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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 March 31, 2005
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 [ ]
At April 27, 2005, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 105,346,501.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)....... 1
Condensed Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004............................................. 2
Condensed Consolidated Statements of Income and Comprehensive
Income for the Three Months Ended March 31, 2005 and 2004..... 3
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2005 and 2004.......................... 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 11
Results of Operations......................................... 13
Liquidity and Capital Resources............................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 16
Item 4. Controls and Procedures....................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 18
SIGNATURES .............................................................. 20
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
1
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2005 2004
---------------------------
(Unaudited)
---------------------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 32,034 $ 50,071
Short-term investments.......................................................... 211,443 154,719
Accounts receivable, net........................................................ 66,614 73,576
Inventories, net ............................................................... 7,453 6,587
Deferred income taxes, net...................................................... 7,981 7,981
Prepaid expenses and other current assets....................................... 3,901 2,734
---------------------------
Total current assets...................................................... 329,426 295,668
Molds, tools and equipment, net................................................... 5,242 5,553
Product and package design costs, net ............................................ 1,230 1,249
Goodwill ..... 341,708 341,708
Accounts receivable, non-current portion.......................................... 32,222 37,718
Deferred income taxes, net ...................................................... 28,645 32,583
Other assets...................................................................... 318 335
---------------------------
Total assets.............................................................. $738,791 $714,814
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 4,143 $ 6,006
Accrued royalties............................................................... 79,065 57,879
Accrued expenses and other current liabilities.................................. 35,910 43,962
Minority interest to be distributed............................................. 3,386 8,428
Income taxes payable............................................................ 12,328 10,129
Deferred revenue ............................................................... 10,208 27,033
---------------------------
Total current liabilities................................................. 145,040 153,437
Accrued rent...................................................................... 1,230 165
Deferred revenue, non-current portion............................................. 17,418 14,712
---------------------------
Total liabilities......................................................... 163,688 168,314
===========================
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued........ - -
Common stock, $.01 par value, 250,000,000 shares authorized, 120,676,702 issued
and 105,335,502 outstanding in 2005 and 120,442,988 issued and 105,101,788
outstanding in 2004............................................................... 1,206 1,205
Deferred stock compensation....................................................... (9,067) (5,164)
Additional paid-in capital........................................................ 581,887 577,169
Retained earnings................................................................. 94,664 66,943
Accumulated other comprehensive loss.............................................. (2,586) (2,652)
Treasury stock, 15,341,200 shares................................................. (91,001) (91,001)
---------------------------
Total stockholders' equity................................................ 575,103 546,500
---------------------------
Total liabilities and stockholders' equity................................ $738,791 $714,814
===========================
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 Ended
March 31,
------------------------
2005 2004
------------ -----------
Net sales............................................ $ 104,144 $ 122,326
Cost of sales........................................ 12,304 40,523
------------ -----------
Gross profit......................................... 91,840 81,803
------------ -----------
Operating expenses:
Selling, general and administrative............. 43,697 32,146
Depreciation and amortization................... 1,033 745
------------ -----------
Total operating expenses........................ 44,730 32,891
------------ -----------
Equity in net income of joint venture................ - 8,117
Other income, net.................................... 846 272
------------ -----------
Operating income..................................... 47,956 57,301
Interest (income) expense, net....................... (1,159) 3,920
------------ -----------
Income before income taxes and minority interest..... 49,115 53,381
Income tax expense................................... 18,864 22,111
Minority interest in consolidated joint venture...... 2,530 ---
------------ -----------
Net income........................................... $ 27,721 $ 31,270
============ ===========
Basic earnings per share attributable to common
stock.............................................. $0.27 $0.29
============ ===========
Weighted average number of basic shares outstanding.. 104,561 108,392
============ ===========
Diluted earnings per share attributable to common
stock.............................................. $ 0.25 $ 0.27
============ ===========
Weighted average number of diluted shares
outstanding........................................ 111,239 115,075
============ ===========
Comprehensive income:
Net income........................................ $ 27,721 $ 31,270
