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, 1999
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.
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(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
incorporation or organization) Identification No.)
387 Park Avenue South, New York, NY 10016
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(Address of principal executive offices) (Zip Code)
212-696-0808
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(Registrant's telephone number, including area code)
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(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
--- ---
At April 26, 1999, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 33,532,127 shares of Common Stock.
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1999 1998
---- ----
ASSETS (unaudited)
Current assets
Cash and cash equivalents $101,609 $43,691
Accounts receivable, net 47,968 50,312
Inventories, net 27,386 32,598
Income tax receivable 7,396 7,396
Deferred income taxes, net 538 538
Assets held for resale - 26,000
Deferred financing costs 1,104 8,281
Prepaid expenses and other 5,895 3,768
------------- ---------------
Total current assets 191,896 172,584
Goodwill and other intangibles, net 481,548 487,731
Molds, tools and equipment, net 16,500 15,548
Product and package design costs, net 6,680 5,909
Deferred charges and other assets 6,438 5,053
Deferred financing costs 9,844 -
Deferred income taxes, net 3,079 3,079
------------- ---------------
Total assets $715,985 $689,904
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $7,641 $7,294
Accrued expenses and other 51,265 70,672
Administrative claims payable 17,889 19,914
Unsecured creditors payable 8,189 8,096
Bridge loan payable - 200,000
------------- ---------------
Total current liabilities 84,984 305,976
------------- ---------------
Long-term liabilities
Senior Notes 250,000 -
Panini liability 27,000 27,000
Deferred income taxes 924 924
------------- ---------------
Total long-term liabilites 277,924 27,924
------------- ---------------
Total liabilities 362,908 333,900
Redeemable cumulative convertible
exchangeable preferred stock 175,823 172,380
Stockholders' equity
Common stock 408 408
Additional paid-in capital 215,035 215,035
Retained earnings (5,234) 1,136
------------- ---------------
Total stockholders' equity before treasury stock 210,209 216,579
------------- ---------------
Treasury stock (32,955) (32,955)
------------- ---------------
Total stockholders' equity 177,254 183,624
------------- ---------------
Total liabilities, redeemable preferred stock and
stockholders' equity $715,985 $689,904
============= ===============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months
Ended March 31,
1999 1998
---- ----
Net sales $75,258 $42,641
Cost of sales 32,650 23,233
------------- --------------
Gross profit 42,608 19,408
Operating expenses:
Selling, general & administrative 23,802 14,222
Depreciation & amortization 3,446 3,138
Amortization of goodwill and other intangibles 6,292 166
------------- --------------
Total operating expenses 33,540 17,526
------------- --------------
Operating income 9,068 1,882
Interest expense, net 7,350 67
------------- --------------
Income before provision for income taxes 1,718 1,815
Income tax provision 3,114 739
------------- --------------
(Loss) income before extraordinary expense (1,396) 1,076
------------- --------------
Extraordinary expense, net of tax benefit of $1,021 1,531 -
------------- --------------
Net (loss) income ($2,927) $1,076
------------- --------------
Less: preferred dividend requirement 3,443 -
------------- --------------
Net (loss) income attributable to Common Stock ($6,370) $1,076
============= ==============
Basic and dilutive earnings per share:
(Loss) income from continuing operations attributable to Common Stock ($0.14) $0.04
Extraordinary expense ($0.05) -
------------- --------------
(Loss)income attributable to Common Stock ($0.19) $0.04
============= ==============
Weighted average number of common and common
equivalent shares outstanding 33,532 27,746
============= ==============
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,
1999 1998
---- ----
Cash flows from operating activities:
Net (loss) income ($2,927) $1,076
------------- -------------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation & amortization 9,739 3,304
Amortization of bridge loan and bond offering costs 1,821 -
Extraordinary expense, net 1,531 -
Change in assets & liabilities:
Decrease in accounts receivable 2,344 5,358
Decrease in inventories 5,212 5,416
Increase in prepaid expenses and other (2,127) (4,110)
Increase in deferred charges and other assets (1,385) -
Increase (decrease) in accounts payable 347 (923)
Decrease in accrued expenses and other (15,667) (12,898)
Increase in unsecured creditors payable 93 -
