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, 2004
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [X] No [ ]
At October 26, 2004, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 104,978,383.
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TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)....... 1
Condensed Consolidated Balance Sheets as of September
30, 2004 and December 31, 2003................................ 2
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three and Nine Months
Ended September 30, 2004 and 2003............................. 3
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2004 and 2003............. 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 12
Results of Operations......................................... 14
Liquidity and Capital Resources............................... 19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.......................................................... 20
Item 4. Controls and Procedures....................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 22
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds...................................................... 23
Purchase of Equity Securities by the Issuer and Affiliated
Purchasers.................................................... 23
Item 6. Exhibits and Reports on Form 8-K.............................. 23
SIGNATURES .............................................................. 24
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PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
1
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MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2004 2003
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 135,662 $ 32,562
Certificates of deposit, tax exempt notes, and commercial paper................ 45,000 214,457
Accounts receivable, net....................................................... 77,917 51,820
Inventories, net .............................................................. 10,222 12,975
Distribution receivable from joint venture, net................................ --- 2,056
Deferred income taxes, net..................................................... 18,197 18,197
Deferred financing costs....................................................... --- 667
Prepaid expenses and other current assets...................................... 1,146 2,273
-------------- --------------
Total current assets 288,144 335,007
Molds, tools and equipment, net.................................................. 5,354 5,811
Product and package design costs, net ........................................... 1,240 1,433
Goodwill, net ................................................................... 341,708 341,708
Intangibles, net................................................................. 179 335
Accounts receivable, non-current portion......................................... 38,491 26,437
Deferred income taxes, net, non-current portion................................. 7,417 28,246
Deferred financing costs, non-current portion.................................... --- 2,779
Other assets..................................................................... 211 101
-------------- --------------
Total assets............................................................. $ 682,744 $741,857
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 15,148 $ 18,455
Accrued royalties.............................................................. 44,077 32,936
Accrued expenses and other current liabilities................................. 42,902 31,442
Minority interest to be distributed............................................ 6,374 ---
Unsecured creditors payable ................................................... --- 2,963
Income taxes payable........................................................... 19,038 4,705
Deferred revenue .............................................................. 18,551 30,308
-------------- --------------
Total current liabilities................................................ 146,090 120,809
Senior notes..................................................................... --- 150,962
Accrued rent..................................................................... 420 636
Deferred revenue, non-current portion............................................ 8,359 ---
------------- --------------
Total liabilities........................................................ 154,869 272,407
------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued and
outstanding.................................................................. --- ---
Common stock, $.01 par value, 250,000,000 shares authorized, 120,314,168 issued
and 106,007,968 outstanding in 2004 and 119,706,206 issued and 108,615,206
outstanding in 2003.......................................................... 1,202 1,197
Deferred stock compensation...................................................... (6,073) (4,857)
Additional paid-in capital....................................................... 575,265 566,909
Retained earnings (deficit)...................................................... 36,819 (57,934)
Accumulated other comprehensive loss............................................. (2,781) (2,910)
-------------- --------------
Total stockholders' equity before treasury stock......................... 604,432 502,405
Treasury stock, 14,306,200 shares in 2004 and 11,091,000 shares in 2003.......... (76,557) (32,955)
-------------- --------------
Total stockholders' equity .............................................. 527,875 469,450
-------------- --------------
Total liabilities and stockholders' equity .............................. $ 682,744 $741,857
============== ==============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
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MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2004 2003 2004 2003
------------ ----------- ----------- -----------
Net sales ............................................. $ 135,183 $ 84,536 $ 412,976 $ 261,878
Cost of sales ......................................... 38,318 20,208 141,701 57,634
--------- --------- --------- ---------
Gross profit .......................................... 96,865 64,328 271,275 204,244
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative .............. 34,940 22,569 97,087 70,163
Depreciation and amortization .................... 1,350 1,051 2,906 2,808
--------- --------- --------- ---------
Total operating expenses ......................... 36,290 23,620 99,993 72,971
--------- --------- --------- ---------
Equity in net income of joint venture ................. -- 1,500 8,117 8,486
Other income, net ..................................... 1,570 870 3,659 1,413
--------- --------- --------- ---------
Operating income ...................................... 62,145 43,078 183,058 141,172
Interest expense (income), net ........................ (550) 4,239 18,343 13,072
--------- --------- --------- ---------
Income before income taxes and minority interest ...... 62,695 38,839 164,715 128,100
Income tax expense (benefit) .......................... 21,476 (24,339) 59,267 (10,053)
Minority interest in consolidated joint venture ....... 6,867 -- 10,695 --
--------- --------- --------- ---------
Net income ............................................ 34,352 63,178 94,753 138,153
Less: preferred dividend requirement .................. -- -- -- 1,163
--------- --------- --------- ---------
Net income attributable to common stock ............... $ 34,352 $ 63,178 $ 94,753 $ 136,990
========= ========= ========= =========
Basic earnings per share attributable to common stock.. $0.32 $0.62 $0.88 $1.40
========= ========= ========= =========
Weighted average number of basic shares outstanding ... 107,130 101,645 108,022 97,757
========= ========= ========= =========
Diluted earnings per share attributable to common stock $0.30 $0.57 $0.83 $1.22
========= ========= ========= =========
Weighted average number of diluted shares outstanding . 113,464 111,322 114,685 112,840
========= ========= ========= =========
Comprehensive income:
Net income ......................................... $ 34,352 $ 63,178 $ 94,753 $ 136,990
Other comprehensive income ......................... (43) (35) (129) (105)
--------- --------- --------- ---------
Comprehensive income ............................... $ 34,309 $ 63,143 $ 94,624 $ 136,885
========= ========= ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
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MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months
Ended September 30
------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income .............................................................. $ 94,753 $ 138,153
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................... 2,906 2,808
Provision for doubtful accounts ......................................... 2,806 779
Amortization of deferred financing costs ................................ 3,446 500
Non-cash charge for stock-based compensation ............................ 3,355 454
Tax benefit of stock option exercise .................................... 2,417 953
Gain from sale of fixed assets .......................................... (754) (134)
