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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 September 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 November 7, 2003, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 71,968,569. This number does not include
7,394,000 shares of the registrant's common stock held by a wholly owned
subsidiary of the registrant.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)........................................ 1
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 .................................................. 1
Consolidated Statements of Income and Comprehensive Income for the Three
and Nine Months Ended September 30, 2003 and 2002....................... 2
Consolidated Statements of Cash Flows for the Nine Months Ended September
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 6. Exhibits and Reports on Form 8-K........................................ 23
SIGNATURES ........................................................................ 24
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Condensed Consolidated Financial Statements
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2003 2002
---- ----
ASSETS (unaudited)
Current assets:
Cash ................................................ $ 17,733 $ 53,690
Certificates of deposit and commercial paper ........ 193,507 --
Accounts receivable, net ............................ 42,980 43,420
Inventories, net .................................... 10,269 16,036
Distribution receivable from joint venture, net ..... 1,413 3,884
Deferred Federal income tax ......................... 33,967 --
Deferred financing costs ............................ 667 667
Prepaid expenses and other current assets ........... 6,639 6,700
---------- ----------
Total current assets ............................ 307,175 124,397
Goodwill, net ........................................ 350,500 365,604
Other intangibles, net ............................... 414 649
Molds, tools and equipment, net ...................... 6,016 6,997
Product and package design costs, net ................ 1,445 859
Accounts receivable, non-current portion ............. 19,470 17,284
Deferred charges and other assets .................... 53 65
Deferred financing costs ............................. 2,946 3,446
---------- ----------
Total assets .................................... $688,019 $519,301
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 6,638 $ 11,607
Accrued expenses and other current liabilities ...... 75,853 52,708
Deferred revenue and distributions in excess of
equity in joint venture ............................ 10,493 27,478
---------- ----------
Total current liabilities ....................... 92,984 91,793
---------- ----------
Senior notes ........................................ 150,962 150,962
Other ............................................... 3,237 897
---------- ----------
Total liabilities ............................... 247,183 243,652
---------- ----------
Redeemable cumulative convertible
exchangeable preferred stock ................ -- 32,780
---------- ----------
Stockholders' equity
Common stock ........................................ 793 685
Additional paid-in capital .......................... 546,869 486,106
Accumulated other comprehensive loss ................ (2,442) (2,548)
Accumulated deficit ................................. (71,429) (208,419)
---------- ----------
Total stockholders' equity before treasury stock 473,791 275,824
Treasury stock ....................................... (32,955) (32,955)
---------- ----------
Total stockholders' equity ...................... 440,836 242,869
---------- ----------
Total liabilities, redeemable convertible
preferred stock and stockholders' equity..... $ 688,019 $ 519,301
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales .................................................... $ 84,536 $ 84,378 $ 261,878 $ 212,539
Cost of sales ................................................ 20,208 41,100 57,634 104,163
----------- ----------- ----------- -----------
Gross profit ................................................. 64,328 43,278 204,244 108,376
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative ..................... 22,569 16,015 70,163 55,188
Depreciation and amortization ........................... 1,051 1,675 2,808 3,897
----------- ----------- ----------- -----------
Total operating expenses ................................ 23,620 17,690 72,971 59,085
Other Income ................................................. 870 366 1,413 1,040
Equity in net income of joint venture ........................ 1,500 1,785 8,486 7,126
----------- ----------- ----------- -----------
Operating income ............................................. 43,078 27,739 141,172 57,457
Interest expense, net ........................................ 4,239 12,086 13,072 27,725
----------- ----------- ----------- -----------
Income before provision for income taxes and cumulative effect
of change in accounting principle ............................ 38,839 15,653 128,100 29,732
Income tax provision (benefit) - current...................... 3,212 941 6,331 1,651
- deferred...................... (27,551) 4,076 (16,384) 8,304
----------- ----------- ----------- -----------
Income before cumulative effect of change in accounting
principle .................................................... 63,178 10,636 138,153 19,777
Cumulative effect of change in accounting principle, net of
income tax benefit of $2.8 million ........................... -- 175 -- (4,386)
----------- ----------- ----------- -----------
Net income ................................................... 63,178 10,811 138,153 15,391
Less: preferred dividend requirement ......................... -- 4,080 1,163 12,216
----------- ----------- ----------- -----------
