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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ---------- to -------------
Commission file number 1-13638
MARVEL ENTERPRISES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3711775
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 East 40th Street, New York, NY 10016
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
212-576-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At August 1, 2002, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 36,297,811 shares of Common Stock.
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION....................................................... 1
Item 1. Financial Statements (unaudited)............................................ 1
Condensed Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001........................................................... 2
Condensed Consolidated Statements of Operations and Comprehensive
Income (Loss) for the Three Months and Six Months Ended June 30, 2002
and 2001.................................................................... 3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001...................................................... 4
Notes to Condensed Consolidated Financial Statements........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 15
General..................................................................... 15
Results of Operations....................................................... 16
Liquidity and Capital Resources............................................. 18
PART II. OTHER INFORMATION.................................................................... 21
Item 1. Legal Proceedings........................................................... 22
Item 2. Exhibits and Reports on Form 8-K............................................ 23
SIGNATURES.................................................................................... 24
i
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2002 2001
------------ -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................. $42,368 $21,591
Accounts receivable, net.............................................. 34,892 35,648
Inventories, net...................................................... 20,867 20,916
Income tax receivable................................................. 934 334
Amounts due from joint venture........................................ 3,557 --
Deferred financing costs.............................................. 9,539 9,144
Prepaid expenses and other current assets............................. 1,949 12,594
----------- ----------
Total current assets.............................................. 114,106 100,227
Molds, tools and equipment, net........................................ 7,310 8,076
Product and package design costs, net.................................. 2,135 2,218
Accounts receivable, non current portion............................... 9,914 11,890
Goodwill, net.......................................................... 371,618 380,675
Other intangibles, net................................................. 819 988
Deferred charges and other assets...................................... 106 139
Deferred financing costs............................................... 10,367 13,357
----------- ----------
Total assets...................................................... $516,375 $517,570
=========== ==========
LIABILITIES, CUMULATIVE CONVERTIBLE EXCHANGEABLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $11,934 $13,052
Accrued expenses and other............................................. 31,160 35,270
Current portion of credit facility..................................... 10,771 6,172
Administrative claims payable.......................................... 2,237 3,500
Unsecured creditors payable............................................ 5,283 5,239
Deferred revenue....................................................... 7,426 7,128
----------- ----------
Total current liabilities.......................................... 68,811 70,361
----------- ----------
Senior notes........................................................... 150,962 150,962
Long term portion of credit facility................................... 24,686 30,828
Accrued rent........................................................... 877 940
Deferred revenue, non-current portion.................................. 12,728 14,546
----------- ----------
Total liabilities.................................................. 258,064 267,637
----------- ----------
Cumulative convertible exchangeable
redeemable preferred stock.................................... 204,298 207,975
----------- ----------
Stockholders' equity
Common stock........................................................... 436 421
Additional paid-in capital............................................. 254,400 238,769
Accumulated deficit.................................................... (166,453) (162,897)
Accumulated other comprehensive loss................................... (1,415) (1,380)
----------- ----------
Total stockholders' equity before treasury stock................... 86,968 74,913
Treasury stock.......................................................... (32,955) (32,955)
----------- ----------
Total stockholders' equity......................................... 54,013 41,958
----------- ----------
Total liabilities, cumulative convertible exchangeable
redeemable preferred stock and stockholders' equity.......... $516,375 $517,570
=========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
1
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales..................................... $70,939 $45,932 $128,161 $88,604
Cost of sales................................. 34,259 22,403 63,063 46,726
-------- -------- -------- --------
Gross profit.................................. 36,680 23,529 65,098 41,878
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative...... 21,062 13,518 39,173 25,715
Pre-acquisition litigation charge........ -- 3,000 -- 3,000
Depreciation and amortization............ 1,191 1,054 2,222 1,910
Amortization of goodwill................. -- 5,867 -- 11,734
-------- -------- -------- --------
Total operating expenses...................... 22,253 23,439 41,395 42,359
Other income.................................. 714 -- 714 --
Equity in net income (loss) of joint venture.. 5,341 (82) 5,341 (178)
-------- -------- -------- --------
Operating income (loss)....................... 20,482 8 29,758 (659)
Interest expense, net......................... 7,786 7,760 15,679 15,627
-------- -------- -------- --------
Income (loss) before provision (benefit) for
income taxes and cumulative effect of change in
accounting principle.......................... 12,696 (7,752) 14,079 (16,286)
Income tax provision (benefit)................ 4,315 (349) 4,938 (195)
-------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle....................... 8,381 (7,403) 9,141 (16,091)
Cumulative effect of change in accounting
principle, net of income tax of $2,605........ -- -- 4,561 --
-------- -------- -------- --------
Net income (loss)............................. 8,381 (7,403) 4,580 (16,091)
Less: preferred dividend requirement.......... 4,005 3,983 8,136 7,951
-------- ------- -------- --------
Net income (loss) attributable to common stock $ 4,376 ($11,386) ($3,556) ($24,042)
-------- ------- -------- --------
Basic earnings (loss) per share before cumulative
effect of change in accounting principle...... $0.12 ($0.33) $0.03 ($0.71)
Cumulative effect of change in accounting
principle..................................... -- -- ( 0.13) --
-------- -------- --------- --------
Basic earnings (loss) per share attributable to
common stock.................................. $0.12 ($0.33) ($ 0.10) ($0.71)
-------- -------- --------- --------
Weighted average number of basic shares
outstanding................................... 35,574 34,163 35,188 33,992
-------- -------- --------- --------
Diluted earnings (loss) per share before
cumulative effect of change in accounting
principle....................................... $0.10 ($0.33) $0.02 ($0.71)
Cumulative effect of change in accounting
principle.......... -- -- (0.11) --
-------- -------- --------- --------
Diluted earnings (loss) per share attributable to
common stock.................................... $0.10 ($0.33) ($0.09) ($0.71)
-------- -------- --------- --------
