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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 June 30, 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 August 7, 2003, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 74,414,906.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).............................. 1
Consolidated Balance Sheets as of June 30, 2003 and December 31,
2002.......................................................... 1
Consolidated Statements of Operations and Comprehensive Income
for the Three and Six Months Ended June 30, 2003 and 2002..... 2
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002........................................ 3
Notes to Consolidated Financial Statements.................... 4
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............................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 20
Item 4. Controls and Procedures....................................... 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 4. Submission of Matters to a Vote of Security Holders........... 23
Item 6. Exhibits and Reports on Form 8-K.............................. 23
SIGNATURES .............................................................. 24
i
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
MARVEL ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2003 2002
---- ----
ASSETS (unaudited)
Current assets:
Cash ................................................. $ 26,337 $ 53,690
Certificates of deposit .............................. 118,000 --
Accounts receivable, net ............................. 36,981 43,420
Inventories, net ..................................... 10,703 16,036
Distribution receivable from Joint Venture, net ...... 1,874 3,884
Deferred financing costs ............................. 667 667
Prepaid expenses and other current assets ............ 7,067 6,700
--------- ---------
Total current assets ............................. 201,629 124,397
Goodwill, net ........................................ 354,437 365,604
Other intangibles, net ............................... 487 649
Molds, tools and equipment, net ...................... 5,888 6,997
Product and package design costs, net ................ 1,193 859
Accounts receivable, non current portion ............. 19,591 17,284
Deferred charges and other assets .................... 53 65
Deferred financing costs ............................. 3,113 3,446
--------- ---------
Total assets .................................... $ 586,391 $ 519,301
========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 3,775 $ 11,607
Accrued expenses and other current liabilities ...... 57,219 48,371
Administrative expense claims payable ............... 768 1,303
Unsecured creditors payable ......................... 2,952 3,034
Deferred revenue and distributions in excess of
equity in Joint Venture ............................. 8,372 27,478
--------- ---------
Total current liabilities ....................... 73,086 91,793
--------- ---------
Senior notes ........................................ 150,962 150,962
Accrued expenses .................................... 804 897
--------- ---------
--------- ---------
Total liabilities ............................... 224,852 243,652
--------- ---------
Redeemable cumulative convertible
exchangeable preferred stock ................ -- 32,780
--------- ---------
--------- ---------
Stockholders' equity
Common stock ........................................ 744 685
Additional paid-in capital .......................... 530,835 486,106
Accumulated other comprehensive loss ................ (2,478) (2,548)
Accumulated deficit ................................. (134,607) (208,419)
--------- ---------
--------- ---------
Total stockholders' equity before treasury
stock ........................................... 394,494 275,824
Treasury stock ....................................... (32,955) (32,955)
--------- ---------
Total stockholders' equity ...................... 361,539 242,869
--------- ---------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity ........ $ 586,391 $ 519,301
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
1
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
Net sales .................................................................. $ 89,966 $ 70,939 $ 177,342 $ 128,161
Cost of sales .............................................................. 17,142 34,259 37,426 63,063
--------- --------- --------- ---------
Gross profit ............................................................... 72,824 36,680 139,916 65,098
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative ................................... 31,235 21,062 47,594 39,173
Depreciation and amortization ......................................... 914 1,191 1,757 2,222
--------- --------- --------- ---------
Total operating expenses .............................................. 32,149 22,253 49,351 41,395
Other Income ............................................................... 7 714 8 714
Equity in net income of joint venture ...................................... 2,162 5,341 6,986 5,341
--------- --------- --------- ---------
Operating income ........................................................... 42,844 20,482 97,559 29,758
Interest expense, net ...................................................... 4,040 7,786 8,298 15,679
--------- --------- --------- ---------
Income before provision for income taxes and
cumulative effect of change in accounting principle ........................ 38,804 12,696 89,261 14,079
--------- --------- --------- ---------
Income tax provision ....................................................... 6,051 4,315 14,286 4,938
--------- --------- --------- ---------