Net income attributable to common stock ................ $ 63,178 $ 6,731 $ 136,990 $ 3,175
=========== =========== =========== ===========
Basic earnings per share before cumulative effect of change in
accounting principle ......................................... $ 0.93 $ 0.19 $ 2.10 $ 0.21
Cumulative effect of change in accounting principle .......... -- -- -- (0.12)
----------- ----------- ----------- -----------
Basic earnings per share attributable to common stock ........ $ 0.93 $ 0.19 $ 2.10 $ 0.09
=========== =========== =========== ===========
Weighted average number of basic shares outstanding .......... 67,763 36,292 65,171 35,560
=========== =========== =========== ===========
Diluted earnings per share before cumulative effect of change
in accounting principle ...................................... $ 0.85 $ 0.17 $ 1.84 $ 0.19
Cumulative effect of change in accounting principle .......... -- -- -- (0.11)
----------- ----------- ----------- -----------
Diluted earnings per share attributable to common stock ...... $ 0.85 $ 0.17 $ 1.84 $ 0.08
=========== =========== =========== ===========
Weighted average number of diluted shares outstanding ........ 74,214 40,586 75,226 40,448
=========== =========== =========== ===========
Comprehensive income
Net income .............................................. $ 63,178 $ 10,811 $ 136,990 $ 15,391
Other comprehensive loss ................................ (35) 868 (105) (512)
----------- ----------- ----------- -----------
Comprehensive income .................................... $ 63,143 $ 11,679 $ 136,885 $ 14,879
=========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months
Ended September 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income ............................................................ $ 138,153 $ 15,391
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................ 2,808 3,897
Amortization of deferred financing costs ............................. 500 11,939
Other ................................................................ 1,273 --
Deferred income taxes ................................................ (16,384) 8,304
Cumulative effect of change in accounting principle, net of income tax
benefit .............................................................. -- 4,386
Equity in net income from joint venture .............................. (8,486) (7,126)
Changes in operating assets and liabilities:
Accounts receivable ............................................... (1,746) (168)
Inventories ....................................................... 5,767 1,327
Income tax receivable ............................................. -- 334
Distributions received from joint venture ......................... 13,642 1,664
Prepaid expenses and other current assets ......................... 61 9,686
Deferred charges and other assets ................................. 12 38
Accounts payable, accrued expenses and other current ..............
liabilities ....................................................... (886) 4,453
--------- ---------
Net cash provided by operating activities ............................. 134,714 54,125
--------- ---------
Cash flows from investing activities:
Payment of administrative claims and unsecured claims, net ......... (641) (3,360)
Purchases of molds, tools and equipment ............................ (814) (1,298)
Expenditures for product and package design ........................ (1,484) (805)
Purchases of certificates of deposit and commercial paper .......... (193,507) --
Other .............................................................. 254 (1)
--------- ---------
Net cash used in investing activities .................................. (196,192) (5,464)
--------- ---------
Cash flows from financing activities:
Deferred financing costs ........................................... -- (196)
Exercise of warrants and stock options ............................. 25,521 1,266
Repayment of Credit Facility ....................................... -- (13,086)
--------- ---------
Net cash provided (used in) by financing activities .................... 25,521 (12,016)
--------- ---------
Net (decrease) increase in cash and cash equivalents .................... (35,957) 36,645
Cash and cash equivalents, at beginning of period ....................... 53,690 21,591
--------- ---------
Cash and cash equivalents, at end of period ............................. $ 17,733 $ 58,236
========= =========
Supplemental disclosures of cash flow information:
Interest paid during the period ..................................... $ 9,058 $ 19,955
Income taxes paid during the period ................................. 2,791 194
Non-cash transactions:
Preferred stock dividends ........................................... $ 1,163 $ 12,216
Conversion of preferred stock to common stock ....................... 33,943 12,102
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 Income and
Comprehensive Income and the Consolidated Statements of Cash Flows for the nine
month period ended September 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 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 Nine Months Ended
September 30, September 30,
------------------------ ----------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except per share data)
Net income, as reported ..................................................... $ 63,178 $ 10,811 $138,153 $ 15,391
Net income attributable to common stock, as reported ........................ 63,178 6,731 136,990 3,175
Net income per share attributable to common stock - basic, as reported ...... $0.93 $0.19 $2.10 $0.09
Net income per share attributable to common stock - diluted, as reported .... $0.85 $0.17 $1.84 $0.08
Stock based employee compensation cost, net of tax, if SFAS 123 was applied . 1,489 561 4,381 1,832
Pro forma net income ........................................................ 61,689 10,250 133,772 13,559
