UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001
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.)
10 East 40th Street, New York, NY 10016
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(Address of principal executive offices) (Zip Code)
917-472-2100
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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 August 1, 2001, the number of outstanding shares of the registrant's
common stock, par value $.01 per share, was 34,464,536 shares of Common Stock.
PART I. Financial Information
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2001 2000
----------- ------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents..................... $18,158 $22,803
Accounts receivable, net...................... 29,392 39,236
Inventories, net.............................. 25,425 42,780
Income tax receivable......................... 334 334
Deferred financing costs...................... 1,344 1,372
Prepaid expenses and other.................... 9,057 6,918
----------- -----------
Total current assets...................... 83,710 113,443
Restricted cash............................... 3,000 ---
Goodwill and other intangibles, net............ 403,740 415,582
Molds, tools and equipment, net................ 8,530 7,005
Product and package design costs, net.......... 2,289 1,603
Income tax receivable.......................... --- 1,327
Deferred charges and other assets.............. 7,495 8,343
Deferred financing costs....................... 7,360 7,981
----------- -----------
Total assets.............................. $516,124 $555,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.............................. $4,470 $18,586
Accrued expenses and other.................... 31,957 38,673
Administrative claims payable................. 7,033 7,444
Unsecured creditors payable................... 5,173 7,000
----------- -----------
Total current liabilities................. 48,633 71,703
----------- -----------
Long-term liabilities
Senior notes.................................. 250,000 250,000
----------- -----------
Total long-term liabilities............... 250,000 250,000
----------- -----------
Total liabilities......................... 298,633 321,703
----------- -----------
Redeemable cumulative convertible
exchangeable preferred stock.......... 203,149 202,185
----------- -----------
Stockholders' equity
Common stock.................................. 418 411
Additional paid-in capital.................... 223,049 216,068
Retained deficit.............................. (176,170) (152,128)
----------- -----------
Total stockholders' equity before treasury 47,297 64,351
stock.................................
----------- -----------
Treasury stock................................ (32,955) (32,955)
Total stockholders' equity............... 14,342 31,396
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity.............. $516,124 $555,284
=========== ===========
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 Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
---------- ---------- --------- ----------
Net sales....................................... $ 45,932 $51,041 $88,604 $94,229
Cost of sales................................... 22,403 24,328 46,726 46,677
---------- ---------- --------- ----------
Gross profit.................................... 23,529 26,713 41,878 47,552
---------- --------- --------- ----------
Operating expenses:
Selling, general and administrative......... 13,518 19,329 25,715 40,135
Pre-acquisition litigation charge........... 3,000 -- 3,000 --
Depreciation and amortization............... 1,000 3,778 1,802 7,097
Amortization of goodwill and other
intangibles................................. 5,921 5,990 11,842 11,982
---------- --------- --------- ----------
Total operating expenses......................... 23,439 29,097 42,359 59,214
---------- --------- --------- ----------
Operating income (loss).......................... 90 (2,384) (481) (11,662)
Interest expense, net............................ 7,760 7,216 15,627 14,416
Loss before (benefit)provision for income --------- --------- --------- ---------
taxes............................................ (7,670) (9,600) (16,108) (26,078)
Income tax (benefit)provision.................... (349) 724 (195) 893
--------- --------- --------- ---------
Loss before equity in net loss of joint venture.. (7,321) (10,324) (15,913) (26,971)
Equity in net loss of joint venture.............. (82) (263) (178) (263)
--------- --------- --------- ---------
Net loss......................................... (7,403) (10,587) (16,091) (27,234)
Less: preferred dividend requirement............. 3,983 3,810 7,951 7,545
--------- --------- --------- ---------
Net loss attributable to Common Stock............ ($11,386) ($14,397) ($24,042) ($34,779)
-------- --------- --------- ---------
Basic and dilutive earnings per share:
Loss attributable to Common Stock............. ($0.33) ($0.43) ($0.71) ($1.03)
Weighted average number of basic and diluted
shares outstanding............................... 34,163 33,651 33,992 33,644
-------- --------- --------- ---------
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)
Six Months
Ended June 30,
2001 2000
---------- ----------
Cash flows from operating activities:
Net loss............................................... ($16,091) ($27,234)
---------- ----------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 13,644 19,079
Deferred financing costs................................ 699 698
Equity in net loss of joint venture......................... 178 263
Change in assets and liabilities:
Decrease in accounts receivable....................... 9,844 26,861
Decrease (increase) in inventories.................... 17,355 (3,987)
Increase in prepaid expenses and other................ (2,139) (7,416)
Decrease (increase) in deferred charges and
other assets................................... 798 (395)