Weighted average number of diluted shares
outstanding..... 41,545 34,163 40,373 33,992
-------- -------- --------- --------
Comprehensive income (loss)
Net income (loss)............................. $8,381 ($7,403) $4,580 ($16,091)
Other comprehensive loss...................... (199) -- (35) --
-------- -------- --------- ---------
Comprehensive income (loss)................... $8,182 ($7,403) $4,545 ($16,091)
-------- -------- --------- ---------
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
2
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months
Ended June 30,
---------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss)................................................... $4,580 ($16,091)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle................. 4,561 --
Deferred income taxes............................................... 4,496 --
Depreciation and amortization....................................... 2,222 13,644
Amortization of deferred financing costs............................ 5,358 699
Equity in net (income) loss of joint venture........................ (5,341) 178
Distributions from joint venture.................................... 442 --
Changes in operating assets and liabilities:
Accounts receivable.............................................. 2,732 9,844
Inventories...................................................... 49 17,355
Income tax receivable............................................ (600) --
Prepaid expenses and other current assets........................ 10,645 (2,139)
Deferred charges and other assets................................ 33 798
Accounts payable, accrued expenses and other liabilities......... (5,504) (19,683)
---------- -----------
Net cash provided by operating activities............................ 23,673 4,605
---------- -----------
Cash flows from investing activities:
Increase in restricted cash....................................... -- (3,000)
Payment of administrative claims and unsecured creditors payable, net (1,219) (2,238)
Purchases of molds, tools and equipment........................... (545) (2,527)
Expenditures for product and package design costs................. (658) (1,486)
Other intangibles................................................. (1) --
---------- ------------
Net cash used in investing activities................................... (2,423) (9,251)
---------- ------------
Cash flows from financing activities:
Deferred financing costs........................................... (196) --
Stock purchase warrants exercised.................................. -- 1
Repayment of credit facility....................................... (1,543) --
Exercise of stock options.......................................... 1,266 --
----------- ------------
Net cash (used) provided by financing activities......................... (473) 1
----------- ------------
Net increase (decrease) in cash and cash equivalents..................... 20,777 (4,645)
Cash and cash equivalents, at beginning of period........................ 21,591 22,803
----------- ------------
Cash and cash equivalents, at end of period.............................. $42,368 $18,158
=========== ============
=========== ============
Supplemental disclosures of cash flow information:
Interest paid during the period (including $9,149
applicable to 2001 interest paid on senior notes in January 2002)... $18,743 $15,310
Income taxes, net, paid during the period........................... $ 66 $ 157
Non-cash transactions:
Preferred dividends requirement..................................... $8,136 $7,951
Conversion of preferred stock to common stock....................... $11,813 $6,986
Fair value of warrants issued in connection with credit facility.... $2,567 $--
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
3
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(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 Statements of
Operations and Comprehensive Income (Loss) for the three months and six months
ended June 30, 2002 and the Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2002 are not necessarily indicative of those for
the full year ending December 31, 2002. Certain prior year amounts have been
reclassified to conform to the 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 for the fiscal year ended December 31,
2001.
2. GOODWILL, OTHER INTANGIBLE ASSETS AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE
In January 2002, the Company adopted Statement of Financial Accounting
Standards No.142, "Goodwill and Other Intangible Assets", "SFAS 142", which
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. SFAS 142 requires that goodwill and intangible
assets deemed to have an indefinite useful life be reviewed for impairment upon
adoption of SFAS 142 (January 1, 2002) and annually thereafter. The Company will
perform its annual impairment review during the fourth quarter of each year,
commencing in the fourth quarter of 2002.
Under SFAS 142, goodwill impairment is deemed to exist if the net book
value of a reporting unit exceeds its estimated fair value. The Company's
reporting units are consistent with the operating segments identified in Note 15
to the Consolidated Financial Statements included in its 2001 annual report,
Form 10-K. This methodology of evaluating each reporting unit separately differs
from the Company's previous policy, as permitted under accounting standards
existing at that time, of using undiscounted cash flows on an enterprise-wide
basis to determine if goodwill was recoverable.
Upon adoption of SFAS 142 in the first quarter of 2002, the Company
recorded a one-time, non-cash charge of approximately $4.6 million, net of
income tax of approximately $2.6 million ($0.11 per share) to reduce the
carrying value of its goodwill, with respect to its toy merchandising and
distribution reporting unit. Such charge is non-operational in nature and is
reflected as a cumulative effect of change in accounting principle in the
accompanying Condensed Consolidated Statement of Operations and Comprehensive
Income (Loss) for the six months ended June 30, 2002. Due to this impairment,
operating results for the three-month period ended March 31, 2002 have been
restated from a previously reported net loss attributable to common stockholders
of $3,371,000 ($0.10 per basic and diluted share) to a net loss attributable to
common stockholders of $7,932,000 ($0.23 per basic and diluted share).
4
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
A summary of the Company's goodwill before and after the application of SFAS
142, and total assets as of June 30, 2002, by reporting unit, is as follows (in
thousands):
Goodwill Total Assets
------------------------------------------------------------------ -------------
Utilization of
January 1, Net Operating June 30 June 30
2002 Impairments Loss Carryforwards 2002 2002
--------- ------------ ------------------ -------- ---------
Licensing $324,193 $ - $ (1,891) $322,302 $364,590
Publishing 49,316 - - 49,316 76,847
Toy Merchandising
and Distributing 7,166 (7,166) - - 74,938
--------- ------------- ------------------ --------- ----------
Total $380,675 $ (7,166) $ (1,891) $371,618 $516,375
========= ============= ================== ========= ==========
The Company has no intangible assets not subject to amortization. As of
June 30, 2002 and December 31, 2001, the Company's intangible assets subject to
amortization and related accumulated amortization consisted of the following (in
thousands):
As of June 30, 2002 As of December 31, 2001
------------------------------------------- -----------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
--------- -------------- --------- --------- ------------ ----------
Patents $ 3,186 $ 2,803 $ 383 $ 3,185 $ 2,695 $ 490
Trademarks 1,264 828 436 1,264 766 498
---------- -------------- --------- --------- ------------ ----------
Total $ 4,450 $ 3,631 $ 819 $ 4,449 $ 3,461 $ 988
========== ============== ========= ========= ============ ==========
The Company recorded amortization expense of intangible assets of $85,000
and $170,000 during the three months and six months ended June 30, 2002 compared
to $54,000 and $109,000 during the three and six month periods ended June 30,
2001. Based on the current amount of intangible assets subject to amortization,
the estimated amortization expense for each of the succeeding 5 years are as
follows: 2002: $338,000; 2003: $304,000; 2004: $217,000; 2005: $129,000; 2006:
$0.