Pro forma net income attributable to common stock ........................... 61,689 6,170 132,609 1,343
Pro forma net income per share attributable to common stock - basic ........ $0.91 $0.17 $2.03 $0.04
Pro forma net income per share attributable to common stock - diluted ....... $0.83 $0.15 $1.76 $0.03
5
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 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 0.646;
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
September 30, December 31,
2003 2002
---- ----
(in thousands)
Accounts receivable, net, consist of the following:
Accounts receivable .................................................. $60,172 $62,835
Less allowances for:
Doubtful accounts .................................................. (6,474) (7,459)
Advertising, markdowns, returns, volume, discounts and other ....... (10,718) (11,956)
--------- ---------
$42,980 $43,420
========= =========
Inventories, net, consist of the following:
Toys:
Finished goods ..................................................... $2,307 $7,566
Component parts, raw materials and work-in-process ................. 94 706
--------- ---------
Total toys ....................................................... 2,401 8,272
Publishing:
Finished goods ..................................................... 2,163 1,786
Editorial and raw materials ........................................ 5,705 5,978
--------- ---------
Total publishing ................................................. 7,868 7,764
--------- ---------
Total ............................................................ $10,269 $16,036
========= =========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment .......................................... $5,356 $4,971
Office equipment and other .......................................... 10,814 11,676
Less accumulated depreciation and amortization ...................... (10,154) (9,650)
--------- ---------
Total ............................................................. $6,016 $6,997
========= =========
Product and package design costs, net, consists of the following:
Product design costs ................................................ $3,730 $2,720
Package design costs ................................................ 1,612 1,138
Less accumulated amortization ....................................... (3,897) (2,999)
--------- ---------
Total ............................................................. $1,445 $859
========= =========
Goodwill, net, consists of the following:
Goodwill ............................................................. $426,799 $441,903
Less accumulated amortization ........................................ (76,299) (76,299)
--------- ---------
Total ............................................................. $350,500 $365,604
========= =========
Other intangibles, net, consists of the following:
Patents .............................................................. $3,186 $3,186
Intangibles .......................................................... 1,263 1,264
Less accumulated amortization ........................................ (4,035) (3,801)
--------- ---------
Total ............................................................. $414 $649
========= =========
Accrued expenses and other current liabilities consists of the following:
Royalties ............................................................ $33,063 $12,800
Inventory purchases .................................................. 5,833 4,130
Income taxes payable ................................................. 4,759 2,218
Bonuses .............................................................. 4,453 4,302
Acquisition accruals ................................................. 1,016 1,184
Accrued expenses - Fleer sale including pension benefits ............. 4,771 4,982
Pre-acquisition litigation charge .................................... -- 3,000
Litigation and legal accruals ........................................ 3,340 4,564
Interest expense ..................................................... 5,573 926
Other accrued expenses ............................................... 13,045 14,602
--------- ---------
Total .............................................................. $75,853 $52,708
========= =========
7
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
4. SHARES OUTSTANDING
The total number of shares of common stock outstanding as of September 30,
2003 was 71,896,236, net of treasury shares; assuming the exercise of all
outstanding warrants and stock options, the number of shares would be
81,101,533.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income $63,178 $10,811 $138,153 $15,391
Preferred dividends ---- (4,080) (1,163) (12,216)
------------- ------------ -------------- -----------
Numerator for basic earnings per share - 63,178 6,731 136,990 3,175
Preferred dividends* ---- ---- 1,163 ----
------------- ------------ -------------- -----------
Numerator for diluted earnings per share $63,178 $6,731 $138,153 $3,175
============= ============ ============== ============
Denominator:
Weighted average common shares outstanding 67,763 36,292 65,171 35,560
Effect of dilutive warrants/options 6,451 4,294 8,946 4,888
Effect of dilutive redeemable cumulative
exchangeable preferred stock** ---- ---- 1,109 ----
------------- ------------ -------------- -----------
Denominator for diluted earnings per share -
adjusted weighted average common shares and
assumed conversions 74,214 40,586 75,226 40,448
============= ============ ============== ============
Basic earnings per share $0.93 $0.19 $2.10 $0.09
============= ============ ============== ============
Diluted earnings per share $0.85 $0.17 $1.84 $0.08
============= ============ ============== ============
* 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 nine months ended
September 30, 2002, as such would be anti-dilutive.