Decrease in administrative claims payable (2,025) -
------------- -------------
Total adjustments (117) (3,853)
------------- -------------
Net cash used in operating activities (3,044) (2,777)
------------- -------------
Cash flows from investing activities:
Purchases of molds, tools and equipment (3,398) (3,501)
Expenditures for product and package design costs (1,771) (1,226)
Other investments (109) (968)
Net proceeds from the sale of Fleer assets 23,326 -
Net proceeds from the sale of Colorforms assets - 2,786
------------- -------------
Net cash provided by (used in) investing activities 18,048 (2,909)
------------- -------------
Cash flows from financing activities:
Net proceeds from Senior Notes offering 239,797 -
Repayment of Bridge Facility (200,000) -
Insurance recovery 3,117 -
Net borrowings under credit agreement - 6,000
------------- -------------
Net cash provided by financing activities 42,914 6,000
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Net increase in cash and cash equivalents 57,918 314
------------- -------------
Cash and cash equivalents, at beginning of period 43,691 7,596
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Cash and cash equivalents, at end of period $101,609 $7,910
------------- -------------
Supplemental disclosures of cash flow information
Interest paid during the period $5,320 $221
Income taxes, net paid during the period $1,272 $1,951
Non-cash transaction
Preferred stock dividends $3,443 -
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
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of
Marvel Enterprises, Inc. (formerly Toy Biz, 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 Statement of Operations and the Condensed Consolidated
Statement of Cash Flows for the three months ended March 31, 1998 do not include
operations of Marvel Entertainment Group, Inc. ("MEG"), which was acquired on
October 1, 1998 (See Note 2). The Condensed Consolidated Statement of Operations
and the Condensed Consolidated Statement of Cash Flow for the three months ended
March 31, 1999 are not necessarily indicative of those for the full year ending
December 31, 1999. For further information on the Company's historical financial
results, refer to the consolidated financial statements and footnotes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and the amendment to that report on Form 10-K/A, dated April
1, 1999, as filed with the Securities and Exchange Commission.
2. ACQUISITION OF MARVEL
On October 1, 1998, pursuant to the Fourth Amended Joint Plan of
Reorganization (the "Plan") proposed by the senior secured lenders of MEG and
Toy Biz, Inc., MEG became a wholly owned subsidiary of Toy Biz, Inc. The
acquisition of MEG was accounted for using the purchase method of accounting.
The results of the acquired business are included in the Company's consolidated
results of operations as of October 1, 1998. Toy Biz, Inc. also changed its name
to Marvel Enterprises, Inc. on that date.
The following unaudited pro forma consolidated financial information gives
effect to the acquisition as if it occurred at the beginning of the period
presented. These pro forma results include certain adjustments, such as
increased amortization and interest expense, and do not reflect MEG's
reorganization items and are not necessarily indicative of the results that
would have been achieved had the acquisition occurred at the beginning of the
period. This financial information also does not include the results of
operations of Fleer/Skybox International ("Fleer"), MEG's subsidiary engaged in
the sale of sports and entertainment trading cards, or Panini S.p.A. ("Panini"),
MEG's Italian subsidiary engaged in the children's activity sticker and adhesive
paper businesses, during the three months ended March 31, 1998 (see note 3).
Three Months Ended
March 31, 1998
--------------
(in thousands,
except per share data)
Net sales $58,732
Net loss (12,489)
Preferred dividend 3,443
Net loss per basic/dilutive attributable to
common shares ($0.48)
5
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. ASSETS HELD FOR RESALE
On February 11, 1999, the Company sold substantially all of the assets of
Fleer for approximately $22.9 million, in cash, net of related fees and closing
adjustments. Proceeds from this transaction were partially used to repay the
bridge facility (See note 5) with the remainder used for working capital
purposes. The Company's results of operations for the periods presented do not
include the results of operations of Fleer.
The Company intends to dispose of Panini. The Company has recorded a $27.0
million long-term liability equal to its guarantee of Panini's debt. The Company
anticipates disposing of Panini in 1999. The Company's results of operations for
the periods presented do not include the results of operations of Panini.