Deferred income taxes ................................................... 20,829 (16,384)
Minority interest in joint venture ...................................... 10,695 --
Equity in net income from joint venture ................................. (8,117) (8,486)
Changes in operating assets and liabilities:
Accounts receivable ................................................... (35,185) (2,525)
Inventories ........................................................... 2,753 5,767
Distributions received from joint venture ............................. 3,321 13,642
Prepaid expenses and other current assets ............................. 1,742 61
Other assets .......................................................... (110) 12
Deferred revenue and distributions in excess of equity in joint venture (8,772) (19,670)
Minority interest distributions ....................................... (4,782) --
Income taxes payable .................................................. 14,333 2,541
Accounts payable, accrued expenses and other current liabilities ...... 16,843 16,243
--------- ---------
Net cash provided by operating activities .................................. 122,479 134,714
--------- ---------
Cash flows from investing activities:
Cash of consolidated joint venture ...................................... 8,376 --
Payment of administrative claims and unsecured claims, net .............. (2,675) (641)
Purchases of molds, tools and equipment ................................. (1,746) (814)
Proceeds from sale of fixed assets ...................................... 1,210 254
Expenditures for product and package design ............................. (810) (1,484)
Net sales (purchases) of certificates of deposit, tax exempt notes,
and commercial paper ................................................. 169,457 (193,507)
--------- ---------
Net cash provided by (used in) investing activities ........................ 173,812 (196,192)
--------- ---------
Cash flows from financing activities:
Payment of senior notes ................................................ (150,962) --
Purchase of Treasury Stock ............................................. (43,602) --
Exercise of warrants and stock options ................................. 1,373 25,521
--------- ---------
Net cash (used) provided by financing activities ........................... (193,191) 25,521
--------- ---------
Net increase (decrease) in cash and cash equivalents ....................... 103,100 (35,957)
Cash and cash equivalents, at beginning of period .......................... 32,562 53,690
--------- ---------
Cash and cash equivalents, at end of period ................................ $ 135,662 $ 17,733
========= =========
Supplemental disclosures of cash flow information:
Interest paid during the period ......................................... $ 18,115 $ 9,058
Income taxes paid during the period ..................................... 21,667 2,791
Non-cash transactions:
Preferred stock dividends ............................................... -- $ 1,163
Conversion of preferred stock to common stock ........................... -- 33,943
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Consolidated Financial Statements of Marvel
Enterprises, Inc. and its subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The Condensed Consolidated Statements of Income
and Comprehensive Income and the Consolidated Statements of Cash Flows for the
three and nine-month periods ended September 30, 2004 are not necessarily
indicative of those for the full year ending December 31, 2004. For further
information on the Company's historical financial results, refer to the
Consolidated Financial Statements and Notes thereto contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Certain
prior period amounts have been re-classified to conform with the current
period's presentation.
All share and per share amounts in the accompanying unaudited Condensed
Consolidated Financial Statements have been adjusted for the Company's 3 for 2
common share stock split effective March 26, 2004.
2. SIGNIFICANT ACCOUNTING POLICIES
Accounting for Stock Based Compensation - In accordance with the provisions
of SFAS 148 "Accounting for Stock-Based Compensation", the Company has elected
to continue to account for its stock options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on date of grant, no compensation expense is recognized. However, during
2004, stock-based compensation under APB 25 was recognized for the vesting of
restricted stock and certain option modifications related to severance
arrangements. Such stock-based compensation expense amounted to $2.1 million and
$3.4 million for the three and nine month periods ended September 30, 2004,
respectively. There was no stock-based compensation recognized in 2003. For the
purposes of SFAS 148 pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2004 2003 2004 2003
--------------------- --------------------
(In thousands, except per share data)
Net income, as reported $34,352 $63,178 $94,753 $138,153
Net income attributable to common stock, as reported 34,352 63,178 94,753 136,990
Net income per share attributable to common stock - basic, as reported $0.32 $0.62 $0.88 $1.40
Net income per share attributable to common stock - diluted, as reported $0.30 $0.57 $0.83 $1.22
Stock based employee compensation cost, net of tax, if SFAS 123 was applied 1,266 1,489 7,326 4,381
Pro forma net income 33,086 61,689 87,427 133,772
Pro forma net income attributable to common stock 33,086 61,689 87,427 132,609
Pro forma net income per share attributable to common stock - basic $0.31 $0.61 $0.81 $1.36
Pro forma net income per share attributable to common stock - diluted $0.29 $0.55 $0.76 $1.19
The fair value for each option grant under the stock option plans was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for the various grants made during
2000: risk free interest rates ranging from 6.12% to 6.72%; no dividend yield;
expected volatility of 0.55; and expected life of three years. The weighted
average assumptions for the 2001 grants are: risk free interest rates ranging
from 2.91% to 4.90%; no dividend yield; expected volatility of 0.92; and
expected life of three years. The weighted average assumptions for the 2002
grants are: risk free interest rates ranging from 3.19% to 4.92%; no dividend
yield; expected volatility of 0.83; and expected life of five
5
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2004
(unaudited)
years. The weighted average assumptions for the 2003 grants are: risk free
interest rates ranging from 2.32% to 3.43%; no dividend yield; expected
volatility ranging from 0.59 to 0.78; and expected life of five years. The
weighted average assumptions for the 2004 grants are: risk free interest rates
ranging from 2.81% to 3.96%; no dividend yield; expected volatility ranging from
0.48 to 0.58; and expected life of five years. The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded options which
have no vesting restrictions and are fully transferable. In addition, the option
valuation model requires the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing model does not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
The effects of applying SFAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net income in future
periods.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
September 30, December 31,
2004 2003
-------------- ---------------
(In thousands)
Accounts receivable, net, consist of the following:
Accounts receivable ........................................... $ 98,108 $ 68,738
Less allowances for:
Doubtful accounts .......................................... (7,498) (5,073)
Advertising, markdowns, returns, volume, discounts and other (12,693) (11,845)
-------- --------
Total, net ............................................... $ 77,917 $ 51,820
======== ========
Inventories, net, consist of the following:
Finished goods .................................................. $ 5,264 $ 8,613
Component parts, raw materials and work-in-process .............. 4,958 4,362
-------- --------
Total ........................................................ $ 10,222 $ 12,975
======== ========
Accrued expenses and other current liabilities consist of the
following:
Advertising costs ............................................... $ 2,270 $ 608
Inventory purchases ............................................. 11,622 7,290
Bonuses ......................................................... 5,742 4,074
Pension benefits (see Note 6) ................................... 5,016 5,234
Litigation and legal accruals ................................... 5,438 2,719
Interest expense ................................................ -- 1,079
Other ........................................................... 12,814 10,438
-------- --------
Total ........................................................... $ 42,902 $ 31,442
======== ========
6
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2004
(unaudited)
4. EARNINGS PER SHARE
The total number of shares of common stock outstanding as of September 30,
2004 was 106,007,968 net of treasury shares; assuming the exercise of all
outstanding stock options, that number would be 121,427,678. During the nine
month period ended September 30, 2004, 396,791 shares of common stock were
issued through stock option exercises.