Decrease in accounts payable.......................... (14,116) (3,232)
Decrease in accrued expenses and other................ (5,567) (13,915)
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Total adjustments.............................. 20,696 17,956
---------- ----------
Net cash provided by (used in) operating activities 4,605 (9,278)
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Cash flows from investing activities:
Increases in restricted cash........................... (3,000) ---
Payment of administrative claims, net.................. (2,238) (1,776)
Purchases of molds, tools and equipment................ (2,527) (4,073)
Expenditures for product and package design costs...... (1,486) (3,561)
Other investments...................................... --- (2)
---------- ----------
Net cash used in investing activities........ (9,251) (9,412)
---------- ----------
Cash flows from financing activities:
Stock warrants exercised.............................. 1 5
Employee stock options exercised..................... --- 112
---------- ----------
Net cash provided by financing
activities............................... 1 117
---------- ----------
Net decrease in cash and cash equivalents.................. (4,645) (18,573)
Cash and cash equivalents, at beginning of period.......... 22,803 64,814
---------- ----------
Cash and cash equivalents, at end of period................ 18,158 46,241
---------- ----------
Supplemental disclosures of cash flow information
Interest paid......................................... $15,310 $15,193
Income taxes, net paid (refunded)..................... 157 (87)
Non-cash transaction
Preferred stock dividends............................ $7,951 $7,545
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. 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 Flow for the six
months ended June 30, 2001 are not necessarily indicative of those for the full
year ending December 31, 2001. Certain prior year amounts have been reclassified
to conform with current year's presentation. 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/A for the fiscal year ended December 31, 2000.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The Company recorded
$5.9 million and $11.7 million of goodwill amorization during the three months
and six months ended June 30, 2001, respectively. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 and has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
-5-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
June 30, December 31,
2001 2000
----------- ----------
Description
Accounts receivable, net:
Accounts receivable......................................... $ 39,001 $ 63,171
Less allowances for:
Doubtful accounts....................................... (2,228) (4,542)
Advertising, markdowns, returns, volume
discounts and other................................... (7,381) (19,393)
----------- ----------
Total $ 29,392 $ 39,236
=========== ==========
Inventories, net:
Toys:
Finished goods........................................... $ 15,917 $ 31,026
Component parts, raw materials and
work-in-process...................................... 5,365 8,001
----------- ----------
Total Toys............................................... $ 21,282 $ 39,027
Publishing:
Finished goods........................................... $ 764 $ 298
Component parts, raw materials and
work-in-process...................................... 3,379 3,455
----------- ----------
Total Publishing........................................ $4,143 $ 3,753
----------- ----------
Total.............................................. $ 25,425 $ 42,780
=========== ==========
Molds, tools and equipment, net:
Molds, tools and equipment................................ $ 32,040 $31,060
Office equipment and other................................ 11,710 10,163
Less accumulated depreciation and amortization............ (35,220) (34,218)
----------- ----------
Total................................................... $ 8,530 $ 7,005
=========== ==========
Product and package design costs, net:
Product design costs...................................... $ 13,961 $13,065
Package design costs...................................... 6,838 6,248
Less accumulated amortization............................. (18,510) (17,710)
----------- ----------
Total.................................................. $ 2,289 $ 1,603
=========== ==========
Goodwill and other intangibles, net:
Goodwill.................................................. $ 469,683 $469,683
Patents and other intangibles............................. 3,932 3,933
Less accumulated amortization............................. (69,875) (58,034)
----------- ----------
Total................................................... $ 403,740 $415,582
=========== ==========
Accrued expenses and other:
Accrued advertising costs................................. $1 $6,802
Accrued royalties......................................... 3,888 6,064
Inventory purchases....................................... 5,062 3,630
Income taxes payable...................................... 3,317 5,070
Other accrued expenses.................................... 19,689 17,107
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Total.................................................. $31,957 $38,673
============= ===========
-6-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. DEBT FINANCING
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. The Senior Notes are due June 15, 2009 and bear interest at 12%
per annum, payable semi-annually on June 15th and December 15th. The Senior
Notes may be redeemed beginning June 15, 2004 for a redemption price of 106% of
the principal amount, plus accrued interest. The redemption price decreases 2%
each year after 2004 and will be 100% of the principal amount, plus accrued
interest, beginning 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.
