principal amount, plus accrued interest, beginning June 15, 2007. Principal and
interest on the Senior Notes are guaranteed on a senior basis jointly and
severally by each of the Company's domestic subsidiaries.
On November 30, 2001, the Company and HSBC Bank USA entered into an
agreement for a senior credit facility (the "HSBC Credit Facility") comprised of
a $20.0 million revolving letter of credit facility renewable annually for up to
three years and a $37.0 million multiple draw three year amortizing term loan
facility, which was used to finance the repurchase of a portion of the Company's
Senior Notes. The term loan bore interest at the lender's reserve adjusted LIBOR
rate plus a margin of 3.5%. On August 30, 2002, the Company prepaid $10.0
million of the term loan. In connection with this early repayment of the term
loan, the Company recorded a charge of $4.1 million for the write-off of a
proportionate share of unamortized deferred financing costs associated with the
facility. On December 12, 2002, the Company prepaid the remaining $22.4 million
of the term loan and recorded an additional charge of $7.7 million for the
write-off of the remaining unamortized deferred financing costs associated with
this facility. Approximately $15.8 million of letters of credit previously
issued by Object Trading Corp, a corporation wholly owned by Isaac Perlmutter,
were replaced, in connection with the establishment of the HSBC Credit Facility,
by letters of credit issued by HSBC Bank USA. On December 18, 2002, the Company
amended the HSBC Credit Facility to provide for a $15.0 million revolving credit
facility and a $15.0 million letter of credit facility. As of March 31, 2003,
$5.4 million of letters of credit were outstanding and there were no borrowings
under the HSBC revolver. The HSBC Credit Facility contains customary event of
default provisions and covenants restricting the Company's operations and
activities, including the amount of capital expenditures, and also contains
certain covenants relating to the maintenance of minimum tangible net worth and
minimum free cash flow. The HSBC Credit Facility is secured by (a) a first
priority perfected lien in all of the assets of the Company; and (b) a first
priority perfected lien in all of the capital stock of each of the Company's
domestic subsidiaries. Borrowings would bear interest at prime or LIBOR-plus-two
percent per annum.
In connection with the HSBC Credit Facility, the Company and Isaac
Perlmutter entered into a Guaranty and Security Agreement ("Security
Agreement"). Under the terms of the Guaranty, Mr. Perlmutter has guaranteed the
payment of the Company's obligations under the HSBC Credit Facility in an amount
equal to 25% of all principal obligations relating to the HSBC Credit Facility
plus an amount, not to exceed $10.0 million, equal to the difference between the
amount required to be in the cash reserve account maintained by the Company and
the actual amount on deposit in such cash reserve account at the end of each
fiscal quarter; provided that the aggregate amount guaranteed by Mr. Perlmutter
will not exceed $30.0 million. Under the terms of the Security Agreement, Mr.
Perlmutter has provided the creditors under the HSBC Credit Facility with a
security interest in the following types of property, whether currently owned or
subsequently acquired by him: all promissory notes, certificates of deposit,
deposit accounts, checks and other instruments and all insurance or similar
payments or any indemnity payable by reason of loss or damage to or otherwise
with respect to any such property. This guaranty continues with the current HSBC
revolving and letter of credit facilities.
8
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
5. SHARES OUTSTANDING
During the first three months of 2003, there were conversions of 3,369,812
shares of preferred stock into 3,501,234 shares of common stock, at a rate of
1,039 shares of common stock for every preferred share converted, 242,775 shares
of common stock were issued upon the exercise of employee stock options and
250,000 shares of common stock were issued upon the exercise of outstanding
warrants. The total number of shares of common stock outstanding as of March 31,
2003 is 65,134,144, net of treasury shares; assuming the exercise of all
outstanding warrants and employee stock options, the number of shares would be
80,711,688.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended
March 31
----------------------
2003 2002
Numerator:
Net income ................................. $ 42,221 $ (3,801)
Preferred dividends ........................ (1,163) (4,131)
-------- --------
Numerator for basic earnings per share ..... 41,058 (7,932)
Preferred dividends* ....................... 1,163 --
-------- --------
Numerator for diluted earnings per share ... $ 42,221 $ (7,932)
======== ========
Denominator:
Denominator for basic earnings per share ... 61,471 34,406
Effect of dilutive warrants** .............. 3,415 --
Effect of employee stock options** ......... 6,047 --
Effect of dilutive redeemable cumulative
exchangeable preferred stock*** .......... 3,327 --
-------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions ................................ 74,260 34,406
======== ========
Basic earnings per share ........................ $ 0.67 $ (0.23)
======== ========
Diluted earnings per share ...................... $ 0.57 $ (0.23)
======== ========
* In accordance with the provisions of SFAS 128 "Earnings Per Share", under the
if-converted method, preferred dividends applicable to convertible preferred
stock are added back to the numerator and the resulting common shares are
included in the denominator for the entire period being presented.