8
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
5. SEGMENT INFORMATION
The Company's business is divided into three segments: Toy Merchandising
and Distribution, Publishing and Licensing.
Toy Merchandising and Distribution Segment
The toy merchandising and distribution segment (Toy Biz) 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, and continues to sell existing inventory, in both mass market
stores and specialty hobby shops. Spectra Star's sales amounted to approximately
$0.6 million and $1.2 million for the three month periods ended September 30,
2003 and 2002, respectively. For the nine month period ended September 30, 2003
and 2002, Spectra Star's sales amounted to approximately $9.8 million and $10.5
million, respectively. Its total assets at September 30, 2003 of approximately
$4.8 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.
Set forth below is certain operating information for the segments of the
Company.
Three month period ended September 30, 2003
- -------------------------------------------
Licensing Publishing Toy Biz Corporate Total
--------- ---------- ------- --------- -----
(in thousands)
Net sales $41,638 $19,553 $23,345 ---- $84,536
Gross profit 41,638 10,322 12,368 64,328
Operating income (loss) *30,267 7,042 8,212 (2,443) 43,078
Three month period ended September 30, 2002
- -------------------------------------------
Licensing Publishing Toy Biz Corporate Total
--------- ---------- ------- --------- -----
(in thousands)
Net sales $25,007 $15,345 $44,026 ---- $84,378
Gross profit 24,008 7,140 12,130 43,278
----
Operating income (loss) *22,514 4,433 4,151 (3,359) 27,739
(*) Includes equity in net income of joint venture of $1,500 and $1,785 for the
three month periods ended September 30, 2003 and 2002, respectively.
9
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
Nine month period ended September 30, 2003
- ------------------------------------------
Licensing Publishing Toy Biz Corporate Total
--------- ---------- ------- --------- -----
(in thousands)
Net Sales $148,289 $54,300 $59,289 ---- $261,878
Gross Profit 148,289 28,525 27,430 204,244
Operating Income (loss) *120,332 18,301 16,765 (14,226) 141,172
Nine month period ended September 30, 2002
- ------------------------------------------
Licensing Publishing Toy Biz Corporate Total
--------- ---------- ------- --------- -----
(in thousands)
Net Sales $51,335 $47,846 $113,358 ---- $212,539
Gross Profit 50,161 24,107 34,108 108,376
----
Operating Income (loss) *43,270 14,397 9,050 (9,260) 57,457
(*) Includes equity in net income of joint venture of $8,486 and $7,126 for the
nine month periods ended September 30, 2003 and 2002, respectively.
6. 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 September 30, 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 September 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 11,204 3,401 6,285 846 672
- -----------------------------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $ 162,166 $ 3,401 $ 6,285 $ 846 $ 151,634
- -----------------------------------------------------------------------------------------------------------------------
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 September 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 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------
10
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
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, alleging 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 parties announced their settlement of this
matter on September 26, 2003 and the effects on the operating results and
financial position of the Company weren't material.
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. (a wholly owned subsidiary of the
Company) (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. The parties have
reached a proposed settlement in which the retailers and resellers would receive
a credit to their account with Marvel's exclusive distributor, depending on
their prior purchases of certain comic book issues. The parties have tendered
that settlement to the Court for approval. It is not known when the Court will
act on this matter or how long it will take for final approval of the
settlement. In the event the matter does not settle, Marvel intends to defend
vigorously against the claims made in this action on their merits.
Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an 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. The action is currently in the discovery phase and no
trial date has been set.
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
11
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
that SPE's claims are without merit and intends to defend vigorously against
those claims. The action is currently in the discovery phase and no trial date
has been set.
Tribune Entertainment Company v. Marvel Enterprises, Inc. On October 30,
2003, Tribune Entertainment Company ("Tribune") filed a complaint against the
Company in New York State Supreme Court, New York County. The complaint alleges
three causes of action: fraud, negligent misrepresentation, and breach of
warranty, all in connection with the license from the Company under which
Tribune produced the Mutant X television series (the "Tribune License"). Prior
to release of the Mutant X television series in 2001, both the Company and
Tribune were sued by Twentieth Century Fox Film Corporation ("Fox"), the
licensee of the X-Men properties for motion pictures, among other rights. That
suit, which alleged breach of the 1993 X-Men movie license, unfair competition,
copyright infringement and tortious interference with contract, all arising from
the Tribune License, was settled between the Company and Fox in February 2003.