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered into
a Revolving Credit Facility ("Credit Agreement") which provided for certain
working capital advances and the issuance of letters of credit to third parties
based on available collateral. At March 31, 2001, the Company was not in
compliance with certain covenants contained in the Credit Agreement. On May 14,
2001, the parties entered into a Waiver Agreement which, among other matters,
waived the covenant failures by the Company, eliminated working capital
availability and limited the amount available for letters of credit to the
amount currently outstanding which is $17.5 million. In addition, under the
terms of the Waiver Agreement, the Company deposited $3.0 million and is
required to deposit an additional $1.0 million on the last day of each month,
from July 31, 2001 to November 30, 2001, into a restricted cash account to
collateralize the outstanding balances of the letters of credit. On November 30,
2001, the Company is also required to deposit an amount equal to 105% of the
outstanding letters of credit on that date less amounts previously deposited (a
maximum of $11.4 million). In the event the Company fails to make any of the
required payments under the Waiver Agreement, the waiver of the company's
failure to comply with some of the covenants in the Facility Agreement will
automatically terminate. The Waiver Agreement also required the Company to grant
a secured lien on all of the Company's copyrights and trademarks. The Company is
required to pay an additional 2% letter of credit fee (total of 4.75%) annually
of the amount of the outstanding letters of credit. At June 30, 2001, there were
no working capital advances outstanding.
On August 14, 2001, the Company announced that it would be terminating its
revolving credit facility with Citibank and replacing the $17.5 million of
letters of credit outstanding under the Citibank facility with letters of credit
issued by Tot Funding Corp., a corporation wholly-owned by Isaac Perlmutter, a
director and majority shareholder of the Company. The Company will grant to Tot
Funding a security interest in the same assets that are granted as security
under the Citibank agreement.
5. SHARES OUTSTANDING
The Condensed Consolidated Statement of Operations presents operations of
the Company for the three months and six months ended June 30, 2001. During the
first six months of 2001, there were 698,588 conversions of shares of preferred
stock into 725,829 shares of common stock and 62 shares of common stock were
issued upon the exercise of warrants. The total number of shares of common stock
outstanding as of June 30, 2001 is 34,428,169, excluding treasury shares
(assuming no conversion of the 8% cumulative convertible exchangeable 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 June 30, 2001 would have been 55,533,752; 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 74,059,876.
6. 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, publishing, 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 4,700 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.
-7-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Set forth below is certain operating information for the divisions of the Company.