** Any dilution arising from the Company's outstanding warrants and employee
stock options during the three months ended March 31, 2002 are not included as
their effect is anti-dilutive.
*** The calculation of diluted earnings per share does not include the assumed
conversion of convertible preferred stock for the three month period ended March
31, 2002, as such would be anti-dilutive - caused by the effect of adding back
the preferred stock dividends (to the numerator) in such calculation.
9
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(unaudited)
6. SEGMENT INFORMATION
Following the Company's acquisition of Marvel Entertainment Group, Inc.
("MEG"), the Company realigned its businesses into three segments: Toy
Merchandising and Distribution, Publishing and Licensing.
Toy Merchandising and Distribution Segment
The toy merchandising and distribution segment designs, develops, markets
and distributes a limited line of toys to the worldwide marketplace. The
Company's toy products are based upon movies and television shows featuring
Spider-Man and produced by Sony Pictures, and upon the movie trilogy Lord of the
Rings (New Line Cinema). The Spectra Star division of Toy Biz (which closed its
manufacturing operations in March 2003) designed, produced and sells kites in
both mass market stores and specialty hobby shops. Spectra Star's sales amounted
to approximately $7.8 million and $8.3 million for the three months ended March
31, 2003 and 2002, respectively. Its total assets at March 31, 2003 of
approximately $12.3 million consist principally of accounts receivable,
inventory, land and buildings.
Publishing Segment
The publishing segment creates and publishes comic books and trade
paperbacks principally in North America. Marvel has been publishing comic books
since 1939 and has developed a roster of more than 4,700 Marvel Characters. The
Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, the
Incredible Hulk, Daredevil, newly developed Marvel Characters and characters
created by other entities and licensed to the Company.
Licensing Segment
The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use in a wide variety of products, including
toys, electronic games, apparel, accessories, footwear, collectibles and
novelties in a variety of media, including feature films, television programs
and destination based entertainment (e.g., theme parks), and for promotional
use.
Set forth below is certain operating information for the divisions of the
Company.
Three months ended March 31, 2003
Licensing Publishing Toy Biz Corporate Total
(in thousands)
Net sales $49,902 $15,212 $22,263 $ ---- $87,377
Gross profit 49,902 8,385 8,806 ---- 67,093
Operating income (loss) 48,724* 5,042 5,937 (4,988) 54,715
Three months ended March 31, 2002
Licensing Publishing Toy Biz Corporate Total
(in thousands)
Net sales $9,172 $14,559 $33,491 $ ---- $57,222
Gross profit 9,157 7,712 11,549 ---- 28,418
Operating income (loss) 4,220* 3,771 3,762 (2,477) 9,276
(*) Includes equity in net income of joint venture of $4,824 and $0 for the
three month periods ended March 31, 2003 and 2002, respectively
10
7. COMMITMENTS AND CONTINGENCIES
Commitments
In June 2000, the Company entered into a lease agreement for a corporate
office facility. The lease term, which is approximately 5 1/2 years, commenced
on April 1, 2001 and terminates on July 31, 2006. At March 31, 2003,
approximately $4.4 million of lease payments are being guaranteed by Mr.
Perlmutter
The following table sets forth the Company's Contractual Cash Obligations
as of March 31, 2003:
Contractual
Cash Obligations Payments Due By Period
- ------------------------------------------------------------------------------------------------------
Less than After
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- ------------------------------------------------------------------------------------------------------
Long Term Debt $ 150,962 --- --- --- $ 150,962
- ------------------------------------------------------------------------------------------------------
Operating Leases 12,894 3,389 6,799 1,822 884
- ------------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $ 163,856 3,389 6,799 1,822 $ 151,846
- ------------------------------------------------------------------------------------------------------
The Company is currently a party to two lease agreements for public
warehouse space in Fife, Washington and Sumner, Washington. The Company is in
the process of transitioning to the Sumner facility and the lease payments
associated with both locations are estimated to average between $180,000 and
$240,000 per year. The lease payments are based on cubic feet, measured monthly,
and are subject to change depending on the capacity devoted to the inventory
stored at these locations.
The Company has a contractual obligation under a studio agreement to spend
approximately $1.5 million and $1.0 million in advertising for the 2002/2003 and
2003/2004 broadcast years, respectively.