Income before cumulative effect of change in accounting principle ......... 32,753 8,381 74,975 9,141
Cumulative effect of change in accounting principle,
net of income tax benefit of $2.6 million .................................. -- -- -- 4,561
--------- --------- --------- ---------
Net income ................................................................. 32,753 8,381 74,975 4,580
Less: preferred dividend requirement ....................................... -- 4,005 1,163 8,136
--------- --------- --------- ---------
Net income (loss) attributable to common stock ............................ $ 32,753 $ 4,376 $ 73,812 ($ 3,556)
========= ========= ========= =========
Basic earnings per share before cumulative effect of
change in accounting principle ............................................. $ 0.49 $ 0.12 $ 1.16 $ 0.03
Cumulative effect of change in accounting principle ........................ -- -- -- (0.13)
--------- --------- --------- ---------
Basic earnings (loss) per share attributable to common stock................ $ 0.49 $ 0.12 $ 1.16 ($ 0.10)
========= ========= ========= =========
Weighted average number of basic shares outstanding ........................ 66,210 35,574 63,853 35,188
========= ========= ========= =========
Diluted earnings per share before cumulative effect
of change in accounting principle .......................................... $ 0.42 $ 0.10 $ 0.99 $ 0.02
Cumulative effect of change in accounting principle ........................ -- -- -- (0.11)
--------- --------- --------- ---------
Diluted earnings (loss) per share attributable to common stock ............. $ 0.42 $ 0.10 $ 0.99 ($ 0.09)
========= ========= ========= =========
Weighted average number of diluted shares outstanding ...................... 77,135 41,545 75,710 40,373
========= ========= ========= =========
Comprehensive income
Net income ....................................................... 32,753 $ 8,381 $ 74,975 $ 4,580
Other comprehensive loss ......................................... (35) (199) (70) (35)
--------- --------- --------- ---------
Comprehensive income ............................................. $ 32,718 $ 8,182 $ 74,905 $ 4,545
========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
2
MARVEL ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months
Ended June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income .................................................. $ 74,975 $ 4,580
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 1,757 2,222
Amortization of deferred financing costs .................... 333 5,358
Non-cash charge for compensatory stock options .............. 454 --
Tax benefit of stock options exercised ...................... 412 --
Gain from sale of fixed assets .............................. (134) --
Deferred income taxes ....................................... 11,167 4,496
Cumulative effect of change in accounting principle, net of
income tax benefit ............................................ -- 4,561
Equity in net (income) from joint venture ................... (6,986) (5,341)
Changes in operating assets and liabilities:
Accounts receivable ...................................... 4,132 2,732
Inventories .............................................. 5,333 49
Income tax receivable .................................... -- (600)
Distributions received from joint venture ................ 10,781 442
Prepaid expenses and other current assets ................ (367) 10,645
Deferred charges and Other assets ........................ 12 33
Accounts payable, accrued expenses and other current
liabilities ................................................... (19,898) (5,504)
--------- ---------
Net cash provided by operating activities .................... 81,971 23,673
--------- ---------
Cash flows from investing activities:
Payment of administrative claims and unsecured claims, net (617) (1,219)
Purchases of molds, tools and equipment .................. (72) (545)
Proceeds from sale of fixed assets ....................... 254 --
Expenditures for product and package design .............. (868) (658)
Purchases of certificates of deposit ..................... (118,000) --
Other intangibles ........................................ -- (1)
--------- ---------
Net cash used in investing activities ......................... (119,303) (2,423)
--------- ---------
Cash flows from financing activities:
Deferred financing costs ................................. -- (196)
Exercise of warrants ..................................... 905 --
Repayment of Credit Facility ............................. -- (1,543)
Exercise of stock options ................................ 9,074 1,266
--------- ---------
Net cash provided by financing activities ..................... 9,979 (473)
--------- ---------
Net increase (decrease) in cash and cash equivalents .......... (27,353) 20,777
Cash and cash equivalents, at beginning of period ............. 53,690 21,591
--------- ---------
Cash and cash equivalents, at end of period ................... $ 26,337 $ 42,368
========= =========
Supplemental disclosures of cash flow information:
Interest paid during the period ........................... $ 9,058 $ 18,743
Income taxes, paid during the period ...................... 2,003 66
Non-cash transactions:
Preferred stock dividends ................................. $ 1,163 $ 8,136
Conversion of preferred stock to common stock ............. 33,943 11,813
Warrants issued in connection with credit facility ........ -- 2,567
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and the Consolidated Statements of Cash Flows for the six
months ended June 30, 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. Certain prior period amounts have been
re-classified to conform with the current period's presentation.