According to the action filed by Tribune on October 30, 2003, Tribune settled
with Fox on October 3, 2003. Tribune's October 30, 2003 complaint against the
Company alleges that the Company misrepresented the rights it was granting to
Tribune in the Tribune License, and that the Company breached its warranty in
the Tribune License that the Mutant X property did not conflict with the rights
of any third party. The Company believes that Tribune's claims are without merit
and intends to defend vigorously against them.
7. INCOME TAXES
The Company's effective tax rate for the nine month period ended September
30, 2003 (7.8%) was lower than the Federal statutory rate due primarily to
release of a portion of the valuation allowance against deferred tax assets
applicable to the anticipated utilization of net operating loss (NOL)
carryforwards (principally Federal NOLs) for which benefit was not previously
recognized. At September 30, 2003, the Company has Federal NOL carryforwards of
approximately $70.6 million, which are scheduled to expire in 2020. All of the
Company's pre-acquisition Federal NOLs have been fully utilized by September 30,
2003 and therefore, the Company's income tax credit for the nine month period
ended September 30, 2003 includes a non-cash tax provision of $15.1 million that
reduced goodwill, including approximately $4 million during the quarter ended
September 30, 2003. Additionally, the Company has various state and local NOL
carryforwards of approximately $404.6 million, which will expire in various
jurisdictions in years 2004 through 2022. The state and local NOLs are not
expected to be utilized in the near future, and further, the Company continues
to be subject to tax in certain state and local jurisdictions.
Due to the inherent difficulty of forecasting certain events and the
success of certain products (e.g., release of feature films or the success of
toy designs), the Company previously determined that it did not have sufficient
positive evidence to recognize its deferred tax assets at such time. However, as
a result of the income generated through September 30, 2003 and the Company's
near-term forecasts, as of September 30, 2003, the Company has determined that
it does have sufficient positive evidence to recognize its deferred tax assets
and, therefore, the valuation allowance against Federal deferred tax assets
(principally Federal NOLs) was released. Deferred tax assets with respect to
state and local NOLs continue to be fully reserved by recorded valuation
allowances. Release of the valuation allowance resulted in a one-time $31.5
million ($0.42 basic and diluted per share for the three and nine month periods
ended September 30, 2003, respectively) deferred tax benefit, which was fully
recognized as a credit to income tax expense in the three month period ended
September 30, 2003.
The Company remains 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
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2003
(unaudited)
8. JOINT VENTURE
For the three month periods ended September 30, 2003 and 2002, the Company
recognized $1.5 million and $1.8 million, 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 nine month
periods ended September 30, 2003 and 2002, the Company recognized $8.5 million
and $7.1 million, 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 East Asia, 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 business is divided into three segments: Toy Merchandising
and Distribution, Publishing and Licensing.
Toy Merchandising and Distribution Segment
The toy merchandising and distribution segment (Toy Biz) 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, and
continues to sell existing inventory, in both mass market stores and specialty
hobby shops. Spectra Star's sales amounted to approximately $0.6 million and
$1.2 million for the three month periods ended September 30, 2003 and 2002,
respectively, and approximately $9.8 million and $10.5 million for the nine
month periods ended September 30, 2003 and 2002, respectively. Its total assets
at September 30, 2003, were approximately $4.8 million, consisting 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 nine month
periods ended September 30, 2003, and 2002 were generated within the following
business categories:
Marvel Enterprises Inc. - Licensing Division Categories
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands) (in thousands)
-------------- --------------
Apparel and accessories $ 9,851 $ 3,831 $ 27,524 $ 7,474
Entertainment (including studios, themed
attractions and electronic games) 5,059 13,440 42,339 31,248
Toys 21,744 7,162 64,538 9,023
Other 4,984 574 13,888 3,590
-------- -------- -------- --------
Totals $ 41,638 $ 25,007 $148,289 $ 51,335
======== ======== ======== ========
Results of Operations
Three month period ended September 30, 2003 compared with the three month period
ended September 30, 2002
- --------------------------------------------------------------------------------
The Company's net sales of $84.5 million in the third quarter of 2003 were
flat with the year-ago period, which was approximately $84.4 million in the
third quarter of 2002. Sales from the Licensing segment increased approximately
$16.6 million to approximately $41.6 million in the third quarter of 2003, from
approximately $25.0 million in the third 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 $4.3 million to
approximately $19.6 million in the third quarter of 2003, from $15.3 million in
the third quarter of 2002, fueled by increases in sales of comics, graphic
novels and advertising income. As anticipated, sales from the Toy segment
decreased approximately $20.7 million to approximately $23.3 million in the
third quarter of 2003, from approximately $44.0 million in the third 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 $21.0 million to approximately $64.3
million in the third quarter of 2003, from approximately $43.3 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 53% for the three
months ended September 30, 2003) increased the Company's gross profit as a
percentage of sales to 76% in the third quarter of 2003, as compared to 51% in
the third quarter of 2002.