Three months ended June 30, 2001
- ---------------------------------
Licensing Publishing Toys Corporate Total
----------- ---------- --------- ----------- ----------
(in thousands)
Net sales $11,237 $11,157 $ 23,538 $ --- $ 45,932
Gross profit 11,025 5,571 6,933 --- 23,529
Pre-acqusition litigation charge --- --- --- (3,000) (3,000)
Operating income (loss) 4,053 1,980 (599) (5,344) 90
EBITDA(1) 9,032 2,775 548 (5,344) 7,011
Three months ended June 30, 2000
- ----------------------------------
Licensing Publishing Toys Corporate Total
----------- ---------- --------- ----------- ----------
(in thousands)
Net sales $7,043 $11,411 $ 32,587 $ --- $ 51,041
Gross profit 6,801 5,693 14,219 --- 26,713
Operating (loss) income (777) 1,898 (1,574) (1,931) (2,384)
EBITDA(1) 4,095 2,792 2,428 (1,931) 7,384
Six months ended June 30, 2001
- ----------------------------------
Licensing Publishing Toys Corporate Total
----------- ---------- --------- ----------- ----------
(in thousands)
Net sales $16,667 $21,374 $ 50,563 $ --- $ 88,604
Gross profit 16,375 10,432 15,071 --- 41,878
Pre-acquisition litigation charge --- --- --- (3,000) (3,000)
Operating income (loss) 1,927 3,924 665 (6,997) ( 481)
EBITDA(1) 11,884 5,514 2,762 (6,997) 13,163
Six months ended June 30, 2000
- ---------------------------------
Licensing Publishing Toys Corporate Total
----------- ---------- --------- ----------- ----------
(in thousands)
Net sales $9,370 $21,352 $ 63,507 $ --- $ 94,229
Gross profit 9,058 10,302 28,192 --- 47,552
Operating (loss) income (6,478) 3,541 (4,925) (3,800) (11,662)
EBITDA(1) 3,266 5,329 2,622 (3,800) 7,417
(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-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. 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.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon is the rightful owner of the Captain
America character.
X-Men Litigation. In April 2001, Twentieth Century Fox Film Corporation
sued Marvel, Tribune Entertainment Co., Fireworks Communications, Inc and
Fireworks Television (US), Inc. in the United States District Court, Southern
District of New York, seeking an injunction and damages for alleged breach of
the 1993 X-Men movie license, unfair competition, copyright infringement and
tortuous interference with the contract arising from the Mutant X television
show being produced by Tribune and Fireworks under license from Marvel which is
scheduled for release in the fall of 2001. On the same day Fox filed the
foregoing suit, Marvel commenced an action against Fox in the same court seeking
a declaratory judgment that the license of the Mutant X title and certain Marvel
characters did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. On August 9, 2001, in response to Fox's motion for a preliminary
injunction and defendants motion to dismiss Fox's claims, the Court (i) granted
the motion to dismiss all of Fox's claims except for its breach of contract and
copyright claims and (ii) granted Fox's motion for a preliminary injunction but
only as to the defendant's use of (a) video clips from the X-Men film and/or
trailer in order to promote the new Mutant X series and (b) a logo that is
substantially similar to the logo used by Fox in connection with the X-Men film.
The Company is reviewing whether to appeal any portion of the Judges ruling.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company intends to file and vigorously prosecute an appeal.
Kimble v. Marvel. In October 2000, a jury trial was held in the United
States District Court of Arizona on the remaining claims from an alleged breach
of oral contract and a patent infringement claim concerning the Toy Biz
Spider-Man Web Blaster TM toy. The patent issues were dismissed prior to trial
on summary judgment . The jury awarded Kimble a royalty of 3.5% on past, present
and future sales of the abovementioned product. The Company is in the process of
appealing this matter.
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.
-9-
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 4,700 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, publishing, 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 4,700 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 Company has been exploring for some time a variety
of strategic options to reduce the financial risk and unpredictability
associated with its toy business. As part of this strategic repositioning, the
Company announced on August 14, 2001, that it entered into a worldwide licensing
agreement with an unrelated Hong Kong-based company, Toy Biz Worldwide Ltd., for
the sale and manufacture of toy action figures and accessories that feature
Marvel characters other than those based upon the upcoming Spider-Man movie.