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 Six Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share data)
Net income, as reported ........................................................... $32,753 $ 8,381 $74,975 $ 4,580
Net income (loss) attributable to common stock, as reported ....................... 32,753 4,376 73,812 (3,556)
Net income (loss) per share attributable to common stock - basic, as reported ..... $ 0.49 $ 0.12 $ 1.16 ($ 0.10)
Net income (loss) per share attributable to common stock - diluted, as reported ... $ 0.42 $ 0.10 $ 0.99 ($ 0.09)
Stock based employee compensation cost, net of tax, if SFAS 123 was applied ....... 1,496 623 2,892 1,271
Pro forma net income .............................................................. 31,257 7,758 72,083 3,309
Pro forma net income (loss) attributable to common stock .......................... 31,257 3,753 70,920 (4,827)
Pro forma net income (loss) per share attributable to common stock-basic .......... $ 0.47 $ 0.11 $ 1.11 ($ 0.14)
Pro forma net income (loss) per share attributable to common stock-diluted ........ $ 0.41 $ 0.09 $ 0.95 ($ 0.12)
4
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 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: 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 2.32% to 3.17%; no dividend yield; expected volatility of 0.720;
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.
5
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
MARVEL ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
June 30, 2003
(unaudited)
June 30, December 31,
2003 2002
(in thousands)
Accounts receivable, net, consist of the following:
Accounts receivable .......................................... $ 55,634 $ 62,835
Less allowances
Doubtful accounts ............................................ (8,055) (7,459)
Advertising, markdowns, returns, volume, discounts and other . (10,598) (11,956)
--------- ---------
Total .................................................... $ 36,981 $ 43,420
========= =========
Inventories, net, consist of the following:
Toys:
Finished goods ............................................. $ 2,080 $ 7,566
Component parts, raw materials and work-in-process ......... 87 706
--------- ---------
Total toys ............................................... 2,167 8,272
Publishing:
Finished goods ............................................. 2,247 1,786
Editorial and raw materials ................................ 6,289 5,978
--------- ---------
Total publishing ........................................... 8,536 7,764
--------- ---------
Total .................................................... $ 10,703 $ 16,036
========= =========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment .................................. $ 4,673 $ 4,971
Office equipment and other .................................. 10,755 11,676
Less accumulated depreciation and amortization .............. (9,540) (9,650)
--------- ---------
Total ........................................................... $ 5,888 $ 6,997
========= =========
Product and package design costs, net, consists of the following:
Product design costs ........................................ $ 3,396 $ 2,720
Package design costs ........................................ 1,330 1,138
Less accumulated amortization ............................... (3,533) (2,999)
--------- ---------
Total ..................................................... $ 1,193 $ 859
========= =========
Goodwill, net, consists of the following:
Goodwill ........................................................ $ 430,736 $ 441,903
Less accumulated amortization ................................ (76,299) (76,299)
--------- ---------
Total ........................................................ $ 354,437 $ 365,604
========= =========
Intangibles, net, consists of the following:
Patents ......................................................... $ 3,186 $ 3,186
Intangibles ..................................................... 1,263 1,264
Less accumulated amortization ................................ (3,962) (3,801)
--------- ---------
Total ........................................................... $ 487 $ 649
========= =========
Accrued expenses and other:
Royalties .................................................... $ 26,115 $ 12,800
Accrued advertising costs .................................... 1,379 3,009
Inventory purchases .......................................... 4,193 4,130
Income taxes payable ......................................... 2,831 2,218
Bonuses ...................................................... 4,502 4,302
Marvel Entertainment Group acquisition accruals .............. 1,042 1,184
Accrued expenses - Fleer sale including pension benefits ..... 4,896 4,982
Pre-acquisition litigation charge ............................ -- 3,000
Litigation and legal accruals ................................ 5,543 4,564
Interest expense ............................................. 1,008 926
Other accrued expenses ....................................... 5,710 7,256
--------- ---------
Total ...................................................... $ 57,219 $ 48,371
========= =========
6
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 June 30, 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.
