UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended June 30, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from __________ to __________
Commission file number 1-13638
MARVEL ENTERPRISES, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3711775
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
387 Park Avenue South,
New York, NY 10016
----------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
212-696-0808
-----------------------------------------
(Registrant's telephone number, including area code)
-----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At August 1, 2000, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 33,702,266 shares of Common Stock.
<PAGE>
PART I. Financial Information
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $46,241 $64,814
Accounts receivable, net............................ 28,980 55,841
Inventories, net.................................... 43,372 39,385
Deferred income taxes, net.......................... ---- 7,042
Deferred financing costs............................ 1,372 1,384
Prepaid expenses and other.......................... 6,859 4,443
---------- ----------
Total current assets......................... 126,824 172,909
Goodwill and other intangibles, net.................. 428,381 440,361
Molds, tools and equipment, net...................... 16,502 17,226
Product and package design costs, net................ 8,210 6,949
Income tax receivable................................ 1,327 1,327
Deferred charges and other assets.................... 11,907 6,512
Deferred financing costs............................. 8,667 9,353
Total assets................................. $601,818 $654,637
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.................................... $6,380 $9,613
Accrued expenses and other.......................... 33,781 53,380
Administrative claims payable....................... 8,690 9,507
Unsecured creditors payable......................... 7,531 8,490
Total current liabilities................... 56,382 80,990
---------- ----------
Long-term liabilities
Senior notes........................................ 250,000 250,000
Deferred income taxes............................... ---- 1,094
---------- ----------
Total long-term liabilities................. 250,000 251,094
---------- ----------
Total liabilities........................... 306,382 332,084
Redeemable cumulative convertible
exchangeable preferred stock..................... 194,335 186,790
Stockholders' equity
Common stock........................................ 409 409
Additional paid-in capital.......................... 215,301 215,184
Retained deficit.................................... (81,654) (46,875)
---------- ----------
Total stockholders' equity before treasury
stock.............................. 134,056 168,718
---------- ----------
Treasury stock...................................... (32,955) (32,955)
Total stockholders' equity.................. 101,101 135,763
---------- ----------
Total liabilities, redeemable preferred stock
and stockholders' equity............... $601,818 $654,637
========== ==========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales........................................... $ 51,041 $61,510 $94,229 $ 136,768
Cost of sales....................................... 24,328 30,831 46,677 63,481
--------- --------- ---------- ----------
Gross profit........................................ 26,713 30,679 47,552 73,287
--------- --------- ---------- ----------
Operating expenses:
Selling, general & administrative.............. 19,329 24,521 40,135 48,323
Depreciation & amortization.................... 3,778 3,720 7,097 7,166
Amortization of goodwill and other intangibles. 5,990 6,482 11,982 12,774
--------- --------- ---------- ----------
Total operating expenses............................ 29,097 34,723 59,214 68,263
--------- --------- ---------- ----------
Operating (loss) income............................. (2,384) (4,044) (11,662) 5,024
Interest expense, net............................... 7,216 7,070 14,416 14,420
--------- --------- ---------- ----------
Loss before provision (benefit) for income taxes.... (9,600) (11,114) (26,078) (9,396)
Income tax provision (benefit)...................... 724 (2,044) 893 1,070
--------- --------- ---------- ----------
Loss before equity in net loss of joint venture..... (10,324) ($9,070) (26,971) ($10,466)
Equity in net loss of joint venture................. (263) --- (263) ---
--------- --------- ---------- ----------
Loss before extraordinary expense................... (10,587) ($9,070) (27,234) ($10,466)
Extraordinary expense, net of tax benefit of $1,021. --- --- --- 1,531
--------- --------- ----------- ----------
Net loss........................................... (10,587) ($9,070) (27,234) ($11,997)
Less: preferred dividend requirement............... 3,810 3,525 7,545 6,968
--------- --------- ----------- ----------