Other comprehensive income........................ 66 43
------------ -----------
Comprehensive income.............................. $ 27,787 $ 31,313
============ ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months
Ended March 31
------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income........................................................ $ 27,721 $ 31,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................................... 1,033 745
Provision for doubtful accounts................................... --- 748
Amortization of deferred financing costs.......................... --- 166
Non-cash charge for stock-based compensation...................... 1,065 621
Tax benefit of stock option exercise.............................. 53 544
Deferred income taxes............................................. 3,938 7,859
Minority interest in joint venture (net of distributions
of $7,572)...................................................... (5,042) ---
Equity in net income from joint venture........................... --- (8,117)
Changes in operating assets and liabilities:
Accounts receivable............................................. 12,458 (21,224)
Inventories..................................................... (866) (2,979)
Distributions received from joint venture....................... --- 3,321
Prepaid expenses and other current assets....................... (1,167) 1,024
Other assets.................................................... (14) 14
Deferred revenue................................................ (14,119) (6,198)
Income taxes payable............................................ 2,199 12,053
Accounts payable, accrued expenses and other current
liabilities................................................... 11,930 24,665
----------- ----------
Net cash provided by operating activities............................ 39,189 44,512
----------- -----------
Cash flows from investing activities:
Payment of administrative claims and unsecured claims, net........ (30) (164)
Purchases of molds, tools and equipment........................... (401) (130)
Expenditures for product and package design ...................... (271) (320)
Net purchases of short-term investments........................... (56,724) (15,698)
----------- -----------
Net cash used in investing activities................................ (57,426) (16,312)
----------- -----------
Cash flows from financing activities:
Exercise of stock options............................................ 200 641
----------- -----------
Net cash provided by financing activities............................ 200 641
----------- -----------
Net increase (decrease) in cash and cash equivalents................. (18,037) 28,841
Cash and cash equivalents, at beginning of period.................... 50,071 32,562
----------- -----------
Cash and cash equivalents, at end of period.......................... $ 32,034 $ 61,403
=========== ===========
Supplemental disclosures of cash flow information:
Income taxes paid during the period............................... $ 12,764 $ 1,672
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(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 Condensed Consolidated Statements of Income
and Comprehensive Income and the Consolidated Statements of Cash Flows for the
three-month period ended March 31, 2005 are not necessarily indicative of those
for the full year ending December 31, 2005. 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, 2004. Certain prior period amounts
have been re-classified to conform with the current period's presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Short-Term Investments - At March 31, 2005 and December 31, 2004,
short-term investments consisted of municipal auction rate securities with
auction reset periods within 35 days of purchase, classified as
available-for-sale securities and stated at cost which approximates fair value.
Accounting for Stock Based Compensation - In accordance with the
provisions of SFAS 148 "Accounting for Stock-Based Compensation", 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 or exceeds the market price of the underlying
stock on date of grant, no compensation expense is recognized. However, during
2005 and 2004, stock-based compensation under APB 25 was recognized for the
vesting of restricted stock. Such stock-based compensation expense amounted to
$1.1 million and $0.6 million for the three-month periods ended March 31, 2005
and 2004, respectively. For the purposes of SFAS 148 pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting periods. The Company's pro forma information follows:
Three Months Ended
March 31,
-------------------------------
2005 2004
-------------------------------
(In thousands, except per
share data)
Net income, as reported........................................ $27,721 $31,270
Net income per share attributable to common stock - basic, as
reported.................................................... 0.27 0.29
Net income per share attributable to common stock - diluted,
as reported................................................. 0.25 0.27
Stock based employee compensation cost, net of tax, if SFAS
123 was applied............................................. 1,323 2,919
Pro forma net income........................................... 26,398 28,351
Pro forma net income per share attributable to common stock -
basic....................................................... 0.25 0.26
Pro forma net income per share attributable to common stock -
diluted..................................................... 0.24 0.25
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. 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 5 years. The weighted average assumptions for the 2003 grants
are: risk free interest rates ranging from 2.32% to 3.43%; no dividend yield;
expected volatility ranging from 0.59 to 0.78; and expected life of 5 years. The
weighted average assumptions for the 2004 grants are: risk free interest rates
ranging from 2.81% to 3.96%; no dividend yield; expected volatility ranging from
0.48 to 0.58; and expected life of 5 years. The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded options which
5
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2005
(unaudited)
have no vesting restrictions and are fully transferable. In addition, the option
valuation model requires the input of highly subjective assumptions. 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.
