UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 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.
----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3711775
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 East 40th Steet, New York, NY 10016
- ----------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
917-472-2100
-----------------------------------------
(Registrant's telephone number, including area code)
- -----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At November 1, 2001, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 34,762,984 shares of Common Stock.
PART I. Financial Information
Item I. Financial Statements
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September December
30, 31,
2001 2000
--------- --------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents................................................. $ 14,811 $ 22,803
Accounts receivable, net.................................................. 30,276 39,236
Inventories, net.......................................................... 25,227 42,780
Income tax receivable..................................................... 334 334
Deferred financing costs.................................................. 1,040 1,372
Prepaid expenses and other................................................ 17,257 6,918
--------- --------
Total current assets.................................................. 88,945 113,443
Restricted cash............................................................ 3,000 ----
Molds, tools and equipment, net............................................ 9,165 7,005
Product and package design costs, net...................................... 1,781 1,603
Goodwill and other intangibles, net........................................ 383,329 415,582
Income tax receivable...................................................... ---- 1,327
Deferred charges and other assets.......................................... 7,487 8,343
Deferred financing costs................................................... 5,639 7,981
--------- --------
Total assets.......................................................... $499,346 $555,284
========= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................................... $ 10,215 $ 18,586
Accrued expenses and other................................................ 40,141 37,206
Deferred revenue.......................................................... 6,371 1,467
Administrative claims payable............................................. 7,003 7,444
Unsecured creditors payable............................................... 5,205 7,000
--------- ---------
Total current liabilities.............................................. 68,935 71,703
--------- ---------
Long-term liabilities
Deferred revenue........................................................... 15,456 ----
Senior notes............................................................... 198,568 250,000
--------- ---------
Total long-term liabilities............................................ 214,024 250,000
--------- ---------
Total liabilities...................................................... 282,959 321,703
--------- ---------
Redeemable cumulative convertible
exchangeable preferred stock....................................... 204,326 202,185
---------- ---------
Stockholders' equity
Common stock............................................................... 421 411
Additional paid-in capital................................................. 225,875 216,068
Retained deficit........................................................... (181,280) (152,128)
---------- ---------
Total stockholders' equity before treasury stock....................... 45,016 64,351
Treasury stock.............................................................. (32,955) (32,955)
---------- ----------
Total stockholders' equity............................................. 12,061 31,396
---------- ----------
Total liabilities, redeemable preferred stock and
stockholders' equity........................................... $499,346 $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)
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
---------- ---------- ---------- ---------
Net sales....................................... $ 43,026 $ 73,461 $131,630 $167,690
Cost of sales................................... 23,188 38,915 69,914 85,592
---------- ---------- ---------- ---------
Gross profit.................................... 19,838 34,546 61,716 82,098
---------- ---------- ---------- ---------
Operating expenses:
Selling, general and administrative........ 12,629 24,100 38,344 64,235
Pre-acquisition litigation charge.......... ---- ---- 3,000 ----
Depreciation and amortization.............. 2,179 4,946 3,982 12,043
Amortization of goodwill and other
intangibles............................. 5,940 6,020 17,782 18,002
---------- ---------- ---------- ---------
Total operating expenses........................ 20,748 35,066 63,108 94,280
---------- ---------- ---------- ---------
Operating loss.................................. (910) (520) (1,392) (12,182)
Interest expense, net........................... 7,162 7,718 22,789 22,134
---------- ---------- ---------- ---------
Loss before provision for income taxes,
equity in net loss of joint venture
and extraordinary gain..................... (8,072) (8,238) (24,181) (34,316)