6
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
4. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
March 31, December 31,
Description 1999 1998
----------- ---- ----
Accounts Receivable, net:
Accounts receivable $71,308 $75,235
Less allowances (23,340) (24,923)
-------------------- ---------------------
Total $47,968 $50,312
==================== =====================
Inventories, net:
Toys:
Finished goods $19,911 $24,685
Component parts, raw materials and
work-in-process 4,568 3,977
-------------------- ---------------------
Total Toys $24,479 $28,662
Publishing:
Finished goods $747 $754
Component parts, raw materials and
work-in-process 2,160 3,182
-------------------- ---------------------
Total Publishing $2,907 $3,936
-------------------- ---------------------
Total $27,386 $32,598
==================== =====================
Goodwill and other intangibles, net:
Goodwill $492,424 $492,424
Patents and other intangibles 3,835 3,726
Less accumulated amortization (14,711) (8,419)
-------------------- ---------------------
Total $481,548 $487,731
==================== =====================
Accrued expenses and other:
Accrued advertising costs $3,791 $8,183
Accrued royalties 8,868 9,584
Inventory purchases 4,027 7,389
Deferred financing costs - 4,000
Income taxes payable 5,894 4,709
Deferred income taxes payable 2,693 2,693
Litigation trusts accrual 1,198 1,922
Other accrued expenses 24,794 32,192
-------------------- ----------------------
Total $51,265 $70,672
==================== =====================
7
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. DEBT FINANCING
To partially finance the acquisition of MEG, the Company obtained a $200.0
million loan (the "Bridge Facility") from UBS AG, Stamford Branch ("UBS AG") on
October 1, 1998. The Bridge Facility bore interest at either the bank's base
rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus the
Federal Funds Rate) plus 5.50% or at the Eurodollar rate plus 6.50%.
On September 28, 1998, the Company and UBS AG entered an agreement for a
$50.0 million revolving credit facility ("UBS Credit Facility"). The UBS Credit
Facility bore interest at either the bank's base rate (defined as the higher of
the prime rate or the sum of 1/2 of 1% plus the Federal Funds Rate) plus a
margin ranging from 0.75% to 1.25% depending on the Company's financial
performance or at the Eurodollar rate plus a margin ranging from 1.75% to 2.25%
depending on the Company's financial performance. The UBS Credit Facility
required the Company to pay a commitment fee of 0.5% per annum on the average
daily unused portion of the facility. There were no borrowings under the UBS
Credit Facility.
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes (the "Senior Notes") in a private placement exempt from
registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.8 million were used to pay all
outstanding balances under the Bridge Facility and for working capital. The
Senior Notes are due June 15, 2009 and bear interest at 12% per annum. The
Senior Notes may be redeemed beginning June 15, 2004 for a redemption price of
106% of the principal amount, plus accrued interest. The redemption price
decreases 2% each year after 2004 and will be 100% of the principal amount, plus
accrued interest, beginning on June 15, 2007. In addition, 35% of the Senior
Notes may, under certain circumstances, be redeemed before June 15, 2002 at 112%
of the principal amount, plus accrued interest. Principal and interest on the
Senior Notes are guaranteed on a senior basis jointly and severally by each of
the Company's domestic subsidiaries. The Company is required to offer to
exchange the Senior Notes, which are not registered under the Act, for
registered notes having substantially the same terms. If the Company fails to
comply with this requirement by August 25, 1999, the interest rate on the Senior
Notes will increase 0.5% per annum until such time that the Senior Notes are
generally freely transferable.
In February 1999, in connection with the repayment of the Bridge Facility
and the termination of the UBS Credit Facility, the Company recorded an
extraordinary charge of approximately $1.5 million, net of tax benefit for the
write-off of deferred financing costs associated with these two facilities.
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered an
agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit
Facility"). The Citibank Credit Facility bears interest at either the bank's
base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on
the Company's financial performance or at the Eurodollar rate plus a margin
ranging from 2.25% to 2.75% depending on the Company's financial performance.