Recent Accounting Pronouncements - On December 16, 2004, the Financial
Accounting Standards Board issued SFAS No. 123 (revised 2004), ("SFAS 123(R)"),
which is a revision of SFAS 123. SFAS 123(R) supersedes APB 25, and amends SFAS
No. 95, "Statement of Cash Flows". Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure will soon no longer be an alternative. SFAS 123(R) must be adopted no
later than January 1, 2006. Early adoption will be permitted in periods in which
financial statements have not yet been issued. The Company expects to adopt SFAS
123(R) on January 1, 2006, using the modified-prospective method as proscribed
in SFAS 123(R).
As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on the Company's results of operations, although it will have no impact on its
overall financial position. While the Company cannot estimate the level of
share-based payments to be issued in the future, based on the stock options that
are currently outstanding, the Company expects that the adoption of SFAS 123(R)
will result in a $5.4 million charge to operations in 2006. SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options and the fair value of the Company's common stock at such dates),
the amount of operating cash flows recognized in prior periods for such excess
tax deductions was $3.6 million and $14.2 million in 2004 and 2003,
respectively, and $0 in 2002. Such amounts were $53,000 and $0.5 million for the
three months ended March 31, 2005 and 2004, respectively.
6
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2005
(unaudited)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
March 31, December 31,
2005 2004
-------------- ---------------
(In thousands)
Accounts receivable, net, consist of the following:
Accounts receivable.......................................... $ 82,195 $ 89,594
Less allowances for:
Doubtful accounts.................................... (4,820) (4,851)
Advertising, markdowns, returns, volume discounts
and other........................................... (10,761) (11,167)
-------------- ---------------
Total, net......................................... $ 66,614 $ 73,576
============== ===============
Inventories, net, consist of the following:
Finished goods............................................ $ 3,112 $ 3,034
Component parts, raw materials and work-in-process........ 4,341 3,553
-------------- ---------------
Total.................................................. $ 7,453 $ 6,587
============== ===============
Accrued expenses and other current liabilities consist of the
following:
Advertising costs......................................... $ 506 $ 2,444
Inventory purchases....................................... 2,738 3,032
Bonuses................................................... 1,364 5,545
Pension benefits.......................................... 6,449 6,538
Litigation accruals....................................... 9,338 8,989
Other..................................................... 15,515 17,414
-------------- ---------------
Total.................................................. $ 35,910 $ 43,962
============== ===============
EARNINGS PER SHARE
The total number of shares of common stock outstanding as of March 31,
2005 was 105,335,502 net of treasury shares; assuming the exercise of all
outstanding stock options, that number would be 120,436,891. During the
three-month period ended March 31, 2005, 39,689 shares of common stock were
issued through stock option exercises.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended
March 31,
-------------------------
2005 2004
------------ ------------
Numerator:
Net income......................................... $27,721 $31,270
============ ============
Denominator:
Denominator for basic earnings per share........... 104,561 108,392
Effect of dilutive warrants /options/ restricted
stock............................................ 6,678 6,683
------------ ------------
Denominator for diluted earnings per share - 111,239 115,075
adjusted weighted average shares and assumed
conversions......................................
============ ============
Basic earnings per share.............................. $0.27 $0.29
============ ============
Diluted earnings per share............................ $0.25 $0.27
============ ============
7
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2005
(unaudited)
5. SEGMENT INFORMATION
The Company's business is divided into three operating segments: Toy,
Publishing and Licensing.
Toy Segment
The Toy 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 characters that the Company has licensed in, such as
characters from the movie trilogy The Lord of the Rings, the television shows
for Total Nonstop Action ("TNA") wrestling and the movie and television shows,
still in production, based on the character Curious George.
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 5,000 Marvel characters. The
Company's titles feature classic Marvel Super Heroes such as Spider-Man, X-Men,
the Incredible Hulk, Daredevil and newly developed Marvel characters.