Marvel will earn licensing and other fees under the agreement and will continue
to provide certain services for Toy Biz Worldwide Ltd., but will have no equity
interest in the new company. In addition to overseeing this relationship,
Marvel's Toy Biz division will continue to manage its other lines of business,
including the Lord of the Rings toy license and the Spectra(R) line of flying
toys.
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.
-10-
Results of Operations
Three months ended June 30, 2001 compared with the three months ended June
30, 2000
The Company's net sales decreased 10% to approximately $45.9 million for
the three months ended June 30, 2001 from approximately $51.0 million in the
corresponding 2000 period. The decrease came from the Toy Biz division and was
primarily due to a decline in sales of Pokemon marbles and Marvel related action
figures and accessories, specifically X-Men movie products. This was partially
offset by a 60% increase in net sales from the Licensing division which was
primarily due to the execution of several domestic licenses for the video game
and collectible markets.
Gross profit decreased 12% to approximately $23.5 million in the three
months ended June 30, 2001 from approximately $26.7 million in the corresponding
2000 period. The decrease was due primarily to a decline in gross profit from
the Toy Biz division of approximately $7.3 million. Gross profit as a percentage
of net sales decreased slightly to approximately 51% in the 2001 period from
approximately 52% in the 2000 period. The Licensing and Publishing divisions
produced gross margins of approximately 98% and 50%, respectively. The gross
profit margin for the Toy Biz division decreased to 29% in the 2001 period from
44% in the 2000 period due primarily to a higher percentage of close-out sales.
Selling, general and administrative expenses decreased 15% to approximately
$16.5 million or approximately 36% of net sales in the three months ended June
30, 2001 from approximately $19.3 million or approximately 38% of net sales in
the three months ended June 30, 2000. The decrease was primarily due to reduced
spending for advertising on high-risk toy categories which was one of the
strategic initiatives taken by management at the beginning of 2001. Expenses for
the Toy Biz division decreased approximately 46% to $6.4 million in the three
months ended June 30, 2001 from approximately $11.8 million in the corresponding
2000 period due primarily to lower advertising, royalties and other selling
expenses. This decrease was partially offset by a pre-acqusition litigation
charge of $3.0 million to the Corporate division relating to a breach of
contract action. See "Note 7, Contingencies".
Amortization of goodwill and other intangibles as well as depreciation of
fixed assets decreased to approximately $6.9 million in the quarter ended June
30, 2001 from approximately $9.8 million in the corresponding quarter of 2000
due to additional amortization expense of $16.8 million in the fourth quarter of
2000 for accelerated write-offs of tooling and product and package design and
development for discontinued toy lines.
Net interest expense increased approximately $0.6 million to $7.8 million
in the three months ended June 30, 2001 as compared to $7.2 million in the
corresponding 2000 period primarily due to reduced interest income. Net interest
expense consisted of approximately $8.1 million in interest and deferred
financing costs attributable to the Senior Notes, offset by approximately $0.3
million in interest and other income.
Six months ended June 30, 2001 compared with the six months ended June 30, 2000
The Company's net sales decreased 6% to approximately $88.6 million for the
six months ended June 30, 2001 from approximately $94.2 million in the
corresponding 2000 period. The decrease was due primarily to a decline in sales
of Pokemon marbles and WCW products within the Toy Biz division. This was
partially offset by a 78% increase in net sales from the Licensing division
which was primarily due to the execution of several domestic licenses for the
video game and collectible markets as well as an international license for the
right to publish Marvel comics in foreign markets.
Gross profit decreased 12% to approximately $41.9 million in the six months
ended June 30, 2001 from approximately $47.6 million in the corresponding 2000
period. The decrease was due to a reduction in gross margin from the Toy Biz
division of $13.1 million, which was partially offset by an increase in gross
margin from the Licensing division of $7.3 million, which was primarily due to
an increase in the number of licenses secured worldwide as well as the number of
film and television studio deals signed versus the corresponding 2000 period.