Income tax provision............................ 6,584 958 6,389 1,851
----------- ---------- ---------- ---------
Loss before equity in net loss of joint
venture and extraordinary gain............. (14,656) (9,196) (30,570) (36,167)
Equity in net loss of joint venture............. (92) ---- (270) (263)
----------- ---------- ----------- ----------
Loss before extraordinary gain.................. (14,748) (9,196) (30,840) (36,430)
Extraordinary gain, net of income tax
provision of $9,686....................... 13,645 ---- 13,645 ----
----------- ---------- ---------- ----------
Net loss........................................ (1,103) (9,196) (17,195) (36,430)
Less: preferred dividend requirement............ 4,006 3,886 11,957 11,431
---------- --------- ---------- ---------
Net loss attributable to common stock........... ($5,109) ($13,082) ($29,152) ($47,861)
---------- --------- ---------- ---------
Basic and dilutive earnings per share:
of common stock
Loss before extraordinary gain less
preferred dividend requirement.......... ($0.54) ($0.39) ($1.25) ($1.42)
Extrordinary gain, net of income tax
provision............................... 0.39 ---- 0.40 ----
---------- --------- ---------- ----------
Net loss.................................. ($0.15) ($0.39) ($0.85) ($1.42)
---------- --------- ---------- ----------
Weighted average number of basic and diluted
shares outstanding......................... 34,529 33,696 34,173 33,661
---------- --------- ---------- ----------
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
-3-
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months
Ended September 30,
2001 2000
--------- -----------
Cash flows from operating activities:
Net loss.................................. ($ 17,195) ($36,430)
--------- -----------
Adjustments to reconcile net loss to net
cash provided by (used in)operating
activities:
Depreciation and amortization............. 21,764 30,046
Compensatory stock issued................. ---- 500
Deferred financing costs.................. 1,053 1,040
Extraordinary net of income tax
provision.............................. (13,645) ----
Deferred income taxes.......................... 5,301 ----
Equity in net loss of joint venture............ 270 263
Change in assets and liabilities:
Decrease in accounts receivable........... 8,960 5,386
Decrease (increase) in inventories........ 17,553 (12,679)
Increase in prepaid expenses and other.... (10,339) (8,888)
Decrease (increase) in deferred charges and 806 (3,096)
other assets..........
Decrease in accounts payable.............. (8,371) (2,435)
Increase in accrued expenses and other.... 3,665 1,171
----------- -----------
Total adjustments.................. 27,017 11,308
----------- -----------
Net cash provided by (used in) operating 9,822 (25,122)
activities............................. ----------- -----------
Cash flows from investing activities:
Increase in restricted cash............... (3,000) ----
Advances from joint venture............... 957 ----
Payment of administrative claims, net..... (2,236) (1,685)
Purchases of molds, tools and equipment... (4,167) (6,092)
Expenditures for product and package
design costs........................... (2,152) (4,980)
Other investments......................... (516) (11)
Net cash used in investing activities.......... (11,114) (12,768)
----------- -----------
Cash flows from financing activities:
Stock purchase warrants exercised......... 1 5
Purchase of senior notes.................. (6,701) ----
Employee stock options exercised.......... ---- 381
---------- ----------
Net cash (used in) provided by financing (6,700) 386
activities................................ ---------- ----------
Net decrease in cash and cash equivalents...... (7,992) (37,504)
Cash and cash equivalents, at beginning
of period................................. 22,803 64,814
----------- -----------
Cash and cash equivalents, at end of period.... $ 14,811 $ 27,310
----------- -----------
Supplemental disclosures of cash flow
information
Interest paid............................. $ 15,310 $ 15,348
Income taxes, net paid.................... 239 208
Non-cash operating and financing activities
Receipt of $39.2 million in senior notes
in satisfaction of licensing fees ........ $ 20,000 $ ----
Preferred stock dividends................. 11,957 11,431
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 nine
months ended September 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 (the "Statements"), 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 $17.8 million of goodwill amortization during the three months
and nine months ended September 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.
On August 1, 2001, the FASB issued SFAS No. 144, "Accounting For Impairment
of Long Lived Assets". The company is required to adopt this pronouncement
beginning January 1, 2002. SFAS No. 144 prescribes the accounting for long-lived
assets (excluding goodwill) to be disposed of by sale. SFAS No. 144 retains the
requirement of SFAS No. 121 to measure long-lived assets classified as held for
sale at the lower of its carrying value or fair market value less the cost to
sell. Therefore, discontinued operations are no longer measured on a net
realizable basis, and future operating results are no longer recognized before
they occur. The impact of adopting SFAS No. 144 is not expected to be
significant.