Licensing Segment
The Licensing segment is responsible for the licensing of 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, publications 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 March 31, 2005
--------------------------------------------------------------
Licensing Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales................... $71,226 $22,418 $10,500 $ --- $104,144
Gross profit................ 71,226 12,477 8,137 --- 91,840
Operating income (loss)..... 39,696 8,885 4,377 (5,002) 47,956
Three month period ended March 31, 2004
--------------------------------------------------------------
Licensing Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales................... $46,860 $19,644 $55,822 $ --- $122,326
Gross profit................ 46,860 10,714 24,229 --- 81,803
Operating income (loss)..... 35,941* 7,310 18,166 (4,116) 57,301
(*) Includes equity in net income of joint venture of $8,117 for the
three month period ended March 31, 2004. The Joint Venture was
consolidated effective April 1, 2004.
8
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2005
(unaudited)
6. BENEFIT PLANS
In connection with the 1999 sale of a subsidiary, the Company retained
certain liabilities related to the Fleer/Skybox International Retirement Plan, a
defined benefit pension plan for employees of such subsidiary (the "Fleer/Skybox
Plan"). In prior years, this plan was amended to freeze the accumulation of
benefits and to prohibit new participants. Assumptions used for the 2005 and
2004 expense include a discount rate of 5.75% and 6.25%, respectively, and an
expected rate of return on plan assets of 7.0% and 8.0%, respectively.
Three Months Ended
March 31,
-------------------------
2005 2004
------------ ------------
(In thousands)
Total cost for plan period
Service cost......................................... $ --- $ ---
Interest cost........................................ 284 294
Expected return on plan assets....................... (240) (278)
Amortization of:
Unrecognized net transition obligation (asset).... --- ---
Unrecognized prior service cost................... (14) (13)
Unrecognized net (gain)/loss...................... 45 30
------------ ------------
Net periodic pension cost............................... $ 75 $ 33
============ ============
INCOME TAXES
The Company's effective tax rate for the three months ended March 31,
2005 (38.4%) was higher than the Federal statutory rate due primarily to state
and local taxes offset by the effects of the consolidation of Spider-Man
Merchandising, L.P. (the "Joint Venture"), and Federally tax-free investment
returns. The Company's effective tax rate for the three months ended March 31,
2004 (41.4%) was higher than the Federal statutory rate due primarily to state
and local taxes and foreign taxes.
8. COMMITMENTS AND CONTINGENCIES
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.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, in New
York State Supreme Court, County of New York, Mr. Hibbs commenced a putative
class action alleging that the Company breached its own Terms of Sale Agreement
to comic book retailers and resellers, breached its obligation of good faith and
fair dealing, fraudulently induced plaintiff and other members of the purported
class to buy comics and unjustly enriched itself. Mr. Hibbs sought certification
of the putative class and his designation 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
9
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 2005
(unaudited)
and resellers would receive a credit to their account with the Company's
exclusive distributor, depending on their prior purchases of certain comic book
issues. The parties tendered that settlement to the Court for approval, but it
was rejected on technical grounds. The parties have appealed the rejection of
the settlement. It is not known when the Appellate Division 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, the Company 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 lifetime employment
agreement. Mr. Lee claimed the right to a 10% profit participation in connection
with all film and television productions that utilize Marvel characters. On
April 20, 2005, the Company and Mr. Lee settled all disputes related to all
prior and future periods in exchange for a lump sum payment due May 2005. The
results of operations for the quarter ended March 31, 2005 included a charge of
$10 million to increase previously established reserves, which were established
for amounts Mr. Lee claimed to be owed for prior periods.
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. 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 was settled between the Company
and Fox in February 2003. The Company filed its answer, denying all material
allegations of Tribune's complaint and asserting counterclaims. The action is in
the discovery phase and no trial date has been set.