The following table sets forth the Company's Other Commercial Commitments
as of March 31, 2003:
Other Commercial Amount of Commitment
Commitments Total Expiration Per Period
- -------------------------------------------------------------------------------------------------------
Less than Over
(Amounts in thousands) 1 Year 1-3 Years 4-5 Years 5 Years
- -------------------------------------------------------------------------------------------------------
Standby Letters of Credit $ 5,444 5,250 194 - -
- -------------------------------------------------------------------------------------------------------
The Company is obligated to make payments under various royalty agreements
of approximately $5,109 and $35 (amounts in thousands) during the years ending
December 31, 2003 and 2004, respectively.
The Company remains liable in connection with businesses previously sold
and has been indemnified against such liabilities by the purchaser of such
businesses.
Legal Matters
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any legal proceeding and there can be no assurances, the
Company believes that its legal proceedings and claims (including those
described below), individually and in the aggregate, are not likely to have a
material adverse effect on its financial condition, results of operations or
cash flows.
11
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
March 31, 2003
(unaudited)
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character. In February 2002, the Court granted the Company's motion for
summary judgment. Simon appealed the Court's decision and the hearing on the
appeal was held in June 2002. On November 7, 2002, the United States Court of
Appeals for the Second Circuit reversed the decision of the United States
District Court for the Southern District of New York, which had granted the
Company's motion for summary judgment and remanded the action to the District
Court for trial. A non-jury trial is scheduled to begin on July 16, 2003.
X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
("Fox") sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc.
and Fireworks Television (US), Inc. in the United States District Court,
Southern District of New York, seeking an injunction and damages for alleged
breach of the 1993 X-Men movie license, unfair competition, copyright
infringement and tortious interference with a contract arising from the Mutant X
television show being produced by Tribune and Fireworks under license from
Marvel which was released in the fall of 2001. On the same day Fox filed the
foregoing suit, Marvel commenced an action against Fox in the same court seeking
a declaratory judgment that the license of the Mutant X title and certain Marvel
characters did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. The case was settled in February 2003. The settlement included an
extension of time during which Fox may exploit its rights in the "X-Men",
"Daredevil", and "Fantastic Four" properties. Additionally, the settlement
expanded the relationship between Fox and Marvel whereby the parties will
negotiate up to three new film and television deals for additional Marvel
properties during the next two years.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company filed an appeal. The Company entered into negotiations and
settled the case in early 2003 at an amount not in excess of the amount
previously provided for in the accompanying consolidated financial statements.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company and Marvel Entertainment Group, Inc. (the "Marvel Defendants") in New
York Supreme Court, County of New York, alleging that the Marvel Defendants
breached their own Terms of Sale Agreement in connection with the sale of comic
books to members of the purported class, breached their obligation of good faith
and fair dealing(s), fraudulently induced plaintiff and other members of the
purported class to buy comics and unjustly enriched themselves. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. Marvel intends to vigorously defend against the claims made
in this action on their merits.
Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced his previously
threatened action in the United States District Court for the Southern District
of New York, alleging claims for breach of his November 1, 1998 employment
agreement. Mr. Lee claims the right to a 10% profit participation in connection
with the Spider-Man movie and other film and television productions that utilize
Marvel characters. Pursuant to the terms of the Employment Agreement, the
Company is currently paying Mr. Lee a salary of $1.0 million per year and
believes that Mr. Lee's claim is without merit. Marvel has answered the
complaint and denied all of its material allegations.
12
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
March 31, 2003
(unaudited)
Marvel Characters, Inc. v. Sony Pictures Entertainment Inc. et al. On
February 25, 2003, Marvel Characters, Inc.("MCI"), a wholly owned subsidiary of
Marvel Enterprises, Inc., filed suit against Sony Pictures Entertainment
Inc.("SPE") and related entities, in California Superior Court for Los Angeles
County, alleging, among other things, that the 1999 license agreement for
Spider-Man between MCI and SPE should be dissolved based on SPE's fraudulent
representations to MCI during the negotiation of the license agreement. As the
Company has previously announced, the suit is not an attempt to stop production
of the Spider-Man movie sequel or to change or upset any of the merchandising
deals that are in place for the sequel. On April 21, 2003, in response to
Marvel's complaint, SPE filed a cross-complaint in which SPE alleges, among
other things, that MCI has breached the licensing agreement with respect to the
licensing of Spider-Man merchandise unrelated to Spider-Man: The Movie to SPE's
financial detriment. Marvel believes that SPE's claims are without merit and
intends to vigorously defend against those claims.
Administration Expense Claims Litigation. While the Company has settled
substantially all Administration Expense Claims, litigation brought by the
Company to contest some of those claims is still pending. The Company estimates
that it may be required to pay approximately $1.3 million of additional
Administration Expense Claims, although there can be no assurance as to the
amount the Company will be required to pay. At March 31, 2003, the Company had
reserves (established in 1998) of $1.3 million for this purpose. Subsequent to
March 31, 2003, the Company paid approximately $0.5 million in Administration
Expense Claims of the estimated $1.3 million that has been provided for in the
accompanying Consolidated Balance Sheet.
