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, 2005
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 ENTERTAINMENT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3711775
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
417 Fifth Avenue, New York, NY 10016
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(Address of principal executive offices) (Zip Code)
(212)-576-4000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
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 November 8, 2005, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 97,146,813.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)....... 1
Condensed Consolidated Balance Sheets as of September
30, 2005 and December 31, 2004................................ 2
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three and Nine Months
Ended September 30, 2005 and 2004............................. 3
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2005 and 2004............. 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 14
Results of Operations......................................... 20
Liquidity and Capital Resources............................... 26
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.......................................................... 27
Item 4. Controls and Procedures....................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 29
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds...................................................... 29
Purchases of Equity Securities by the Issuer and
Affiliated Purchasers......................................... 29
Item 6. Exhibits...................................................... 30
SIGNATURES .............................................................. 30
(i)
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
1
MARVEL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
September 30, December 31,
2005 2004
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 18,097 $ 50,071
Short-term investments......................................................... 54,574 154,719
Accounts receivable, net....................................................... 63,803 73,576
Inventories, net .............................................................. 9,086 6,587
Income tax receivable.......................................................... 15,300 --
Deferred income taxes, net..................................................... 7,981 7,981
Prepaid expenses and other current assets...................................... 4,098 2,734
-------------- --------------
Total current assets..................................................... 172,939 295,668
Molds, tools and equipment, net.................................................. 5,417 5,553
Product and package design costs, net ........................................... 1,039 1,249
Goodwill......................................................................... 341,708 341,708
Accounts receivable, non-current portion......................................... 25,199 37,718
Deferred income taxes, net ..................................................... 32,823 32,583
Deferred financing costs......................................................... 25,302
Advances to joint venture partner................................................ 2,702 --
Other assets..................................................................... 309 335
-------------- --------------
Total assets............................................................. $607,438 $714,814
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 4,406 $ 6,006
Accrued royalties.............................................................. 63,239 57,879
Accrued expenses and other current liabilities................................. 38,538 43,962
Minority interest to be distributed............................................ -- 8,428
Income taxes payable........................................................... -- 10,129
Deferred revenue .............................................................. 8,525 27,033
-------------- --------------
Total current liabilities................................................ 114,708 153,437
Accrued rent.................................................................... 950 165
Deferred revenue, non-current portion........................................... 19,921 14,712
Film slate facility obligation................................................... 24,800 --
-------------- --------------
Total liabilities........................................................ 160,379 168,314
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued....... -- --
Common stock, $.01 par value, 250,000,000 shares authorized, 121,740,632 issued
and 97,128,222 outstanding in 2005 and 120,442,988 issued and 105,101,788
outstanding in 2004............................................................ 1,217 1,205
Deferred stock compensation...................................................... (6,839) (5,164)
Additional paid-in capital....................................................... 594,180 577,169
Retained earnings................................................................ 143,843 66,943
Accumulated other comprehensive loss............................................. (2,455) (2,652)
Treasury stock, 24,611,810 shares in 2005 and 15,341,200 shares in 2004.......... (282,887) (91,001)
-------------- --------------
Total stockholders' equity............................................... 447,059 546,500
-------------- --------------
Total liabilities and stockholders' equity............................... $607,438 $714,814
============== ==============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
MARVEL ENTERTAINMENT, 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,
------------------------ -----------------------
2005 2004 2005 2004
------------ ----------- ----------- -----------
Net sales............................................ $ 81,128 $ 135,183 $ 273,412 $ 412,976
------------ ----------- ----------- -----------
Costs and expenses:
Cost of revenues (excluding depreciation expense). 14,105 38,318 37,545 141,701
Selling, general and administrative............... 30,686 34,940 107,597 97,087
Depreciation and amortization..................... 1,232 1,350 3,375 2,906
------------ ----------- ----------- -----------
Total costs and expenses............................. 46,023 74,608 148,517 241,694
Equity in net income of joint venture................ -- -- -- 8,117
Other income, net.................................... 245 1,570 1,493 3,659
------------ ----------- ----------- -----------
Operating income..................................... 35,350 62,145 126,388 183,058
Interest income (expense), net....................... (399) 550 2,173 (18,343)
------------ ----------- ----------- -----------
Income before income taxes and minority interest..... 34,951 62,695 128,561 164,715
Income tax expense................................... 11,158 21,476 47,121 59,267
Minority interest in consolidated joint venture...... 401 6,867 4,540 10,695
------------ ----------- ----------- -----------
Net income........................................... $ 23,392 $ 34,352 $ 76,900 $ 94,753
============ =========== =========== ===========
Basic earnings per share attributable to common stock $ 0.24 $ 0.32 $ 0.76 $ 0.88
============ =========== =========== ===========
Weighted average number of basic shares outstanding.. 96,647 107,130 101,273 108,022
============ =========== =========== ===========
Diluted earnings per share attributable to common
stock................................................ $ 0.23 $ 0.30 $ 0.71 $ 0.83
============ =========== =========== ===========
Weighted average number of diluted shares outstanding 103,174 113,464 107,918 114,685
============ =========== =========== ===========
Comprehensive income:
Net income........................................ $ 23,392 $ 34,352 $ 76,900 $ 94,753
Other comprehensive loss.......................... (66) (43) (197) (129)
------------ ----------- ----------- -----------
Comprehensive income.............................. $ 23,326 $ 34,309 $ 76,703 $ 94,624
============ =========== =========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
MARVEL ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months
Ended September 30,
2005 2004
---- ----
Cash flows from operating activities:
Net income............................................................ $ 76,900 $ 94,753
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization....................................... 3,375 2,906
Provision for doubtful accounts..................................... -- 2,806
Amortization of deferred financing costs............................ 477 3,446
Non-cash charge for stock-based compensation........................ 3,234 3,355
Tax benefit of stock option exercise................................ 6,186 2,417
Gain from sale of fixed assets...................................... -- (754)
Deferred income taxes............................................... (240) 20,829
Minority interest in net income of joint venture (net of
distributions of
$15,671 and $4,782, respectively)................................ (11,130) 5,913
Equity in net income from joint venture............................. -- (8,117)
Changes in operating assets and liabilities:
Accounts receivable................................................. 22,292 (35,185)
Inventories......................................................... (2,499) 2,753
Income tax receivable............................................... (15,300) --
Distributions received from joint venture........................... -- 3,321
Prepaid expenses and other current assets........................... (1,364) 1,742
Other assets........................................................ (67) (110)
Deferred revenue ................................................... (13,299) (8,772)
Income taxes payable................................................ (10,129) 14,333
Accounts payable, accrued expenses and other current liabilities.... (1,153) 16,843
------------- -------------
Net cash provided by operating activities................................. 57,283 122,479
------------- -------------
Cash flows from investing activities:
Cash of consolidated joint venture.................................... -- 8,376
Payment of administrative claims and unsecured claims, net............ (50) (2,675)
Purchases of molds, tools and equipment............................... (2,214) (1,746)
Proceeds from sale of fixed assets -- 1,210
Expenditures for product and package design........................... (722) (810)
Sales of short-term investments...................................... 320,022 100
Purchases of short-term investments................................... (219,877) (60,869)
Net sales of certificates of deposit.................................. -- 169,457
------------- -------------
Net cash provided by investing activities 97,159 113,043
------------- -------------
Cash flows from financing activities:
Payment of Senior Note................................................ -- (150,962)
Proceeds from debt facility........................................... 24,800 --
Deferred financing costs.............................................. (24,714) --
Purchase of treasury stock............................................ (191,886) (43,602)
Exercise of stock options............................................. 5,384 1,373
------------- -------------
Net cash used in financing activities.......................... (186,416) (193,191)
------------- -------------
Net (decrease) increase in cash and cash equivalents...................... (31,974) 42,331
Cash and cash equivalents, at beginning of period......................... 50,071 32,562
------------- -------------
Cash and cash equivalents, at end of period............................... $ 18,097 $ 74,893
============= =============
Supplemental disclosures of cash flow information:
Interest paid during the period....................................... $ -- $ 18,115
Income taxes paid during the period................................... $ 67,330 $ 21,667
Supplemental disclosure of non-cash financing activities:
Commom stock warrants issued in settlement of deferred
financing costs....................................................... $ 1,065 $ --
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
4
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements
of Marvel Entertainment, 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 adjustments) considered necessary
for a fair statement of financial position, results of operations and cash flows
of the Company for the periods presented have been included. The unaudited
Condensed Consolidated Statements of Income and Comprehensive Income for the
three and nine-month periods ended September 30, 2005 and the unaudited
Consolidated Statements of Cash Flows for the nine-month period ended September
30, 2005 are not necessarily indicative of those for the full year ending
December 31, 2005. 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, 2004. Certain prior period amounts have been re-classified to
conform with the current period's presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Revision in the Classification of Certain Securities - During the first
quarter of fiscal 2005, the Company concluded that it was appropriate to
classify its auction rate municipal bonds as current investments. Previously,
such investments had been classified as cash equivalents. Accordingly, the
Company has revised the classification to report these securities as current
investments in a separate line item on its Condensed Consolidated Balance Sheet
as of December 31, 2004. The Company has also made corresponding adjustments to
its Condensed Consolidated Statement of Cash Flows for the period ended
September 30, 2004, to reflect the gross purchases and sales of these securities
as investing activities rather than as a component of cash and cash equivalents.