Selling, general and administrative (SG&A) expenses increased approximately
$6.6 million to approximately $22.6 million, or approximately 27% of net sales,
in the third quarter of 2003, from approximately $16.0 million, or approximately
19% of net sales, in the third quarter of 2002. The licensing division increased
by $10.2 million, to $13.5 million, primarily due to higher royalty provisions
for the share of merchandise license royalties owed to the Company's studio
partners. Partially off-setting these increases, the Toy Biz division decreased
approximately $3.3 million primarily due to lower selling expenses, specifically
royalties and commissions. General Corporate expenses decreased approximately
$1.0 million due to the closure of certain legal matters.
For the three months ended September 30, 2003 and 2002, the Company
recognized income of $1.5 million and $1.8 million, 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 $7.8 million to approximately
$4.2 million in the third quarter of 2003, as compared to approximately $12.0
million in the third quarter of 2002. The prepayment of the HSBC term loan in
the fourth quarter of 2002 eliminated future amortization of all related
deferred financing costs associated with such loan. Such amortization expense,
classified as interest expense in the accompanying statement of operations,
aggregated approximately $6.4 million during the third quarter of 2002.
The Company's effective tax rate for the three month period ended September
30, 2003 (62.7%) was lower than the Federal statutory rate due primarily to
release of a portion of the valuation allowance against deferred tax assets
applicable to the anticipated utilization of net operating loss (NOL)
carryforwards (principally Federal NOLs) for which benefit was not previously
recognized. At September 30, 2003, the Company has Federal NOL carryforwards of
approximately $70.6 million, which are scheduled to expire in 2020. All of the
Company's pre-acquisition Federal NOLs have been fully utilized by September 30,
2003 and therefore, the Company's income tax credit for the three month period
ended September 30, 2003 includes a non-cash tax provision of $3.9 million that
reduced goodwill. Additionally, the Company has various state and local NOL
carryforwards of approximately $404.6 million, which will expire in various
jurisdictions in years 2004 through 2022. The state and local NOLs are not
expected to be utilized in the near future, and further, the Company continues
to be subject to tax in certain state and local jurisdictions. The Company
expects to provide for a normal income tax rate (roughly 37%) commencing on
October 1, 2003.
Due to the inherent difficulty of forecasting certain events and the
success of certain products (e.g., release of feature films or the success of
toy designs), the Company previously determined that it did not have sufficient
positive evidence to recognize its deferred tax assets at such time. However, as
a result of the income generated through September 30, 2003 and the Company's
near-term forecasts, as of September 30, 2003, the Company has determined that
it does have sufficient positive evidence to recognize its deferred tax assets
and, therefore, the valuation allowance against Federal deferred tax assets
(principally Federal NOLs) was released. Deferred tax assets with respect to
state and local NOLs continue to be fully reserved by recorded valuation
allowances. Release of the valuation allowance resulted in a one-time $31.5
million ($0.42 basic and diluted per share for the three and nine month periods
ended September 30, 2003, respectively) deferred tax benefit, which was fully
recognized as a credit to income tax expense in the three month period ended
September 30, 2003.
The Company remains 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.