8. INCOME TAXES
The Company's effective tax rate for the three months ended March 31, 2003
(16.3%) was lower than the Federal statutory rate due primarily to the expected
benefit from the utilization of net operating loss carryforwards for which
benefit was not previously taken. The Company's effective tax rate for the three
months ended March 31, 2002 was higher than the Federal statutory rate due
primarily to foreign and state and local taxes.
9. JOINT VENTURE
For the three months ended March 31, 2003 and 2002, the Company recognized
$4.8 million and $0, in income, respectively, in connection with its share in a
jointly owned limited partnership with Sony whose purpose is to pursue licensing
opportunities for motion picture and television related merchandise relating to
the Spider-Man: The Movie characters. For the three months ended March 31, 2003
and 2002, net sales reported by the joint venture was $10.0 million and $0,
respectively, and net income reported by the joint venture was $9.6 million (of
which the Company recognized 50%) and $0, respectively. The Company accounts for
the activity of this joint venture under the equity method.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURTIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed herein
concerning the Company's business and operations could cause actual results to
differ materially from those contained in forward-looking statements made in
this Form 10-Q Quarterly Report. When used in this Form 10-Q, the words "intend,
"estimate", "believe", "expect", and similar expressions are intended to
identify forward-looking statements. In addition, the following factors, among
others, could cause the Company's financial performance to differ materially
from that expressed in any forward-looking statements made by the Company: (i) a
decrease in the level of media exposure or popularity of the Company's
characters, (ii) financial difficulties of the Company's licensees, (iii)
changing consumer preferences, (iv) movie- and television-production delays and
cancellations, (v) toy-production delays or shortfalls, continued concentration
of toy retailers, and toy inventory risk, (vi) the imposition of quotas or
tariffs on products manufactured in China, (vii) any effect of Severe Acute
Respiratory Syndrome on our manufacturers or licensees in the Far East, and
(viii) a decrease in cash flow even as the Company remains indebted to its
noteholders. These forward-looking statements speak only as of the date of this
report. The Company does not intend to update or revise any forward-looking
statements to reflect events or circumstances after the date of this report,
including changes in business strategy or planned capital expenditures, or to
reflect the occurrence of unanticipated events.
General
Following the Company's acquisition of MEG, the Company realigned its
businesses into three segments: Toy Merchandising and Distribution, Publishing
and Licensing Segments.
Toy Merchandising and Distribution Segment
The toy merchandising and distribution segment designs, develops, markets
and distributes a limited line of toys to the worldwide marketplace. The
Company's toy products are based upon movies and television shows featuring
Spider-Man and produced by Sony Pictures, and upon the movie trilogy Lord of the
Rings (New Line Cinema). The Spectra Star division of Toy Biz (which closed its
manufacturing operations in March 2003) designed, produced and sells kites in
both mass market stores and specialty hobby shops. Spectra Star's sales amounted
to approximately $7.8 million and $8.3 million for the three months ended March
31, 2003 and 2002, respectively. Its total assets at March 31, 2003, of
approximately $12.3 million consist principally of accounts receivable,
inventory, land and buildings.
Publishing Segment
The publishing segment creates and publishes comic books and trade
paperbacks principally in North America. Marvel has been publishing comic books
since 1939 and has developed a roster of more than 4,700 Marvel Characters. The
Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, the
Incredible Hulk, Daredevil, newly developed Marvel Characters and characters
created by other entities and licensed to the Company.
Licensing Segment
The licensing segment relates to the licensing of or joint ventures
involving Marvel Characters for use in a wide variety of products, including
toys, electronic games, apparel, accessories, footwear, collectibles and
novelties in a variety of media, including feature films, television programs
and destination based entertainment (e.g., theme parks), and for promotional
use.
14
Revenue recognized under license agreements during the three months ended
March 31, 2003, and 2002 were generated within the following business
categories:
Three Months Ended March 31,
2003 2002
(in thousands)
Apparel and accessories $ 4,873 $1,828
Entertainment (including studios, themed attractions
and electronic games) 27,908 5,814
Toys 15,611 537
Other 1,510 993
-------------- ---------------
Totals $49,902 $9,172
============== ===============
Results of Operations
Three months ended March 31, 2003 compared with the three months ended March 31,
2002
The Company's net sales increased approximately $30.2 million to $87.4
million in the first quarter of 2003 from approximately $57.2 million in the
first quarter of 2002. The increase is primarily due to improved performance
within the Licensing segment. Sales from the Licensing segment increased
approximately $40.7 million to approximately $49.9 million in the first quarter
of 2003 from approximately $9.2 million in the first quarter of 2002. This
improvement reflects a combination of new licenses and modifications to existing
licenses. The major categories of the improvements in Licensing activities were
generated via interactive video games and toys. Sales from the Publishing
division increased approximately $0.7 million to approximately $15.2 million in
the first quarter of 2003 from $14.5 million in the first quarter of 2002
primarily due to an increase in sales of trade paperbacks. As anticipated, sales
from the Toy segment decreased approximately $11.2 million to approximately
$22.3 million in the first quarter of 2003 from approximately $33.5 million in
the first quarter of 2002 primarily due to a decrease in the sales of action
figures and accessories based on characters associated with Spider-Man: The
Movie.