This change in classification does not affect previously reported cash flows
from operations or from financing activities in the Company's previously
reported Consolidated Statements of Cash Flows, or its previously reported
Consolidated Statements of Income for any period.
As of December 31, 2004, $154.7 million of these current investments
were previously classified as cash and cash equivalents on the Company's
Consolidated Balance Sheet. For the year ended December 31, 2004, net cash used
in investing activities related to these current investments of $154.7 million
was included in cash and cash equivalents in the Company's Consolidated
Statements of Cash Flows. The Company did not hold this type of investment
during the years ended December 31, 2003 or 2002.
Short-Term Investments - At September 30, 2005 and December 31, 2004,
the Company held $54.6 million and $154.7 million, respectively, of short-term
investments, which consist of auction rate municipal bonds classified as
available-for-sale securities. The Company's investments in these securities are
recorded at cost, which approximates fair market value due to their variable
interest rates, which typically reset within 35 days, and, despite the long-term
nature of their stated contractual maturities, the Company has the ability to
readily liquidate these securities. As a result, the Company had no cumulative
gross unrealized holding gains (losses) or gross realized gains (losses) from
its current investments. All income generated from these current investments was
recorded as interest income.
5
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
(unaudited)
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
2005 and 2004, stock-based compensation under APB 25 was recognized for the
vesting of restricted stock. 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,
------------------------ ------------------------
2005 2004 2005 2004
----------- ------------ ----------- -----------
(In thousands, except per share data)
Net income, as reported................................. $ 23,392 $ 34,352 $ 76,900 $ 94,753
Add: Stock-based compensation expense included in
reported net income, net of taxes................... 792 397 2,079 1,190
Deduct: Total stock-based compensation expense
determined under fair-value based method for all
awards,
net of taxes......................................... (2,347) (1,663) (6,519) (8,516)
----------- ------------ ------------------------
Pro forma net income.................................... $ 21,837 $ 33,086 $ 72,460 $ 87,427
=========== ============ ========================
Basic earnings per share:
As reported.......................................... $ 0.24 $ 0.32 $ 0.76 $ 0.88
Pro-forma............................................ 0.23 0.31 0.72 0.81
Diluted earnings per share:
As reported.......................................... 0.23 0.30 0.71 0.83
Pro forma............................................ 0.21 0.29 0.67 0.76
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. 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 5 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 5 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 5 years. There were no options granted during
the nine-month period ended September 30, 2005. 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. 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.
6
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
Recent Accounting Pronouncements - On December 16, 2004, the Financial
Accounting Standards Board issued SFAS No. 123 (revised 2004), ("SFAS 123(R)"),
which is a revision of SFAS 123. SFAS 123(R) supersedes APB 25, and amends SFAS
No. 95, "Statement of Cash Flows". Generally, the approach in SFAS 123(R) is
similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure will soon no longer be an alternative. SFAS 123(R) must be adopted by
the Company no later than January 1, 2006. Early adoption will be permitted in
periods in which financial statements have not yet been issued. The Company
expects to adopt SFAS 123(R) on January 1, 2006, using the modified-prospective
method as proscribed in SFAS 123(R).
As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS 123(R)'s fair value method will have an impact
on the Company's results of operations, although it will have no impact on its
overall financial position. While the Company cannot estimate the level of
share-based payments to be issued in the future, based on the stock options that
are currently outstanding, the Company expects that the adoption of SFAS 123(R)
will result in a $5.4 million charge to operations in 2006. SFAS 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. While the Company cannot estimate what those amounts will be in the
future (because they depend on, among other things, when employees exercise
stock options and the fair value of the Company's common stock at such dates),
the amount of operating cash flows recognized in prior annual periods for such
excess tax deductions was $3.6 million and $14.2 million in 2004 and 2003,
respectively, and $0 in 2002. Such amounts were $6.2 million and $2.4 million
for the nine months ended September 30, 2005 and 2004, respectively.
3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
September 30, December 31,
2005 2004
-------------- ---------------
(In thousands)
Accounts receivable, net, consist of the following:
Accounts receivable.......................................... $ 81,049 $ 89,594
Less allowances for:
Doubtful accounts......................................... (4,367) (4,851)
Advertising, markdowns, returns, volume discounts and
other..................................................... (12,879) (11,167)
-------------- ---------------
Total, net................................................... $ 63,803 $ 73,576
============== ===============
Inventories, net, consist of the following:
Finished goods............................................... $ 4,364 $ 3,034
Component parts, raw materials and work-in-process........... 4,722 3,553
-------------- ---------------
Total........................................................ $ 9,086 $ 6,587
============== ===============
Accrued expenses and other current liabilities consist of the
following:
Advertising and promotions................................... $ 4,560 $ 5,488
Inventory purchases.......................................... 3,686 3,032
Bonuses...................................................... 5,959 5,545
Pension benefits............................................. 5,596 6,538
Litigation and legal fees................................... 10,116 8,989
Other........................................................ 8,621 14,370
-------------- ---------------
Total........................................................ $ 38,538 $ 43,962
============== ===============
7
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
4. EARNINGS PER SHARE
The total number of shares of common stock outstanding as of September
30, 2005 was 97,128,222 net of treasury shares; assuming the exercise of all
outstanding stock options and warrants, that number would be 111,414,800. During
the nine-month period ended September 30, 2005, 3,165 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,
2005 2004 2005 2004
Numerator:
Net income.......................................... $ 23,392 $ 34,352 $ 76,900 $ 94,753
============ ============ =========== ===========
Denominator:
Denominator for basic earnings per share............ 96,647 107,130 101,273 108,022
Effect of dilutive options and restricted stock..... 6,527 6,334 6,645 6,663
------------ ------------ ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares and assumed
conversions....................................... 103,174 113,464 107,918 114,685
============ ============ =======================
Basic earnings per share............................... $ 0.24 $ 0.32 $ 0.76 $ 0.88
Diluted earnings per share............................. $ 0.23 $ 0.30 $ 0.71 $ 0.83
During the three and nine-month periods ended September 30, 2005, the
Company purchased 1.6 and 9.3 million shares, respectively, of its common stock
through the share repurchase program announced on July 12, 2004 and increased in
May 2005. On July 19, 2005, the Company completed its $250 million stock
repurchase program, under which the Company repurchased a total of 13.5 million
shares of its common stock, at an average purchase price of $18.48 per share.
5. FILM SLATE FACILITY OBLIGATION
On September 1, 2005, the Company, through its wholly-owned
consolidated subsidiary, MVL Film Finance LLC, closed a non-recourse
$525,000,000 financing that will enable it to produce its own slate of feature
films (the "Film Facility"). The Film Facility, which expires on September 1,
2016 or sooner if the films produced under the Film Facility fail to meet
certain defined performance measures, consists of $465 million in revolving
senior bank debt and $60 million in debt referred to as mezzanine debt, which is
subordinated to the senior bank debt. An insurance company has insured repayment
of the senior debt. The rate for the senior bank debt, including the insurance
company's fees, is LIBOR (4.07% at September 30, 2005) or the commercial paper
rate, as applicable, plus 1.635%. The interest rate for the mezzanine debt is
LIBOR plus 7.00%. Pursuant to the terms of the financing, the mezzanine debt
will be drawn first and will remain outstanding for the life of the senior bank
facility. The Company must comply with a minimum tangible net worth covenant and
various administrative covenants. In addition, conditions to the initial funding
of the fifth film to be produced under the Film Facility, and each film
thereafter, are the satisfaction of an interim asset test and foreign pre-sales
test, as defined in the Film Facility.