-5-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS
(unaudited)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Sept. 30, Dec. 31,
2001 2001
---------- ----------
Description
Accounts receivable, net:
Accounts receivable......................... $ 40,047 $ 63,171
Less allowances for:
Doubtful accounts....................... (2,235) (4,542)
Advertising, markdowns, returns, volume
discounts and other..................... (7,536) (19,393)
---------- ----------
Total $ 30,276 $ 39,236
========== ==========
Inventories, net:
Toys:
Finished goods............................ $ 14,937 $ 31,026
Component parts, raw materials and
work-in-process....................... 5,029 8,001
---------- ----------
Total Toys................................ 19,966 39,027
---------- ----------
Publishing:
Finished goods............................ 1,232 298
Component parts, raw materials and
work-in-process....................... 4,029 3,455
---------- ----------
Total Publishing.......................... 5,261 3,753
---------- ----------
Total................................ $ 25,227 $ 42,780
========== ==========
Molds, tools and equipment, net:
Molds, tools and equipment.................. $ 33,485 $ 31,060
Office equipment and other.................. 11,905 10,163
Less accumulated depreciation and
amortization......................... (36,225) (34,218)
---------- ----------
Total..................................... $ 9,165 $ 7,005
========== ==========
Product and package design costs, net:
Product design costs........................ $ 14,513 $ 13,065
Package design costs........................ 6,952 6,248
Less accumulated amortization............... (19,684) (17,710)
---------- ----------
Total..................................... $ 1,781 $ 1,603
========== ==========
Goodwill and other intangibles, net:
Goodwill.................................... $ 454,696 $469,683
Patents and other intangibles............... 4,448 3,933
Less accumulated amortization............... (75,815) (58,034)
---------- ----------
Total..................................... $ 383,329 $ 415,582
========== ==========
Accrued expenses and other:
Accrued advertising costs................... $ 75 $ 6,802
Accrued royalties........................... 4,275 6,064
Inventory purchases......................... 5,403 3,630
Income taxes payable........................ 4,369 5,070
Other accrued expenses...................... 26,019 15,640
---------- ----------
Total.................................... $ 40,141 $ 37,206
========== ==========
-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 October 5, 2001, the Company terminated its Revolving Credit Facility
with Citibank N.A., and replaced $12.4 million of letters of credit outstanding
under the Citibank facility with letters of credit guaranteed by Object Trading
Corp., a corporation wholly-owned by Isaac Perlmutter, a director and major
shareholder of the Company. The $3.4 million letter of credit issued in
connection with the appeal in the MacAndrews & Forbes litigation (see Note 8)
was also guaranteed by Object Trading. The Company has granted to Object Trading
a first security interest in the same assets that were granted as security under
the Citibank agreement. The Company is currently negotiating a new credit
facility with a bank. No assurance can be given that the Company will be able to
successfully enter into such a credit facility.
5. EARLY RETIREMENT OF DEBT AND LICENSE AGREEMENT
During the quarter ended September 30, 2001, the Company received $39.2
million in principal amount of its Senior Notes in satisfaction of $20.0 million
of licensing fees in connection with a licensing agreement with Toy Biz
Worldwide, Ltd. ("TBW") an unrelated company, for the sale and manufacture of
toy action figures and accessories of all Marvel characters other than those
based upon the upcoming Spider-Man movie. The fair value of these notes was
$20.0 million, including $0.3 million in accrued interest. As a result of this
transaction, the Company reported an extraordinary gain of $10.6 million, net of
write-offs of deferred financing costs of $1.3 million and income taxes of $7.6
million in the Condensed Consolidated Statement of Operations. The Company
recognized $1.7 million of the $20.0 million licensing fee as of September 30,
2001. The remaining $18.3 million which is included in deferred revenues, $2.9
million in short term liabilities and $15.4 million in long term liabilities,
will be recognized over the term of the agreement.