Gross profit increased approximately $38.7 million to approximately $67.1
million in the first quarter of 2003 from approximately $28.4 million in the
2002 period. The growth in Licensing revenues, where gross profit as a
percentage of sales approximates 100%, increased the Company's gross profit as a
percentage of sales to 77% in the first quarter of 2003 as compared to 50% in
the first quarter of 2002.
Selling, general and administrative expenses decreased approximately $1.7
million to approximately $16.4 million or approximately 19% of net sales in the
first quarter of 2003 from approximately $18.1 million or approximately 32% of
net sales in the first quarter of 2002. The Toy Biz division accounted for
approximately $4.7 million of the decrease primarily due to lower selling
expenses, specifically advertising and royalties.
For the three months ended March 31, 2003 and 2002, the Company recognized
$4.8 million and $0, in income, respectively, in connection with its share in a
jointly owned limited partnership with Sony whose purpose is to pursue licensing
opportunities for motion picture and television related merchandise relating to
the Spider-Man: The Movie characters. The Company accounts for the activity of
this joint venture under the equity method.
During the first half of 2002, the Company completed the first of the
impairment tests of goodwill required under SFAS 142, which was adopted
effective January 1, 2002. As a result of completing the required test, the
Company recorded a charge retroactive to the adoption date (effective to the
quarter ended March 31, 2002) for the cumulative effect of change in accounting
principle in the initial amount of $4.6 million, net of tax benefit of $2.6
million, representing the excess of the carrying value of the toy merchandising
and distribution reporting unit as compared to its fair value.
15
Net interest expense decreased approximately $3.6 million to approximately
$4.3 million in the first quarter of 2003 as compared to approximately $7.9
million in the first quarter of 2002. The prepayment of the HSBC term loan in
the fourth quarter of 2002 resulted in the elimination of amortization of
deferred financing costs associated with such loan and the Security Agreement
entered into by the Company and Mr. Isaac Perlmutter, of approximately $2.5
million, as well as cash interest savings of approximately $0.5 million.
The Company's effective tax rate for the three months ended March 31, 2003
(16.3%) was lower than the Federal statutory rate due primarily to the expected
benefit from the utilization of net operating loss carryforwards for which
benefit was not previously taken. At March 31, 2003, the Company has Federal net
operating loss carryforwards of approximately $112.8 million, which are
scheduled to expire in the years 2017 through 2020. Of the total Federal loss
carryforwards, approximately $20.6 million is subject to a Section 382
limitation. A portion of these pre-acquisition NOLs was utilized in the quarter
ended March 31, 2003 and recorded as a $6.5 million reduction in goodwill.
Additionally, the Company has various state and local net operating loss
carryforwards of approximately $387.7 million, which will expire in various
jurisdictions in years 2005 through 2023. The state and local loss carryforwards
are also generally subject to a Section 382 limitation. As of March 31, 2003, no
value has been ascribed in the accompanying financial statements for either the
Federal or state and local net operating loss carryforwards.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand, cash flows
from operations and from the $15.0 million HSBC letter of credit and $15.0
million credit line facilities. The Company anticipates that its primary needs
for liquidity will be to: (i) conduct its business; (ii) meet debt service
requirements; (iii) make capital expenditures; and (iv) pay administration
expense claims.
Net cash provided by operating activities was approximately $29.5 million
in the first quarter of 2003 as compared to net cash provided by operating
activities of $3.1 million in the first quarter of 2002.
At March 31, 2003, the Company had working capital of $82.0 million.
In an effort to reduce the redemption and dividend requirements associated
with the Company's 8% Preferred Stock, the Company completed an Exchange Offer
on November 18, 2002, when approximately 17.6 million (85%) shares of its 8%
Preferred Stock were tendered in exchange for its common stock. Under the
Exchange Offer, 1.39 shares of common stock were issued for every share of 8%
Preferred Stock tendered. In the fourth quarter of 2002, the Company recorded a
non-cash charge of $55.3 million (representing the fair value of the additional
common shares issued in the Exchange Offer) as a preferred dividend in
connection with this exchange. Under the terms of the 8% Preferred Stock, the
Company was able to force the conversion of all outstanding shares of 8%
Preferred Stock following the completion of 10 consecutive trading days ending
March 18, 2003 on which the closing price of the Company's common stock exceeded
$11.55 per share. As a result, and as the Company announced on March 19, 2003,
the Company forced the conversion of all of the outstanding 8% Preferred Stock.