8
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
The Company entered into an interest rate cap agreement in connection
with the Film Facility whereby LIBOR is capped at 6.0% for debt outstanding
under the Film Facility up to certain stipulated notional amounts which vary
over the term of the Film Facility. The notional amount of the interest rate cap
agreement at September 30, 2005 was $25 million. The interest rate cap is
recorded at fair value and included in deferred financing costs in the
accompanying balance sheet at September 30, 2005. The interest rate cap expires
on October 15, 2014.
As of September 30, 2005, MVL Film Finance LLC had $24.8 million in outstanding
mezzanine borrowings through the Film Facility. The borrowings were used
primarily to finance transaction costs related to the development and closing of
the facility ($21.5 million) and the purchase of the interest rate cap discussed
above ($3.2 million). The transaction costs are being amortized over the minimum
expected term of the facility, which approximates 4.5 years.
6. SEGMENT INFORMATION
The Company's business is divided into three operating segments: Toy,
Publishing and Licensing.
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.
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, Fantastic Four and newly developed Marvel characters.
Toy Segment
The Toy segment designs, develops and markets toys (primarily action
figures and accessories) to the worldwide marketplace. The majority of these
toys are produced and sold by Marvel's master toy licensee, Toy Biz Worldwide
Ltd. ("TBW"). The Company itself produces and sells a limited line of toys it
designs, develops and markets based upon movies and television shows featuring
Spider-Man and produced by Sony Pictures, and upon characters that the Company
has licensed in, such as characters from the movie trilogy The Lord of the
Rings, the forthcoming movie and television shows based on the character Curious
George and the television shows for Total Nonstop Action ("TNA") wrestling.
9
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
Set forth below is certain operating information for the segments of
the Company.
Three months ended September 30, 2005
--------------------------------------------------------------
Licensing Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales................... $ 33,218 $ 25,800 $ 22,110 $ -- $ 81,128
Costs and expenses.......... 13,171 14,835 11,874 6,143 46,023
Operating income (loss)..... 20,051 10,974 10,468 (6,143) 35,350
Three months ended September 30, 2004
--------------------------------------------------------------
Licensing Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales................... $ 64,224 $ 22,621 $ 48,338 $ -- $ 135,183
Costs and expenses.......... 15,204 14,572 36,748 8,084 74,608
Operating income (loss)..... 49,024 9,372 11,833 (8,084) 62,145
Nine months ended September 30, 2005
--------------------------------------------------------------
Licensing Publishing Toys Corporate Total
--------------------------------------------------------------
(In thousands)
Net sales................... $ 148,318 $ 69,082 $ 56,012 $ -- $ 273,412
Costs and expenses.......... 60,561 41,334 28,568 18,054 148,517
Operating income (loss)..... 87,966 27,757 28,069 (17,404) 126,388
Nine months ended September 30, 2004
-------------------------------------------------------------
Licensing* Publishing Toys Corporate Total
-------------------------------------------------------------
(In thousands)
Net sales.................. $ 158,078 $ 63,874 $ 191,024 $ -- $ 412,976
Costs and expenses......... 47,724 40,598 137,020 16,352 241,694
Operating income (loss).... 118,475 25,651 55,284 (16,352) 183,058
(*) Includes equity in net income of joint venture of $8,117 from
January 1, 2004 to March 31, 2004.
10
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
7. 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 used for the 2005 and
2004 expense include a discount rate of 5.75% and 6.25%, respectively, and an
expected rate of return on plan assets of 7.0% and 8.0%, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------
2005 2004 2005 2004
------------ ------------- ---------- -----------
(In thousands)
Total cost for plan period
Service cost....................................... $ -- $ -- $ -- $ --
Interest cost...................................... 283 293 850 879
Expected return on plan assets..................... (240) (277) (720) (832)
Amortization of:
Unrecognized net transition obligation (asset) -- -- -- --
Unrecognized prior service cost................. (13) (13) (40) (39)
Unrecognized net loss........................... 45 30 135 90
------------ ------------- ---------- -----------
Net periodic pension cost............................. $ 75 $ 33 $ 225 $ 98
============ ========================= ===========
8. INCOME TAXES
The Company's effective tax rate for the three-month period ended
September 30, 2005 (31.9%) was lower than the statutory rate due primarily to
the recognition of additional tax benefit relating to state and local net
operating losses, the effects of the consolidation of the Spider-Man
Merchandising, L.P. (the "Joint Venture"), and Federally tax free investment
returns offset by state and local taxes. The effective tax rate for the third
quarter reflects a benefit of 4.5% from discrete items primarily related to the
valuation of deferred tax assets for state and local net operating losses, which
will not recur in future quarters. The Company's effective tax rate for the
nine-month period ended September 30, 2005 (36.7%) was higher than the Federal
statutory rate due primarily to state and local taxes offset by a recognition of
additional tax benefit relating to state and local net operating losses, the
effects of the consolidation of the Joint Venture, and Federally tax-free
investment returns. The Company's effective tax rate for the three-month period
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 and local taxes. The Company's effective tax rate for the
nine-month period 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 the Joint Venture. The Company is not responsible for the
income taxes related to the minority share of the Joint Venture income, and as
such, the minority share of the Joint Venture income is deducted in computing
the Company's effective tax rate. The impact of this reduction to the Company's
effective tax rate is greater in periods when the operating results of the Joint
Venture are higher and lesser in periods when the operating results of the Joint
Venture are lower.
11
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
9. 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, in New
York State Supreme Court, County of New York, Mr. Hibbs commenced a putative
class action alleging that the Company breached its own Terms of Sale Agreement
to comic book retailers and resellers, breached its obligation of good faith and
fair dealing, fraudulently induced plaintiff and other members of the purported
class to buy comics and unjustly enriched itself. Mr. Hibbs sought certification
of the putative class and his designation 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 reached a 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. On August 9, 2005, the court certified the class for
settlement purposes and approved the parties' settlement as fair, reasonable and
adequate. As the Court's order was entered on August 25, 2005, and the time for
any class member to appeal has elapsed, the settlement is currently being
administered and class members are receiving their agreed upon credits pursuant
to the settlement. The Company believes this matter is now concluded.
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. 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. In 2003, the Fox litigation was settled.
Tribune seeks to recover $31 million in damages from Marvel in connection with
the Mutant X television series and the Fox litigation. On October 4, 2005, after
completion of fact discovery, the Company filed a motion for summary judgment
seeking dismissal of all of Tribune's claims. That motion will be decided by the
Court after Tribune's answering papers and the Company's reply papers, if any,
are filed. The action is in the expert discovery phase and a tentative trial
date of March 1, 2006 has been scheduled by the Court.
10. Subsequent Events
Credit Facility
On November 9, 2005, the Company entered into an agreement for a credit
facility with HSBC Bank USA, National Association (the "HSBC Credit Facility")
to provide for a $150 million revolving credit line (this amount decreases to
$100 million on March 31, 2006) with a sublimit of $27 million for the issuance
of letters of credit. Borrowings under the HSBC Credit Facility may be used by
the Company for working capital and other general corporate purposes and for
repurchases of the Company's common stock. The HSBC Credit Facility, which
expires on October 31, 2007, contains customary event-of-default provisions and
covenants regarding the Company's net worth, leverage ratio, and free cash flow.
The HSBC Credit Facility is secured by a first priority perfected lien on (a)
the Company's accounts receivable, (b) the Company's rights in its master toy
license with TBW and in any successor license, and (c) all common stock of the
Company repurchased after the facility's closing date. Borrowings under the
facility would bear interest at HSBC's prime rate or, at the Company's choice,
at LIBOR-plus-1.25% per annum.
12
MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
September 30, 2005
(unaudited)
Stock Repurchase Program
On November 9, 2005, the Company authorized a $250 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 until such time as $250 million of
the Company's shares have been repurchased under the program. The Company's
largest stockholder and Chief Executive Officer, Isaac Perlmutter, has agreed
not to sell any shares until the earlier of October 15, 2006 or the last day in
which the repurchase program is in place.
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 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.
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.