10
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 major
licensees, (iii) delays and cancellations of movies and television productions
based on the Company's characters, (iv) poor performance of major movies based
on the Company's characters, (v) toy-production delays or shortfalls, continued
concentration of toy retailers, and toy inventory risk and (vi) significant
appreciation of the Chinese currency against other currencies and the imposition
of quotas or tariffs on products manufactured in China. In addition, in
connection with the proposed film slate described below, the following factors,
among others, could cause the Company's or the film slate's financial
performance to differ materially from that expressed in any forward-looking
statements made by the Company: whether the film slate will close, Marvel's
ability to attract and retain creative talent, the popularity of Marvel's films,
the expense associated with producing the films, union activity which could
interrupt film production, that Marvel has in the past, worked along side film
studios on its film projects, changes or disruptions in the way films are
distributed, piracy of films and related products, a limited number of releases,
fluctuations in reported income or loss related to the accounting of film
production activities, and Marvel's dependence on a single distributor to
distribute films included in the film slate. For further discussion of the
factors described above, please see the section entitled "Cautionary Statement
for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995" in our 2004 10-K and our Current Report on Form
8-K filed with the Securities and Exchange Commission on April 28, 2005. 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.
Management Overview of Business Trends
The Company principally operates in three distinct segments: Licensing,
Publishing and Toys. The Company's strategy is to increase exposure of the
Marvel characters through its media and promotional licensing activities, which
it believes will create revenue opportunities for the Company through sales of
toys and other licensed merchandise. The Company uses comic book publishing to
support consumer awareness of the Marvel characters and to develop new
characters and storylines.
A key driver of operating results is the successful release of major
entertainment programming, such as movies, published materials and television
shows, based on the Company's characters, which fuels demand for all products
based on the featured characters. In 2004, the Company benefited from one major
theatrical release that fueled growth in its businesses: Spider-Man 2. This
release resulted in increased awareness of this character family, which
subsequently drove sales of Marvel-branded licensed products, published
materials and toys based on this character. The Company's results are partially
dependent on the successful release of theatrical films and acceptance of
products developed for the characters appearing in the films. Marvel is involved
in the creative direction of all entertainment projects based on its characters.
During late April 2005, the Company obtained a binding financing commitment from
Merrill Lynch Commercial Finance Corp., for a $525 million non-recourse
revolving credit facility over seven years to permit the Company to fund the
production of a film slate. The non-recourse element of this structure limits
the Company's cash risk to un-reimbursed film development costs and general
incremental overhead. The credit facility will be secured by a pledge of the
intellectual property rights for ten Marvel characters for use in films,
including Captain America and Nick Fury. The Company will retain all other
rights to the characters, including merchandising rights. The financing is
subject to numerous contingencies, including the negotiation of a definitive
distribution agreement with Paramount Pictures; the
11
negotiation of definitive agreements related to the credit facility; the absence
of any material adverse change in the Company's business or any adverse change
in financial, banking or capital market conditions that would materially and
adversely affect Merrill's ability to syndicate film or entertainment financings
generally and the absence of changes in senior management of the Company or its
Marvel Studios division. There is no assurance that the financing will be
completed.
Licensing
Marvel's Licensing segment is responsible for the merchandising,
licensing and promotions of Marvel's characters worldwide. The Licensing segment
expanded its overseas businesses in 2004 through newly established offices
located in London and Tokyo. The Licensing segment is pursuing a strategy of
concentrating its licensee relationships in a smaller number of high-quality
licensees, and negotiating higher guaranteed royalty amounts from each licensee.
The Licensing segment is also focusing on entering into licenses in new product
categories, such as the wireless category, which was first licensed in
late-2004. The Company typically enters into multi-year merchandise license
agreements that specify guaranteed minimum royalty payments and include a
significant down-payment upon signing. The Company recognizes license revenue
when it satisfies the requirements of completing the earnings process, which is
normally upon the effective date of the agreement. The remaining balance of the
guaranteed payments, reflected as accounts receivable, is due in accordance with
the periodic schedule as specified in each agreement. If sales of the licensee's
merchandise are high enough to entitle the Company to royalties in excess of the
amount of the minimum royalty guarantee (which excess amounts are defined as
"overages"), the Company receives the remaining balance of the guaranteed
payment sooner than provided for in the agreement's payment schedule. Overages
are not recognized as revenue, in most cases, until the minimum guaranteed
payments are fully collected. Licensing fees collected in advance of the period
in which revenue would be recognized are recorded as deferred revenue.