The 2001 results on a historical basis do not reflect the provisions of
SFAS 142. Had the Company adopted SFAS 142 on January 1, 2001, the historical
loss attributable to common stockholders and basic and diluted net loss per
common share would have changed to the adjusted amounts indicated below (in
thousands except per share amounts):
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
-------------- ---------------
Net loss attributable to common stockholders
As reported - historical basis $ (11,386) $ (24,042)
Add: Goodwill amortization 5,867 11,733
--------------- ----------------
Adjusted net loss attributable to common stockholders $ (5,519) $ (12,309)
=============== ================
Basic and diluted loss per share attributable to common stock $ (0.16) $ (0.36)
5
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(In thousands)
(unaudited)
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
June 30, December 31
2002 2001
--------- ------------
Accounts receivable, net, consist of the following:
Accounts receivable.............................................. $59,046 $52,761
Less allowances
Doubtful accounts.................................... (7,280) (5,275)
Advertising, markdowns, returns, volume, discounts
and other............................................ (16,874) (11,838)
---------- ------------
Total......................................................... $34,892 $35,648
========== ============
Inventories, net, consist of the following:
Toys:
Finished goods................................................. $9,669 $12,039
Component parts, raw materials and work-in-process............. 2,816 3,849
---------- -----------
Total toys.................................................. 12,485 15,888
---------- -----------
Publishing:
Finished goods................................................. 1,524 1,411
Editorial and raw materials.................................... 6,858 3,617
--------- -----------
Total publishing............................................. 8,382 5,028
--------- -----------
Total........................................................ $20,867 $20,916
========= ===========
Molds, tools and equipment, net, consists of the following:
Molds, tools and equipment...................................... $3,695 $3,410
Office equipment and other...................................... 12,164 12,096
Less accumulated depreciation and amortization.................. (8,549) (7,430)
---------- ------------
Total......................................................... $7,310 $8,076
========== ============
Product and package design costs, net, consists of the following:
Product design costs............................................ $2,742 $2,255
Package design costs............................................ 1,035 864
Less accumulated amortization................................... (1,642) (901)
---------- ------------
Total......................................................... $2,135 $2,218
========== ============
Accrued expenses and other:
Accrued royalties................................................ $4,230 $2,737
Inventory purchases.............................................. 5,599 1,443
Income taxes payable............................................. 2,357 2,051
Marvel Entertainment Group acquisition accruals.................. 1,483 1,857
Interest expense................................................. 1,461 9,971
Accrued expenses - Fleer sale including pension benefits......... 3,854 3,946
Pre-acquisition litigation charge................................ 3,000 3,000
Other accrued expenses........................................... 9,176 10,265
--------- -----------
Total.......................................................... $31,160 $35,270
========= ===========
6
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
4. DEBT FINANCING
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 ("the Act") pursuant to Rule 144A under the Act. On
August 20, 1999, the Company completed an exchange offer under which it
exchanged virtually all of the senior notes, which contained restrictions on
transfer, for an equal principal amount of registered, transferable senior notes
("Senior Notes"). The Senior Notes are due June 15, 2009 and bear interest at
12% per annum payable semi-annually on June 15th and December 15th. The Senior
Notes may be redeemed beginning June 15, 2004 for a redemption price of 106% of
the principal amount, plus accrued interest. The redemption price decreases 2%
each year after 2004 and will be 100% of the principal amount, plus accrued
interest, beginning on June 15, 2007. Principal and interest on the Senior Notes
are guaranteed on a senior basis jointly and severally by each of the Company's
domestic subsidiaries.
On November 30, 2001, the Company and HSBC Bank USA entered into an
agreement for an $80 million senior credit facility (the "Credit Facility"). The
Credit Facility is comprised of a $20 million revolving letter of credit
facility renewable annually for up to three years and a $60 million multiple
draw three year amortizing term loan facility. During the fourth quarter of
2001, the Company drew down $37 million under this facility, which was used to
finance the repurchase of a portion of the Company's Senior Notes. No additional
draws were taken by the Company in 2002. The Company's ability to borrow
additional funds from this facility was limited to the period prior to February
1, 2002. The term loan facility amortizes quarterly over three years with the
outstanding principal due and payable on December 31, 2004. At the option of the
Company, the term loans bear interest either at the lender's base rate plus a
margin of 2.5% or the lender's reserve adjusted LIBOR rate plus a margin of 3.5%
(5.5% at June 30, 2002). The Company may prepay the term loans applying the base
rate at any time without penalty, but may only prepay the LIBOR rate loans
without penalty at the end of the applicable interest period. The letter of
credit facility is a one-year facility subject to annual renewal, expiring on
the date which is five days prior to the final maturity for the term loan
facility. At June 30, 2002, $13.9 million of letters of credit were outstanding.
The Credit Facility contains customary mandatory prepayment provisions for
facilities of this nature, including an excess cash flow sweep. It also contains
customary event of default provisions and covenants restricting the Company's
operations and activities, including the amount of capital expenditures, and
also contains certain covenants relating to the maintenance of minimum net worth
and a minimum interest coverage and leverage ratio and restrictions on paying
cash dividends. The Credit Facility is secured by (a) a first priority perfected
lien in all of the assets of the Company; (b) a first priority perfected lien in
all of the capital stock of each of the Company's domestic subsidiaries; (c) a
first priority perfected lien in 65% of the capital stock of each of the
Company's foreign subsidiaries; and (d) cash collateral to be placed in a cash
reserve account in an amount equal to at least $10 million at the end of each
fiscal quarter.
In consideration for the Credit Facility, the Company issued warrants on
November 30, 2001 to HSBC to purchase up to 750,000 shares of the Company's
common stock. These warrants have an exercise price of $3.62 and a life of five
years. The fair value for the warrants was estimated at the date of issuance
using the Black-Scholes pricing model with the following assumptions: risk free
interest rate of 4.16%; no dividend yield; expected volatility of 0.924; and
expected life of five years. The aggregate value of $1,980,000 is included in
deferred financing costs on the Condensed Consolidated Balance Sheets and is
being amortized over the term of the Credit Facility using the effective
interest method.
7
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
In connection with the Credit Facility, the Company and Isaac Perlmutter
entered into a Guaranty and Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
Credit Facility in an amount equal to 25% of all principal obligations relating
to the Credit Facility plus an amount, not to exceed $10 million, equal to the
difference between the amount required to be in the cash reserve account
maintained by the Company and the actual amount on deposit in such cash reserve
account at the end of each fiscal quarter; provided that the aggregate amount
guaranteed by Mr. Perlmutter will not exceed $30 million. Under the terms of the
Security Agreement, Mr. Perlmutter has provided the creditors under the Credit
Facility with a security interest in the following types of property, whether
currently owned or subsequently acquired by him: all promissory notes,
certificates of deposit, deposit accounts, checks and other instruments and all
insurance or similar payments or any indemnity payable by reason of loss or
damage to or otherwise with respect to any such property.