In addition, in connection with the Company's Marvel Studios
operations, including those related to the slate of feature films the Company
plans to produce on its own with proceeds from its $525 million film slate
facility (the "Film Facility"), the following factors, among others, could cause
the Company's or Marvel Studios' financial performance to differ materially from
that expressed in any forward-looking statements made by the Company: (i) Marvel
Studios' potential inability to attract and retain creative talent, (ii) the
potential lack of popularity of the Company's films, (iii) the expense
associated with producing films, (iv) union activity which could interrupt film
production, (v) that Marvel Studios has not, in the past, produced film projects
on its own, (vi) changes or disruptions in the way films are distributed
including a decline in the profitability of the DVD market, (vii) piracy of
films and related products, (viii) that only a limited number of films will be
released, (ix) fluctuations in reported income or loss or difficulties in
implementing internal controls related to the accounting of film production
activities, (x) Marvel Studios' dependence on a single distributor, (xi) the
potential inability of the Company's subsidiaries to meet the conditions
necessary for an initial funding of a film under the Film Facility, and (xii)
the potential inability of the Company's subsidiaries to obtain financing to
make more than four films if certain tests related to the economic performance
of the film slate are not satisfied (specifically, an interim asset test and a
foreign pre-sales test).
For further discussion of the factors described above, please see the
section entitled "Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995" in the
Company's 2004 annual report on Form 10-K and the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on September 6, 2005.
Forward-looking statements in this report 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 as of which they
are made, including changes in business strategy or planned capital
expenditures, or to reflect the occurrence of unanticipated events.
14
Management Overview of Business Trends
Current Direction
The Company principally operates in three distinct segments: Licensing
(including the Company's Marvel Studios media licensing operations), Publishing
and Toys. The Company expects that in the future, the expansion of the studio
operations associated with the Company's recently announced Film Facility will
cause the Company to treat Marvel Studios as a segment separate from the
Company's licensing operations.
The Company's growth strategy has been to increase exposure of Marvel
characters by licensing them to third parties for development as movies and
television shows. The increased exposure can then create revenue opportunities
for the Company through increased sales of toys and other licensed merchandise.
The Company's results have been significantly affected by the release
of movies based on its characters, which has fueled demand for products based on
the characters featured in the movie. For example, in 2004, the Company
benefited from the theatrical release of the movie Spider-Man 2. This release
resulted in increased awareness of the Spider-Man character family, which
subsequently drove sales of Marvel-branded licensed products, published
materials and toys based on that character family. The Company hoped to
similarly benefit from the July 2005 theatrical release of the movie Fantastic
Four. However, although the Fantastic Four movie experienced significant
box-office success, the Company's Toy and Licensing segments did not achieve
similar benefits in sales based on the Fantastic Four character family for the
three and nine months ended September 30, 2005.
While Marvel is involved in the creative direction of all entertainment
projects based on its characters, the only completed entertainment projects it
has produced are published materials. All other completed entertainment projects
were conducted through licenses of Marvel's intellectual property.
Growth Strategy for the Future
The Company remains committed to expanding its brands through movies
and television shows created by third parties. This media licensing strategy,
however, has inherent limitations, both in terms of profit potential and control
over items such as content, release dates, and advertising. Accordingly, on
September 1, 2005, MVL Film Finance LLC, a newly formed, special-purpose,
bankruptcy-remote, wholly-owned consolidated subsidiary of the Company, closed a
$525,000,000 financing facility that will enable the Company to produce its own
slate of feature films (the "Film Facility").
The Film Facility provides the Company with another vehicle for
potential growth. Films produced by Marvel Studios through the Film Facility
could provide the Company with a meaningful source of profits and more control
over the destiny of its film projects. The following Company segment review is
accompanied by a description of the Film Facility.
Licensing
Marvel's Licensing segment is responsible for the merchandising,
licensing and promotion of Marvel's characters worldwide. The Licensing segment
expanded its international presence in 2004 through newly established sales
offices located in London and Tokyo. Also during 2004, the Company began
consolidating the operations of Spider-Man Merchandising, LP (the "Joint
Venture"), its joint venture with Sony Pictures Entertainment, Inc. The
Licensing segment 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 segment is
also focusing on entering into licenses in new product categories, such as the
wireless category, which was first licensed in late 2004, and the massively
multi-player online game category, which was licensed in 2005.
The Company typically enters into multi-year merchandise license
agreements that specify 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, including the determination
that the credit-worthiness of the licensee reasonably assures collectibility of
any specified but unpaid minimum royalties. Once the earnings process is
complete, the Company records as revenue the
15
present value of the minimum royalty payments. If cumulative earned royalties
exceed the specified minimum royalty payments, such excess royalties are
recorded as revenue when earned and are referred to as "overages". If the
licensee is not sufficiently creditworthy, the Company does not recognize
scheduled royalty payments until they are received.
In licenses in which the Company has significant continuing involvement
or a performance obligation, the minimum royalty payments are recognized as and
when such obligations are fulfilled. Licensing fees collected in advance of
obligations being fulfilled are recorded as deferred revenue.
Revenue recognized under license agreements during the periods ended
September 30, 2005 and 2004 was generated within the product categories set
forth below. The table does not include royalties earned from toys (primarily
action figures and accessories) produced and sold by the Company's master toy
licensee, Toy Biz Worldwide Ltd. ("TBW"), as such revenue is recorded in the
Company's Toy segment. The "Other" category includes licensing revenue from
domestics, collectibles and other items.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
2005 2004 2005 2004
------------- ----------- ------------- -------------
(in millions) (in millions)
Apparel and accessories..................... $ 9.8 $ 24.1 $ 42.6 $ 64.3
Entertainment (including studios, themed
attractions and electronic games)......... 4.5 19.7 46.0 35.9
Toys........................................ 11.7 11.4 24.9 26.8
Other....................................... 7.2 9.0 34.8 31.1
------------- ----------- ------------- -------------
Total....................................... $ 33.2 $ 64.2 $ 148.3 $ 158.1
============= =========== ============= =============
Licensing revenue was derived from the following sources during the
periods ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------------
2005 2004 2005 2004
------------- ----------- ------------- -------------
(in millions) (in millions)
Domestic.................................... $ 20.5 $ 17.5 $ 76.3 $ 78.4
International............................... 7.5 8.4 30.1 22.3
Joint Venture............................... 2.3 28.4 20.4 40.0
Studios..................................... 2.9 9.9 21.5 17.4
------------- ----------- ------------- -------------
Total....................................... $ 33.2 $ 64.2 $ 148.3 $ 158.1
============= =========== ============= =============
Publishing
Marvel's Publishing segment is in the process of expanding its
advertising and promotions business with an increased emphasis on custom comics
and in-school marketing. The Publishing segment also intends to continue its
long-term focus on expanding distribution to new channels, such as the mass
market, and expanding its product line to a younger demographic. The Company
does not expect these initiatives to have a significant impact on 2005 revenue.
Growth in 2005 is largely due to the expansion of core product lines of comics
and trade paperbacks and the introduction of product into new distribution
channels.
Toys
The Company has licensed to TBW the right to produce and sell action
figures and accessories, and certain other toys, the Company designs. Marvel
also provides product development, marketing and sales services for TBW in
exchange for a service fee. The Company receives royalties and service fees from
TBW based on TBW's sales of Marvel-designed toys produced and sold by TBW. All
royalties received by the Company from the sales of other licensed toys are
recorded as royalties in the Company's Licensing segment, as the Company does no
product development, marketing, sales or other services for these licensees.
16
Toys produced and sold by or for the account of the Company for the
period from January 1, 2004 through September 30, 2005 were primarily (i) toys
based on Spider-Man movies and television shows produced by Sony Pictures, (ii)
toys based on the Lord of the Rings movie trilogy and (iii) toys based on the
television shows for Total Nonstop Action ("TNA") wrestling.
The Company and TBW have entered into agreements which require the
Company to provide TBW with certain administrative and management support for
which TBW reimburses the Company. For the nine months ended September 30, 2005
and 2004, the Company was reimbursed $6.5 and $6.4 million, respectively, for
administrative management and support.
Film Slate
The Film Facility will enable the Company to produce its own slate of
feature films, including films featuring the following Marvel characters:
o Ant-Man
o Black Panther
o Captain America
o Cloak & Dagger
o Doctor Strange
o Hawkeye
o Nick Fury
o Shang-Chi
Films in the film slate may also be titled Power Pack and feature that
family of characters (i.e., Alex, Jack, Julie and Katie Power) or The Avengers
and feature Ant-Man, Black Panther, Captain America, Hawkeye and Nick Fury. Also
included in the film slate are many of the supporting characters that would be
most closely associated with the featured characters and character families. For
example, Captain America's sidekick, Bucky Barnes, and his nemesis, Red Skull,
are both included in the film slate.
While these characters may be developed as movies by Marvel only
through the film slate, Marvel may continue to license its other characters for
movie productions by third parties, obtain financing to produce movies based on
these other characters itself or with others or, with the consent of the film
slate lenders, produce films based on these other characters through the Film
Facility.