Nine month period ended September 30, 2003 compared with the Nine month period
ended September 30, 2002
- --------------------------------------------------------------------------------
The Company's net sales increased approximately $49.4 million to $261.9
million for the nine month period ended September 30, 2003 from approximately
$212.5 million for the nine month period ended September 30, 2002. The increase
is primarily due to improved performance within the Licensing segment. Sales
from the Licensing segment increased approximately $97.0 million to
approximately $148.3 million for the nine month period ended September 30, 2003
from approximately $51.3 million for the nine month period ended September 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 major movies released in 2003, and an extension of 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 $6.4 million to
approximately $54.3 million for the nine month period ended September 30, 2003
from $47.9 million for the nine month period ended September 30, 2002 primarily
due to an increase in custom publishing and advertising income. As anticipated,
sales from the Toy segment decreased approximately $54.1 million to
approximately $59.3 million for the nine month period ended September 30, 2003
from approximately $113.4 million for the nine
16
month period ended September 30, 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 $95.8 million to approximately $204.2
million for the nine month period ended September 30, 2003 from approximately
$108.4 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
nine month period ended September 30, 2003) increased the Company's gross profit
as a percentage of sales to 78% in the nine month period ended September 30,
2003, as compared to 51% for the nine month period ended September 30, 2002.
Selling, general and administrative (SG&A) expenses increased approximately
$15.0 million to approximately $70.2 million or approximately 27% of net sales
for the nine month period ended September 30, 2003 from approximately $55.2
million or approximately 26% of net sales for the nine month period ended
September 30, 2002. The licensing division increased by $23.2 million, to $37.2
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 $12.8 million due to
lower selling expenses, specifically advertising and royalties. General
Corporate expenses increased approximately $5.0 million to $14.2 million,
primarily due to active litigation.
For the nine month period ended September 30, 2003 and 2002, the Company
recognized $8.5 million and $7.1 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. In the third
quarter of 2002, the Company recorded an adjustment of $0.2 million to the
income tax provision related to this charge so as to properly reflect year-end
taxes. As of September 30, 2002, the net cumulative effect of adopting this
accounting principle was $4.4 million.
Net interest expense decreased approximately $14.6 million to approximately
$13.1 million for the nine month period ended September 30, 2003 as compared to
approximately $27.7 million for the nine month period ended September 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, which amounted to approximately $11.4 million during the nine month period
ended September 30, 2002, as well as cash interest savings of approximately $1.4
million.
The Company's effective tax rate for the nine month period ended September
30, 2003 (7.8%) was lower than the Federal statutory rate due primarily to
release of a portion of the valuation allowance against deferred tax assets
applicable to the anticipated utilization of net operating loss (NOL)
carryforwards (principally Federal NOLs) for which benefit was not previously
recognized. At September 30, 2003, the Company has Federal NOL carryforwards of
approximately $70.6 million, which are scheduled to expire in 2020. All of the
Company's pre-acquisition Federal NOLs have been fully utilized by September 30,
2003 and therefore, the Company's income tax credit for the nine month period
ended September 30, 2003 includes a non-cash tax provision of $15.1 million that
reduced goodwill. Additionally, the Company has various state and local NOL
carryforwards of approximately $404.6 million, which will expire in various
jurisdictions in years 2004 through 2022. The state and local NOLs are not
expected to be utilized in the near future, and further, the Company continues
to be subject to tax in certain state and local jurisdictions. The Company
expects to provide for a normal income tax rate (roughly 37%) commencing on
October 1, 2003.
Due to the inherent difficulty of forecasting certain events and the
success of certain products (e.g., release of feature films or the success of
toy designs), the Company previously determined that it did not have sufficient
positive evidence to recognize its deferred tax assets at such time. However, as
a result of
17
the income generated through September 30, 2003 and the Company's near-term
forecasts, as of September 30, 2003, the Company has determined that it does
have sufficient positive evidence to recognize its deferred tax assets and,
therefore, the valuation allowance against Federal deferred tax assets
(principally Federal NOLs) was released. Deferred tax assets with respect to
state and local NOLs continue to be fully reserved by recorded valuation
allowances. Release of the valuation allowance resulted in a one-time $31.5
million ($0.42 basic and diluted per share for the three and nine month periods
ended September 30, 2003, respectively) deferred tax benefit, which was fully
recognized as a credit to income tax expense in the three month period ended
September 30, 2003.
The Company remains 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 and certificates of
deposit 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 $134.7 million
for the nine month period ended September 30, 2003 as compared to net cash
provided by operating activities of $54.1 million for the nine month period
ended September 30, 2002.