In consideration for the Guaranty and Security Agreement, the Company
issued Mr. Perlmutter warrants on November 30, 2001 to purchase up to five
million shares of the Company's common stock. These warrants have an exercise
price of $3.11, a life of five years and whose exercisability is determined by a
calculation reflecting the amounts guaranteed by Mr. Perlmutter. During February
2002, Mr. Perlmutter guaranteed $4.4 million relating to the Company's corporate
office lease agreement as well as certain letters of credit totaling
approximately $0.2 million, which are included within his maximum guarantee of
$30 million, for which the Company granted him warrants to purchase 735,601
shares of common stock at an exercise price of $3.11 and a life of five years.
Based on the cumulative amounts guaranteed by Mr. Perlmutter, 4,603,309 warrants
are exercisable at June 30, 2002 (3,867,708 warrants at December 31, 2001). The
fair value for these warrants was estimated at the date of issuance using the
Black-Scholes pricing model with the following assumptions: risk free interest
rate of 4.16%; no dividend yield; expected volatility of 0.924; and expected
life of five years. The aggregate value of the exercisable warrants was
$13,048,735 and is included in the Condensed Consolidated Balance Sheets as
deferred financing costs and is being amortized as interest expense over the
three-year term of the Credit Facility using the effective interest method.
5. SHARES OUTSTANDING
The Condensed Consolidated Statement of Operations presents operations of
the Company for the three and six months ended June 30, 2002. During the first
six months of 2002, there were conversions of 1,181,209 shares of preferred
stock into 1,227,276 shares of common stock and 275,865 shares of common stock
were issued upon the exercise of employee stock options. The total number of
shares of common stock outstanding as of June 30, 2002 is 36,269,988; Assuming
conversion of all of the outstanding 8% Preferred Stock, the number of shares of
common stock outstanding at June 30, 2002 would have been 57,494,967, further
assuming conversion of all of the 8% Preferred Stock and exercise of all
outstanding warrants and employee stock options, the number of shares of common
stock would have been 81,540,118.
8
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30 June 30
------------------------ --------------------------
2002 2001 2002 2001
----------- ---------- ---------- ------------
Numerator:
Net income $ 8,381 $ (7,403) $ 4,580 $ (16,091)
Preferred dividends (4,005) (3,983) (8,136) (7,951)
------------ ---------- ---------- ------------
Numerator for basic and diluted earnings per share -
income attributable to common stockholders $ 4,376 $ (11,386) $ (3,556) $ (24,042)
============ ========== ========== ============
Denominator:
Denominator for basic earnings per share 35,574 34,163 35,188 33,992
Effect of dilutive warrants 2,822 - 2,482 -
Effect of employee stock options* 3,149 - 2,703 -
Effect of dilutive of redeemable cumulative
exchangeable preferred stock** - - - -
------------ ---------- ----------- ------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 41,545 34,163 40,373 33,992
============ ========== ============ ============
Basic earnings per share $ 0.12 $ (0.33) $ (0.10) $ (0.71)
============ ========== ============ ============
Diluted earnings per share $ 0.10 $ (0.33) $ (0.09) $ (0.71)
============ ========== ============ ============
* Any dilution arising from the Company's outstanding employee stock options
during the three and six months ended June 30, 2001 are not included as their
effect is anti-dilutive.
** The calculation of diluted earnings per share does not include the assumed
conversion of convertible preferred stock for the three and six month periods
ended June 30, 2002, as such would be anti-dilutive - caused by the effect of
adding back the preferred stock dividends (to the numerator) in such
calculation.
9
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
6. SEGMENT INFORMATION
The Company's operations consist of three segments: Toy Merchandising and
Distributing, Publishing and Licensing Segments.
Toy Merchandising and Distributing Segment
The toy merchandising and distributing segment designs, develops, markets
and distributes a limited line of toys to the worldwide marketplace. The
Company's toy products are based upon Spider-Man: The Movie as well as
properties that the Company licenses in from other studios such as the Lord of
the Rings (New Line Cinema). The Spectra Star division of the toy merchandising
segment designs, produces and sells kites in both the mass market stores and
specialty hobby shops.
Publishing Segment
The publishing segment creates and publishes comic books principally in
North America. The acquired company has been publishing comic books since 1939
and has developed a roster of more than 4,700 Marvel Characters. The Company's
titles feature classic Marvel Super Heroes, Spider-Man, X-Men, newly developed
Marvel Characters and characters created by other entities and licensed to the
Company.
Licensing Segment
The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use with (i) merchandise and toys, (ii)
promotions, (iii) publishing, (iv) television and film, (v) on-line and
interactive software and (vi) restaurants, theme parks and site-based
entertainment.
Set forth below is certain operating information for the segments of the
Company.
Three months ended June 30, 2002
Licensing Publishing Toys Corporate Total
--------- ---------- --------- --------- --------
(in thousands)
Net sales $17,156 $17,942 $35,841 $ ---- $70,939
Gross profit 16,995 9,256 10,429 ---- 36,680
Operating income (loss) 16,556 6,213 1,137 (3,424) 20,482
EBITDA(1) 16,587 6,217 2,293 (3,424) 21,673
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-acquisition litigation charge ---- ---- ---- (3,000) (3,000)
Operating income (loss) 3,971 1,980 (599) (5,344) 8
EBITDA(1) 8,950 2,775 548 (5,344) 6,929
10
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
Six months ended June 30, 2002
Licensing Publishing Toys Corporate Total
--------- ---------- --------- --------- --------
(in thousands)
Net sales $26,328 $32,501 $69,332 $ ---- $128,161
Gross profit 26,152 16,968 21,978 ---- 65,098
Operating income (loss) 20,776 9,984 4,899 (5,901) 29,758
EBITDA(1) 20,839 9,992 7,050 (5,901) 31,980
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) 1,749 3,924 665 (6,997) (659)
EBITDA(1) 11,706 5,514 2,762 (6,997) 12,985
- ------
(1) "EBITDA" is defined as earnings before cumulative effect of change in
accounting principle, 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.
7. SPIDER-MAN: THE MOVIE
During 1999, the Company entered into a license agreement with Sony
Pictures Entertainment, Inc., ("Sony") providing for the licensing of the
Spider-Man character in exchange for a gross participation in the marketing of
the Spider-Man: The Movie (which was commercially released on May 3, 2002) and
related releases on DVD/VHS and likely other revenue sources (e.g., syndication
sales, etc.), and established an equally owned joint venture for the merchandise
licensing of the Spider-Man: The Movie character.