On September 25, 2001, the Company purchased $12.2 million in principal
amount of its Senior Notes for $7.0 million, which included $0.3 million in
accrued interest. As a result of this transaction, the Company recorded an
extraordinary gain of $3.0 million, net of write-offs of deferred financing
costs of $0.4 million and income taxes of $2.1 million in the Condensed
Consolidated Statement of Operations.
-7-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. SHARES OUTSTANDING
The Condensed Consolidated Statements of Operations present operations
of the Company for the three months and nine months ended September 30, 2001.
During the first nine months of 2001, there were 981,434 conversions of shares
of preferred stock into 1,019,704 shares of common stock and 114 shares of
common stock were issued upon the exercise of warrants. The total number of
shares of common stock outstanding as of September 30, 2001 is 34,722,096
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 September 30, 2001 would
have been 55,949,966; 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 73,903,456.
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, 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,
during the quarter the Company entered into a five and one-half year licensing
agreement with an unrelated Hong Kong company, TBW 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
TBW, but has no equity interest in TBW. In order to permit the orderly
transition of the Marvel action figure business from the Company to TBW, the
company is temporarily acting as the sales and distribution agent for TBW. It is
presently anticipated that the transition will be completed by the beginning of
fiscal 2002. In addition to overseeing the relationship with TBW, 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. Set forth below is
certain operating information for the divisions of the Company.
-8-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three months ended September 30, 2001
- -------------------------------------
Licensing Publishing Toys Corporate Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Net sales $ 5,996 $ 12,829 $ 24,201 ---- 43,026
Gross profit 5,731 6,519 7,588 ---- 19,838
Operating loss (income) (752) 2,827 57 (3,042) (910)
EBITDA(1) 4,226 3,622 2,403 (3,042) 7,209
Three months ended September 30, 2000
- -------------------------------------
Licensing Publishing Toys Corporate Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Net sales $ 5,768 $ 11,477 $ 56,216 ---- $73,461
Gross profit 5,614 5,952 22,980 ---- 34,546
Operating (loss) income (848) 2,364 175 (2,211) (520)
EBITDA(1) 4,252 3,059 5,346 (2,211) 10,446
Nine months ended September 30, 2001
- ------------------------------------
Licensing Publishing Toys Corporate Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Net sales $ 22,663 $ 34,203 $ 74,764 ---- $131,630
Gross profit 22,106 16,951 22,659 ---- 61,716
Pre-acquisition litigation charge ---- ---- ---- (3,000) (3,000)
Operating income (loss) 1,174 6,751 722 (10,039) (1,392)
EBITDA(1) 16,110 9,136 5,165 (10,039) 20,372
Nine months ended September 30, 2000
- ------------------------------------
Licensing Publishing Toys Corporate Total
----------- ----------- ----------- ----------- -----------
(in thousands)
Net sales $ 15,138 $ 32,829 $119,723 ---- $167,690
Gross profit 14,671 16,253 51,174 ---- 82,098
Operating (loss) income (7,327) 5,905 (4,749) (6,011) (12,182)
EBITDA(1) 7,518 8,387 7,969 (6,011) 17,863
(1) "EBITDA" is defined as earnings before extraordinary items, interest
expense, income taxes, depreciation and amortization and equity in net loss of
joint venture. EBITDA does not represent net income or cash flows from
operations as those terms are defined by generally accepted accounting
principles and does not necessarily indicate whether cash flows will be
sufficient to fund cash needs.
-9-
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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. A hearing was held in August 2001 on the Company's motion for
summary judgment and the Company is awaiting the judge's decision. If the motion
is denied, a trial would then proceed.
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 was released
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 defendants' 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
preliminary injunction will not have a significant effect on the Company's
operations. A hearing on Fox's appeal of the District Court's decision was held
in August 2001 and the Company is awaiting the Appellate Court's decision.