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
2004 2003 2004 2003
------------ ------------ ----------- -----------
Numerator:
Net income $34,352 $63,178 $94,753 $138,153
Preferred dividends --- --- --- (1,163)
------------ ------------ ----------- -----------
Numerator for basic earnings per share 34,352 63,178 94,753 136,990
Preferred dividends* --- --- --- 1,163
------------ ------------ ----------- -----------
Numerator for diluted earnings per share $34,352 $63,178 $94,753 $138,153
============ ============ =========== ===========
Denominator:
Denominator for basic earnings per share 107,130 101,645 108,022 97,757
Effect of dilutive warrants /options/ restricted
stock 6,334 9,677 6,663 13,419
Effect of dilutive redeemable cumulative
exchangeable preferred stock --- --- --- 1,664
-------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions 113,464 111,322 114,685 112,840
============ ============ =========== ===========
Basic earnings per share $0.32 $0.62 $0.88 $1.40
============ ============ =========== ===========
Diluted earnings per share $0.30 $0.57 $0.83 $1.22
============ ============ =========== ===========
* In accordance with the provisions of SFAS 128 "Earnings Per Share", under
the if-converted method, preferred dividends applicable to convertible
preferred stock are added back to the numerator and the resulting common
shares are included in the denominator for the entire period presented.
7
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2004
(unaudited)
5. SEGMENT INFORMATION
The Company's business is divided into three operating segments: Toy
Merchandising and Distribution, Publishing and Licensing.
Toy Segment
The toy segment designs, develops, sources, markets and distributes a
limited line of toys to the worldwide marketplace. The Company's toy products
are based upon movies and television shows featuring Spider-Man and produced by
Sony Pictures, and upon the movie trilogy Lord of the Rings (New Line Cinema).
Publishing Segment
The publishing segment creates and publishes comic books and trade
paperbacks principally in North America. Marvel has been publishing comic books
since 1939 and has developed a roster of more than 5,000 Marvel characters. The
Company's titles feature classic Marvel Super Heroes such as Spider-Man, X-Men,
the Incredible Hulk, Daredevil and newly developed Marvel characters. The
Company's titles also feature characters created by others and licensed to the
Company.
Licensing Segment
The licensing segment is responsible for the licensing of Marvel characters
for use in a wide variety of products, including toys, electronic games,
apparel, accessories, footwear, collectibles and novelties in a variety of
media, including feature films, television programs, publications and
destination based entertainment (e.g., theme parks), and for promotional use.
Set forth below is certain operating information for the segments of the
Company.
Three month period ended September 30, 2004
--------------------------------------------------------------
Licensing Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales $69,215 $22,621 $43,347 $ --- $135,183
Gross profit 69,215 12,014 15,636 --- 96,865
Operating income (loss) 53,198 9,372 7,659 (8,084) 62,145
Three month period ended September 30, 2003
--------------------------------------------------------------
Licensing* Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales $41,638 $19,553 $23,345 $ --- $84,536
Gross profit 41,638 10,322 12,368 --- 64,328
Operating income (loss) 30,267 7,042 8,212 (2,443) 43,078
(*) Includes equity in net income of joint venture of $1,500 for the three month
period ended September 30, 2003. The Joint Venture was consolidated
effective April 1, 2004.
8
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2004
(unaudited)
Nine month period ended September 30, 2004
--------------------------------------------------------------
Licensing* Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales $168,855 $63,874 $180,247 $ --- $412,976
Gross profit 168,855 34,125 68,295 --- 271,275
Operating income (loss) 127,248 25,651 46,511 (16,352) 183,058
Nine month period ended September 30, 2003
----------------------------------------------------------------
Licensing** Publishing Toys Corporate Total
----------------------------------------------------------------
(In thousands)
Net sales $148,289 $54,300 $59,289 $ --- $261,878
Gross profit 148,289 28,525 27,430 --- 204,244
Operating income (loss) 120,332 18,301 16,765 (14,226) 141,172
(*) Includes equity in net income of joint venture of $8,117 from January 1,
2004 to March 31, 2004.
(**)Includes equity in net income of joint venture of $8,486 for the nine month
period ended September 30, 2003.
6. BENEFIT PLANS
In connection with the 1999 sale of a subsidiary, the Company retained
certain liabilities related to the Fleer/Skybox International Retirement Plan, a
defined benefit pension plan for employees of such subsidiary (the "Fleer/Skybox
Plan"). In prior years, this plan was amended to freeze the accumulation of
benefits and to prohibit new participants. Assumptions include: a discount rate
of 6.25% for 2004 expense, 6.25% for the obligation and an expected rate of
return of 8.0%.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------
2004 2003 2004 2003
------------ ------------- ---------- -----------
(In thousands)
Total cost for plan period
Service cost...................................... $ --- $ --- $ --- $ ---
Interest cost..................................... 293 300 879 900
Expected return on plan assets.................... (277) (272) (832) (816)
Amortization of:
Unrecognized net transition obligation (asset) --- 24 --- 71
Unrecognized prior service cost.................. (13) (14) (39) (41)
Unrecognized net (gain)/loss..................... 30 --- 90 ---
------------ ------------- ---------- -----------
Net periodic pension cost............................ $ 33 $ 38 $ 98 $ 114
============ ============= ========== ===========
9
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2004
(unaudited)
7. INCOME TAXES
The Company's effective tax rate for the nine months ended September 30,
2004 (36.0%) was higher than the Federal statutory rate due primarily to state
and local taxes offset by the effects of the consolidation of Spider-Man
Merchandising, L.P. (the "Joint Venture"). The Company's effective tax rate for
the three months ended September 30, 2004 (34.3%) was lower than the Federal
statutory rate due primarily to the effects of the consolidation of the Joint
Venture offset by the impact of state of local taxes. At March 31, 2004, the
Company had completely utilized its Federal net operating loss carryforwards.
The Company retains various state and local net operating loss carryforwards of
$340 million, which will expire in various jurisdictions in the years 2005
through 2024. As of September 30, 2004, there is a valuation allowance of $7.3
million against certain state and local and foreign net operating loss
carryforwards, as there is no assurance that such assets will be realized in the
future.