Key Financial Terms of the Film Facility
Financing Available; Rate of Interest; Borrowings Outstanding
The Film Facility, which expires on September 1, 2016 or sooner if the
films produced under the facility fail to meet certain defined performance
measures, consists of $465 million in revolving senior bank debt and $60 million
in debt referred to as mezzanine debt, which is subordinated to the senior bank
debt. Both Standard & Poor's, a division of the McGraw-Hill Companies, Inc., and
Moody's Investor Rating Service, Inc. have given the senior bank debt an
investment grade rating. In addition, Ambac Assurance Corporation has insured
repayment of the senior debt, raising its rating to AAA. The rate for the senior
bank debt, including Ambac's fees, is LIBOR or the commercial paper rate, as
applicable, plus 1.635%. The interest rate for the mezzanine debt is LIBOR plus
7.00%. Pursuant to the terms of the financing, the mezzanine debt will be drawn
on first and will remain outstanding for the life of the senior bank facility.
As of September 30, 2005, MVL Film Finance LLC had $24.8 million in outstanding
mezzanine borrowings through the Film Facility. The borrowings were used
primarily to finance transaction costs related to the development and closing of
the facility.
Limitations on Recourse under Film Facility
The borrowings under the Film Facility are non-recourse to the Company
and its affiliates, other than MVL Film Finance LLC. MVL Film Finance LLC has
pledged all of its assets, principally consisting of the theatrical film rights
to the characters included in the film slate, as collateral for the borrowings.
17
While the borrowings are non-recourse to the Company, the Company has agreed to
instruct its subsidiaries involved in the film slate to maintain certain
operational covenants. If such covenants are not maintained, the Company may be
liable for the actual damages caused by such failure. The Company's liability in
this circumstance would be subject to limitations even then, including the
exclusion of consequential damages arising out of the breach of these
operational covenants.
Use of Funds
Funds under the facility will be used for the production of up to ten
films featuring the characters included in the film slate. Funds may be used to
produce more than one film based on a single character or character family, so
even if ten films are produced using the funds from the facility, not all
characters and character families included in the film slate will necessarily be
the subject of a film financed under the Film Facility.
Initial Funding Conditions
For any film included in the Film Facility, an initial funding may be
made only if certain conditions are met. These conditions include obtaining a
satisfactory completion bond, production insurance, distribution for the film
and compliance with representations, warranties and covenants contained in the
transaction documents. The distribution requirements, described in detail below,
require Marvel to pre-sell the distribution rights to a film in Australia and
New Zealand, Japan, Germany and German speaking Switzerland and Austria, France
and French speaking Belgium, and Spain (the "Reserved Territories") and obtain
an agreement with a major studio to distribute the film in all other
territories. To obtain a completion bond, Marvel will need to have the main
operational pieces to producing a film, including approved production, cash flow
and delivery schedules, an approved budget, an approved screenplay and the key
members of the production crew, including the director and producer, in place.
Additional Initial Funding Conditions for Fifth Film and each Film Thereafter
In addition, a condition to the initial funding for the fifth film and
for each film thereafter is the satisfaction of an interim asset test and a
foreign pre-sales test. The interim asset test requires the value of MVL Film
Finance LLC's assets to exceed its debt by a ratio of 1.15 to 1. The foreign
presales test requires that, on a cumulative basis, at least 33% of the cost of
each prior film, as defined in the Film Facility, has been paid for by the
pre-sale of the distribution rights to the Reserved Territories and/or the
proceeds of any government rebate, subsidy or tax incentive program.
Unrestricted Proceeds of the Film Facility
For each film, the Company will receive a fixed producer fee of
$1,500,000 as an advance against a 5% participation in the gross receipts and
proceeds of distribution pre-sales (the "5% Participation") and will retain all
of the film-related merchandising revenues, such as revenues from toy sales and
product licensing based on the movies. These merchandising revenues and the 5%
Participation are neither pledged as collateral nor subject to cash restrictions
under the facility.
Restricted Proceeds of the Film Facility
MVL Film Finance LLC will receive and retain funds from various revenue
streams (including: box office receipts, DVD/VHS sales, television, and
soundtrack sales relating to the films financed under the slate) after payment
of production costs, distribution fees, marketing costs, interest expense and
principal repayment. These revenue streams will be placed into a blocked account
maintained by MVL Film Finance LLC and may only be used for the production of
films and repayment of indebtedness under the facility. After the release of the
third film, funds may be withdrawn from the blocked account for Marvel's general
corporate purposes (a permitted distribution) under limited circumstances,
including compliance with certain financial coverage tests and a minimum balance
requirement. After three films, the minimum balance requirement on deposit in
the blocked account to make a permitted distribution is $350 million. For each
film thereafter until film nine, the minimum balance requirement is reduced by
$50 million.
18
Ability to Refinance or Discontinue Film Facility
The Film Facility allows MVL Film Finance LLC to either refinance or
simply discontinue the financing at any time without penalty by prepaying all
outstanding indebtedness and reducing the amount available under the financing
to zero.
Development and Distribution of the Film Slate
As a film development company, MVL Productions LLC, a wholly-owned
consolidated subsidiary of the Company, will engage in a broad range of
pre-production services including developing film concepts and screenplays,
preparing budgets and production schedules, obtaining production insurance and
completion bonds and forming a special-purpose, bankruptcy-remote subsidiary to
produce each film as a work-made-for-hire for MVL Film Finance LLC. MVL
Productions LLC has also entered into a studio distribution agreement with
Paramount Pictures Corporation ("Paramount").
Distribution: Worldwide Excluding Reserved Territories
MVL Productions LLC's studio distribution agreement with Paramount
requires Paramount, at the request of MVL Productions LLC, to distribute up to
ten films produced under the Film Facility. Paramount is required to release
each film during one of two prime release periods each year - the Spring/Summer
and Fall/Holiday seasons. Under the studio distribution agreement, Paramount has
guaranteed MVL Productions LLC wide distribution outside of the Reserved
Territories with commensurate advertising and marketing efforts for each film.
Included in Paramount's distribution rights are exclusive theatrical and
non-theatrical (e.g., exhibition on airplanes, schools and military
installations), home video, pay television and international television
(excluding the Reserved Territories) distribution rights. Excluded are all
distribution rights with respect to the Reserved Territories and free television
distribution in the United States. As compensation for its services under the
studio distribution agreement, Paramount is permitted to recoup its distribution
costs (including print and advertising costs) and expenses for each film from
the gross receipts of that film and to receive a distribution fee.
Distribution: Reserved Territories
MVL Productions LLC is required to pre-sell the distribution rights for
each film in the Reserved Territories. The proceeds of these pre-sale
arrangements will provide a source of funding for the direct costs of the films
in addition to the Film Facility. The target for such pre-sales is 33% of the
costs of each film. Obtaining this target (on a cumulative basis) is a condition
to the initial funding for the fifth film and for each film thereafter.
Reimbursement of Development Costs and Overhead
Under the Film Facility, the Company expects to incur expenses,
principally incremental overhead expenses and costs of developing each film to
the stage at which the conditions for an initial funding of such film are met.
Until the initial funding for a film, these costs will be paid for by the
Company. At initial funding, these development costs and incremental overhead
expenses of the Company related to the film of up to two percent (2%) of the
costs for that film will be reimbursed by the Film Facility. The Company will be
responsible for any additional overhead expenses and any development costs that
are not reimbursed in the event the conditions of an initial funding for the
film to which such development costs relate were never met.
Costs of Film Facility in 2005
The Company expects that expenses (primarily interest expense) related
to the Film Facility will be approximately $4.3 million during 2005, of which
$0.9 million has been recognized in the third quarter of 2005 with the balance
expected in the fourth quarter. While some of these expenses may be reimbursable
as described above, the Company cannot estimate at this time the amount of
additional expenses that will be reimbursable through additional borrowings
under the Film Facility.
19
Marvel Studios
Marvel Studios is in the process of ramping up its operations to meet
the increased responsibilities it will face as a working movie studio. Marvel
Studios has relocated to new office space and is in the process of adding key
personnel to its film operations. In addition, Marvel Studios continues to work
on media licensing projects at various stages of development or production.