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was entered
in the Sedgwick County, Kansas District Court in 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 filed and intends to vigorously prosecute an appeal. The
Company was required to post a letter of credit in the amount of the judgment
plus interest.
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. In September 2001, after the
Company had filed an appeal, the action was settled.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. The only material litigation remaining
involves the claim by the National Hockey League Players Association for amounts
based upon guaranteed royalties allegedly due under license agreements relating
to trading cards. 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 assurances.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURTIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed 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 need for
additional financing, (ii) the Company's potential inability to successfully
implement its business strategy, (iii) 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, (iv) the lack of commercial success of
properties owned by major entertainment companies that have granted the Company
toy licenses, (v) the lack of consumer acceptance of new product introductions,
(vi) 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, (vii)
changing consumer preferences, (viii) production delays or shortfalls, (ix)
continued pressure by certain of the Company's major retail customers to
significantly reduce their toy inventory levels, (x) the impact of competition
and changes to the competitive environment on the Company's products and
services, (xi) the ability of the Company's licensees to successfully market and
sell the licensed products, (xii) changes in technology, (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,
during the quarter the Company entered into a five and one-half year licensing
agreement with an unrelated Hong Kong company, TBW, 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
TBW. In order to permit the orderly transition of the Marvel action figure
business from the Company to TBW, the company is temporarily acting as the sales
and distribution agent for TBW. It is presently anticipated that the transition
will be completed by the beginning of fiscal 2002. In addition to overseeing the
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.
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Results of Operations
Three months ended September 30, 2001 compared with the three months ended
September 30, 2000
The Company's net sales decreased 41% to approximately $43.0 million for
the three months ended September 30, 2001 from approximately $73.5 million in
the corresponding 2000 period. The decrease came from the Toy Biz division and
was primarily due to a decline in sales of Marvel related action figures and
accessories as a result of the licensing agreement with Toy Biz Worldwide, Ltd.
In addition, the decrease can be attributed to the decline in sales of dolls and
games, which is a direct result of the Company's decision in the first quarter
of 2001 to withdraw from high risk toy categories that are advertising
intensive. This was partially offset by increases in sales in the feature plush
category with Puppy and Kitty Magic as well as a new line of toys associated
with the motion picture "The Lord of the Rings".
Gross profit decreased 43% to approximately $19.8 million in the three
months ended September 30, 2001 from approximately $34.5 million in the
corresponding 2000 period. The decrease was due primarily to a decline in gross
profit from the Toy Biz division of approximately $15.4 million. Gross profit as
a percentage of net sales decreased slightly to approximately 46% in the 2001
period from approximately 47% in the 2000 period. The Licensing and Publishing
divisions produced gross margins of approximately 96% and 51%, respectively. The
gross profit margin for the Toy Biz division decreased to 31% in the 2001 period
from 41% in the 2000 period due primarily to the licensing out of higher margin
Marvel related action figures and accessories to Toy Biz Worldwide, Ltd. as well
as a higher percentage of close-out sales.
Selling, general and administrative expenses decreased 48% to approximately
$12.6 million or approximately 29% of net sales in the three months ended
September 30, 2001 from approximately $24.1 million or approximately 33% of net
sales in the three months ended September 30, 2000. The decrease was primarily
due to reduced spending for advertising and royalties on high-risk toy
categories as well as reduced payroll expenses in the Toy Biz division. Expenses
for the Toy Biz division decreased approximately 71% to $5.2 million in the
three months ended September 30, 2001 from approximately $17.6 million in the
corresponding 2000 period.
Amortization of goodwill and other intangibles as well as depreciation of
fixed assets decreased to approximately $8.1 million in the quarter ended
September 30, 2001 from approximately $11.0 million in the corresponding quarter
of 2000 due to accellerated writeoffs of tooling and product and package design
and development for discontinued toy lines in the fourth quarter of 2000.