7
5. SHARES OUTSTANDING
During the three months ended June 30, 2003, there were no conversions of
preferred stock into common stock. The total number of shares of common stock
outstanding as of June 30, 2003 is 67,017,039, net of treasury shares; assuming
the exercise of all outstanding warrants and employee stock options, the number
of shares would be 80,852,696.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
-------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income $ 32,753 $ 8,381 $ 74,975 $ 4,580
Preferred dividends -- (4,005) (1,163) (8,136)
-------- -------- -------- --------
Numerator for basic earnings per share - 32,753 4,376 73,812 (3,556)
Preferred dividends* -- -- 1,163 --
-------- -------- -------- --------
Numerator for diluted earnings per share $ 32,753 $ 4,376 $ 74,975 $ (3,556)
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share 66,210 35,574 63,853 35,188
Effect of dilutive warrants/options 10,925 5,971 10,193 5,185
Effect of dilutive redeemable cumulative
exchangeable preferred stock** -- -- 1,664 --
-------- -------- -------- --------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 77,135 41,545 75,710 40,373
======== ======== ======== ========
Basic earnings per share $ 0.49 $ 0.12 $ 1.16 $ (0.10)
======== ======== ======== ========
Diluted earnings per share $ 0.42 $ 0.10 $ 0.99 $ (0.09)
======== ======== ======== ========
* 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.
** The calculation of diluted earnings per share does not include the assumed
conversion of convertible preferred stock for the three and six months ended
June 30, 2002, as such would be anti-dilutive - caused by the effect of adding
back the preferred stock dividends (to the numerator) in such calculation.
8
6. SEGMENT INFORMATION
The Company's businesses is divided 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 sold kites in
both mass market stores and specialty hobby shops. Spectra Star's sales amounted
to approximately $1.4 million and $1.0 million for the three months ended June
30, 2003 and 2002, respectively. For the six month period ending June 30, 2003
and 2002, Spectra Star's sales amounted to approximately $9.2 million and $9.3
million, respectively. Its total assets at June 30, 2003 of approximately $4.7
million consist principally of accounts receivable, inventory, 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 segments of the
Company.
Three months ended June 30, 2003
Licensing Publishing Toy Biz Corporate Total
(in thousands)
Net sales $56,750 $19,535 $13,681 -- $89,966
Gross profit 56,750 9,817 6,257 -- 72,824
Operating income (loss) 41,156* 6,169 2,314 (6,795) 42,844
Three months ended June 30, 2002
Licensing Publishing Toy Biz Corporate Total
(in thousands)
Net sales $17,156 $17,942 $35,841 -- $70,939
Gross profit 16,995 9,256 10,429 -- 36,680
Operating income (loss) 16,556* 6,213 1,137 (3,424) 20,482
(*) Includes equity in net income of joint venture of $2,162 and $5,341 for the
three month periods ended June 30, 2003 and 2002, respectively.
9
Six months ended June 30, 2003
Licensing Publishing Toy Biz Corporate Total
(in thousands)
Net Sales $106,651 $ 34,747 $35,944 -- $177,342
Gross Profit 106,651 18,202 15,063 -- 139,916
Operating Income 89,880* 11,211 8,251 (11,783) 97,559
Six months ended June 30, 2002
Licensing Publishing Toy Biz Corporate Total
(in thousands)
Net Sales $ 26,328 $ 32,501 $69,332 -- $128,161
Gross Profit 26,152 16,968 21,978 -- 65,098
Operating Income 20,776* 9,984 4,899 (5,901) 29,758
(*) Includes equity in net income of joint venture of $6,986 and $5,341 for the
six month periods ended June 30, 2003 and 2002, respectively.
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 June 30, 2003,
approximately $4.4 million of lease payments are being guaranteed by Mr.
Perlmutter
10
The following table sets forth the Company's Contractual Cash Obligations
as of June 30, 2003:
Contractual
Cash Obligations Payments Due By Period
- ---------------------------------------------------- ------------------------------------------------------------
Less than After
(in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------------------------------- -------- -------- -------- -------- --------
Long Term Debt $150,962 $ -- $ -- $ -- $150,962
- ---------------------------------------------------- -------- -------- -------- -------- --------
Operating Leases 12,049 3,395 6,789 1,088 778
- ---------------------------------------------------- -------- -------- -------- -------- --------
Total Contractual
Cash Obligations $163,011 $ 3,395 $ 6,789 $ 1,088 $151,740
- ---------------------------------------------------- -------- -------- -------- -------- --------
The Company is currently a party to two lease agreements for public
warehouse space in Fife, Washington and Sumner, Washington. 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 $1.0 million in advertising for the 2003/2004 broadcast years.
The following table sets forth the Company's Other Commercial Commitments
as of June 30, 2003:
Other Commercial Amount of Commitment
Commitments Total Expiration Per Period
- -------------------------------------------------------------------------------------------------------
Less than Over
(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 $5,074 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.