Results of Operations
Three-month period ended September 30, 2005 compared with the three-month period
- --------------------------------------------------------------------------------
ended September 30, 2004
- ------------------------
Net Sales
Three Months ended
September 30,
------------------------
2005 2004 Change
-------------------------------------
(dollars in millions)
Licensing................................... $ 33.2 $ 64.2 (48)%
Publishing.................................. 25.8 22.6 14%
Toys........................................ 22.1 48.4 (54)%
----------- -----------
Total....................................... $ 81.1 $ 135.2 (40)%
=========== ===========
The Company's consolidated net sales decreased $54.1 million to $81.1
million in the third quarter of 2005, primarily as a result of the decrease in
sales from the Licensing and Toy segments.
Licensing segment sales decreased $31.0 million from $64.2 million
during the third quarter of 2004 to $33.2 million during the third quarter of
2005. This decrease was principally due to the reduction in sales derived from
the Joint Venture and from studio media licensing generated by the July 2004
Spider-Man 2 theatrical release. Sales derived from the Joint Venture for the
third quarter of 2005 was $2.4 million compared to $28.3 million in the prior
year period. Studio media licensing related to Spider-Man 2 decreased $4.7
million in the third quarter of 2005.
Sales from the Publishing segment increased $3.2 million to $25.8
million in the third quarter of 2005, resulting from higher sales of trade
paperbacks into the bookstore and direct market channels.
Sales from the Toy segment decreased $26.3 million to $22.1 million in
the third quarter of 2005, primarily due to a $35.0 million decrease in the
direct sales of action figures and accessories based on characters associated
with the July 2004 Spider-Man 2 theatrical release. This decrease was partially
offset by increases in royalty and service fee revenue derived from licensed toy
sales associated with TBW.
20
Cost of Revenues
Three Months ended September 30,
-------------------------------------------------
2005 2004
% of Net % of Net
Amount Sales Amount Sales
---------- ------------ ------------ ------------
(dollars in millions)
Licensing....................................... $ -- N/A $ -- N/A
Publishing...................................... 11.0 43% 10.6 47%
Toys............................................ 3.1 14% 27.7 57%
----------- -------------
Total........................................... $ 14.1 17% $ 38.3 28%
=========== =============
Consolidated cost of revenues decreased $24.2 million to $14.1 million
in the third quarter of 2005, primarily due to decreased production costs,
resulting from lower direct sales of action figures and accessories based on
characters associated with the July 2004 Spider-Man 2 theatrical release, as
described above. Consequently, the Company's consolidated cost of revenues as a
percentage of sales decreased to 17% in the third quarter of 2005, as compared
to 28% in the third quarter of 2004.
Publishing cost of revenues as a percentage of sales decreased from 47%
in the third quarter of 2004 to 43% in the third quarter of 2005 as a result of
an increase in sales of trade paperbacks, which have lower creative production
costs than comic books.
The decrease in Toy cost of revenues from 57% of net sales in the third
quarter of 2004 to 14% in the third quarter of 2005 reflects a change in product
mix due to a decrease in production costs associated with decreased revenue
derived from the direct sales of action figures and accessories based on
characters associated with the July 2004 Spider-Man 2 theatrical release and an
increase in royalty and service fee revenue from licensed toy sales associated
with TBW, for which there are no production costs.
Selling, General and Administrative Expenses
Three Months ended September 30,
--------------------------------------------------
2005 2004
% of Net % of Net
Amount Sales Amount Sales
------------ ------------ ---------- -------------
(dollars in millions)
Licensing............................... $ 13.1 39% $ 15.2 24%
Publishing.............................. 3.9 15% 3.9 17%
Toys.................................... 7.6 34% 7.7 16%
Corporate Overhead...................... 6.1 N/A 8.1 N/A
------------- -----------
Total................................... $ 30.7 38% $ 34.9 26%
============= ===========
Consolidated selling, general and administrative ("SG&A") expenses
decreased $4.2 million to $30.7 million in the third quarter of 2005, primarily
due to lower expenses in the Licensing and Corporate segments. Consolidated SG&A
as a percentage of net sales increased to 38% in the third quarter of 2005 as
compared to 26% in the third quarter of 2004, resulting from the decrease in net
sales.
SG&A expenses decreased $2.1 million in the Licensing segment in the
third quarter of 2005 compared with the third quarter of 2004 primarily as a
result of a favorable settlement related to a merchandise royalty sharing
dispute. As a result of the decrease in licensing segment sales, SG&A increased
to 39% of licensing net sales in the third quarter of 2005 compared with 24% in
the third quarter of 2004.
Toy segment SG&A expenses remained flat but increased as a percentage
of sales from 16% in the third quarter of 2004 to 34% in the third quarter of
2005 as a result of the decline in Toy sales.
Corporate overhead expenses decreased $2.0 million in the third quarter
of 2005 compared with the third quarter of 2004, principally due to a decrease
in salaries and in legal expenses.
21
Operating Income
Three Months ended September 30,
------------------------------------------------
2005 2004
Amount Margin Amount Margin
------------ ------------ ---------- -----------
(dollars in millions)
Licensing.............................. $ 20.0 60% $ 49.0 76%
Publishing............................. 11.0 43% 9.4 42%
Toys................................... 10.5 48% 11.8 24%
Corporate Overhead..................... (6.1) N/A (8.1) N/A
------------- -----------
Total.................................. $ 35.4 44% $ 62.1 46%
============= ===========
Consolidated operating income decreased $26.7 million to $35.4 million
in the third quarter of 2005, primarily due to the lower sales in the Licensing
segment. As a percentage of sales, consolidated operating margins in the third
quarter of 2005 were slightly below the third quarter of 2004 as a result of
lower Licensing segment margins due to lower Licensing sales, offset by higher
Toy segment margins due to the change in product mix.
Operating margins of the Licensing segment decreased to 60% in the
third quarter of 2005 from 76% in the comparable prior year quarter as a result
of relatively flat overhead costs coupled with lower sales. The margin was
further reduced due to the decrease in sales generated from the Joint Venture.
Joint Venture revenues have no related royalty expense payable to studios, and
therefore have higher margins than other License segment revenue streams, where
the related royalty expense payable to studios is recorded within selling
expense.
Operating margins increased in the Toy segment to 48% in the third
quarter of 2005 from 24% in the third quarter of 2004 as a result of an increase
in higher margin royalty and service fee revenue from licensed toy sales
associated with TBW and a decrease in revenue derived from lower margin direct
sales of action figures and accessories based on characters associated with the
July 2004 Spider-Man 2 theatrical release.
Other
The Company had net interest expense of $0.4 million in the third
quarter of 2005, compared to net interest income of $0.6 million in the third
quarter of 2004. This was the result of interest expense in 2005 related to the
Film Facility of $0.9 million, offset by interest income. Interest income
reflects amounts earned on the Company's cash equivalents and short-term
investments.
Income Taxes
The Company's effective tax rate for the three-month period ended
September 30, 2005 (31.9%) was lower than the statutory rate due primarily to
recognition of additional tax benefit relating to state and local net operating
losses, the effects of the consolidation of the Joint Venture, and Federally tax
free investment returns offset by state and local taxes. The effective tax rate
for the third quarter reflects a benefit of 4.5% from discrete items primarily
related to the valuation of deferred tax assets for state and local net
operating losses, which will not recur in future quarters. The Company is not
responsible for the income taxes related to the minority share of the Joint
Venture income, and as such, the minority share of the Joint Venture income is
deducted in computing the Company's effective tax rate. The impact of this
reduction to the Company's effective tax rate is greater in periods when the
operating results of the Joint Venture are higher and lesser in periods when the
operating results of the Joint Venture are lower. The Company completely
utilized its Federal net operating loss carryforwards in 2004. The Company
retains various state and local net operating loss carryforwards of
approximately $308 million, which will expire in various jurisdictions in years
2005 through 2023.
The Company is under examination by various state and local
jurisdictions, the results of which are not expected to be material to the
Company's financial position, results of operations or cash flows.
2 21
Nine-month period ended September 30, 2005 compared with the nine-month period
- --------------------------------------------------------------------------------
ended September 30, 2004
- ------------------------
Net Sales
Nine Months ended
September 30,
------------------------
2005 2004 Change
-----------------------------------
(dollars in millions)
Licensing................................... $148.3 $158.1 (6)%
Publishing.................................. 69.1 63.9 8%
Toys........................................ 56.0 191.0 (71)%
----------- -----------
Total....................................... $273.4 $413.0 (34)%
=========== ===========
The Company's consolidated net sales of $273.4 million for the
nine-month period ended September 30, 2005 were $139.6 million lower than net
sales in the comparable period of 2004, primarily due to decreased sales from
the Toy segment.