Net interest expense decreased approximately $0.5 million to $7.2 million
in the three months ended September 30, 2001 as compared to $7.7 million in the
corresponding 2000 period primarily due to the early retirement of debt. Net
interest expense consisted of approximately $7.3 million in interest and
deferred financing costs attributable to the Senior Notes, offset by
approximately $0.1 million in interest and other income.
In the three months ending September 30, 2001, the Company reported an
extraordinary gain of $13.6 million, net of write-offs of deferred financing
costs of $1.7 million and income taxes of $9.7 million. This gain was a result
of two transactions, one being the receipt of $39.2 million in principal amount
of its senior notes in satisfaction of $20.0 million of licensing fees in
accordance with a licensing agreement with Toy Biz Worldwide, Ltd. an unrelated
company, for the sale and manufacture of toy action figures and accessories of
certain Marvel characters other than those based upon the upcoming Spider-Man
movie. The fair value of these notes was $20.0 million, including $0.3 million
in accrued interest. The Company recognized $1.7 million of the $20.0 million
licensing fee as of September 30, 2001. The remaining $18.3 million which is
included in deferred revenues, $2.9 million in short term liabilities and $15.4
million in long term liabilities, will be recognized over the term of the
agreement. The second transaction was the purchase of $12.2 million in principal
amount of its senior notes for $7.0 million, which included $0.3 million in
accrued interest.
The Company's effective tax rate for the three months ended September 30,
2001 was higher than the statutory rate due primarily to tax benefits not being
provided as well as the utilization of pre-acquisition Net Operating Loss
carryforwards ("NOLs"). Benefit was not provided as the utilization of tax
losses is uncertain. The Company estimates its NOLs to be $150.3 million at
September 30, 2001 of which $58.1 million relates to the acquisition of MEG.
Benefits from these acquired NOLs, when realized, result in a reduction in
goodwill in the period realized.
-12-
Nine months ended September 30, 2001 compared with the nine months ended
September 30, 2000
The Company's net sales decreased 22% to approximately $131.6 million for
the nine months ended September 30, 2001 from approximately $167.7 million in
the corresponding 2000 period. The decrease was due primarily to a decline in
toy sales, specifically Pokemon marbles, dolls, games, WCW products and Marvel
related action figures and accessories as a result of the licensing agreement
with Toy Biz Worldwide, Ltd. This was partially offset by a 50% 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
a growing number of studio deals for movie, television and home video projects.
Gross profit decreased 25% to approximately $61.7 million in the nine
months ended September 30, 2001 from approximately $82.1 million in the
corresponding 2000 period. The decrease was due to a reduction in gross margin
from the Toy Biz division of $28.5 million, which was partially offset by an
increase in gross margin from the Licensing division of $7.4 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 49% 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 30% in the 2001 period from 43% in the 2000 period due
primarily to the licensing out of higher margin Marvel related action figures
and accessories to Toy Biz Worldwide, Ltd. as well as a higher percentage of
close-out sales.
Selling, general, administrative expenses and pre-acquisition litigation
charge decreased 36% to approximately $41.3 million or approximately 31% of net
sales in the nine months ended September 30, 2001 from approximately $64.2
million or approximately 38% of net sales in the nine months ended September 30,
2000. The decrease was primarily due to reduced spending for advertising and
royalties on high-risk toy categories as well as other selling and payroll
expenses which was one of the strategic initiatives taken by management at the
beginning of 2001. Expenses for the Toy Biz division decreased approximately 60%
to $17.5 million in the nine months ended September 30, 2001 from approximately
$43.2 million in the corresponding 2000 period. This decrease was partially
offset by a pre-acquisition litigation charge of $3.0 million to the Corporate
division relating to a breach of contract action as well as the legal fees
associated with that action. See "Note 8, Contingencies".
Amortization of goodwill and other intangibles as well as depreciation of
fixed assets decreased to approximately $21.8 million in the nine months ended
September 30, 2001 from approximately $30.0 million in the corresponding period
in 2000 due to accelerated write-offs of tooling and product and package design
and development for discontinued toy lines in the fourth quarter of 2000.