Earnings associated with the Company's participation in the gross proceeds
of the movie have been recognized as non-refundable advance royalty payments as
received, which amounted to $10 million in 1999 and $2.5 million in 2002 (second
quarter). Prospectively, movie royalties in excess of advances received will be
recognized as reported by Sony.
Earnings associated with our merchandising joint venture (accounted for
under the equity method of accounting) amounted to approximately $5.3 million
during the quarter ended June 30, 2002, and represent the Company's share of the
minimum guaranteed merchandising royalties, net of expenses. The Company's share
of the joint venture's earlier losses amounted to $0.3 million in 2000 and 2001.
Additional earnings, in excess of the minimum guarantees, will be recognized as
reported to the joint venture as earned.
11
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
8. COMMITMENTS AND CONTINGENCIES
Commitments
In June 2000, the Company entered into a merchandise licensing agreement to
manufacture and distribute a line of toys associated with a motion picture
trilogy. The first motion picture in the trilogy was released on December 19,
2001 and the remaining two are expected to be released during the fourth
quarters of 2002 and 2003, respectively. In connection with this licensing
agreement and future minimum royalty obligations, the Company was required to
provide the licensor with a $5.0 million cash payment and a standby letter of
credit in the amount of $10.0 million, which is outstanding at June 30, 2002.
The Company is a party to various other royalty agreements with future
guaranteed royalty payments through 2004. Minimum future obligations under all
royalty agreements are as follows:
(in thousands)
2002..... $ 5,503
2003..... 5,221
-------
Total $10,724
=======
The Company remains liable in connection with businesses previously sold.
Legal Matters
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any 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. In February 2002, the Court granted the Company's motion for
summary judgment. Simon appealed the Court's decision and the hearing on the
appeal was held in June 2002. The Company is awaiting the Court's decision.
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,
12
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(unaudited)
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 (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 has not and will not, have a
significant effect on the Company's operations. In January 2002, the United
States Appeals Court for the Second Circuit, in response to Fox's appeal,
affirmed the District Court's denial of Fox's motion for a preliminary
injunction to prevent the airing of the Mutant X series and remanded the case to
the District Court for further proceedings consistent with its opinion. At the
present time, the parties are engaged in pre-trial discovery with a trial on the
merits scheduled for November 2002.
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. The Company has provided for this judgment during the second
quarter of 2001 in the Consolidated Statement of Operations.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company and Marvel Entertainment Group, Inc. (the "Marvel Defendants") in New
York Supreme Court, County of New York, alleging that the Marvel Defendants
breached their own Terms of Sale Agreement in connection with the sale of comic
books to members of the purported class, breached their obligation of good faith
and fair dealing(s), fraudulently induced plaintiff and other members of the
purported class to buy comics and unjustly enriched themselves. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. Marvel intends to oppose certification of the purported
class and vigorously defend this action on its merits.
Administrative Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administrative Expense Claims
submitted to the Company for payment. As of June 30, 2002, the Company has
settled substantially all Administrative Expense Claims and believes the
remaining accrual of $2.2 million is sufficient to provide for its remaining
obligations.
13
Item 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURTIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed 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
inability to successfully implement its business strategy, (ii) a decrease in
the level or a shift in the timing of media exposure or a decrease in popularity
of the Company's characters resulting in declining revenues from products based
on those characters, (iii) the continued financial stability of major licensees
of the Company (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) a decrease
in cash flow effecting the Company's ability to pay the outstanding indebtedness
(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's businesses are managed within three segments: Toy
Merchandising and Distributing, Publishing and Licensing Segments.
Toy Merchandising and Distributing Segment
The toy merchandising and distributing segment designs, develops, markets
and distributes a limited line of toys to the worldwide marketplace. The
Company's toy products are based upon Spider-Man: The Movie as well as
properties that the Company licenses in from other studios such as the Lord of
the Rings (New Line Cinema). The Spectra Star division of the toy merchandising
segment designs, produces and sells kites in both the mass market stores and
specialty hobby shops.
Publishing Segment
The publishing segment creates and publishes comic books principally in
North America. The acquired company has been publishing comic books since 1939
and has developed a roster of more than 4,700 Marvel Characters. The Company's
titles feature classic Marvel Super Heroes, Spider-Man, X-Men, newly developed
Marvel Characters and characters created by other entities and licensed to the
Company.
Licensing Segment
The licensing segment relates to the licensing of or joint ventures
involving the Marvel Characters for use with (i) merchandise and toys, (ii)
promotions, (iii) publishing, (iv) television and film, (v) on-line and
interactive software and (vi) restaurants, theme parks and site-based
entertainment.
14
Results of Operations
Three months ended June 30, 2002 compared with the three months ended June 30,
2001
The Company's net sales increased approximately $25.0 million to $70.9
million in the second quarter of 2002 from approximately $45.9 million in the
second quarter of 2001. The increase is due to improved performance across each
of the Company's operating segments. Sales from the Toy segment increased
approximately $12.3 million to approximately $35.8 million in the second quarter
of 2002 from approximately $23.5 million in the second quarter of 2001,
primarily due to the sales of action figures and accessories based on characters
from Spider-Man: The Movie which were partially offset by lower sales of toys
from other product categories. Sales from the Publishing segment increased
approximately $6.8 million to approximately $18.0 million in the second quarter
of 2002 from $11.2 million in the second quarter of 2001, primarily due to an
increase in the sales of comic books and trade paperbacks to the direct and mass
markets. Sales from the Licensing segment increased approximately $5.9 million
to approximately $17.1 million in the second quarter of 2002 from approximately
$11.2 million in the second quarter of 2001, primarily due to the Company's
participation in the box office receipts for Spider-Man: The Movie as well as a
$5.0 million advance payment from Sony Pictures Entertainment to begin the
production on the sequel of Spider-Man: The Movie. In addition, there was
additional revenue recognized in connection with other non-refundable advance
payments for future motion pictures based on the characters X-Men and Hulk.
Gross profit increased approximately $13.2 million to approximately $36.7
million in the second quarter of 2002 from approximately $23.5 million in the
second quarter of 2001. This was primarily due to improvements in each of the
Company's operating segments. Gross profits improved 54% in Licensing, 66% in
Publishing, and 50% in Toys as compared to the second quarter of 2001.
Consolidated gross profit as a percentage of net sales increased to
approximately 52% in the 2002 period from approximately 51% in the 2001 period.