Net loss attributable to Common Stock............. ($14,397) ($12,595) ($34,779) ($18,965)
--------- --------- ----------- ----------
Basic and dilutive earnings per share:
Loss from continuing operations attributable
to Common Stock............................. ($0.43) ($0.38) ($1.03) ($0.52)
Extraordinary expense........................... - - - ($0.05)
--------- --------- ----------- ----------
Loss attributable to Common Stock............... ($0.43) ($0.38) ($1.03) ($0.57)
--------- --------- ----------- ----------
Weighted average number of basic and diluted
shares outstanding.......................... 33,651 33,532 33,644 33,532
--------- --------- ----------- ----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................... ($27,234) ($11,997)
--------- ---------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation & amortization............... 19,079 19,940
Amortization of bridge loan and bond offering
costs................................... 698 2,169
Extraordinary expense, net................ --- 1,531
Equity in net loss of joint venture....... 263 ---
Change in assets & liabilities:
Decrease in accounts receivable........ 26,861 9,473
(Increase) decrease in inventories..... (3,987) 2,030
Decrease in income tax receivable...... --- 6,130
Increase in prepaid expenses and other. (7,416) (3,127)
Increase in deferred charges and other
assets.............................. (395) (4,194)
Decrease in accounts payable........... (3,232) (436)
Decrease in accrued expenses and other. (13,915) (16,408)
--------- ---------
Total adjustments......................... 17,956 17,108
` --------- ---------
Net cash (used in) provided by
operating activities................... (9,278) 5,111
--------- ---------
Cash flows from investing activities:
Payment of administrative claims, net......... (1,776) (2,414)
Purchases of molds, tools and equipment....... (4,073) (5,784)
Expenditures for product and package design
costs...................................... (3,561) (3,061)
Other investments............................. (2) (110)
Net proceeds from the sale of Fleer assets.... --- 22,885
---------- ---------
Net cash (used in) provided by investing
activities.............................. (9,412) 11,516
---------- ---------
Cash flows from financing activities:
Net proceeds from senior notes offering....... --- 239,038
Repayment of bridge facility.................. --- (200,000)
Stock warrants exercised...................... 5 189
Employees stock options exercised............. 112 ---
---------- ---------
Net cash provided by financing activities. 117 39,227
---------- ---------
Net (decrease) increase in cash and cash
equivalents................................... (18,573) 55,854
Cash and cash equivalents, at beginning of
period........................................ 64,814 43,691
---------- ---------
Cash and cash equivalents, at end of period..... 46,241 $99,545
---------- ---------
Supplemental disclosures of cash flow information
Interest paid................................. $15,193 $14,579
Income taxes, net (paid) refunded............. (87) $4,782
Non-cash transaction
Preferred stock dividends..................... $7,545 $6,968
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of
Marvel Enterprises, Inc. and its subsidiaries (collectively, the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The Condensed Consolidated Statement of
Operations and the Condensed Consolidated Statement of Cash Flow for the six
months ended June 30, 2000 are not necessarily indicative of those for the full
year ending December 31, 2000. Certain prior year amounts have been reclassified
to conform with current year's presentation. For further information on the
Company's historical financial results, refer to the consolidated financial
statements and footnotes thereto contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
5
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ----------
Description
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.......................... $48,140 $84,353
Less allowances for:
Doubtful accounts............................ (3,871) (3,951)
Advertising, markdowns, returns, volume discounts
and other.................................. (15,289) (24,561)
----------- ----------
Total $28,980 $55,841
=========== ==========
Inventories, net:
Toys:
Finished goods............................... $34,272 $31,397
Component parts, raw materials and
work-in-process............................ 5,452 4,787
----------- ----------
Total Toys................................... $39,724 $36,184
Publishing:
Finished goods............................... $ --- $ ---
Component parts, raw materials and
work-in-process............................ 3,648 3,201
----------- ----------
Total Publishing............................. $3,648 $3,201
----------- ----------
Total........................................ $43,372 $39,385
=========== ==========
Molds, tools and equipment, net:
Molds, tools and equipment.................. $26,917 $23,047