Net interest expense increased approximately $0.7 million to $22.8 million
in the nine months ended September 30, 2001 as compared to $22.1 million in the
corresponding 2000 period primarily due to the early retirement of debt. Net
interest expense consisted of approximately $23.4 million in interest and
deferred financing costs attributable to the senior notes, offset by
approximately $0.6 million in interest and other income.
In the nine months ending September 30, 2001, the Company reported an
extraordinary gain of $13.6 million, net of write-offs of deferred financing
costs of $1.7 million and income taxes of $9.7 million. This gain was a result
of two transactions, one being the receipt of $39.2 million in principal amount
of its senior notes in satisfaction of $20.0 million of licensing fees in
accordance with a licensing agreement with Toy Biz Worldwide, Ltd. an unrelated
company, for the sale and manufacture of toy action figures and accessories of
certain Marvel characters other than those based upon the upcoming Spider-Man
movie. The fair value of these notes was $20.0 million, including $0.3 million
in accrued interest. The Company recognized $1.7 million of the $20.0 million
licensing fee as of September 30, 2001. The remaining $18.3 million which is
included in deferred revenues, $2.9 million in short term liabilities and $15.4
million in long term liabilities, will be recognized over the term of the
agreement. The second transaction was the purchase of $12.2 million in principal
amount of its senior notes for $7.0 million, which included $0.3 million in
accrued interest.
The Company's effective tax rate for the nine months ended September 30,
2001 was higher than the statutory rate due primarily to tax benefits not being
provided as well as the utilization of pre-acquisition Net Operating Loss
carryforwards ("NOLs"). Benefit was not provided as the utilization of tax
losses is uncertain. The Company estimates its NOLs to be $150.3 million at
September 30, 2001 of which $58.1 million relates to the acquisition of MEG.
Benefits from these acquired NOLs, when realized, result in a reduction in
goodwill in the period realized.
-13-
Liquidity and Capital Resources
Net cash provided by operating activities was approximately $9.8 million in
the first nine months of 2001, while net cash used in operating activities was
approximately $25.1 million in the first nine 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 October 5, 2001, the Company terminated its Revolving Credit Facility
with Citibank N.A., and replaced the $17.5 million of letters of credit
outstanding under the Citibank facility with letters of credit issued by Object
Trading Corp., a corporation wholly-owned by Isaac Perlmutter, a director and
major shareholder of the Company. The Company has granted to Object Trading a
first security interest in the same assets that were granted as security under
the Citibank agreement. The Company is currently negotiating a new credit
facility with a bank. No assurance can be given that the Company will be able to
successfully enter into such a credit facility.
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. A hearing was held in August 2001 on the Company's motion for
summary judgment and the Company is awaiting the judge's decision. If the motion
is denied, a trial would then proceed.
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 was released
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 defendants' 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
preliminary injunction will not have a significant effect on the Company's
operations. A hearing on Fox's appeal of the District Court's decision was held
in August 2001 and the Company is awaiting the Appellate Court's decision.
-14-
MacAndrews & Forbes v. Marvel. On July 25, 2001, a jury verdict was
entered in the Sedgwick County, Kansas District Court in 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 filed and intends to vigorously prosecute an
appeal. The Company was required to post a letter of credit in the amount of the
judgment plus interest.
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. In September 2001, after the
Company had filed an appeal, the action was settled.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. The only material litigation remaining
involves the claim by the National Hockey League Players Association for amounts
based upon guaranteed royalties allegedly due under license agreements relating
to trading cards. 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 assurances.
Item 2. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
Exhibits No. 10.1 Agreement dated August 23, 2001 between Object Trading Corp
and the Company relating to the issuance of letters of credit
on behalf of the Company.
Exhibit 12 Statement re: Computation of Ratios dated as of September 30, 2001.
-15-
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: November 14, 2001 By: /s/ F. Peter Cuneo
F. Peter Cuneo
Chief Executive Officer