The Company's effective tax rate for the three and nine months ended
September 30, 2003 was lower than the Federal statutory rate due primarily to
the expected benefit from the utilization of net operating loss carryforwards
for which benefit was not previously taken.
8. COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any legal proceeding and there can be no assurances, the
Company believes that its legal proceedings and claims (including those
described below), individually and in the aggregate, are not likely to have a
material adverse effect on its financial condition, results of operations or
cash flows.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company in New York State Supreme Court, County of New York, alleging that the
Company breached its own Terms of Sale Agreement in connection with the sale of
comic books to members of the purported class, breached its obligation of good
faith and fair dealing(s), fraudulently induced plaintiff and other members of
the purported class to buy comics and unjustly enriched itself. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. The parties have reached a proposed settlement in which the
retailers and resellers would receive a credit to their account with the
Company's exclusive distributor, depending on their prior purchases of certain
comic book issues. The parties have tendered that settlement to the Court for
approval. It is not known when the Court will act on this matter or how long it
will take for final approval of the settlement. In the event the matter does not
settle, the Company intends to defend vigorously against the claims made in this
action on their merits.
Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an action in
the United States District Court for the Southern District of New York, alleging
claims for breach of his November 1, 1998 employment agreement. Mr. Lee claims
the right to a 10% profit participation in connection with the Spider-Man movie
and other film and television productions that utilize Marvel characters.
Pursuant to the terms of the employment agreement, the Company is currently
paying Mr. Lee a salary of $1.0 million per year and believes that Mr. Lee's
claim is without merit. Marvel has answered the complaint and denied all of its
material allegations. The action is currently in the discovery phase and no
trial date has been set.
10
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MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2004
(unaudited)
Tribune Entertainment Company v. Marvel Enterprises, Inc. On October 30,
2003, Tribune Entertainment Company ("Tribune") filed a complaint against the
Company in New York State Supreme Court, New York County. The complaint alleges
three causes of action: fraud, negligent misrepresentation, and breach of
warranty, all in connection with the license from the Company under which
Tribune produced the Mutant X television series (the "Tribune License"). Prior
to release of the Mutant X television series in 2001, both the Company and
Tribune were sued by Twentieth Century Fox Film Corporation ("Fox"), the
licensee of the X-Men properties for motion pictures, among other rights. That
suit, which alleged breach of the 1993 X-Men movie license, unfair competition,
copyright infringement and tortious interference with contract, all arising from
the Tribune License, was settled between the Company and Fox in February 2003.
According to the action filed by Tribune on October 30, 2003, Tribune settled
with Fox on October 3, 2003. Tribune's October 30, 2003 complaint against the
Company alleges that the Company misrepresented the rights it was granting to
Tribune in the Tribune License, and that the Company breached its warranty in
the Tribune License that the Mutant X property did not conflict with the rights
of any third party. On December 11, 2003, the Company filed its answer, denying
all material allegations of Tribune's complaint and asserting counterclaims. The
action is in the discovery phase and no trial date has been set.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURTIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed herein
concerning the Company's business and operations could cause actual results to
differ materially from those contained in forward-looking statements made in
this Form 10-Q Quarterly Report. When used in this Form 10-Q, the words
"intend", "estimate", "believe", "expect", and similar expressions are intended
to identify forward-looking statements. In addition, the following factors,
among others, could cause the Company's financial performance to differ
materially from that expressed in any forward-looking statements made by the
Company: (i) a decrease in the level of media exposure or popularity of the
Company's characters, (ii) financial difficulties of the Company's major
licensees, (iii) delays and cancellations of movies and television productions
based on the Company's characters, (iv) poor performance of major movies based
on the Company's characters, (v) toy-production delays or shortfalls, continued
concentration of toy retailers, and toy inventory risk and (vi) significant
appreciation of the Chinese currency against other currencies and the imposition
of quotas or tariffs on products manufactured in China. These forward-looking
statements speak only as of the date of this report. The Company does not intend
to update or revise any forward-looking statements to reflect events or
circumstances after the date of this report, including changes in business
strategy or planned capital expenditures, or to reflect the occurrence of
unanticipated events.
Management Overview of Business Trends
The Company principally operates in three distinct operating segments:
licensing, publishing and toys. The Company's strategy is to increase exposure
of the Marvel characters through its media and promotional licensing activities,
which it believes will create revenue opportunities for the Company through
sales of toys and other licensed merchandise. The Company uses comic book
publishing to support consumer awareness of the Marvel characters and to develop
new characters and storylines.
A key driver of operating results is the successful release of major
entertainment programming, such as movies, published materials and television
shows, based on the Company's characters, which fuels demand for all products
based on the featured characters. During 2003 and through September 30, 2004,
the Company had four major theatrical releases that fueled growth in its
businesses: Daredevil, The Hulk, X-Men II, and Spider-Man 2. These theatrical
releases resulted in increased awareness of these characters, which led to
increased sales of Marvel-branded licensed products, including toys and
published materials based on these characters. The Company's results are
partially dependent on the successful release of theatrical films and acceptance
of products developed for the characters appearing in the films. Marvel is also
involved in the creative direction of all entertainment projects based on its
characters.
Licensing
Marvel's licensing group is responsible for the merchandising, licensing and
promotions for Marvel's characters worldwide. The licensing group expanded its
overseas businesses in the fourth quarter of 2003 through the establishment of
offices located in London and Tokyo. The licensing group is pursuing a strategy
of concentrating its licensee relationships in a smaller number of high-quality
licensees, and negotiating higher guaranteed royalty amounts from each licensee.
The licensing group is also focusing on entering into licenses in new product
categories. The Company typically enters into multi-year merchandise license
agreements that specify guaranteed minimum royalty payments and include a
significant down-payment upon signing. The Company recognizes license revenue
when it satisfies the requirements of completing the earnings process, which is
normally upon the effective date of the agreement. If sales of the licensee's
merchandise are high enough to entitle the Company to royalties over the amount
of the minimum royalty guarantee (which excess amounts are defined as
"overages"), the Company receives the remaining balance of the guaranteed
payment sooner than provided for in the agreement's payment schedule. Overages
are not recognized as revenue until the minimum guaranteed payments are fully
collected.