The Citibank Credit Facility requires the Company to pay a commitment fee of
0.625% per annum on the average daily unused portion of the facility unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount outstanding above $20.0 million. The Company has
not borrowed under the Citibank Credit Facility. The amount available under this
facility is reduced by the amount of letters of credit outstanding, which is
approximately $1.8 million as of April 26, 1999. The Citibank Credit Facility is
secured by a lien on all of the Company's inventory and receivables.
8
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. SHARES OUTSTANDING
The Condensed Consolidated Statement of Operations presents operations of
the Company for the three months ended March 31, 1999. During that period the
Company had 33,532,127 shares of common stock outstanding, excluding treasury
shares (assuming no conversion of the 8% cumulative convertible exchangable
preferred stock ("8% Preferred Stock") and no exercise of any warrants or
employee stock options); assuming conversion of all of the 8% Preferred Stock,
the number of shares outstanding at March 31, 1999 would have been 51,800,641;
assuming conversion of all of the 8% Preferred Stock and exercise of all
warrants and employee stock options, the number of shares would have been
71,688,641.
7. SEGMENT REPORTING
Following the Company's acquisition of MEG, the Company realigned its
business into four divisions: Licensing, Publishing, Toys ("Toy Biz") and
Corporate.
The Marvel Licensing division licenses the Marvel characters for use in
television programs, motion pictures, destination-based entertainment (such as
theme parks), on-line media, consumer products and promotions.
The Marvel Publishing division publishes comic books and paperbacks based
upon the Company's library of over 3,500 characters as well as certain licensed
material.
The Toy Biz division designs, develops, markets and distributes both
innovative and traditional toys worldwide. The toy products fall into three
categories: toys based on the Company's characters, proprietary toys designed
and developed by the Company and toys based on properties licensed to the
Company by third parties.
The Corporate division monitors the three operating divisions, manages
external debt and equity holders, outlines business strategy and generally
conducts the corporate governance functions of the Company.
Set forth below is certain operating information for the divisions of the
Company.
Three months ended March 31, 1999
Licensing Publishing Toy Biz Corporate Total
--------- ---------- ------- --------- -----
(in thousands)
Net Sales $15,294 $10,400 $49,564 $ - $75,258
Gross Profit 15,163 4,586 22,859 - 42,608
Operating Income (Loss) 8,327 1,241 2,100 (2,600) 9,068
EBITDA(1) 13,325 2,414 5,668 (2,600) 18,807
9
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(unaudited)
Three months ended March 31, 1998
Licensing Publishing Toy Biz Corporate Total
--------- ---------- ------- --------- -----
(in thousands)
Net Sales $ - $ - $42,641 $ - $42,641
Gross Profit - - 19,408 - 19,408
Operating Income - - 1,882 - 1,882
EBITDA(1) - - 5,186 - 5,186
(1) "EBITDA" is defined as earnings before extraordinary items, interest
expense, taxes, depreciation and amortization. EBITDA does not represent net
income or cash flow from operations as those terms are defined by generally
accepted accounting principles and does not necessarily indicate whether cash
flow will be sufficient to fund cash needs.
8. CONTINGENCIES
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.
Spider-Man Litigation. The Company's MEG and Marvel Characters, Inc.
subsidiaries (collectively, the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character in the Superior Court of the
State of California for the County of Los Angeles (the "Superior Court"), to
which Metro-Goldwyn Mayer Studios Inc. and two of its affiliates ("MGM"),
Columbia Tristar Home Video and related entities ("Sony"), Viacom International
Inc. ("Viacom") and others were also parties. In February 1999, the Superior
Court granted summary judgement to the Marvel Parties and dismissed MGM's
claims. In March 1999, MGM, Sony and the Marvel Parties settled all remaining
claims among themselves. In April 1999 the Superior Court ruled, following the
completion of a trial on the claims asserted by Viacom, that Viacom had no
rights in a motion picture based on the Spider-Man character.
Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the Central
District of California against New Line Cinema Corporation, Time Warner
Companies, Inc., the Company, MEG and Marvel Characters, Inc., and others. The
complaint alleges that the motion picture Blade, produced and distributed by New
Line pursuant to an agreement with MEG, as well as the Company's sale of related
action figure toys, infringes Wolfman's claimed copyrights and trademarks as the
author of the original stories featuring the Blade and Deacon Frost characters
(collectively, the "Work") and that Wolfman created the Work as an independent
contractor engaged by MEG. The relief sought by complaint includes a declaration
that the defendants have infringed Wolfman's copyrights, compensatory and
punitive damages, an injunction and various other forms of equitable relief. The
Company believes that each component of the Work was created for MEG as a "work
for hire" within the meaning of the copyright law and believes that all of
Wolfman's claims are without merit and intends to defend the action vigorously
if the action is allowed to proceed.
Prior to commencing his action in California, Wolfman had filed a proof of
claim in the bankruptcy cases of MEG and Marvel Characters, Inc. asserting
ownership rights to the Blade and Deacon Frost characters, among others. On
February 24, 1999, Wolfman and the Company entered into a stipulation pursuant
to which the United States District Court for the District of Delaware will
determine
10
the issue of whether Wolfman or Marvel Characters, Inc. is the rightful owner of
Blade and Deacon Frost and a number of other characters. In the context of this
proceeding, the Company has sought a declaration that Marvel Characters, Inc.,
not Wolfman, is the lawful owner of the rights claimed by Wolfman.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material to
the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows, although there can be no
assurance.
11
MANAGEMENT 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 under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could cause actual results to differ materially from those contained
in forward-looking statements made in this form 10-Q Quarterly Report and in
oral statements made by authorized officers of the Company. 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, or on behalf of, the Company: (i) the Company's potential
need for additional financing, (ii) the Company's potential inability to
integrate Toy Biz's operations with those of MEG, (iii) the Company's potential
inability to successfully implement its business strategy, (iv) a decrease in
the level of media exposure or popularity of the Company's characters resulting
in declining revenues from products based on those characters, (v) the lack of
commercial success of properties owned by major entertainment companies that
have granted the Company toy licenses, (vi) the lack of consumer acceptance of
new product introductions, (vii) the imposition of quotas or tariffs on toys
manufactured in China as a result of a deterioration in trade relations between
the U.S. and China, (viii) changing consumer preferences, (ix) production delays
or shortfalls, (x) continued pressure by certain of the Company's major retail
customers to significantly reduce their toy inventory levels, (xi) the impact of
competition and changes to the competitive environment on the Company's products
and services, (xii) changes in technology (including uncertainties associated
with Year 2000 compliance), (xiii) changes in governmental regulation, and (xiv)
other factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
General
The Company operates in the licensing, comic book publishing and toy
businesses. The Company owns the copyrights to over 3,500 fictional characters,
including Spider-Man, X-Men, Captain America, Fantastic Four and The Incredible
Hulk. The Company operates through the following four divisions:
The Marvel Licensing division licenses the Marvel characters for use in
television programs, motion pictures, destination-based entertainment (such as
theme parks), on-line media, consumer products and promotions.
The Marvel Publishing division publishes comic books and paperbacks based
upon the Company's library of over 3,500 characters as well as certain licensed
material.
The Toy Biz division designs, develops, markets and distributes both
innovative and traditional toys worldwide. The toy products fall into three
categories: toys based on the Company's characters, proprietary toys designed
and developed by the Company and toys based on properties licensed to the
Company by third parties.
The Corporate division monitors the three operating divisions, manages
external debt and equity holders, outlines business strategy and generally
conducts the corporate governance functions of the Company.
The Company acquired Fleer and Panini in connection with the acquisition of
MEG on October 1, 1998. The Company sold Fleer in February 1999. The Company
does not intend to continue operating Panini. The results of operations of Fleer
and Panini are not included in the Company's consolidated results of operations
for any period.
12
The Condensed Consolidated Statements of Operations and Cash Flows for the
three months ended March 31, 1998 do not include the Licensing and Publishing
divisions which were acquired on October 1, 1998.