Office equipment and other.................. 9,906 10,189
Less accumulated depreciation and
amortization.............................. (20,321) (16,010)
----------- ----------
Total....................................... $16,502 $17,226
=========== ==========
Product and package design costs, net:
Product design costs........................ $10,986 $8,856
Package design costs........................ 5,299 3,868
Less accumulated amortization............... (8,075) (5,775)
----------- -----------
Total....................................... $8,210 $6,949
=========== ===========
Goodwill and other intangibles, net:
Goodwill................................... $470,729 $470,729
Patents and other intangibles.............. 3,905 3,902
Less accumulated amortization.............. (46,253) (34,270)
----------- ----------
Total...................................... $428,381 $440,361
=========== ==========
Accrued expenses and other:
Accrued advertising costs................. $ ---- $6,787
Accrued royalties......................... 3,978 8,197
Inventory purchases....................... 9,141 5,547
Income taxes payable...................... 5,093 4,366
Deferred income taxes payable............. ---- 5,948
Other accrued expenses.................... 15,569 22,535
----------- ----------
Total..................................... $33,781 $53,380
=========== ==========
</TABLE>
6
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. DEBT FINANCING
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes (the "Senior Notes") in a private placement exempt from
registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.0 million were used for
working capital and to pay all outstanding balances under a $200 million loan
(the "Bridge Facility") from UBS AG, Stamford Branch ("UBS AG") which was used
to partially finance the acquisition of Marvel Entertainment Group, Inc. ("MEG")
in 1998. The Senior Notes are due June 15, 2009 and bear interest at 12% per
annum, payable semi-annually on June 15th and December 15th. The Senior Notes
may be redeemed beginning June 15, 2004 for a redemption price of 106% of the
principal amount, plus accrued interest. The redemption price decreases 2% each
year after 2004 and will be 100% of the principal amount, plus accrued interest,
beginning on June 15, 2007. In addition, 35% of the Senior Notes may, under
certain circumstances, be redeemed before June 15, 2002 at 112% of the principal
amount, plus accrued interest. Principal and interest on the Senior Notes are
guaranteed on a senior basis jointly and severally by each of the Company's
domestic subsidiaries. On August 20, 1999, the Company completed an exchange
offer under which it exchanged virtually all of the Senior Notes, which
contained restrictions on transfer, for an equal principal amount of registered,
transferable notes whose terms are identical in all other material respects to
the terms of the Senior Notes.
In February 1999, in connection with the repayment of the Bridge Facility
and the termination of a $50 million credit facility with UBS AG which was
obtained in 1998, the Company recorded an extraordinary charge of approximately
$1.5 million, net of tax benefit, for the write-off of deferred financing costs
associated with these two facilities.
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered into
an agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit
Facility"). The Citibank Credit Facility bears interest at either the bank's
base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on
the Company's financial performance or at the Eurodollar rate plus a margin
ranging from 2.25% to 2.75% depending on the Company's financial performance.
The Citibank Credit Facility requires the Company to pay a commitment fee of
0.625% per annum on the average daily unused portion of the facility unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount outstanding above $20.0 million. In March 2000,
the parties agreed to an amendment whereby financial covenants would not be
tested as long as the total amount outstanding does not exceed $20.0 million and
the borrowing base less the total outstanding amount exceeds $20.0 million. In
April 2000, the parties agreed to reduce the Citibank Credit Facility to $40.0
million. In August 2000, the parties agreed to an amendment whereby financial
covenants would not be tested as long as the total amount outstanding does not
exceed $20.0 million and the borrowing base less the total outstanding amount
exceeds $10.0 million. In addition, the amendment requires the re-negotiation of
the financial covenants once financial projections are provided to the Lender
.The Company has never borrowed under this facility. The amount available under
this facility is reduced by the amount of outstanding letters of credit, which
total approximately $15.5 million as of June 30, 2000. The Citibank Credit
Facility is secured by a lien on all of the Company's inventory and receivables.