12
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Royalties collected in advance of the period in which revenue is earned are
recorded as deferred revenue. During the three and nine month periods ended
September 30, 2003, merchandise license income related to Spider-Man movie
characters, other than for action figure and accessory toys, was recorded
through the Company's investment in the joint venture with Sony. Effective April
1, 2004, the joint venture with Sony is included in the Company's consolidated
results. Revenue derived from this joint venture for the third quarter of 2004
and the period from April 1, 2004 through September 30, 2004, and included in
the table below, was $28.3 million and $39.5 million, respectively.
Revenue recognized under license agreements during the periods ended
September 30, 2004 and 2003 were generated within the following business
categories:
Licensing Segment
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------- -------------
(in millions) (in millions)
Apparel and accessories $24.2 $ 9.9 $ 64.4 $ 27.5
Entertainment (including studios, themed
attractions and electronic games) 19.7 5.0 35.9 42.4
Master toy licensee:
Toy royalties 2.9 9.0 6.8 24.5
Toy service fees 2.0 10.6 3.9 29.3
Other toys 11.4 2.1 26.8 10.7
Other 9.0 5.0 31.1 13.9
------------- ----------- ------------- -------------
Total $69.2 $41.6 $168.9 $148.3
============= =========== ============= =============
Publishing
Marvel's publishing group is in the process of expanding its advertising and
promotions business with an increased emphasis on custom comics and in-school
marketing. The publishing business will also continue its long-term focus on
expanding distribution to new channels, like the mass market, and expanding its
product line to target new demographics, although the Company does not expect
these initiatives to have a significant impact on 2004 revenue.
Toys
Toy sales during 2004 have been closely tied to the movie, Spider-Man 2,
which was released on June 30, 2004. Spider-Man 2 was one of the Toy Industry's
most highly anticipated events of 2004, and retailers developed strategies
around the movie release.
Revenues from Sales of the Company's Toys vs. from Licensed Toys
The only toys produced by or for the account of the Company are (i) toys
based on Spider-Man movies and television shows produced by Sony Pictures and
(ii) toys based on the Lord of the Rings movie trilogy. Sales of toys produced
by or for the account of the Company are recorded in the Company's toy segment.
The Company has licensed the right to make all other toys based on Marvel
characters to licensees. Royalties received by the Company from the sales of
licensed toys are recorded in the Company's licensing segment, as royalties.
In 2003, there was no release of a Spider-Man movie, but there were several
movies released that featured Marvel characters (notably The Hulk) on which
licensed toys were based. As a result, the Company's toy segment revenue for
2003 was somewhat lower, and the Company's licensing segment revenue for 2003
was somewhat higher, than if the year's main Marvel-character movie had been a
Spider-Man movie.
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Results of Operations
Three month period ended September 30, 2004 compared with the three month period
ended September 30, 2003
- --------------------------------------------------------------------------------
Net Sales
Three Months ended
September 30,
----------------------
2004 2003 Change
-----------------------------------
(dollars in millions)
Licensing $ 69.2 $ 41.6 66%
Publishing 22.6 19.6 15%
Toys 43.4 23.3 86%
----------- -----------
Total $ 135.2 $ 84.5 60%
=========== ===========
The Company's net sales of $135.2 million in the third quarter of 2004 were
up significantly versus the net sales in the third quarter of 2003, which
amounted to $84.5 million. Prior to April 1, 2004, licenses related to the
Spider-Man 2 movie were recorded as equity in joint venture, not licensing
sales. Effective April 1, 2004, the joint venture with Sony is included in the
Company's consolidated results. Revenue derived from the Sony joint venture for
the third quarter of 2004 and included in the table above was $28.3 million. The
overall increase ($27.6 million) in licensing revenue was less than the effect
of the consolidation of the joint venture because of a planned decrease in
licensing revenue. This planned decrease was due to a shift from royalties
earned from Hulk related toy sales during the three months ended September 30,
2003, which were recorded within licensing segment revenues, to Spider-Man 2 toy
sales during the three months ended September 30, 2004, which are recorded
within the Company's toy segment revenues. Overages, which are license revenues
in excess of minimum guarantees, were $32.3 million in the third quarter of 2004
(including $23.9 million associated with the joint venture with Sony) versus
$12.8 million in the third quarter of 2003.
Sales from the publishing segment increased $3.0 million to $22.6 million in
the third quarter of 2004 fueled by increases in sales of comics, trade
paperbacks and advertising.
As anticipated, sales from the toy segment increased $20.1 million to $43.4
million in the third quarter of 2004, primarily due to an increase in the sales
of action figures and accessories based on characters associated with the
Spider-Man 2 theatrical release.
Gross Profit
Three Months ended September 30,
------------------------------------------------
2004 2003
Amount Margin Amount Margin
---------- ------------ ------------ -----------
(dollars in millions)
Licensing $69.2 100% $41.6 100%
Publishing 12.0 53% 10.3 53%
Toys 15.7 36% 12.4 53%
----------- -------------
Total $96.9 72% $64.3 76%
=========== =============
Gross profit increased $32.6 million to $96.9 million in the third quarter
of 2004, due to increased revenue in all of the Company's operating segments.
The Company's gross profit as a percentage of sales decreased to 72% in the
third quarter of 2004, as compared to 76% in the third quarter of 2003, due to
an increase in toy segment revenues as a percentage of total revenue. Gross
margins in the toy segment decreased from 53% to 36% as a result of a change in
product mix.
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Selling, General and Administrative Expenses
Three Months ended September 30,
-------------------------------------------------
2004 2003
% of Net % of Net
Amount Sales Amount Sales
------------ ------------ ---------- ------------
(dollars in millions)
Licensing $16.0 23% $13.5 32%
Publishing 3.9 17% 3.3 17%
Toys 6.9 16% 3.4 15%
Corporate Overhead 8.1 N/A 2.4 N/A
------------- -----------
Total $34.9 26% $22.6 27%
============= ===========
Selling, general and administrative ("SG&A") expenses increased $12.3
million to $34.9 million in the third quarter of 2004. As a percentage of net
sales, SG&A in the third quarter of 2004 was comparable to the third quarter of
2003. The toy operating segment exhibited the highest year-over-year growth in
absolute dollars with an increase of $3.5 million, primarily due to an increased
advertising effort. General corporate expenses increased $5.7 million in the
third quarter of 2004 principally due to increased compensation expense for new
and existing employees of $2.2 million, and increased accounting and legal fees
and the recognition of estimated loss contingencies, aggregating $2.5 million.