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. 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 was scheduled to begin on July
16, 2003, but has been stayed pending a decision of the Second Circuit Court of
Appeals as to whether Mr. Simon is entitled to a jury trial. It is not known
when the Second Circuit will rule on this issue, nor when a trial would be
rescheduled.
11
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 State 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.
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. At June 30, 2003, the
Company had reserves (established in 1998) of $0.8 million for this purpose.
8. INCOME TAXES
The Company's effective tax rate for the six month period ended June 30,
2003 (16.0%) was lower than the Federal statutory rate due primarily to
anticipated utilization of net operating loss ("NOL") carryforwards for which
benefit was not previously recognized. At June 30, 2003, the Company has Federal
NOL carryforwards of approximately $70.3 million, which are scheduled to expire
in the years 2018 through 2020. All of the Company's remaining pre-acquisition
Federal NOLs were utilized in the half ended June 30, 2003 and therefore, the
Company recorded a non-cash tax provision of $11.2 million that reduced
goodwill. Additionally, the Company has various state and local NOL
carryforwards of approximately $402.8 million, which will expire in various
jurisdictions in years 2005 through 2023. Despite these state and local NOLs,
the Company is subject to tax in certain state and local jurisdictions.
As of June 30, 2003, deferred tax assets (primarily Federal, state and
local NOL carryforwards) continue to be fully reserved by valuation allowances.
The Company had a cumulative tax loss for the three year period ended December
31, 2002 which effectively prevented any reduction in the amount of these
valuation allowances.
Although the Company has returned to income tax profitability, a portion of
its income is associated with certain events and the success of certain products
(i.e., release of feature films or the success of toy designs). Due to the
inherent difficulty of forecasting these items, the Company has determined that
it does not yet have sufficient positive evidence to recognize its deferred tax
assets. The Company will re-evaluate the recognition of the Company's net
deferred tax assets in the third and fourth quarters of this year. If the
Company determines that sufficient evidence supports the recognition of the
deferred tax assets in 2003, it may result in reducing the recorded valuation
allowance by approximately $30 to $33 million. This reduction in the valuation
allowance would be accounted for as a one-time credit to income tax expense in
the period that the reduction is effected.
The Company is currently under examination by the Internal Revenue Service
for the 1995 through 1998 years. The IRS has proposed certain adjustments, to
which the Company is responding. The effects of these adjustments are not
expected to be material to the Company's financial position, results of
operations or cash flows.
12
9. JOINT VENTURE
For the three months ended June 30, 2003 and 2002, the Company recognized
$2.2 million and $5.3, 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 six months ended June
30, 2003 and 2002, the Company recognized $7.0 million and $5.3, in income,
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
The Company's businesses is divided 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 $1.4 million and $1.0 million for the three months ended June
30, 2003 and 2002, respectively, and approximately $9.2 million and $9.3 million
for the six months ended June 30, 2003 and 2002, respectively. Its total assets
at June 30, 2003, of approximately $4.7 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 and six months
ended June 30, 2003, and 2002 were generated within the following business
categories:
Marvel Enterprises - Licensing Division Categories
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
Apparel and accessories $ 12,800 $ 1,815 $ 17,673 $ 3,643
Entertainment (including studios, themed
attractions and electronic games) 9,373 11,995 37,281 17,809
Toys 27,183 1,324 42,794 1,861
Other 7,394 2,022 8,903 3,015
-------- -------- -------- --------
Totals $ 56,750 $ 17,156 $106,651 $ 26,328
======== ======== ======== ========
Results of Operations
Three months ended June 30, 2003 compared with the three months ended June 30,
2002
The Company's net sales increased approximately $19.0 million to $90.0
million in the second quarter of 2003 from approximately $70.9 million in the
second quarter of 2002. The increase is primarily due to improved performance
within the Licensing segment with modest growth in publishing. Sales from the
Licensing segment increased approximately $39.6 million to approximately $56.8
million in the second quarter of 2003, from approximately $17.2 million in the
second quarter of 2002. This improvement reflects a combination of new licenses
and royalty collections above minimum royalty payment guaranties associated with
continuing licenses.