During the three month period ended March 31, 2004, merchandise license
income related to Spider-Man movie characters, other than for action figure and
accessory toys, was recorded through the Company's investment in the Joint
Venture. Effective April 1, 2004, the Joint Venture is included in the Company's
consolidated results. Revenue derived from the Joint Venture for the first
quarter of 2005, and included in the table below, was $11.0 million.
Revenue recognized under license agreements during the three months
ended March 31, 2005 and 2004 was generated within the business categories set
forth below. The table does not include revenues from the Company's master toy
licensee, Toy Biz Worldwide Ltd. ("TBW"), as such revenue is recorded in the
Company's Toy segment. The "Other" category includes licensing revenue from
domestics, collectibles and other:
Three Months Ended
March 31,
--------------------------
2005 2004
------------- -----------
(in millions)
Apparel and accessories..................... $ 24.8 $ 19.7
Entertainment (including studios, themed
attractions and electronic games)......... 24.9 5.4
Toys........................................ 5.1 6.4
Other....................................... 16.4 15.4
------------- -----------
Total....................................... $ 71.2 $ 46.9
============= ===========
Publishing
Marvel's Publishing segment is in the process of expanding its
advertising and promotions business with an increased emphasis on custom comics
and in-school marketing. The publishing business will also continue its
long-term focus on expanding distribution to new channels, like the mass market,
and expanding its product line to target new demographics, although the Company
does not expect these initiatives to have a significant impact on 2005 revenue.
Growth in 2005 is expected to come largely from expansion of the core product
lines of comics and trade paperbacks, and increased advertising and custom
publishing sales due to the anticipated effects of future media events.
12
Toys
The 2005 business outlook for toys is closely tied to the scheduled
release in July of the movie Fantastic Four. Retailers have developed strategies
to fully embrace the Fantastic Four property. In addition, the Company should
benefit from continuing sales of other brands in the Marvel Universe of
characters.
The only toys produced by or for the account of the Company during 2004
and 2005 were (i) toys based on Spider-Man movies and television shows produced
by Sony Pictures, and (ii) toys based on the Lord of the Rings movie trilogy.
The Company has licensed the right to make all other toys based on
Marvel characters to licensees. TBW is the Company's master toy licensee for
action figures and accessories. Marvel does the product development, marketing
and sales for TBW, and the Company records income from TBW, and related
expenses, in the Toy segment. All royalties received by the Company from the
sales of other licensed toys are recorded as royalties in the Company's
Licensing segment, as the Company does no product development, marketing, sales
or other services for these licensees.
Results of Operations
Three month period ended March 31, 2005 compared with the three month period
- ----------------------------------------------------------------------------
ended March 31, 2004
- --------------------
Net Sales
Three Months ended
March 31,
------------------------
2005 2004 Change
-------------------------------------
(dollars in millions)
Licensing.......................... $ 71.2 $ 46.9 52%
Publishing......................... 22.4 19.6 14%
Toys............................... 10.5 55.8 (81)%
----------- -----------
Total.............................. $104.1 $122.3 (15)%
=========== ===========
The Company's net sales of $104.1 million in the first quarter of 2005
were lower than net sales in the first quarter of 2004, which amounted to $122.3
million. Prior to April 1, 2004, licenses related to the Spider-Man 2 movie were
recorded as equity in Joint Venture, not Licensing segment sales. Effective
April 1, 2004, the Joint Venture is included in the Company's consolidated
results. Revenue derived from the Joint Venture for the first quarter of 2005
and included in the table above was $11.0 million. The overall increase ($24.3
million) in Licensing revenue was greater than the effect of the consolidation
of the Joint Venture because of an increase in Licensing revenue. This increase
was due to continued momentum in both domestic and international licensing
resulting from the exploitation of the Company's broad array of characters.
Overages, which are license revenues in excess of minimum guarantees, were $20.9
million in the first quarter of 2005 (including $10.7 million associated with
the Joint Venture) versus $7.9 million in the first quarter of 2004.
Sales from the Publishing segment increased $2.8 million to $22.4
million in the first quarter of 2005 fueled by increases in sales of comics and
trade paperbacks.