The conversion extinguished the Company's obligation to redeem any remaining
shares of 8% Preferred Stock for $10.00 per share in cash in 2011. The
conversion was effective on March 30, 2003. Earnings per share in 2003 will be
impacted by a full-year effect of the additional common shares and the
elimination of the preferred stock dividend associated with those shares
exchanged.
The Company estimates that it may be required to pay approximately $1.3
million of additional Administration Expense Claims, although there can be no
assurance as to the amount the Company will be required to pay. Subsequent to
March 31, 2003, the Company paid approximately $0.5 million in Administration
Expense Claims of the estimated $1.3 million that has been provided for in the
accompanying Consolidated Balance Sheet.
The Company will be required to make a cash payment to MEG's unsecured
creditors at such time as the amount thereof is determined. The Company
initially deposited $8 million into a trust account to satisfy the maximum
amount of such payment. Cumulatively, through March 31, 2003, the Company
received approximately $2.2 million back from the trust account, primarily as a
result of a settlement with the National Basketball Association. The balance in
the trust account as of March 31, 2003 is approximately $3.0 million.
16
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 (the "Securities Act") pursuant to Rule 144A under the
Securities Act. On August 20, 1999, the Company completed an exchange offer
under which it exchanged virtually all of those senior notes, which contained
restrictions on transfer, for an equal principal amount of registered,
transferable senior notes (the "Senior Notes"). The Senior Notes are due June
15, 2009 and bear interest at 12% per annum payable semi-annually on June 15th
and December 15th. The Senior Notes may be redeemed beginning June 15, 2004 for
a redemption price of 106% of the principal amount, plus accrued interest. The
redemption price decreases 2% each year after 2004 and will be 100% of the
principal amount, plus accrued interest, beginning June 15, 2007. Principal and
interest on the Senior Notes are guaranteed on a senior basis jointly and
severally by each of the Company's domestic subsidiaries.
On November 30, 2001, the Company and HSBC Bank USA entered into the HSBC
Credit Facility comprised of a $20 million revolving letter of credit facility
renewable annually for up to three years and a $37.0 million multiple draw three
year amortizing term loan facility, which was used to finance the repurchase of
a portion of the Company's Senior Notes. The term loan bore interest at the
lender's reserve adjusted LIBOR rate plus a margin of 3.5%. On August 30, 2002,
the Company prepaid $10.0 million of the term loan. In connection with this
early repayment of the term loan, the Company recorded a charge of $4.1 million
for the write-off of a proportionate share of unamortized deferred financing
costs associated with the facility. On December 12, 2002, the Company prepaid
the remaining $22.4 million of the term loan and recorded an additional charge
of $7.7 million for the write-off the remaining unamortized deferred financing
costs associated with this facility. Approximately $15.8 million of letters of
credit previously issued by Object Trading Corp, a corporation wholly owned by
Isaac Perlmutter, were replaced, in connection with the establishment of the
HSBC Credit Facility, by letters of credit issued by HSBC Bank USA. On December
18, 2002, the Company amended the HSBC Credit Facility to provide for a $15.0
million revolving credit facility and a $15.0 million letter of credit facility.
As of March 31, 2003, $5.4 million of letters of credit were outstanding and
there were no borrowings under the HSBC revolver. The HSBC Credit Facility
contains customary event of default provisions and covenants restricting the
Company's operations and activities, including the amount of capital
expenditures, and also contains certain covenants relating to the maintenance of
minimum tangible net worth and minimum free cash flow. The HSBC Credit Facility
is secured by (a) a first priority perfected lien in all of the assets of the
Company; and (b) a first priority perfected lien in all of the capital stock of
each of the Company's domestic subsidiaries. Borrowings would bear interest at
prime or LIBOR-plus-two percent per annum.
In consideration for the HSBC Credit Facility in 2001, the Company issued
warrants to HSBC to purchase up to 750,000 shares of the Company's common stock.
These warrants had an exercise price of $3.62 and a life of five years. The fair
value for the warrants was estimated at the date of issuance using the
Black-Scholes pricing model with the following assumptions: risk free interest
rate of 4.16%; no dividend yield; expected volatility of 0.924; and expected
life of five years. The aggregate value of approximately $2.0 million was
initially included in deferred financing costs. Due to the prepayment of the
term loan, the related unamortized deferred financing costs which were being
amortized over the initial three year term of the HSBC Credit Facility using the
effective interest method were subsequently written off on an accelerated basis
as of December 31, 2002. In December 2002, HSBC exercised 500,000 warrants and
received 295,110 shares of common stock under a Cashless Exercise Ratio
provision of the warrants. Warrants to purchase 250,000 common shares were
exercised in February 2003 and no warrants issued to HSBC were outstanding at
March 31, 2003.