The major categories of the improvements in Licensing activities were toys
and apparel and accessories, predominantly driven by the release of The Hulk
movie. Sales from the Publishing division increased approximately $1.6 million
to approximately $19.5 million in the second quarter of 2003, from $17.9 million
in the second quarter of 2002, fueled by increases in sales of custom publishing
projects and advertising income. As anticipated, sales from the Toy segment
decreased approximately $22.2 million to approximately $13.7 million in the
second quarter of 2003, from approximately $35.8 million in the second 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 $36.1 million to approximately $72.8
million in the second quarter of 2003, from approximately $36.7 million in the
2002 period. The growth in Licensing revenues, where gross profit as a
percentage of sales approximates 100%, combined with the decrease in Toy sales
(where gross profit as a percentage of sales approximated 46% for the three
months ended June 30, 2003) increased the Company's gross profit as a percentage
of sales to 81% in the second quarter of 2003, as compared to 52% in the second
quarter of 2002.
Selling, general and administrative expenses increased approximately $10.1
million to approximately $31.2 million, or approximately 35% of net sales in the
second quarter of 2003, from approximately $21.1 million, or approximately 30%
of net sales in the second quarter of 2002. The licensing division increased by
$12.0 million, to $17.7 million, primarily due to higher royalty provisions for
the share of merchandise license royalties owed to the Company's studio
partners. General Corporate expenses increased approximately $3.4 million due to
active litigation. Partially off-setting these increases, the Toy Biz division
decreased approximately $5.1 million primarily due to lower selling expenses,
specifically royalties, commissions and general overhead.
For the three months ended June 30, 2003 and 2002, the Company recognized
income of $2.2 million and $5.3, respectively, in connection with its share in a
jointly owned limited partnership with Sony. The purpose of this joint venture
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.
15
Net interest expense decreased approximately $3.7 million to approximately
$4.0 million in the second quarter of 2003, as compared to approximately $7.8
million in the second quarter of 2002. The fourth quarter of 2002 prepayment of
the HSBC term loan eliminated future amortization of all related deferred
financing costs associated with such credit facility. Such amortization expense,
classified as interest expense in the accompanying statement of operations,
aggregated approximately $2.5 million during the second quarter of 2002.
The Company's effective tax rate for the three month period ended June 30,
2003 (15.6%) was lower than the Federal statutory rate due primarily to
anticipated utilization of net operating loss ("NOL") carryforwards for which
benefit was not previously recognized. At June 30, 2003, the Company has Federal
NOL carryforwards of approximately $70.3 million, which are scheduled to expire
in the years 2018 through 2020. All of the Company's remaining pre-acquisition
Federal NOLs were utilized in the quarter ended June 30, 2003 and therefore, the
Company recorded a non-cash tax provision of $4.6 million in the quarter that
reduced goodwill. Additionally, the Company has various state and local NOL
carryforwards of approximately $402.8 million, which will expire in various
jurisdictions in years 2005 through 2023. Despite these state and local NOLs,
the Company is subject to tax in certain state and local jurisdictions.
As of June 30, 2003, deferred tax assets (primarily Federal, state and
local NOL carryforwards) continue to be fully reserved by valuation allowances.
The Company had a cumulative tax loss for the three year period ended December
31, 2002 which effectively prevented any reduction in the amount of these
valuation allowances.
Although the Company has returned to income tax profitability, a portion of
its income is associated with certain events and the success of certain products
(i.e., release of feature films or the success of toy designs). Due to the
inherent difficulty of forecasting these items, the Company has determined that
it does not yet have sufficient positive evidence to recognize its deferred tax
assets. The Company will re-evaluate the recognition of the Company's net
deferred tax assets in the third and fourth quarters of this year. If the
Company determines that sufficient evidence supports the recognition of the
deferred tax assets, it would result in reducing the recorded valuation
allowance by approximately $30 to $33 million. This reduction in the valuation
allowance would be accounted for as a one-time credit to income tax expense in
the period that the reduction is effected.
The Company is currently under examination by the Internal Revenue Service
for the 1995 through 1998 years. The IRS has proposed certain adjustments, to
which the Company is responding. The effects of these adjustments are not
expected to be material to the Company's financial position, results of
operations or cash flows.
Six months ended June 30, 2003 compared with the six months ended June 30, 2002
The Company's net sales increased approximately $49.2 million to $177.3
million for the six months ended June 30, 2003 from approximately $128.2 million
for the six months ended June 30, 2002. The increase is primarily due to
improved performance within the Licensing segment. Sales from the Licensing
segment increased approximately $80.3 million to approximately $106.7 million
for the six months ended June 30, 2003 from approximately $26.3 million for the
six months ended June 30, 2002. This improvement reflects a combination of new
licenses and royalty collections above minimum royalty payment guaranties
associated with continuing licenses.