As anticipated, sales from the Toy segment decreased $45.3 million to
$10.5 million in the first quarter of 2005, primarily due to a decrease in the
sales of action figures and accessories based on characters associated with the
Spider-Man 2 theatrical release.
13
Gross Profit
Three Months ended March 31,
----------------------------------------------
2005 2004
Amount Margin Amount Margin
---------- ------------ ------------ ---------
(dollars in millions)
Licensing...................... $ 71.2 100% $ 46.9 100%
Publishing..................... 12.5 56% 10.7 55%
Toys........................... 8.1 77% 24.2 43%
----------- -------------
Total.......................... $ 91.8 88% $ 81.8 67%
=========== =============
Gross profit increased $10.0 million to $91.8 million in the first
quarter of 2005, due to increased revenues in the Licensing segment. The
Company's gross profit as a percentage of sales increased to 88% in the first
quarter of 2005, as compared to 67% in the first quarter of 2004, due to an
increase in Licensing segment revenues as a percentage of total revenue. In
addition, gross margins in the Toy segment increased from 43% to 77% as a result
of a shift in revenue derived from the Company's direct sales of toys to royalty
and service fee revenue derived from licensed toy sales.
Selling, General and Administrative Expenses
Three Months ended March 31,
-----------------------------------------------
2005 2004
% of Net % of Net
Amount Sales Amount Sales
------------ ------------ ---------- ----------
(dollars in millions)
Licensing...................... $ 31.5 44% $ 19.0 41%
Publishing..................... 3.6 16% 3.4 17%
Toys........................... 3.0 29% 5.6 10%
Corporate Overhead............. 5.6 N/A 4.1 N/A
------------- -----------
Total.......................... $ 43.7 42% $ 32.1 26%
============= ===========
Selling, general and administrative ("SG&A") expenses increased $11.6
million to $43.7 million in the first quarter of 2005, primarily due to the $10
million charge associated with the Stan Lee settlement recorded in the first
quarter of 2005. As a result of this charge, consolidated SG&A as a percentage
of net sales increased to 42% in the first quarter of 2005 as compared to 26% in
the first quarter of 2004. General corporate expenses increased $1.5 million in
the first quarter of 2005 principally due to increased legal fees.
The Company participates with Sony in the Joint Venture, whose purpose
is to pursue licensing opportunities, other than action figure and accessory
toys, relating to characters based upon movies and television shows featuring
Spider-Man and produced by Sony. The Company accounted for the activity of the
Joint Venture under the equity method until April 1, 2004. Effective April 1,
2004, the operations of the Joint Venture have been included in the accompanying
consolidated financial statements (within Licensing, above).
Operating Income
Three Months ended March 31,
---------------------------------------------
2005 2004
Amount Margin Amount Margin
----------- ---------- ---------- ----------
(dollars in millions)
Licensing $ 39.7 56% $ 35.9 77%
Publishing 8.9 40% 7.3 37%
Toys 4.4 42% 18.2 33%
Corporate Overhead (5.0) N/A (4.1) N/A
------------- -----------
Total $ 48.0 46% $ 57.3 47%
============= ===========
14
Operating income decreased $9.3 million to $48.0 million in the first
quarter of 2005, primarily due to the $10 million charge for the Stan Lee
settlement included in the Licensing segment. As a percentage of sales,
operating margins in the first quarter of 2005 remained consistent with the
first quarter of 2004. Excluding the impact of the additional charge for this
settlement, operating margins would have increased to 56% of net sales in the
first quarter of 2005 predominantly due to the shift towards a higher weighting
of the Licensing segment, which has the highest margins. Operating margins
increased in both the Publishing and Toy segments as a result of shifts in
product mix.
The Company had net interest income of $1.2 million in the first
quarter of 2005, compared to net interest expense of $3.9 million in the first
quarter of 2004. This was the result of the redemption of the Company's 12%
senior notes on June 15, 2004. Interest income was earned on the Company's cash
equivalents and short-term investments.
The Company's effective tax rate for the three months ended March 31,
2005 (38.4%) was higher than the Federal statutory rate due primarily to state
and local taxes offset by the effects of the consolidation of the Joint Venture,
and Federally tax-free investment returns. The Company completely utilized its
Federal net operating loss carryforwards in 2004. The Company retains various
state and local net operating loss carryforwards of approximately $318 million,
which will expire in various jurisdictions in years 2005 through 2023.