The gross profit percentage for the Toy segment remained at 29% in the 2002
period as compared to the 2001 period. The gross profit percentage for
Publishing segment increased to 52% in the 2002 period from 50% in the 2001
period, primarily due to increased sales of high margin trade paperbacks. The
gross profit percentage for Licensing remained relatively the same in the first
quarter of 2002 as compared to the first quarter of 2001.
Selling, general and administrative expenses increased approximately $4.5
million to approximately $21.0 million, or approximately 30% of net sales in the
second quarter of 2002 as compared to approximately $16.5 million (which
includes a $3.0 million pre-acquisition litigation charge as described below) or
approximately 36% of net sales in the second quarter of 2001. The Licensing
segment accounted for approximately $3.8 million of the increase, $2.5 million
of which is attributable to recognition of development costs associated with the
X-Men Evolution television series that were expensed during the second quarter
of 2002 and approximately $1.2 million attributable to increases in recorded
accounts receivable reserves. The Publishing segment accounted for approximately
$0.9 million of the increase, which was principally attributable to an increase
in distribution fees resulting from increased sales to the direct market. The
Toy segment accounted for approximately $1.7 million of the increase primarily
due to an increase in selling expenses, specifically the write-off of prepaid
royalties of approximately $3.1 million associated with the Lord of the Rings
toy license. This overall increase was partially offset by a reimbursement of
$2.4 million from Toy Biz Worldwide Ltd., an unrelated entity, for
administrative and management support provided. The Corporate division accounted
for a decrease of $1.9 million due to the pre-acquisition litigation charge of
$3.0 million relating to the litigation involving The Coleman Company
(MacAndrews & Forbes v. Marvel - See Part II, Item 1, Legal Proceedings) that
was recorded in the second quarter of 2001 that was partially offset by an
increase in legal fees in the second quarter of 2002 relating to several ongoing
litigations (See Part II, Item 1, " Legal Proceedings" for further details).
In the second quarter of 2002, upon the release of Spider-Man: The Movie
(May 3, 2002), the Company recognized $5.3 million in net revenue in connection
with its share in a jointly owned limited partnership with Sony whose purpose is
to pursue licensing opportunities for motion picture and television related
merchandise relating to the Spider-Man character. The Company accounts for the
activity of this joint venture under the equity method and has recognized net
revenue of approximately $5.3 million in the second quarter of June 30, 2002 as
compared to expenses of $0.1 million in the second quarter of 2001.
15
Depreciation and amortization expense decreased approximately $5.7 million
to approximately $1.2 million in the 2002 period from approximately $6.9 million
in the 2001 period primarily due to the effect of the adoption of SFAS No 142,
"Goodwill and Other Intangible Assets", whereby periodic goodwill amortization
charges are no longer recorded (See Note 2 to the Condensed Consolidated
Financial Statements).
Net interest expense remained at $7.8 million in the second quarter of
2002 as compared to the second quarter of 2001. Cash interest savings from the
2001 repurchase of Senior Notes was principally offset by the non-cash
amortization of deferred financing costs associated with the HSBC financing and
the Perlmutter Guaranty and Security Agreement.
The Company's effective tax rate for the quarter approximates the federal
statutory rate due primarily to the tax benefit from stock option exercises and
the payment of certain unsecured and administrative claims which arose during
the bankruptcy, offset by the effect of state and foreign taxes. The Company has
net operating loss carryforwards (NOLs) of approximately $137.4 million, of
which $45.1 million is related to the acquisition of Marvel Entertainment Group.
A portion of these pre-acquisition NOLs were utilized in the three months ended
June 30, 2002 and recorded as a reduction in goodwill.
Six months ended June 30, 2002 compared with the six months ended June 30, 2001
The Company's net sales increased approximately $39.6 million to $128.2
million for the six months ended June 30, 2002 from approximately $88.6 million
for the six months ended June 30, 2001. The increase is due to improved
performance across each of the Company's operating segments. Sales from the Toy
segment increased approximately $18.8 million to approximately $69.4 million in
the 2002 period from approximately $50.6 million in the 2001 period primarily
due to the sales of action figures and accessories based on characters from
Spider-Man: The Movie. Sales from the Publishing segment increased approximately
$11.1 million to approximately $32.5 million in the 2002 period from $21.4
million in the 2001 period primarily due to an increase in the sales of comic
books and trade paperbacks to the direct and mass markets. Sales from the
Licensing segment increased approximately $9.7 million to approximately $26.3
million in the 2002 period from approximately $16.6 million in the 2001 period,
primarily due to the Company's participation in the box office receipts for
Spider-Man: The Movie as well as an advance payment of $5.0 million from Sony
Pictures Entertainment to begin production on the sequel of Spider-Man: The
Movie. In addition, there was additional revenue recognized in connection with
other non-refundable advance payments for future motion pictures based on the
characters X-Men, Hulk and Daredevil.
Gross profit increased approximately $23.2 million to approximately $65.1
million for the six months ended June 30, 2002 from approximately $41.9 million
for the six months ended June 30, 2001. This was primarily due to increases in
gross profit across each of the Company's operating segments. Gross profit as a
percentage of net sales increased to approximately 51% in the 2002 period from
approximately 47% in the 2001 period. The gross profit percentage for the Toy
segment increased to 32% in the 2002 period as compared to 30% in the 2001
period primarily due to toy sales based on characters from Spider-Man: The
Movie. The gross profit percentage for the Publishing segment increased to 52%
in the 2002 period from 49% in the 2001 period primarily due to increased sales
of high margin trade paperbacks. The gross profit percentage for Licensing
remained relatively the same in the first half of 2002 as compared to the first
half of 2001.