At September 30, 2003, the Company had working capital of $214.2 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 will be required to make a cash payment, at such time as the
amount thereof is determined, to parties who were unsecured creditors of Marvel
Entertainment Group, Inc., prior to that company's emergence from Chapter 11
proceedings on October 1, 1998. The Company initially deposited $8 million into
a trust account to satisfy the maximum amount of such payment. Cumulatively,
through September 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 September 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
18
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. 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. 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 September 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
September 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.
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The following table sets forth the Company's Contractual Cash Obligations as of
September 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 11,204 3,401 6,285 846 672
- -----------------------------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $ 162,166 $ 3,401 $ 6,285 $ 846 $ 151,634
- -----------------------------------------------------------------------------------------------------------------------
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 September 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 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 and certificates of deposit 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 administrative 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 September 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.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management's, Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of its principal executive
officer and principal financial officer, has evaluated the effectiveness of its
disclosure controls and procedures (as defined in
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Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, the Company's principal executive officer and
principal financial officer concluded that these disclosure controls and
procedures are effective. The Company has not identified any changes in its
internal controls over financial reporting during the quarter ended September
30, 2003 that have materially affected, or are reasonably likely to materially
affect, its internal controls over financial reporting.
21
PART II. OTHER INFORMATION.
--------------------------------
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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 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, alleging 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 parties announced their settlement of this
matter on September 26, 2003 and the effects on the operating results and
financial position of the Company weren't material.
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. (a wholly owned subsidiary of the
Company) (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. The parties have
reached a proposed settlement in which the retailers and resellers would receive
a credit to their account with Marvel's exclusive distributor, depending on
their prior purchases of certain comic book issues. The parties have tendered
that settlement to the Court for approval. It is not known when the Court will
act on this matter or how long it will take for final approval of the
settlement. In the event the matter does not settle, Marvel intends to defend
vigorously against the claims made in this action on their merits.
Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an 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. The action is currently in the discovery phase and no
trial date has been set.
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 defend vigorously against those claims. The action is currently in
the discovery phase and no trial date has been set.
Tribune Entertainment Company v. Marvel Enterprises, Inc. On October 30,
2003, Tribune Entertainment Company ("Tribune") filed a complaint against the
Company in New York State Supreme Court, New York County. The complaint alleges
three causes of action: fraud, negligent misrepresentation, and breach of
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warranty, all in connection with the license from the Company under which
Tribune produced the Mutant X television series (the "Tribune License"). Prior
to release of the Mutant X television series in 2001, both the Company and
Tribune were sued by Twentieth Century Fox Film Corporation ("Fox"), the
licensee of the X-Men properties for motion pictures, among other rights. That
suit, which alleged breach of the 1993 X-Men movie license, unfair competition,
copyright infringement and tortious interference with contract, all arising from
the Tribune License, was settled between the Company and Fox in February 2003.
According to the action filed by Tribune on October 30, 2003, Tribune settled
with Fox on October 3, 2003. Tribune's October 30, 2003 complaint against the
Company alleges that the Company misrepresented the rights it was granting to
Tribune in the Tribune License, and that the Company breached its warranty in
the Tribune License that the Mutant X property did not conflict with the rights
of any third party. The Company believes that Tribune's claims are without merit
and intends to defend vigorously against them.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
10.1 Employment Agreement, dated as of August 1, 2003, between
the company and Timothy Rothwell.*
10.2 Amendment Number 1 to Employment Agreement, dated as of
November 12, 2002, between the Company and Bill Jemas.*
10.3 Amendment Number 2 to Employment Agreement, dated as of
October 13, 2003, between the Company and Bill Jemas.*
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.
* Management contract or compensatory plan or arrangement.
b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during
the quarter ended September 30, 2003:
1. Current Report on Form 8-K dated July 29, 2003, reporting
Items 7 and 12.
2. Current Report on Form 8-K dated August 12, 2003, reporting
Items 7 and 12.
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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, thereunto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Dated: November 10, 2003 By: /s/ Allen S. Lipson
-----------------------------------
Allen S. Lipson
President and Chief Executive Officer
Dated: November 10, 2003 By: /s/ Kenneth P. West
-----------------------------------
Kenneth P. West
Chief Financial Officer
25