The Company participates in a jointly owned limited partnership with Sony,
whose purpose is to pursue licensing opportunities, other than action figure and
accessory toys, relating to characters based upon movies and television shows
featuring Spider-Man and produced by Sony. The Company accounted for the
activity of this joint venture under the equity method until April 1, 2004.
Effective April 1, 2004, the operations of the joint venture have been included
in the accompanying consolidated financial statements (within licensing, above).
Other Income
Other income during the three month period ended September 30, 2004 includes
$1.0 million related to the reversal of certain bankruptcy related accruals,
previously set up for specific matters, that are no longer required as a result
of resolutions favorable to the Company.
Operating Income
Three Months ended September 30,
----------------------------------------------
2004 2003
Amount Margin Amount Margin
----------- ---------- ---------- -----------
(dollars in millions)
Licensing $53.2 77% $30.3 73%
Publishing 9.4 42% 7.0 36%
Toys 7.6 18% 8.2 35%
Corporate Overhead (8.1) N/A (2.4) N/A
------------- -----------
Total $62.1 46% $43.1 51%
============= ===========
Operating income increased $19.0 million to $62.1 million in the third
quarter of 2004. As a percentage of sales, operating margins decreased to 46% of
net sales in the third quarter of 2004 predominantly due to the shift towards a
higher weighting of the toy segment, which has the lowest margins. While
operating margins increased in the licensing and publishing segments, margins in
the toy segment decreased due to a change in product mix as well as an increase
in the advertising effort.
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The Company had net interest income of $550,000 in the third quarter of
2004, compared to net interest expense of $4.2 million in the third quarter of
2003. This was the result of the redemption of the Company's 12% senior notes on
June 15, 2004. Interest income was earned on the Company's cash equivalents,
certificates of deposit, tax exempt notes and commercial paper balances.
The Company's effective tax rate for the three months ended September 30,
2004 (34.3%) was lower than the Federal statutory rate due primarily to the
effects of the consolidation of Spider-Man Merchandising, L.P. (the "Joint
Venture") offset by the impact of state of local taxes. At March 31, 2004, the
Company had completely utilized its Federal net operating loss carryforwards.
The Company retains various state and local net operating loss carryforwards of
$340 million, which will expire in various jurisdictions in the years 2005
through 2024. As of September 30, 2004, there is a valuation allowance of $7.3
million against certain state and local and foreign net operating loss
carryforwards as there is no assurance that such assets will be realized in the
future.
The Internal Revenue Service has concluded its examination of the Company's
Federal income tax returns for the 1995 through 1998 years. Such findings were
reviewed in accordance with procedures of the Congressional Joint Committee on
Taxation and are therefore final. The effect of these adjustments was not
material to the Company's financial position, results of operations or cash
flows for the three or nine month periods ended September 30, 2004.
Nine month period ended September 30, 2004 compared with the nine month period
ended September 30, 2003
- ------------------------
Net Sales
Nine Months ended
September 30,
---------------------------------
2004 2003 Change
---------------------------------
(dollars in millions)
Licensing $168.9 $148.3 14%
Publishing 63.9 54.3 18%
Toys 180.2 59.3 204%
----------------------
Total $413.0 $261.9 58%
========== ===========
The Company's net sales of $413.0 million for the nine months ended
September 30, 2004 were up significantly versus the net sales in the same period
in 2003, which were $261.9 million. Sales within the licensing segment were
$168.9 million for the nine months ended September 30, 2004 as compared to
$148.3 million for the nine months ended September 30, 2003. Prior to April 1,
2004, merchandise licenses related to the Spider-Man 2 movie were recorded as
equity in joint venture, not licensing sales. Effective April 1, 2004, the joint
venture with Sony is included in the Company's consolidated results. Revenue
derived from the Sony joint venture for the period from April 1, 2004 through
September 30, 2004 and included in the table above was $39.5 million. The
overall increase ($20.6 million) in licensing revenue was less than the effect
of the consolidation of the joint venture because of a planned decrease in
licensing revenue. This planned decrease was due to a shift from royalties
earned from Hulk related toy sales during the nine months ended September 30,
2003, which were recorded within licensing segment revenues, to Spider-Man 2 toy
sales during the nine months ended September 30, 2004, which are recorded within
the Company's toy segment revenues. Overages, which are license revenues in
excess of minimum guarantees, were $48.6 million for the nine months ended
September 30, 2004 (including $23.9 million associated with the joint venture
with Sony) versus $28.7 million in the year-ago period.
Sales from the Publishing segment increased $9.6 million to $63.9 million
for the nine months ended September, 30 2004, from $54.3 million for the nine
months ended September 30, 2003, generated by increases in sales of comics,
trade paperbacks and advertising income. As anticipated, sales from the Toy
segment increased $120.9 million to $180.2 million for the nine months ended
September 30, 2004, primarily due to an increase in the sales of action figures
and accessories based on characters associated with the Spider-Man 2 theatrical
release.
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Gross Profit
Nine Months ended September 30,
------------------------------------------------
2004 2003
Amount Margin Amount Margin
----------- ---------- ------------ -----------
(dollars in millions)
Licensing $168.9 100% $148.3 100%
Publishing 34.1 53% 28.5 52%
Toys 68.3 38% 27.4 46%
------------ --------------
Total $271.3 66% $204.2 78%
============ ==============
Gross profit increased $67.1 million to $271.3 million for the nine months
ended September 30, 2004, primarily due to increased revenue in all of the
Company's operating segments. The Company's gross profit as a percentage of
sales decreased to 66% for the nine months ended September 30, 2004, as compared
to 78% for the nine months ended September 30, 2003, due to an increase in toy
revenue as a percentage of total revenue. Gross margins in the toy segment
decreased from 46% to 38% as a result of a change in product mix.