Selling, general and administrative expenses increased approximately $10.5
million to approximately $39.2 million or approximately 31% of net sales for the
six months ended June 30, 2002 from approximately $28.7 million (which includes
a $3.0 million pre-acquisition litigation charge as described below) or
approximately 32% of net sales for the six months ended June 30, 2001. The
Licensing segment accounted for approximately $6.2 million of the increase, $3.9
million of which is attributable to recognition of development costs associated
with the X-Men Evolution television series as well as approximately $1.7 million
attributable to increases in recorded accounts receivable reserves. The
Publishing segment accounted for approximately $2.8 million of the increase
which was attributable to an increase in distribution fees of approximately $1.9
million resulting from increased sales to the direct market as well as an
additional $0.4 million in accounts receivable reserves and $0.5 million which
16
relates to a donation to the Twin Towers Fund resulting from sales of its
"Heroes" issue.. The Toy segment accounted for approximately $2.6 million of the
increase primarily due to an increase in selling expenses, specifically
advertising for Spider-Man: The Movie toys as well as the write-off of prepaid
royalties of approximately $3.1 million associated with the Lord of the Rings
toy license. This was partially offset by a reimbursement of $3.8 million from
Toy Biz Worldwide Ltd., an unrelated entity, for administrative and management
support provided. The Corporate division accounted for a decrease of $1.1
million due to the pre-acquisition litigation charge of $3.0 million relating to
the litigation involving The Coleman Company (MacAndrews & Forbes v. Marvel -
See Part II, Item 1, Legal Proceedings) that was recorded in the second quarter
of 2001 partially offset by an increase in legal fees in the second quarter of
2002 relating to several ongoing litigations (See Part II, Item 1, " Legal
Proceedings" for further detail) as well as an increase in payroll expenses.
For the six months ended June 30, 2002 upon the release of Spider-Man: The
Movie (May 3, 2002), the Company recognized $5.3 million in net revenue in
connection with its share in a jointly owned limited partnership with Sony whose
purpose is to pursue licensing opportunities for motion picture and television
related merchandise relating to the Spider-Man character. The Company accounts
for the activity of this joint venture under the equity method and has
recognized net revenue of $5.3 million in the first half of 2002 as compared to
expenses of $0.2 million in the first half of 2001.
During the six month period ended June 30, 2002, the Company completed the
first of the impairment tests of goodwill required under SFAS 142, which was
adopted effective January 1, 2002. Under the new rules, goodwill is no longer
subject to amortization but it is reviewed for potential impairment, upon
adoption and thereafter annually or upon the occurrence of an impairment
indicator. The annual amortization of goodwill which would have approximated
$23.5 million is no longer required. Other intangible assets continue to be
amortized over their useful lives. As a result of completing the required test,
the Company recorded a charge retroactive to the adoption date for the
cumulative effect of the accounting change in the amount of $4.6 million, net of
tax of $2.6 million, representing the excess of the carrying value of the toy
merchandising and distribution reporting unit as compared to its estimated fair
value.
Depreciation and amortization expense decreased approximately $11.4
million to approximately $2.2 million in the 2002 period from approximately
$13.6 million in the 2001 period primarily due to the effect of the adoption of
SFAS No 142, "Goodwill and Other Intangible Assets", whereby periodic goodwill
amortization charges are no longer recorded (See Note 2 to the Condensed
Consolidated Financial Statements).
Net interest expense remained approximately at the same level, $15.7
million for the 2002 period as compared to $15.6 million for the 2001 period.
Cash interest savings from the 2001 repurchase of Senior Notes was principally
offset by the non-cash amortization of deferred financing costs associated with
the HSBC financing and the Perlmutter Guaranty and Security Agreement.
The Company's effective tax rate for the first half of 2002 approximates
the federal statutory rate due primarily to the tax benefit from stock option
exercises and the payment of certain unsecured and administrative claims which
arose during the bankruptcy, offset by the effect of state and foreign taxes.
The Company has net operating loss carryforwards (NOLs) of approximately $137.4
million, of which $45.1 million is related to the acquisition of Marvel
Entertainment Group. A portion of these pre-acquisition NOLs were utilized in
the six months ended June 30, 2002 and recorded as a reduction in goodwill.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash on hand, cash flows
from operations and from the $20.0 million HSBC letter of credit facility. The
Company anticipates that its primary needs for liquidity will be to: (i) conduct
its business; (ii) meet debt service requirements; (iii) make capital
expenditures; and (iv) pay administrative expense claims.
Net cash provided by operating activities was approximately $23.7 million
for the six months ended June 30, 2002 as compared to net cash provided by
operating activities of $4.6 million for the six months ended June 30, 2001.
17
At June 30, 2002, the Company had working capital of $45.3 million.
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes in a private placement exempt from registration under the
Securities Act of 1933 ("the Act") pursuant to Rule 144A under the Act. On
August 20, 1999, the Company completed an exchange offer under which it
exchanged virtually all of the senior notes, which contained restrictions on
transfer, for an equal principal amount of registered, transferable senior notes
("Senior Notes"). The Senior Notes are due June 15, 2009 and bear interest at
12% per annum payable semi-annually on June 15th and December 15th. The Senior
Notes may be redeemed beginning June 15, 2004 for a redemption price of 106% of
the principal amount, plus accrued interest. The redemption price decreases 2%
each year after 2004 and will be 100% of the principal amount, plus accrued
interest, beginning on June 15, 2007. Principal and interest on the Senior Notes
are guaranteed on a senior basis jointly and severally by each of the Company's
domestic subsidiaries.
On November 30, 2001, the Company and HSBC Bank USA entered into an
agreement for an $80 million senior credit facility (the "Credit Facility"). The
Credit Facility is comprised of a $20 million revolving letter of credit
facility renewable annually for up to three years and a $60 million multiple
draw three year amortizing term loan facility. During the fourth quarter of
2001, the Company drew down $37 million under this facility, which was used to
finance the repurchase of a portion of the Company's Senior Notes. No additional
draws were taken by the Company in 2002. The Company's ability to borrow
additional funds from this facility was limited to the period prior to February
1, 2002. The term loan facility amortizes quarterly over three years with the
outstanding principal due and payable on December 31, 2004. At the option of the
Company, the term loans bear interest either at the lender's base rate plus a
margin of 2.5% or the lender's reserve adjusted LIBOR rate plus a margin of 3.5%
(5.5% at June 30, 2002). The Company may prepay the term loans applying the base
rate at any time without penalty, but may only prepay the LIBOR rate loans
without penalty at the end of the applicable interest period. The letter of
credit facility is a one-year facility subject to annual renewal, expiring on
the date which is five days prior to the final maturity for the term loan
facility. At June 30, 2002, $13.9 million of letters of credit were outstanding.
The Credit Facility contains customary mandatory prepayment provisions for
facilities of this nature, including an excess cash flow sweep. It also contains
customary event of default provisions and covenants restricting the Company's
operations and activities, including the amount of capital expenditures, and
also contains certain covenants relating to the maintenance of minimum net worth
and a minimum interest coverage and leverage ratio and restrictions on paying
cash dividends. The Credit Facility is secured by (a) a first priority perfected
lien in all of the assets of the Company; (b) a first priority perfected lien in
all of the capital stock of each of the Company's domestic subsidiaries; (c) a
first priority perfected lien in 65% of the capital stock of each of the
Company's foreign subsidiaries; and (d) cash collateral to be placed in a cash
reserve account in an amount equal to at least $10 million at the end of each
fiscal quarter.