Results of Operations
Three months ended March 31, 1999 compared with the three months ended March 31,
1998
The Company's net sales increased 76% from approximately $42.6 million in
the first quarter of 1998 to approximately $75.3 million in the first quarter of
1999. The increase is due primarily to the inclusion of approximately $15.3
million in sales from the Licensing division and approximately $10.4 million in
sales from the Publishing division in the 1999 period. A significant portion of
the licensing revenue in the first quarter is attributable to the license of the
Spider-Man character to Sony Pictures Entertainment. The Licensing and
Publishing divisions were acquired on October 1, 1998 and therefore were not
included in the 1998 period. Toy Biz sales increased by approximately $6.9
million from 1998 to 1999 primarily due to sales of World Championship Wrestling
("WCW") action figures, a product line that was introduced in 1999, partially
offset by a decline in the sales of Marvel-related product and large girls dolls
in the 1999 period.
Gross profit increased from approximately $19.4 million in the first
quarter of 1998 to approximately $42.6 million in the first quarter of 1999. The
inclusion of the Licensing and Publishing divisions in 1999 accounted for
approximately $15.2 million and approximately $4.5 million, respectively, of the
increase. Gross profit from the Toy Biz division accounted for approximately
$3.5 million of the increase. Gross profit as a percentage of net sales
increased from approximately 46% in the 1998 period to approximately 57% in the
1999 period. The Licensing and Publishing divisions produced gross margins of
approximately 99% and 44%, respectively, while the gross profit margin for the
Toy Biz division remained constant at approximately 46% for both periods.
Selling, general and administrative expenses increased 67% to approximately
$23.8 million or approximately 32% of net sales in the first quarter of 1999
from approximately $14.2 million or approximately 33% of net sales in the first
quarter of 1998. The Licensing, Publishing and Corporate divisions collectively
accounted for approximately $6.6 million in selling, general and administrative
expense increases. An increase of approximately $3.0 million in expenses for the
Toy Biz division resulted primarily from increased royalties for the WCW product
sales and additional advertising expenses to support Toy Biz' new mini-doll
category and WCW product lines in the 1999 period.
Amortization of goodwill increased to approximately $6.3 million in the
first quarter of 1999 from approximately $200,000 in the first quarter of 1998
due to the goodwill created in the MEG acquisition in October 1998 which is
amortized over 20 years.
Net interest expense of approximately $7.4 million was recorded in the
first quarter of 1999 which consisted of approximately $5.4 million in interest
and deferred financing costs for the Bridge Facility, and approximately $2.9
million in interest and deferred financing costs for the Senior Notes, offset by
approximately $900,000 in interest and other income.
In connection with the repayment of the Bridge Facility in 1999, the
Company recorded an extraordinary charge of approximately $1.5 million, net of
tax benefit, for the write-off of the Bridge Facility deferred financing costs.
The Company's effective tax rate for the quarter was higher than the
statutory rate due primarily to non-deductible goodwill, other intangibles and
state income taxes. The Company expects this to continue. The Company has Net
Operating Loss Carryforwards ("NOLs") of $32.7 million related to the
acquisition of MEG. Benefits from the NOLs, if realized, will be a reduction in
goodwill in the period realized.
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Liquidity and Capital Resources
Net cash used in operating activities remained relatively constant from the
first quarter of 1998 to the first quarter of 1999 amounting to approximately
$2.8 million and $3.0 million, respectively.
On February 11, 1999, the Company sold substantially all of the assets of
Fleer, for approximately $22.9 million, in cash, net of related fees and closing
adjustments. Proceeds from this transaction were partially used to repay the
Bridge Facility with the remainder used for working capital purposes.
To partially finance the acquisition of MEG, the Company obtained a $200.0
million Bridge Facility from UBS AG on October 1, 1998. The Bridge Facility bore
interest at either the bank's base rate (defined as the higher of the prime rate
or the sum of 1/2 of 1% plus the Federal Funds Rate) plus 5.50% or at the
Eurodollar rate plus 6.50%.