Selling, General and Administrative Expenses
Nine Months ended September 30,
------------------------------------------------
2004 2003
% of Net % of Net
Amount Sales Amount Sales
----------- ------------ ---------- -----------
(dollars in millions)
Licensing $49.6 29% $37.2 25%
Publishing 10.8 17% 10.3 19%
Toys 20.3 11% 8.5 14%
Corporate Overhead 16.4 N/A 14.2 N/A
------------ ------------
Total $97.1 24% $70.2 27%
============ ============
Selling, general and administrative ("SG&A") expenses increased $26.9
million to $97.1 million for the nine months ended September 30, 2004. As a
percentage of sales, SG&A decreased to 24% of net sales for the nine months
ended September 30, 2004, from 27% of net sales for the nine months ended
September 30, 2003. The licensing segment exhibited the highest year-over-year
growth, in absolute dollars and as a percentage of licensing sales, with an
increase of $12.4 million, primarily due to increased salaries and related costs
and incremental overhead costs required to manage the Company's licensing
growth, including the establishment of offices in London and Tokyo. Also
contributing to the increase in licensing SG&A was the establishment of
additional reserves for bad debts, commensurate with the growth in licensing
accounts receivable. The toy operating segment experienced an increase in SG&A
of $11.8 million primarily due to a change in product mix resulting in increased
royalties owed to the Company's studio partner and an increased advertising
effort. General corporate expenses increased $2.2 million due to increased
compensation expense for new and existing employees and the recognition of
estimated loss contingencies.
The Company accounted for the activity of its joint venture with Sony under
the equity method until April 1, 2004. Effective April 1, 2004, the operations
of the joint venture have been included in the accompanying consolidated
financial statements, within the Company's licensing segment.
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Other Income
Other income during the nine month period ended September 30, 2004 includes
$1.0 million generated from cash previously held in trust for the purpose of
paying bankruptcy claims assumed by the Company when it acquired Marvel
Entertainment Group, Inc. out of bankruptcy in 1998. Those funds were released
to the Company upon the formal completion of the bankruptcy proceedings, closed
effective June 2004. Additionally, $1.0 million was recognized due to the
reversal of certain bankruptcy related accruals, previously set up for specific
matters, that are no longer required as a result of resolutions favorable to the
Company.
Operating Income
Nine Months ended September 30,
2004 2003
Amount Margin Amount Margin
------------ ----------- ----------- ----------
(dollars in millions)
Licensing $127.3 75% $120.3 81%
Publishing 25.7 40% 18.3 34%
Toys 46.5 26% 16.8 28%
Corporate Overhead (16.4) N/A (14.2) N/A
------------ -----------
Total $183.1 44% $141.2 54%
============ ===========
Operating income increased $41.9 million to $183.1 million for the nine
months ended September 30, 2004. As a percentage of sales, operating margins
decreased to 44% of net sales for the nine months ended September 30, 2004,
predominately due to the shift towards a higher weighting of the toy segment,
which has the lowest margins. Margins in the licensing segment decreased due to
increased salaries and related expenses and incremental overhead costs required
to manage the Company's growth in licensing, including the establishment of
offices in London and Tokyo during the nine months ended September 30, 2004.
Net interest expense increased $5.2 million to $18.3 million during the nine
months ended September 30, 2004, as compared to $13.1 million for the comparable
period in 2003. This increase was the result of the second quarter 2004
write-off of unamortized deferred debt costs ($3.2 million) plus a 6% prepayment
premium ($9.0 million) in connection with the redemption of the Company's 12%
senior notes on June 15, 2004. These expenses were partially offset by increased
interest income as a result of higher cash and cash equivalents, certificates of
deposit, tax exempt notes and commercial paper balances.
The Company's effective tax rate for the nine months ended September 30,
2004 (36.0%) was higher than the Federal statutory rate due primarily to state
and local taxes offset by the effects of the consolidation of Spider-Man
Merchandising, L.P. (the "Joint Venture"). At March 31, 2004, the Company had
completely utilized its Federal net operating loss carryforwards. The Company
retains various state and local net operating loss carryforwards of $340
million, which will expire in various jurisdictions in the years 2005 through
2024. As of September 30, 2004, there is a valuation allowance of $7.3 million
against certain state and local and foreign net operating loss carryforwards as
there is no assurance that such assets will be realized in the future.
The Internal Revenue Service has concluded its examination of the Company's
Federal income tax returns for the 1995 through 1998 years. Such findings were
reviewed in accordance with procedures of the Congressional Joint Committee on
Taxation and are therefore final. The effect of these adjustments was not
material to the Company's financial position, results of operations or cash
flows for the three or nine month periods ended September 30, 2004.
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Liquidity and Capital Resources
The Company's primary sources of liquidity are cash and cash equivalents,
certificates of deposit, tax exempt notes, and commercial paper on hand and cash
flows from operations. The Company anticipates that its primary uses for
liquidity will be to conduct its business and continue to pursue its stock
buy-back program.
Net cash provided by operating activities was $122.5 million for the nine
month period ended September 30, 2004 as compared to net cash provided by
operating activities of $134.7 million for the nine month period ended September
30, 2003. Operating cash flows in 2004 included Federal tax obligations not
required in 2003 due to the full utilization of NOL carryforwards through March
31, 2004.
At September 30, 2004, the Company had working capital of $142.1 million.
Earlier in 2004, the Company had outstanding senior notes due June 15, 2009
which bore interest at 12% per annum. The Company redeemed all of such notes on
June 15, 2004 with available cash resources, which resulted in a non-recurring
charge of $3.2 million associated with the accelerated write-off of previously
unamortized deferred financing costs, and a non-recurring charge of $9.0 million
related to the 6% premium necessitated by the terms of the redemption, both
recorded during the second quarter of 2004.
The Company maintains a credit facility with HSBC Bank USA ("HSBC Credit
Facility") to provide for a $15.0 million revolving credit facility and a $15.0
million letter of credit facility. As of September 30, 2004, $0.1 million of
letters of credit were outstanding and there were no borrowings under the HSBC
revolver. The HSBC Credit Facility contains customary event of default
provisions and covenants restricting the Company's operations and activities,
including the amount of capital expenditures, and also contains certain
covenants relating to the maintenance of minimum tangible net worth and minimum
free cash flow. The HSBC Credit Facility is secured by (a) a first priority
perfected lien in all of the assets of the Company; and (b) a first priority
perfected lien in all of the capital stock of each of the Company's domestic
subsidiaries. Borrowings would bear interest at prime or LIBOR-plus-two percent
per annum.
On July 12, 2004, the Company announced a $100 million common stock
repurchase program. Pursuant to the authorization, the Company may at its
option, purchase shares of its common stock from time to time in the open market
or through privately negotiated transactions through the earlier of January 2006
or such time as $100 million of the Company's shares have been repurchased under
the program. The Company's largest stockholder and Vice Chairman, Isaac
Perlmutter, and its Marvel Studios' Chief Executive Officer, Avi Arad, have each
agreed not to sell any shares while the repurchase program is in place. During
the third quarter of 2004, the Company repurchased 3.2 million shares of its
common stock at an aggregate purchase price of $43.6 million.