In consideration for the Credit Facility, the Company issued warrants on
November 30, 2001 to HSBC to purchase up to 750,000 shares of the Company's
common stock. These warrants have an exercise price of $3.62 and a life of five
years. The fair value for the warrants was estimated at the date of issuance
using the Black-Scholes pricing model with the following assumptions: risk free
interest rate of 4.16%; no dividend yield; expected volatility of 0.924; and
expected life of five years. The aggregate value of $1,980,000 is included in
deferred financing costs on the Condensed Consolidated Balance Sheets and is
being amortized over the term of the Credit Facility using the effective
interest method.
In connection with the Credit Facility, the Company and Isaac Perlmutter
entered into a Guaranty and Security Agreement. Under the terms of the Guaranty,
Mr. Perlmutter has guaranteed the payment of the Company's obligations under the
Credit Facility in an amount equal to 25% of all principal obligations relating
to the Credit Facility plus an amount, not to exceed $10 million, equal to the
difference between the amount required to be in the cash reserve account
maintained by the Company and the actual amount on deposit in such cash reserve
account at the end of each fiscal quarter; provided that the aggregate amount
guaranteed by Mr. Perlmutter will not exceed $30 million. Under the terms of the
Security Agreement, Mr. Perlmutter has provided the creditors under the Credit
Facility with a security interest in the following types of property, whether
currently owned or subsequently acquired by him: all promissory notes,
certificates of deposit, deposit accounts, checks and other instruments and all
insurance or similar payments or any indemnity payable by reason of loss or
damage to or otherwise with respect to any such property.
18
In consideration for the Guaranty and Security Agreement, the Company
issued Mr. Perlmutter warrants on November 30, 2001 to purchase up to five
million shares of the Company's common stock. These warrants have an exercise
price of $3.11, a life of five years and whose exercisability is determined by a
calculation reflecting the amounts guaranteed by Mr. Perlmutter. During February
2002, Mr. Perlmutter guaranteed $4.4 million relating to the Company's corporate
office lease agreement as well as certain letters of credit totaling
approximately $0.2 million, which are included within his maximum guarantee of
$30 million, for which the Company granted him warrants to purchase 735,601
shares of common stock at an exercise price of $3.11 and a life of five years.
Based on the cumulative amounts guaranteed by Mr. Perlmutter, 4,603,309 warrants
are exercisable at June 30, 2002 (3,867,708 warrants at December 31, 2001). The
fair value for the warrants was estimated at the date of issuance using the
Black-Scholes pricing model with the following assumptions: risk free interest
rate of 4.16%; no dividend yield; expected volatility of 0.924; and expected
life of five years. The aggregate value of the exercisable warrants was
$13,048,735 and is included in the Condensed Consolidated Balance Sheets as
deferred financing costs and is being amortized as interest expense over the
three year term of the Credit Facility using the effective interest method.
The Company believes that cash on hand, cash flow from operations,
borrowings available under the HSBC letter of credit facility and other sources
of liquidity, will be sufficient for the Company to conduct its business, meet
debt service requirements, make capital expenditures and pay Administrative
Expense Claims.
The following tables set forth the Company's Contractual Cash Obligations and
Other Commercial Commitments as of June 30, 2002:
Contractual
Cash Obligations Payments Due By Period
------------------ ----------------------
Less than After
(Amounts in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years
-------- --------- ----------- ----------- ---------
Long Term Debt $186,419 $ 10,771 $ 24,686 ---- $ 150,962
Operating Leases 16,174 3,537 7,105 4,330 1,202
-------- --------- ----------- ----------- ---------
Total Contractual
Cash Obligations $202,593 $ 14,308 $ 31,791 $ 4,330 $ 152,164
======== ========= =========== =========== =========
Other Commercial Amount of Commitment
Commitments Total Expiration Per Period
------------------ -------- ------------------------------------------------------
Less than Over
(Amounts in thousands) 1 Year 1-3 Years 4-5 Years 5 Years
---------- ----------- ---------- ---------
Standby Letters of Credit $13,894 $ 5,194 $ 8,700 $ - $ -
======== ========= =========== ========== =========
19
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. In February 2002, the Court granted the Company's motion for
summary judgment. Simon appealed the Court's decision and the hearing on the
appeal was held in June 2002. The Company is awaiting the Court's decision.
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 (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 has not and will not, have a significant effect on the
Company's operations. In January 2002, the United States Appeals Court for the
Second Circuit, in response to Fox's appeal, affirmed the District Court's
denial of Fox's motion for a preliminary injunction to prevent the airing of the
Mutant X series and remanded the case to the District Court for further
proceedings consistent with its opinion. At the present time, the parties are
engaged in pre-trial discovery with a trial on the merits scheduled for November
2002.
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. The Company has provided for this judgment during the second
quarter of 2001 in the Consolidated Statement of Operations.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company and Marvel Entertainment Group, Inc. (the "Marvel Defendants") in New
York Supreme Court, County of New York, alleging that the Marvel Defendants
breached their own Terms of Sale Agreement in connection with the sale of comic
books to members of the purported class, breached their obligation of good faith
20
and fair dealing(s), fraudulently induced plaintiff and other members of the
purported class to buy comics and unjustly enriched themselves. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. Marvel intends to oppose certification of the purported
class and vigorously defend this action on its merits.
Administrative Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administrative Expense Claims
submitted to the Company for payment. As of June 30, 2002 the Company has
settled substantially all Administrative Expense Claims and believes the
remaining accrual of $2.2 million is sufficient to provide for its remaining
obligations.
Item 2. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
Exhibit No.
- ----------
10.1 Amendement to Ungar Employment Agreement and Loan Out Agreement
dated April 9,2002
12 Statement re: Computation of Ratios dated as of June 30, 2002.
99.1 Certification by Chief Executive Officer pursuant to
Sarbanes-Oxley Act
99.2 Certification by Chief Financial Officer pursuant to
Sarbanes-Oxley Act
b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during the
quarter ended June 30, 2002:
None
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, 2002 By: /s/ F. Peter Cuneo
-------------------
F. Peter Cuneo
President and Chief
Executive Officer
By: /s/ Kenneth P. West
-------------------
Kenneth P. West
Chief Financial Officer