The major categories of the improvements in Licensing activities were toys,
entertainment and apparel and accessories, predominantly driven by the release
of The Hulk movie. In addition, the company extended an interactive video game
license in the period ending March 31, 2003 that added a significant amount of
sales. Sales from the Publishing division increased approximately $2.2 million
to approximately $34.7 million for the six months ended June 30, 2003 from $32.5
million for the six months ended June 30, 2002 primarily due to an increase in
custom publishing and advertising income. As anticipated, sales from the Toy
segment decreased approximately $33.4 million to approximately $35.9 million for
the six months ended June 30, 2003 from approximately $69.3 million for the six
months ended June 30, 2002 primarily due to a decrease in the sales of action
figures and accessories based on characters associated with Spider-Man: The
Movie.
16
Gross profit increased approximately $74.8 million to approximately $139.9
million for the six months ended June 30, 2003 from approximately $65.1 million
in the 2002 period. The growth in Licensing revenues, where gross profit as a
percentage of sales approximates 100%, combined with the expected decrease in
Toy sales (where gross profit as a percentage of sales approximated 42% for the
six months ended June 30, 2003) increased the Company's gross profit as a
percentage of sales to 79% in the second quarter of 2003, as compared to 51% for
the six months ended June 30, 2002.
Selling, general and administrative expenses increased approximately $8.4
million to approximately $47.6 million or approximately 27% of net sales for the
six months ended June 30, 2003 from approximately $39.2 million or approximately
31% of net sales for the six months ended June 30, 2002. The licensing division
increased by $13.0 million, to $23.7 million, primarily due to higher royalty
provisions for the share of merchandise license royalties owed to the Company's
studio partners. The Toy Biz division partially off-set this increase,
decreasing approximately $9.8 million due to lower selling expenses,
specifically advertising and royalties. General Corporate expenses increased
approximately $5.9 million to $11.8 million, primarily due to active litigation.
For the six months ended June 30, 2003 and 2002, the Company recognized
$7.0 million and $5.3 million in income, respectively, in connection with its
share in a jointly owned limited partnership with Sony. The purpose of this
joint venture 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.
Net interest expense decreased approximately $7.4 million to approximately
$8.3 million for the six months ended June 30, 2003 as compared to approximately
$15.7 million for the six months ended June 30, 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, which
amounted to approximately $5.0 million during the six month period ended June
30, 2002, as well as cash interest savings of approximately $1.0 million.
The Company's effective tax rate for the six month period ended June 30,
2003 (16.0%) was lower than the Federal statutory rate due primarily to
anticipated utilization of net operating loss ("NOL") carryforwards for which
benefit was not previously recognized. At June 30, 2003, the Company has Federal
NOL carryforwards of approximately $70.3 million, which are scheduled to expire
in the years 2018 through 2020. All of the Company's remaining pre-acquisition
Federal NOLs were utilized in the half ended June 30, 2003 and therefore, the
Company recorded a non-cash tax provision of $11.2 million that reduced
goodwill. Additionally, the Company has various state and local NOL
carryforwards of approximately $402.8 million, which will expire in various
jurisdictions in years 2005 through 2023. Despite these state and local NOLs,
the Company is subject to tax in certain state and local jurisdictions.
As of June 30, 2003, deferred tax assets (primarily Federal, state and
local NOL carryforwards) continue to be fully reserved by valuation allowances.
The Company had a cumulative tax loss for the three year period ended December
31, 2002 which effectively prevented any reduction in the amount of these
valuation allowances.
Although the Company has returned to income tax profitability, a portion of
its income is associated with certain events and the success of certain products
(i.e., release of feature films or the success of toy designs). Due to the
inherent difficulty of forecasting these items, the Company has determined that
it does not yet have sufficient positive evidence to recognize its deferred tax
assets. The Company will re-evaluate the recognition of the Company's net
deferred tax assets in the third and fourth quarters of this year. If the
Company determines that sufficient evidence supports the recognition of the
deferred tax assets in 2003, it may result in reducing the recorded valuation
allowance by approximately $30 to $33 million. This reduction in the valuation
allowance would be accounted for as a one-time credit to income tax expense in
the period that the reduction is effected.