7
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. COMMITMENTS
In June 2000, the Company entered into a merchandise licensing agreement to
manufacture and distribute a line of toys associated with motion pictures that
are expected to be released at the end of 2001, 2002 and 2003. In connection
with this licensing agreement and future minimum royalty obligations, the
Company was required to provide the licensor with a $5.0 million cash payment
and a Standby Letter of Credit in the amount of $10.0 million which is
outstanding at June 30, 2000.
In June 2000, the Company entered into a lease agreement for a corporate
office facility. The lease term, which is approximately 5 1/2 years, commences
on or about January 1, 2001 and terminates on July 31, 2006. Rent payments due
for the year 2001 total approximately $3.3 million and will increase annually at
rates ranging from 2.7% to 5.0% per annum. In connection with the lease, the
Company was required to provide the landlord with a Standby Letter of Credit in
the amount of $5.08 million which is outstanding at June 30, 2000.
5. SHARES OUTSTANDING
The Condensed Consolidated Statement of Operations presents operations of
the Company for the three months and six months ended June 30, 2000. During the
first six months of 2000, the Company issued 80,000 shares of common stock as
annual compensation to its non-employee directors, issued 19,000 shares of
common stock upon the exercise of employee stock options and issued 275 shares
of common stock upon the exercise of warrants. The total number of shares of
common stock outstanding as of June 30, 2000 is 33,656,516, excluding treasury
shares (assuming no conversion of the 8% cumulative convertible exchangeable
preferred stock ("8% Preferred Stock") and no additional exercise of any
warrants or employee stock options); assuming conversion of all of the 8%
Preferred Stock, the number of shares outstanding at June 30, 2000 would have
been 53,846,333; assuming conversion of all of the 8% Preferred Stock and
exercise of all outstanding warrants, all remaining warrants required to be
issued by the Company under the Plan and all employee stock options, the number
of shares would have been 71,563,694.
6. SEGMENT REPORTING
Following the Company's acquisition of MEG, the Company realigned its
business into four divisions: Licensing, Publishing, Toys ("Toy Biz") and
Corporate.
The Marvel Licensing division licenses the Marvel characters for use in
television programs, motion pictures, publishing, destination-based
entertainment (such as theme parks), on-line media, consumer products and
promotions.
The Marvel Publishing division publishes comic books and paperbacks based
upon the Company's library of over 4,700 characters as well as certain licensed
material.
The Toy Biz division designs, develops, markets and distributes both
innovative and traditional toys worldwide. The toy products fall into three
categories: toys based on the Company's characters, proprietary toys designed
and developed by the Company and toys based on properties licensed to the
Company by third parties.
The Corporate division monitors the three operating divisions, manages
external debt and equity holders, outlines business strategy and generally
conducts the corporate governance functions of the Company.
8
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Set forth below is certain operating information for the divisions of the
Company.