The overall decrease in Licensing segment sales ($9.8 million) was due
to decreases in the Joint Venture and domestic licensing, which were only
partially off-set by strength in international licensing. For the nine-month
period ended September 30, 2005, the Joint Venture generated $20.4 million of
sales compared with $40.0 million recorded by the Company for the period from
April 1 2004 (the initial date the Joint Venture was consolidated) through
September 30, 2004. This decrease was partially off-set by increases in
international licensing ($7.8 million) and studio media licensing ($4.5
million).
Sales from the Publishing segment increased $5.2 million to $69.1
million for the nine-month period ended September 30, 2005 primarily due to $4.3
million of higher sales of trade paperbacks and comic books into the direct
market channel. This was partially due to an increase in the number of published
comic book titles from 580 during the nine months ended September 30, 2004 to
605 for the nine months ended September 30, 2005.
Sales from the Toy segment decreased $135.0 million to $56.0 million in
the nine-month period ended September 30, 2005, primarily due to a $156.4
million decrease in the direct sales of action figures and accessories based on
characters associated with the July 2004 Spider-Man 2 theatrical release. This
decrease was partially offset by increases in royalty and service fee revenue
derived from licensed toy sales associated with TBW.
Cost of Revenues
Nine Months ended September 30,
-------------------------------------------------
2005 2004
% of Net % of Net
Amount Sales Amount Sales
---------- ------------ ------------ ------------
(dollars in millions)
Licensing.................... $ -- N/A $ -- N/A%
Publishing................... 30.2 44% 29.7 46%
Toys......................... 7.3 13% 112.0 59%
--------- -------------
Total........................ $37.5 14% $141.7 34%
========= =============
23
Consolidated cost of revenues decreased $104.2 million to $37.5 million
for the nine-month period ended September 30, 2005, primarily due to decreased
production costs, resulting from lower direct sales of action figures and
accessories based on characters associated with the July 2004 Spider-Man 2
theatrical release, as described above. Consequently, the Company's consolidated
cost of revenues as a percentage of sales decreased to 14% for the nine-month
period ended September 30, 2005, as compared to 34% in comparable period of
2004.
Publishing cost of revenues as a percentage of sales decreased from 46%
in the third quarter of 2004 to 44% in the third quarter of 2005 as a result of
an increase in sales of trade paperbacks, which have lower creative production
costs than comic books.
The decrease in Toy cost of revenues from 59% of net sales in the
nine-month period ended September 30, 2004 to 13% in the nine-month period ended
September 30, 2005 reflects a change in product mix due to a decrease in
production costs associated with decreased revenue derived from the direct sales
of action figures and accessories based on characters associated with the July
2004 Spider-Man 2 theatrical release and an increase in royalty and service fee
revenue from licensed toy sales associated with TBW, for which there are no
production costs.
Selling, General and Administrative Expenses
Nine Months ended September 30,
-------------------------------------------------
2005 2004
% of Net % of Net
Amount Sales Amount Sales
------------ ------------ ---------- ------------
(dollars in millions)
Licensing.................... $ 60.4 41% $ 47.6 30%
Publishing................... 11.1 16% 10.8 17%
Toys......................... 18.0 32% 22.3 12%
Corporate Overhead........... 18.1 N/A 16.4 N/A
------------- -----------
Total........................ $ 107.6 39% $ 97.1 24%
============= ===========
Consolidated selling, general and administrative ("SG&A") expenses
increased $10.5 million to $107.6 million for the nine-month period ended
September 30, 2005, primarily due to the $10 million charge associated with the
settlement of litigation with Stan Lee recorded in the first quarter of 2005 in
the Licensing segment. Consolidated SG&A as a percentage of net sales increased
to 39% for the nine-month period ended September 30, 2005 as compared to 24% in
the comparable period of 2004 as a result of the decrease in consolidated net
sales and the impact of the first-quarter 2005 Stan Lee settlement provision.
Licensing segment SG&A expenses increased $12.8 million (27%) as a
result of the $10 million charge associated with the Stan Lee settlement, higher
international sales commissions and higher salaries. As a percentage of sales,
licensing SG&A increased to 41% in the nine-month period ended September 30,
2005 from 30% in the comparable prior year period as a result of these cost
increases combined with the decrease in licensing sales in 2005.
Toy segment SG&A expenses increased as a percentage of sales from 12%
in the nine-month period ended September 30, 2004 to 32% in the nine-month
period ended September 30, 2005 as a result of the decline in Toy sales. Toy
SG&A expenses decreased $4.3 million to $18.0 million for the nine-month period
ended September 30, 2005 from $22.3 million for the nine-month period ended
September 30, 2004 as a result of a decline in royalty fees of $5.5 million due
to the reduction of direct sales of action figures and accessories based on
characters associated with the July 2004 Spider-Man 2 theatrical release, which
was partially offset by a $1.0 million increase to advertising expense.
Corporate overhead expenses increased $1.7 million for the nine-month
period ended September 30, 2005 principally due to increased legal expenses.
24
Operating Income
Nine Months ended September 30,
------------------------------------------------
2005 2004
Amount Margin Amount Margin
----------- ---------- ---------- -------------
(dollars in millions)
Licensing...................... $ 88.0 59% $118.5 75%
Publishing..................... 27.7 40% 25.7 40%
Toys........................... 28.1 50% 55.3 29%
Corporate Overhead............. (17.4) N/A (16.4) N/A
------------ -----------
Total.......................... $126.4 46% $183.1 44%
============ ===========
Consolidated operating income decreased $56.7 million to $126.4 million
for the nine-month period ended September 30, 2005, primarily due to the lower
sales in the Licensing and Toy segments. As a percentage of sales, consolidated
operating margins for the nine-month period ended September 30, 2005 were
slightly higher than for the comparable period of 2004 as a result of lower
Licensing segment margins due to lower Licensing sales, offset by higher Toy
segment margins due to the change in product mix.
Operating margins decreased in the Licensing segment from 75% for the
nine-month period ended September 30, 2004 to 59% in the comparable period of
2005 as a result of lower licensing sales in 2005 and higher costs as a result
of the Stan Lee settlement. The margin was further reduced due to the decrease
in sales generated from the Joint Venture. Joint Venture revenues have no
related royalty expense payable to studios, and therefore have higher margins
than other License segment revenue streams, where the related royalty expense
payable to studios is recorded within selling expense.
Operating margins increased in the Toy segment to 50% for the
nine-month period ended September 30, 2005 from 29% in the comparable period of
2004 as a result of an increase in higher margin royalty and service fee revenue
from licensed toy sales associated with TBW and a decrease in revenue derived
from lower margin direct sales of action figures and accessories based on
characters associated with the July 2004 Spider-Man 2 theatrical release.
Other
The Company had net interest income of $2.2 million for the nine-month
period ended September 30, 2005, compared to net interest expense of $18.3
million in the comparable period of 2004. This was the result of the redemption
of the Company's 12% senior notes on June 15, 2004. Interest income reflects
amounts earned on the Company's cash equivalents and short-term investments.
Income Taxes
The Company's effective tax rate for the nine-month period ended
September 30, 2005 (36.7%) was higher than the Federal statutory rate due
primarily to state and local taxes offset by the recognition of additional tax
benefit relating to state and local net operating losses, the effects of the
consolidation of the Joint Venture, and Federally tax-free investment returns.
The Company is not responsible for the income taxes related to the minority
share of the Joint Venture income, and as such, the minority share of the Joint
Venture income is deducted in computing the Company's effective tax rate. The
impact of this reduction to the Company's effective tax rate is greater in
periods when the operating results of the Joint Venture are higher and lesser in
periods when the operating results of the Joint Venture are lower. The Company
completely utilized its Federal net operating loss carryforwards in 2004. The
Company retains various state and local net operating loss carryforwards of
approximately $308 million, which will expire in various jurisdictions in years
2005 through 2023.
The Company is under examination by various state and local
jurisdictions, the results of which are not expected to be material to the
Company's financial position, results of operations or cash flows.
25
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash and cash
equivalents, short-term investments, cash flows from operations, the Film
Facility and the HSBC Credit Facility (defined below). The Company anticipates
that its primary uses for liquidity will be to conduct its business and pursue
its stock repurchase program.
Net cash provided by operating activities decreased $65.2 million to
$57.3 million for the nine-month period ended September 30, 2005, compared to
$122.5 million for the comparable prior year period primarily due to the Company
having fully utilized its net operating loss carryforwards in late 2004,
resulting in the generation of current tax obligations. Income tax payments in
2005 totaled $67.3 million, compared with $21.7 million in the prior year. In
addition, the Company had a $10.9 million increase in distributions to the Joint
Venture partner.