Gross profit as a percentage of net sales decreased to approximately 47% in the
2001 period from approximately 50% in the 2000 period. The Licensing and
Publishing divisions produced gross margins of approximately 98% and 49%,
respectively. The gross profit margin for the Toy Biz division decreased to 30%
in the 2001 period from 44% in the 2000 period due primarily to a higher
percentage of close-out sales.
Selling, general and administrative expenses decreased 28% to approximately
$28.7 million or approximately 32% of net sales in the six months ended June 30,
2001 from approximately $40.1 million or approximately 43% of net sales in the
six months ended June 30, 2000. The decrease was primarily due to reduced
spending for advertising on high-risk toy categories which was one of the
strategic initiatives taken by management at the beginning of 2001. Expenses for
the Toy Biz division decreased approximately 52% to $12.3 million in the six
months ended June 30, 2001 from approximately $25.6 million in the corresponding
2000 period due primarily to lower advertising, royalty and other selling costs
as well as lower payroll costs. This decrease was partially offset by a
pre-acqusition litigation charge of $3.0 million to the Corporate division
relating to a breach of contract action. See "Note 7, Contingencies".
Amortization of goodwill and other intangibles as well as depreciation of
fixed assets decreased to approximately $13.6 million in the six months ended
June 30, 2001 from approximately $19.1 million in the corresponding period in
2000 due to additional amortization expense of $16.8 million in the fourth
quarter of 2000 for accelerated write-offs of tooling and product and package
design and development for discontinued toy lines.
Net interest expense increased approximately $1.2 million to $15.6 million
in the six months ended June 30, 2001 as compared to $14.4 million in the
corresponding 2000 period primarily due to reduced interest income. Net interest
expense consisted of approximately $16.0 million in interest and deferred
financing costs attributable to the Senior Notes, offset by approximately $0.4
million in interest and other income.
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The Company's effective tax rate for the six months ended June 30, 2001 was
higher than the statutory rate due primarily to tax benefit not being provided.
Benefit was not provided as the utilization of tax losses is uncertain. The
Company estimates its Net Operating Loss Carryforwards ("NOLs") to be $189.2
million at June 30, 2001 of which $95.6 million relates to the acquisition of
MEG. Benefits from these acquired NOLs, if realized, will be a reduction in
goodwill in the period realized.
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $4.6 million in
the first six months of 2001, while net cash used in operating activities was
approximately $9.3 million in the first six months of 2000. 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. The
Senior Notes are due June 15, 2009 and bear interest at 12% per annum, payable
semi-annually on June 15th and December 15th. The Senior Notes may be redeemed
beginning June 15, 2004 for a redemption price of 106% of the principal amount,
plus accrued interest. The redemption price decreases 2% each year after 2004
and will be 100% of the principal amount, plus accrued interest, beginning 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.
On April 1, 1999, the Company and Citibank entered into the Credit
Agreement Credit Agreement which provided for certain working capital advances
and the issuance of letters of credit to third parties based on available
collateral. At March 31, 2001, the Company was not in compliance with certain
covenants contained in the Credit Agreement. On May 14, 2001, the parties
entered into a Waiver Agreement which, among other matters, waived the covenant
failures by the Company, eliminated working capital availability and limit the
amount available for letters of credit to the amount currently outstanding which
$17.5 million. In addition, under the terms of the Waiver Agreement, the Company
deposited $3.0 million and is required to deposit an additional $1.0 million on
the last day of each month, commencing July 31, 2001 and ending November 30,
2001, into a restricted cash account to collateralize the outstanding balances
of the letters of credit. On November 30, 2001, the Company is also required to
deposit an amount equal to 105% of the outstanding letters of credit on that
date less amounts previously deposited (a maximum of $11.4 million). In the
event the Company fails to make any of the required payments under the Waiver
Agreement, the waiver of the Company's failure to comply with some of the
covenants in the Facility Agreement will automatically terminate. The Waiver
Agreement also required the Company to grant a secured lien on all of the
Company's copyrights and trademarks. The Company is required to pay an
additional 2% letter of credit fee (total of 4.75%) annually of the amount of
the outstanding letters of credit. At June 30, 2001, there were no working
capital advances outstanding,
On August 14, 2001, the Company announced that it would be terminating its
revolving credit facility with Citibank and replacing the $17.5 million of
letters of credit outstanding under the Citibank facility with letters of credit
issued by Tot Funding Corp., a corporation wholly-owned by Isaac Perlmutter, a
director and majority shareholder of the Company. The Company will grant to Tot
Funding a security interest in the same assets that are granted as security
under the Citibank agreement.