In connection with the HSBC Credit Facility, the Company and Isaac
Perlmutter entered into a Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
HSBC Credit Facility in an amount equal to 25% of all principal obligations
relating to the HSBC Credit Facility plus an amount, not to exceed $10.0
million, equal to the difference between the amount required to be in the cash
reserve account maintained by the Company and the actual amount on deposit in
such cash reserve account at the end of each fiscal quarter; provided that the
aggregate amount guaranteed by Mr. Perlmutter will not exceed $30.0 million.
Under the terms of the Security Agreement, Mr. Perlmutter has provided the
creditors under the HSBC Credit Facility with a security interest in the
following types of property, whether currently owned or subsequently acquired by
him: all promissory notes, certificates of deposit, deposit accounts, checks and
other instruments and all insurance or similar payments or any indemnity payable
by reason of loss or damage to or otherwise with respect to any such property.
This guaranty continues with the current HSBC revolving, and letter of, credit
facilities.
17
The following table sets forth the Company's Contractual Cash Obligations as of March 31, 2003:
Contractual
Cash Obligations Payments Due By Period
- ------------------------------------------------------------------------------------------------------
Less than After
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- ------------------------------------------------------------------------------------------------------
Long Term Debt $ 150,962 --- --- --- $ 150,962
- ------------------------------------------------------------------------------------------------------
Operating Leases 12,894 3,389 6,799 1,822 884
- ------------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $ 163,856 3,389 6,799 1,822 $ 151,846
- ------------------------------------------------------------------------------------------------------
The Company is currently a party to two lease agreements for public
warehouse space in Fife, Washington and Sumner, Washington. The Company is in
the process of transitioning to the Sumner facility and the lease payments
associated with both locations are estimated to average between $180,000 and
$240,000 per year. The lease payments are based on cubic feet, measured monthly,
and are subject to change depending on the capacity devoted to the inventory
stored at these locations.
The Company has a contractual obligation under a studio agreement to spend
approximately $1.5 million and $1.0 million in advertising for the 2002/2003 and
2003/2004 broadcast years, respectively.
The following table sets forth the Company's Other Commercial Commitments
as of March 31, 2003:
Other Commercial Amount of Commitment
Commitments Expiration Per Period
- ------------------------ ---------------------------------------
Less than Over
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------
Standby Letters of Credit $ 5,444 $ 5,250 $ 194 - -
The Company is obligated to make payments under various royalty agreements
of approximately $5,109 and $35 (amounts in thousands) during the years ending
December 31, 2003 and 2004, respectively.
The Company remains liable in connection with businesses previously sold
and has been indemnified against such liabilities by the purchaser of such
businesses.
The Company believes that cash on hand, cash flow from operations,
borrowings available under the HSBC letter of credit facilities and other
sources of liquidity, will be sufficient for the Company to conduct its
business, meet debt service requirements, make capital expenditures and pay
administration expense claims.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in Hong Kong. In the normal course of business,
the operations are exposed to fluctuations in currency values. Management
believes that the impact of currency fluctuations do not represent a significant
risk in the context of the Company's current international operations. The
Company does not generally enter into derivative financial instruments in the
normal course of business, nor are such instruments used for speculative
purposes.
Market risks related to the Company's operations result primarily from
changes in interest rates. At March 31, 2003, the Company's Senior Notes bore
interest at a fixed rate,. A 10% increase or decrease in the interest rate on
the Company's credit facility might have a significant future impact on the
Company's financial position or results of operations.
However, the fair market value of the fixed rate debt is sensitive to
changes in interest rates. The Company is subject to the risk that market
interest rates will decline and the interest rates for the fixed rate debt will
exceed the then prevailing market rates. Under its current policies, the Company
does not utilize any interest rate derivative instruments to manage its exposure
to interest rate changes.
18
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
Based upon their evaluation of the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect such
internal controls subsequent to the date of their evaluation.
19
PART II. OTHER INFORMATION.
20
Item 1. Legal Proceedings
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character. In February 2002, the Court granted the Company's motion for
summary judgment. Simon appealed the Court's decision and the hearing on the
appeal was held in June 2002. On November 7, 2002, the United States Court of
Appeals for the Second Circuit reversed the decision of the United States
District Court for the Southern District of New York, which had granted the
Company's motion for summary judgment and remanded the action to the District
Court for trial. A non-jury trial is scheduled to begin on July 16, 2003.