The Company had working capital of $58.2 million at September 30, 2005
compared with working capital of $142.2 million at December 31, 2004, a decline
of $83.9 million. This decline is primarily the result of the Company using
short-term investments and operating cash to finance its stock repurchase plan
described below, which was partially offset by cash generated through
operations.
Net cash flows from investing activities for the nine-month period
ended September 30, 2005 reflect the sale of short-term investments to finance
the Company's common stock repurchase program described below. Net cash flows
from investing activities for the nine-month period ended September 30, 2004
reflect the sale of short-term investments to repay long-term debt and finance
the Company's common stock repurchase program described below.
In July 2004, the Company began a $100 million common stock repurchase
program, which was increased to $250 million on May 11, 2005. The Company
completed its $250 million stock repurchase program on July 19, 2005, under
which the Company repurchased a total of 13.5 million shares of its common
stock, at an average purchase price of $18.48 per share. During 2005, the
Company expended $191.9 million for the repurchase of common stock. These
repurchases were financed through the sale of investments of approximately
$100.1 million and cash generated from operations.
As described above, MVL Film Finance LLC maintains a $525,000,000
credit facility for the purpose of producing theatrical motion pictures based on
Marvel's characters. The Film Facility consists of $465 million in revolving
senior bank credit and $60 million in credit referred to as mezzanine debt,
which is subordinated to the senior bank debt. Both Standard & Poor's, a
division of the McGraw-Hill Companies, Inc., and Moody's Investor Rating
Service, Inc. have given the senior bank debt an investment grade rating. In
addition, Ambac Assurance Corporation has insured repayment of the senior debt,
raising its rating to AAA. The rate for the senior bank credit, including
Ambac's fees, is LIBOR or the commercial paper rate, as applicable, plus 1.635%.
The interest rate for the mezzanine debt is LIBOR plus 7.00%. The Company
entered into an interest rate cap agreement in connection with the Film Facility
whereby LIBOR is capped at 6.0% for outstanding debt under the Film Facility up
to certain stipulated notional amounts which vary over the term of the Film
Facility. Pursuant to the terms of the financing, the mezzanine credit will be
drawn on first and will remain outstanding for the life of the senior bank
facility. As of September 30, 2005, MVL Film Finance LLC had $24.8 million in
outstanding mezzanine borrowings through the Film Facility. The borrowings were
used primarily to finance transaction costs related to the development and
closing of the facility. The Company must comply with a minimum tangible net
worth covenant and various administrative covenants. In addition, conditions to
the initial funding of the fifth film to be produced under the Film Facility,
and each film thereafter, are the satisfaction of an interim asset test and
foreign pre-sales test, as defined in the Film Facility. The Company is in
compliance with its covenants under the Film Facility.
During most of the third quarter, the Company maintained a credit
facility with HSBC Bank USA, National Association ("HSBC") that provided for a
$15 million revolving line of credit and up to $15 million in letters of credit.
At the Company's election, effective as of the closing of the Film Facility, the
Company and HSBC terminated this credit facility.
26
On November 9, 2005, the Company entered into an agreement for a credit
facility with HSBC (the "HSBC Credit Facility") to provide for a $150 million
revolving credit line (this amount decreases to $100 million on March 31, 2006)
with a sublimit of $27 million for the issuance of letters of credit. Borrowings
under the HSBC Credit Facility may be used by the Company for working capital
and other general corporate purposes and for repurchases of the Company's common
stock. As of November 9, 2005, $0.3 million of letters of credit were
outstanding, and there were no borrowings, under the HSBC Credit Facility. The
HSBC Credit Facility, which expires on October 31, 2007, contains customary
event-of-default provisions and covenants regarding the Company's net worth,
leverage ratio, and free cash flow. The HSBC Credit Facility is secured by a
first priority perfected lien on (a) the Company's accounts receivable, (b) the
Company's rights in its master toy license with TBW and in any successor
license, and (c) all common stock of the Company repurchased after the
facility's closing date. Borrowings under the facility would bear interest at
HSBC's prime rate or, at the Company's choice, at LIBOR-plus-1.25% per annum.
On November 9, 2005, the Company authorized a $250 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 until such time as $250 million of
the Company's shares have been repurchased under the program. The Company's
largest stockholder and Chief Executive Officer, Isaac Perlmutter, has agreed
not to sell any shares until the earlier of October 15, 2006 or the last day in
which the repurchase program is in place.
The Company believes that its cash and cash equivalents, short-term
investments and cash flows from operations, the Film Facility, the HSBC Credit
Facility and other sources of liquidity will be sufficient for the Company to
conduct its business and pursue its stock repurchase program.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has foreign operations in Hong Kong, the United Kingdom 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.
Interest rate changes generally do not effect the market value of the
Company's debt under the Film Facility but do impact the amount of the Company's
interest payments under the Film Facility and therefore, the Company's future
earnings and cash flows, assuming other factors are held constant. On September
30, 2005, the Company had variable rate debt under the Film Facility of $24.8
million. On September 1, 2005, the Company entered into an interest rate cap
agreement in connection with the Film Facility, to mitigate its exposure to
increases in the LIBOR rate, as described in the Notes to Condensed Consolidated
Financial Statements in Part I hereof. The interest rate cap settles on the 15th
day (or the first business day thereafter) after the end of each calendar
quarter in which it is in effect until its expiration on October 15, 2014. The
fair value of this interest rate cap at September 30, 2005 is $3.4 million. The
Company does not enter into derivative financial instruments 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, 2005 that have
materially affected, or are reasonably likely to materially affect, its internal
controls over financial reporting.
27
PART II. OTHER INFORMATION.
--------------------------------
28
ITEM 1. LEGAL PROCEEDINGS
The information required by Part II, Item 1 is incorporated herein by
reference to the information appearing under the caption "Legal Matters" in the
Notes to Condensed Consolidated Financial Statements in Part I hereof.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Total number of Approximate dollar
shares purchased value of shares
Total number of as part of that may yet be
shares Average price publicly announced purchased under
purchased (a) paid per plans or programs the plans or
Period share (b) programs
- ------------------ ----------------- ------------------- ------------------------ --------------------
2005
July............ 1,572,100 $ 20.76 1,572,100
August.......... 73,400 19.06 --
September....... -- -- --
----------------- --------------------
Total........... 1,645,500 20.68 1,572,100 $--(c)
================= ====================
(a) This column's figures include 73,400 shares purchased by the
Fleer/Skybox Plan.
(b) This column represents the number of shares repurchased through the
common stock repurchase program announced on July 12, 2004 and
revised as announced on May 11, 2005, under which the Company was
authorized to repurchase up to $250 million worth of its common stock
through June, 30, 2006.
(c) No further shares may be purchased under the repurchase program in
effect during the quarter ended September 30, 2005. On November 9,
2005, the Company announced a new repurchase program under which $250
million may be used by the Company to repurchase shares of its common
stock.
29
ITEM 6. EXHIBITS
3(i) Articles of Incorporation
10.1 Amended and Restated Studio Distribution Agreement dated as of
August 31, 2005, by and between MVL Productions LLC and
Paramount Pictures Corporation. Portions of this exhibit have
been omitted pursuant to a request for confidential treatment
filed separately with the Securities and Exchange Commission
10.2 Form of Performance-Based Phantom Stock Agreement under the
Company's 2005 Stock Incentive Plan
10.3 Form of Performance-Based Award Letter under the Company's
2005 Cash Incentive Plan
10.4 Amendment to Employment Agreement Between Timothy E. Rothwell
and the Company
10.5 Credit Agreement, dated as of November 9, 2005 among Marvel
Entertainment, Inc. and HSBC Bank USA, National Association
10.6 Pledge and Security Agreement, dated as of November 9, 2005 by
Marvel Entertainment, Inc. and Marvel Characters, Inc. in
favor of HSBC Bank USA, National Association
10.7 Guaranty, dated as of November 9, 2005 by Marvel Characters,
Inc. in favor of and for the benefit of HSBC Bank USA,
National Association
10.8 Share Disposition Agreement, dated as of November 8, 2005 by
and between Marvel Entertainment, Inc. and Isaac Perlmutter
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
30
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 ENTERTAINMENT, INC.
(Registrant)
Dated: November 9, 2005 By: /s/ Isaac Perlmutter
----------------------------
Isaac Perlmutter
Chief Executive Officer
Dated: November 9, 2005 By: /s/ Kenneth P. West
-------------------------------
Kenneth P. West
Chief Financial Officer
31