The Company believes that it will have sufficient funds available from cash
and cash equivalents and operating activities to meet peak working capital needs
and capital expenditure requirements. In addition, the Company has made certain
strategic modifications in order to minimize cash outflow. For example, the toy
division has been redirected so that the majority of its business will require
its customers to produce letters of credit prior to delivery of goods. Also
tooling, which the Company has totally funded prior to the manufacture of
product, will now be funded through the cost of the goods purchased with the
Company retaining ownership of the tooling. These actions reduce the Company's
capital needs and provides for a more cash efficient and profitable toy
business. PART II. Other Information.
Item 1. Legal Proceedings
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon is the rightful owner of the Captain
America character.
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X-Men Litigation Litigation. In April 2001, Twentieth Century Fox Film
Corporation sued Marvel, Tribune Entertainment Co., Fireworks Communications,
Inc and Fireworks Television (US), Inc. in the United States District Court,
Southern District of New York, seeking an injunction and damages for alleged
breach of the 1993 X-Men movie license, unfair competition, copyright
infringement and tortuous interference with contract arising from the Mutant X
television show being produced by Tribune and Fireworks under license from
Marvel which is scheduled for release in the fall. On the same day Fox filed the
foregoing suit, Marvel commenced an action against Fox in the same court seeking
a declaratory judgment that the license of the Mutant X title and certain Marvel
characters did not breach the 1993 X-Men movie license with Fox. Both suits were
consolidated. On August 9, 2001, in response to Fox's motion for a preliminary
injunction and defendants motion to dismiss Fox's claims, the Court (i) granted
the motion to dismiss all of Fox's claims except for its breach of contract and
copyright claims and (ii) granted Fox's motion for a preliminary injunction but
only as to the defendant's use of (a) video clips from the X-Men film and/or
trailer in order to promote the new Mutant X series and (b) a logo that is
substantially similar to the logo used by Fox in connection with the X-Men film.
The Company is reviewing whether to appeal any portion of the Judges ruling.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District court the amount of $3.0 million on a
breach of contract action based on a 1994 toy license between Toy Biz and The
Coleman Company. The complaint alleged that Toy Biz did not fulfill its
obligation to spend certain monies on the advertising and promotion of Coleman's
products. The Company intends to file and vigorously prosecute an appeal.
Kimble v. Marvel. In October 2000, a jury trial was held in the United
States District Court of Arizona on the remaining claims from an alleged breach
of oral contract and a patent infringement claim concerning the Toy Biz
Spider-Man Web Blaster TM toy. The patent issues were dismissed prior to trial
on summary judgment . The jury awarded Kimble a royalty of 3.5% on past, present
and future sales of the abovementioned product. The Company is in the process of
appealing this matter.
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.
Item 2. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
Exhibit 12 Statement re: Computation of Ratios dated as of June 30, 2001.
b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter ended June
30, 2001.
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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: August 14, 2001 By: /s/ F. Peter Cuneo
-------------------------
F. Peter Cuneo
Chief Executive Officer