X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
("Fox") sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc.
and Fireworks Television (US), Inc. in the United States District Court,
Southern District of New York, seeking an injunction and damages for alleged
breach of the 1993 X-Men movie license, unfair competition, copyright
infringement and tortious interference with a contract arising from the Mutant X
television show being produced by Tribune and Fireworks under license from
Marvel which was released in the fall of 2001. On the same day Fox filed the
foregoing suit, Marvel commenced an action against Fox in the same court seeking
a declaratory judgment that the license of the Mutant X title and certain Marvel
characters did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. The case was settled in February 2003. The settlement included an
extension of time during which Fox may exploit its rights in the "X-Men",
"Daredevil", and "Fantastic Four" properties. Additionally, the settlement
expanded the relationship between Fox and Marvel whereby the parties will
negotiate up to three new film and television deals for additional Marvel
properties during the next two years.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company filed an appeal. The Company entered into negotiations and
settled the case in early 2003 at an amount not in excess of the amount
previously provided for in the accompanying consolidated financial statements.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company and Marvel Entertainment Group, Inc. (the "Marvel Defendants") in New
York Supreme Court, County of New York, alleging that the Marvel Defendants
breached their own Terms of Sale Agreement in connection with the sale of comic
books to members of the purported class, breached their obligation of good faith
and fair dealing(s), fraudulently induced plaintiff and other members of the
purported class to buy comics and unjustly enriched themselves. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. Marvel intends to vigorously defend against the claims made
in this action on their merits.
Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced his previously
threatened action in the United States District Court for the Southern District
of New York, alleging claims for breach of his November 1, 1998 employment
agreement. Mr. Lee claims the right to a 10% profit participation in connection
21
with the Spider-Man movie and other film and television productions that utilize
Marvel characters. Pursuant to the terms of the Employment Agreement, the
Company is currently paying Mr. Lee a salary of $1.0 million per year and
believes that Mr. Lee's claim is without merit. Marvel has answered the
complaint and denied all of its material allegations.
Marvel Characters, Inc. v. Sony Pictures Entertainment Inc. et al. On
February 25, 2003, Marvel Characters, Inc.("MCI"), a wholly owned subsidiary of
Marvel Enterprises, Inc., filed suit against Sony Pictures Entertainment
Inc.("SPE") and related entities, in California Superior Court for Los Angeles
County, alleging, among other things, that the 1999 license agreement for
Spider-Man between MCI and SPE should be dissolved based on SPE's fraudulent
representations to MCI during the negotiation of the license agreement. As the
Company has previously announced, the suit is not an attempt to stop production
of the Spider-Man movie sequel or to change or upset any of the merchandising
deals that are in place for the sequel. On April 21, 2003, in response to
Marvel's complaint, SPE filed a cross-complaint in which SPE alleges, among
other things, that MCI has breached the licensing agreement with respect to the
licensing of Spider-Man merchandise unrelated to Spider-Man: The Movie to SPE's
financial detriment. Marvel believes that SPE's claims are without merit and
intends to vigorously defend against those claims.
Administration Expense Claims Litigation. While the Company has settled
substantially all Administration Expense Claims, litigation brought by the
Company to contest some of those claims is still pending. The Company estimates
that it may be required to pay approximately $1.3 million of additional
Administration Expense Claims, although there can be no assurance as to the
amount the Company will be required to pay. At March 31, 2003, the Company had
reserves (established in 1998) of approximately $1.3 million for this purpose.
Subsequent to March 31, 2003, the Company paid approximately $0.5 million in
Administration Expense Claims of the estimated $1.3 million that has been
provided for in the accompanying Consolidated Balance Sheet.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
10.1 Amendment to Employment Agreement with Avi Arad dated December 9, 2002.*
99.1 Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Act.**
99.2 Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Act.**
*Management contract or compensatory plan or arrangement.
**Pursuant to Commission Release No. 33-8212, this certification will be
treated as "accompanying" this Quarterly Report on Form 10-Q and not
"filed" as part of such report for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of Section 18 of the Exchange
Act and this certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or
the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference.
b) Reports on Form 8-K The Registrant filed the following reports on Form 8-K
during the quarter ended March 31, 2003:
1. Current Report on Form 8-K dated February 24, 2003, reporting Item 5.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Dated: May 15, 2003 By: /s/
-------------------------------------
Allen S. Lipson
President and Chief Executive Officer
Dated: May 15, 2003 By: /s/
------------------------------------
Kenneth P. West
Chief Financial Officer
23
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Allen S. Lipson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marvel Enterprises,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003
By:/s/
-----------------------
Allen S. Lipson
Chief Executive Officer
24
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kenneth West, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Marvel Enterprises,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 15, 2003
By:/s/
-----------------------
Kenneth P. West
Chief Financial Officer
25