On September 28, 1998, the Company and UBS AG entered an agreement for the
$50.0 million UBS Credit Facility. The UBS Credit Facility bore interest at
either the bank's base rate (defined as the higher of the prime rate or the sum
of 1/2 of 1% plus the Federal Funds Rate) plus a margin ranging from 0.75% to
1.25% depending on the Company's financial performance or at the Eurodollar rate
plus a margin ranging from 1.75% to 2.25% depending on the Company's financial
performance. The UBS Credit Facility required the Company to pay a commitment
fee of 0.5% per annum on the average daily unused portion of the facility. There
were no borrowings under the UBS Credit Facility. The amount available under
this facility was reduced by the amount of letters of credit outstanding.
On February 25, 1999, the Company completed a $250.0 million Senior Notes
offering in a private placement exempt from registration under the Act pursuant
to Rule 144A under the Act. Net proceeds of approximately $239.8 million were
used to pay all outstanding balances under the Bridge Facility and for working
capital. The Senior Notes are due June 15, 2009 and bear interest at 12% per
annum. The Senior Notes may be redeemed beginning June 15, 2004 for a redemption
price of 106% of the principal amount, plus accrued interest. The redemption
price decreases 2% each year after 2004 and will be 100% of the principal
amount, plus accrued interest, beginning on June 15, 2007. In addition, 35% of
the Senior Notes may, under certain circumstances, be redeemed before June 15,
2002 at 112% of the principal amount, plus accrued interest. Principal and
interest on the Senior Notes are guaranteed on a senior basis jointly and
severally by each of the Company's domestic subsidiaries. The Company is
required to offer to exchange the Senior Notes, which are not registered under
the Act, for registered notes having substantially the same terms. If the
Company fails to comply with this requirement by August 25, 1999, the interest
rate on the Senior Notes will increase 0.5% per annum until such time that the
Senior Notes are generally freely transferable.
On April 1, 1999, the Company and Citibank entered an agreement for a $60.0
million Citibank Credit Facility. The Citibank Credit Facility bears interest at
either the bank's base rate (defined as the higher of the prime rate or the sum
of 1/2 of 1% plus the Federal Funds Rate) plus a margin ranging from 0.75% to
1.25% depending on the Company's financial performance or at the Eurodollar rate
plus a margin ranging from 2.25% to 2.75% depending on the Company's financial
performance. The Citibank Credit Facility requires the Company to pay a
commitment fee of 0.625% per annum on the average daily unused portion of the
facility unless there is at least $20.0 million outstanding borrowings in which
case the rate is 0.50% per annum for the amount outstanding above $20.0 million.
The Company has not borrowed under the Citibank Credit Facility. The amount
available under this facility is reduced by the amount of letters of credit
outstanding, which is approximately $1.8 million as of April 26, 1999. The
Citibank Credit Facility is secured by a lien on all of the Company's inventory
and receivables.
The Company believes that it has sufficient funds available from cash and
cash equivalents, operating activities and borrowings under the Citibank Credit
Facility to meet peak working capital needs and capital expenditure
requirements.
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Year 2000
Through March 31, 1999, the Company incurred Year 2000 ("Y2K") conversion
costs of approximately $1.5 million, primarily for the Toy Biz division, and the
Company expects to incur an additional $1 million for the Company in 1999. The
Company is utilizing both internal and external resources to upgrade or replace
the Company's software for year Y2K compliance. The Company anticipates
completing the Y2K project for the Company by October 31, 1999.
During MEG's bankruptcy, the Licensing and Publishing divisions had
received only nominal Y2K conversion attention. The Company has placed all its
divisions on an accelerated program and has enlisted full time external project
management resources to supplement the Company's efforts.
A weekly steering committee now monitors the Y2K program against its
primary goal of critical system remediation across three key areas: 1)
Enterprise software for basic accounting and order execution; 2) legacy and
infrastructure remediation (i.e. remaining systems, PCs, telephones); and 3)
third party (customers, vendors) status and contingency planning. A quality
assurance program will be initiated in the third quarter.