The Company believes that cash on hand, cash flow from operations, and other
sources of liquidity will be sufficient for the Company to conduct its business
and continue to pursue its stock buy-back program.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has operations in Hong Kong, the UK and Japan. In the normal
course of business, these operations are exposed to fluctuations in currency
values. Management believes that the impact of currency fluctuations do not
represent a significant risk. The Company does not enter into derivative
financial instruments in the normal course of business, nor are such instruments
used for speculative purposes.
Additional information relating to the Company's outstanding financial
instruments is included in Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of its principal executive
officer and principal financial officer, has evaluated the effectiveness of its
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the end of the
period covered by this Quarterly Report on Form 10-Q. Based on this evaluation,
the Company's principal executive officer and principal financial officer
concluded that these disclosure controls and procedures are effective. The
Company has not identified any changes in its internal controls over financial
reporting during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, its internal controls
over financial reporting.
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PART II. OTHER INFORMATION.
---------------------------
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ITEM 1. LEGAL PROCEEDINGS
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any legal proceeding and there can be no assurances, the
Company believes that its legal proceedings and claims (including those
described below), individually and in the aggregate, are not likely to have a
material adverse effect on its financial condition, results of operations or
cash flows.
Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff
commenced an action on behalf of himself and a purported class consisting of
specialty store retailers and resellers of Marvel comic books against the
Company in New York State Supreme Court, County of New York, alleging that the
Company breached its own Terms of Sale Agreement in connection with the sale of
comic books to members of the purported class, breached its obligation of good
faith and fair dealing(s), fraudulently induced plaintiff and other members of
the purported class to buy comics and unjustly enriched itself. The relief
sought in the complaint consists of certification of the purported class and the
designation of plaintiff as its representative, compensatory damages of $8
million on each cause of action and punitive damages in an amount to be
determined at trial. The parties have reached a proposed settlement in which the
retailers and resellers would receive a credit to their account with the
Company's exclusive distributor, depending on their prior purchases of certain
comic book issues. The parties have tendered that settlement to the Court for
approval. It is not known when the Court will act on this matter or how long it
will take for final approval of the settlement. In the event the matter does not
settle, the Company intends to defend vigorously against the claims made in this
action on their merits.
Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an action in
the United States District Court for the Southern District of New York, alleging
claims for breach of his November 1, 1998 employment agreement. Mr. Lee claims
the right to a 10% profit participation in connection with the Spider-Man movie
and other film and television productions that utilize Marvel characters.
Pursuant to the terms of the employment agreement, the Company is currently
paying Mr. Lee a salary of $1.0 million per year and believes that Mr. Lee's
claim is without merit. Marvel has answered the complaint and denied all of its
material allegations. The action is currently in the discovery phase and no
trial date has been set.
Tribune Entertainment Company v. Marvel Enterprises, Inc. On October 30,
2003, Tribune Entertainment Company ("Tribune") filed a complaint against the
Company in New York State Supreme Court, New York County. The complaint alleges
three causes of action: fraud, negligent misrepresentation, and breach of
warranty, all in connection with the license from the Company under which
Tribune produced the Mutant X television series (the "Tribune License"). Prior
to release of the Mutant X television series in 2001, both the Company and
Tribune were sued by Twentieth Century Fox Film Corporation ("Fox"), the
licensee of the X-Men properties for motion pictures, among other rights. That
suit, which alleged breach of the 1993 X-Men movie license, unfair competition,
copyright infringement and tortious interference with contract, all arising from
the Tribune License, was settled between the Company and Fox in February 2003.
According to the action filed by Tribune on October 30, 2003, Tribune settled
with Fox on October 3, 2003. Tribune's October 30, 2003 complaint against the
Company alleges that the Company misrepresented the rights it was granting to
Tribune in the Tribune License, and that the Company breached its warranty in
the Tribune License that the Mutant X property did not conflict with the rights
of any third party. On December 11, 2003, the Company filed its answer, denying
all material allegations of Tribune's complaint and asserting counterclaims. The
action is in the discovery phase and no trial date has been set.
22
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Approximate dollar
Total number of value of shares
shares purchased that may yet be
Total number as part of purchased under
of shares Average price publicly announced the plans or
Period purchased(a) paid per share plans or programs (b) programs
- ------------------------------------------------------------------------------------------------------
2004
July 26,880 $ 16.03 -0-
August 3,232,930 13.56 3,215,200
September -0- -- -0-
---------------- ---------------- --------------------
Total 3,259,810 $ 13.58 3,215,200 $ 56.4 million(c)
================ ================ ====================
(a) This column's figures include 44,610 shares purchased by the Fleer/Skybox
Plan. The Fleer/Skybox Plan's purchases were made pursuant to irrevocable
investment instructions given to the trustee of the Fleer/Skybox Plan on May
25, 2004 pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934.
Those instructions required the trustee to buy and sell Company stock
pursuant to a formula through August 5, 2004.
(b) This column represents the number of shares repurchased through the share
repurchase program authorized on July 9, 2004 and announced on July 12,
2004, under which the Company is authorized to repurchase up to $100 million
of its common stock through January 8, 2006.
(c) As of September 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.1 Amendment, dated as of May 1, 2004, to Employment Agreement with Isaac
Perlmutter.
10.2 Amendment, dated October 15, 2004, to Employment Agreement with Isaac
Perlmutter.
10.3 Share Disposition Agreement, dated as of July 9, 2004, between the
Company and Isaac Perlmutter.
10.4 Share Disposition Agreement, dated as of July 9, 2004, between the
Company and Avi Arad.
31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a)
under the Exchange Act.
31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a)
under the Exchange Act.
32 Certification by Chief Executive Officer and Chief Financial Officer
pursuant to Rule 13a-14(b) under the Exchange Act.
b) Reports on Form 8-K
The Registrant filed the following reports on Form 8-K during the quarter
ended September 30, 2004:
1. Current Report on Form 8-K filed July 12, 2004, reporting Items 5 and
7.
2. Current Report on Form 8-K filed August 3, 2004, reporting Items 7 and
12.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Dated: October 29, 2004 By: /s/ Allen S. Lipson
----------------------------
Allen S. Lipson
President and Chief Executive Officer
Dated: October 29, 2004 By: /s/ Kenneth P. West
----------------------------
Kenneth P. West
Chief Financial Officer
24
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