17
The Company is currently under examination by the Internal Revenue Service
for the 1995 through 1998 years. The IRS has proposed certain adjustments, to
which the Company is responding. The effects of these adjustments are not
expected to be material to the Company's financial position, results of
operations or cash flows.
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 $82.0 million
for the six months ended June 30, 2003 as compared to net cash provided by
operating activities of $23.7 million for the six months ended June 30, 2002.
At June 30, 2003, the Company had working capital of $128.5 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 $0.8
million of additional Administration Expense Claims, although there can be no
assurance as to the amount the Company will be required to pay.
The Company will be required to make 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 June 30, 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 June 30, 2003 is approximately $3.0 million.
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.
18
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 June 30, 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
June 30, 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.
19
The following table sets forth the Company's Contractual Cash Obligations as of
June 30, 2003:
Contractual
Cash Obligations Payments Due By Period
- ---------------------------------------------------------------------------------------------
Less than After
(in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
- ---------------------------- -------- -------- --------- --------- --------
Long Term Debt $150,962 $ --- $ --- $ --- $150,962
- ---------------------------- -------- -------- -------- -------- --------
Operating Leases 12,049 3,395 6,789 1,088 778
- ---------------------------- -------- -------- -------- -------- --------
Total Contractual
Cash Obligations $163,011 $ 3,395 $ 6,789 $ 1,088 $151,740
- ---------------------------- -------- -------- -------- -------- --------
The Company is currently a party to two lease agreements for public
warehouse space in Fife, Washington and Sumner, Washington. 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 $1.0 million in advertising for the 2003/2004 broadcast years.
The following table sets forth the Company's Other Commercial Commitments
as of June 30, 2003:
Other Commercial Amount of Commitment
Commitments Total Expiration Per Period
- -------------------------------------------------------------------------------------------------------
Less than Over
(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 $5,074 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 June 30, 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.
20
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.
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 these
controls subsequent to the date of their evaluation.
21
PART II. OTHER INFORMATION.
--------------------------------
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. 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 was scheduled to begin on July
16, 2003, but has been stayed pending a decision of the Second Circuit Court of
Appeals as to whether Mr. Simon is entitled to a jury trial. It is not known
when the Second Circuit will rule on this issue, nor when a trial would be
rescheduled.
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 State 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.
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. At June 30, 2003, the
Company had reserves (established in 1998) of approximately $0.8 million for
this purpose.
22
Item 4. Submission of Matters to a Vote of Security Holders
The only matters submitted to a vote of security holders during the second
quarter of 2003 were those voted upon at the Company's Annual Meeting of
Stockholders held on May 8, 2003. At the meeting, (i) Avi Arad, Lawrence Mittman
and Richard L. Solar were elected as directors and (ii) the appointment of Ernst
& Young LLP as the Company's independent accountants for the fiscal year ending
December 31, 2003 was ratified.
For the election of Avi Arad to the board of directors, votes cast at the
meeting were 58,390,651 "For" and 451,750 withheld; for the election of Lawrence
Mittman to the board of directors, votes cast were 58,335,644 "For" and 506,708
withheld; for the election of Richard L. Solar to the board of directors, votes
cast were 58,509,901 "For" and 332,451 withheld; and for the ratification of the
appointment of Ernst & Young LLP as the Company's independent accountants for
the fiscal year ending December 31, 2003, votes cast were 57,698,666 "For" and
1,117,208 "Against," with 25,467 votes abstaining. There were no broker
non-votes.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
31.1 Certification by Chief Executive Officer pursuant to Rule
13a-14(a) under the Exchange Act.
31.2 Certification by Chief Financial Officer pursuant to Rule
13a-14(a) under the Exchange Act.
32 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) under the Exchange Act.
b) Reports on Form 8-K
The Registrant filed the following report on Form 8-K during the
quarter ended June 30, 2003:
1. Current Report on Form 8-K dated May 6, 2003, reporting Items 7
and 9.*
*As disclosed in the Form 8-K, the information included in Section 9
was intended to be included in "Item 12. Disclosure of Results of
Operations and Financial Condition" and was included under Item 9 in
accordance with the Securities and Exchange Commission's Release Nos.
33-8216; 34-47583.
23
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: August 12, 2003 By: /s/ Allen S. Lipson
-------------------------------
Allen S. Lipson
President and Chief Executive Officer
Dated: August 12, 2003 By: /s/ Kenneth P. West
----------------------------------------
Kenneth P. West
Chief Financial Officer
24