The Company is under examination by various state and local
jurisdictions, the results of which 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 cash
equivalents, short-term investments and cash flows from operations. The Company
anticipates that its primary uses for liquidity will be to conduct its business
and to continue to pursue its stock repurchase program.
Net cash provided by operating activities was $39.2 million for the
three-month period ended March 31, 2005 as compared to net cash provided by
operating activities of $44.5 million for the three-month period ended March 31,
2004. Operating cash flows in the first quarter of 2004 included the benefit of
NOL carryforwards, which were fully utilized as of March 31, 2004.
At March 31, 2005, the Company had working capital of $184.4 million.
During the first quarter of 2004, the Company had outstanding senior
notes due June 15, 2009 which bore interest at 12% per annum. The Company
redeemed all of such notes on June 15, 2004 with available cash resources.
The Company maintains a credit facility with HSBC Bank USA ("HSBC
Credit Facility") to provide for a $15.0 million revolving credit facility and a
$15.0 million letter of credit facility. As of March 31, 2005, $0.3 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 tangible 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.
On July 12, 2004, the Company announced a $100 million common stock
repurchase program. Pursuant to the authorization, the Company may at its
option, purchase shares of its common stock from time to time in the open market
or through privately negotiated transactions through the earlier of January 2006
or such time as $100 million of the Company's shares have been repurchased under
the program. The Company's largest stockholder, Vice Chairman and Chief
Executive Officer, Isaac Perlmutter, and its Chief Creative Officer and the
Chairman and Chief Executive Officer of Marvel Studios, Avi Arad, have each
agreed not to sell any shares while the repurchase program is in place. Through
March 31, 2005, the Company repurchased 4.3 million shares of its common stock
under the repurchase program, at an aggregate purchase price of $58.0 million.
15
The Company believes that its cash and cash equivalents, short-term
investments and cash flow from operations, and other sources of liquidity, will
be sufficient for the Company to conduct its business and to continue to pursue
its stock repurchase program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has foreign operations in Hong Kong, the UK and Japan. In
the normal course of business, these operations are exposed to fluctuations in
currency values. Management believes that the impact of currency fluctuations do
not represent a significant risk. The Company does not enter into derivative
financial instruments in the normal course of business, nor are such instruments
used for speculative purposes.
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 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 March 31, 2005 that have
materially affected, or are reasonably likely to materially affect, its internal
controls over financial reporting.
16
PART II. OTHER INFORMATION.
---------------------------
17
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.
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 in New York State Supreme Court, County of New York,
alleging that the Company breached its own Terms of Sale Agreement in connection
with the sale of comic books to members of the purported class, breached its
obligation of good faith and fair dealing(s), fraudulently induced plaintiff and
other members of the purported class to buy comics and unjustly enriched itself.
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
the Company'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, the Company 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 lifetime employment
agreement. Mr. Lee claimed the right to a 10% profit participation in connection
with all film and television productions that utilize Marvel characters. On
April 20, 2005, the Company and Mr. Lee settled all disputes related to all
prior and future periods in exchange for a lump sum payment due May 2005. The
results of operations for the quarter ended March 31, 2005 included a charge of
$10 million to increase previously established reserves, which were established
for amounts Mr. Lee claimed to be owed for prior periods.
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. 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 was settled between the Company
and Fox in February 2003. The Company filed its answer, denying all material
allegations of Tribune's complaint and asserting counterclaims. The action is in
the discovery phase and no trial date has been set.
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 reports on Form 8-K during the
quarter ended March 31, 2005:
18
1. Current Report on Form 8-K filed January 27, 2005, reporting
Item 5.02.
2. Current Report on Form 8-K filed March 11, 2005, reporting
Items 2.02 and 9.01.
19
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: April 28, 2005 By: /s/ Isaac Perlmutter
--------------------------------
Isaac Perlmutter
Chief Executive Officer
Dated: April 28, 2005 By: /s/ Kenneth P. West
----------------------------------
Kenneth P. West
Chief Financial Officer
20