The cost of the project and the date on which the Company will complete the
Y2K modifications are only estimates. The Company is currently not aware of any
material issues of Y2K non-compliance with its customers and suppliers. The
worst-case scenarios would be manual performance of all accounting functions and
the loss of relationships with major customers because of the inability of the
Company's computers to interface with theirs. The Company has not yet developed
a contingency plan to assess the likelihood of, and to address, the worst-case
scenarios. If the Y2K project is not completed on a timely basis, or if the
Company's customers or suppliers fail to address all the Y2K issues, it could
have a material adverse impact on the Company's operations. The Company
currently believes that the Y2K issue will not pose significant operational
problems for the Company's computer systems.
PART II. Other Information.
Item 1. Legal Proceedings
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.
Spider-Man Litigation. The Marvel Parties have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character in the Superior Court of the
State of California for the County of Los Angeles, to which MGM, Sony, Viacom
and others were also parties. In February 1999, the Superior Court granted
summary judgement to the Marvel Parties and dismissed MGM's claims. In March
1999, MGM, Sony and the Marvel Parties settled all remaining claims among
themselves. In April 1999 the Superior Court ruled, following the completion of
a trial on the claims asserted by Viacom, that Viacom had no rights in the
Spider-Man character.
Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the Central
District of California against New Line Cinema Corporation, Time Warner
Companies, Inc., the Company, MEG and Marvel Characters, Inc., and others. The
complaint alleges that the motion picture Blade, produced and distributed by New
Line pursuant to an agreement with MEG, as well as the Company's sale of action
figure toys, infringes Wolfman's claimed copyrights and trademarks as the author
of the Work and that Wolfman created the Work as an independent contractor
engaged by MEG. The relief sought by complaint includes a declaration that the
defendants have infringed Wolfman's copyrights, compensatory and punitive
damages, an injunction and various other
15
forms of equitable relief. The Company believes that each component of the Work
was created for MEG as a "work for hire" within the meaning of the copyright law
and believes that all of Wolfman's claims are without merit and intends to
defend the action vigorously if the action is allowed to proceed.
Prior to commencing his action in California, Wolfman had filed a proof of
claim in the bankruptcy cases of MEG and Marvel Characters, Inc. asserting
ownership rights to the Blade and Deacon Frost characters, among others. On
February 24, 1999, Wolfman and the Company entered into a stipulation pursuant
to which the United States District Court for the District of Delaware will
determine the issue of whether Wolfman or Marvel Characters, Inc. is the
rightful owner of Blade and Deacon Frost and a number of other characters. In
the context of this proceeding, the Company has sought a declaration that Marvel
Characters, Inc., not Wolfman, is the lawful owner of the rights claimed by
Wolfman.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material to
the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows, although there can be no
assurance.
Item 2. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
Exhibits No.
-------------
Exhibit 10.1 Revolving Credit Facility between the Company
and Citibank N.A. dated as of April 1, 1999.
Exhibit 10.2 Security Agreement, dated as of April 1, 1999,
among the Company, the subsidiary guarantors
party thereto and Citibank N.A., as collateral
agent.
Exhibit 12 Statement re: Computation of Ratios dated as
of May 31, 1999.
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K.
The Registrant filed the following reports on Form 8-K during the
quarter ended March 31, 1999:
1. Current Report on Form 8-K dated February 4, 1999 and filed
with the Commission on February 4, 1999, including Items 5
and 7.
2. Current Report on Form 8-K dated February 23, 1999 and filed
with the Commission on February 23, 1999, including Items 5
and 7 and including the following financial statements: (i)
unaudited pro forma consolidated financial statements and
the notes thereto for the year ended December 31, 1998 and
(ii) audited consolidated financial statements and the notes
thereto for the three year period ended December 31, 1998.
3. Current Report on Form 8-K dated February 25, 1999 and filed
with the Commission on February 25, 1999, including Items 5
and 7.
4. Current Report on Form 8-K dated February 25, 1999 and filed
with the Commission on March 10, 1999, including Items 5 and
7 and including the following financial statements: audited
consolidated financial statements and the notes thereto for
the three year period ended December 31, 1998.
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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, thereto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Dated: May 7, 1999 By: /s/ Robert S. Hull
--------------------
Robert S. Hull
Senior Vice President and
Chief Financial Officer
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