<TABLE>
<CAPTION>
Three months ended June 30, 2000:
Licensing Publishing Toys Ccrporate Total
--------- ---------- -------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net Sales $7,043 $11,411 $32,587 $ - $ 51,041
Gross Profit 6,801 5,693 14,219 - 26,713
Operating (Loss) Income (777) 1,898 (1,574) (1,931) (2,384)
EBITDA(1) 4,095 2,792 2,428 (1,931) 7,384
Three months ended June 30, 1999
Licensing Publishing Toys Corporate Total
--------- ---------- ---- --------- -----
(in thousands)
Net Sales $7,139 $10,759 $43,612 $ - $ 61,510
Gross Profit 7,016 4,825 18,838 - 30,679
Operating (Loss) Income (67) 1,124 149 (5,250) (4,044)
EBITDA(1) 4,930 2,297 4,181 (5,250) 6,158
Six months ended June 30, 2000
Licensing Publishing Toys Corporate Total
--------- ---------- ---- --------- -----
(in thousands)
Net Sales $9,370 $21,352 $63,507 $ - $ 94,229
Gross Profit 9,058 10,302 28,192 - 47,552
Operating (Loss) Income (6,478) 3,541 (4,925) (3,800) (11,662)
EBITDA(1) 3,266 5,329 2,622 (3,800) 7,417
Six months ended June 30, 1999
Licensing Publishing Toys Corporate Total
--------- ---------- ---- --------- -----
(in thousands)
Net Sales $22,432 $21,159 $93,177 $ - $136,768
Gross Profit 22,179 9,412 41,696 - 73,287
Operating Income(Loss) 8,261 2,366 2,247 (7,850) 5,024
EBITDA(1) 18,255 4,712 9,847 (7,850) 24,964
</TABLE>
(1)"EBITDA" is defined as earnings before extraordinary items, interest expense,
taxes, depreciation and amortization. EBITDA does not represent net income or
cash flow from operations as those terms are defined by generally accepted
accounting principles and does not necessarily indicate whether cash flow will
be sufficient to fund cash needs.
9
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. JOINT VENTURE
The Company has entered into a jointly owned limited partnership with Sony
Pictures in order to pursue licensing opportunities for motion picture and
television related merchandise relating to the Spider-Man character. The
Company's share of marketing and promotional expenses for the three months ended
June 30, 2000 totals approximately $260,000.
8. CONTINGENCIES
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.
Spider-Man Litigation. The Company's subsidiaries MEG and Marvel
Characters, Inc., (collectively , the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character and pending in the Superior
Court of the State of California for the County of Los Angeles, to which
Metro-Goldwyn Mayer Studios Inc. and two of its affiliates ("MGM"), Columbia
Tristar Home Video and related entities ("Sony"), Viacom International Inc.
("Viacom") and others were also parties. In February 1999, the Superior Court
granted summary judgement to the Marvel Parties and dismissed MGM's claims. In
March 1999, MGM, Sony and the Marvel Parties settled all remaining claims among
themselves. The litigation among Sony, the Marvel Parties and Viacom over claims
by Viacom to distribute on pay and free television a feature length live action
motion picture based on the Spider-Man character have not been resolved. It is
the Company's position that Viacom has no such rights. The rights asserted by
Viacom are alleged to arise under an agreement between the Marvel Parties and
21st Century Productions, Inc., which the Marvel Parties claim has expired or
was terminated, and an agreement between 21st Century and Viacom to which Marvel
was not a party. Although there can be no assurances, the Company believes that
it will ultimately be successful in establishing its television distribution
rights with respect to a Spider-Man movie and intends to litigate its claims
against Viacom vigorously.
Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the Central
District of California against New Line Cinema Corporation, Time Warner
Companies, Inc., the Company, MEG and its wholly owned subsidiary, Marvel
Characters, Inc., and others. The complaint alleges that the motion picture
Blade, produced and distributed by New Line pursuant to an agreement with MEG,
as well as the Company's sale of related action figure toys, infringes Wolfman's
claimed copyrights and trademarks as the author of the original stories
featuring the Blade and Deacon Frost characters (collectively, the "Work") and
that Wolfman created the Work as an independent contractor engaged by MEG. The
relief sought by complaint includes a declaration that the defendants have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various other forms of equitable relief. The Company believes that each
component of the Work was created for MEG as a "work for hire" within the
meaning of the applicable copyright statute and believes that all of Wolfman's
claims are without merit and intends to defend the action vigorously if the
action is allowed to proceed.
10
<PAGE>
On February 24, 1999, Wolfman and the Company entered into a stipulation
pursuant to which the United States District Court for the District of Delaware
will determine the issue of whether Wolfman or Marvel Characters, Inc. (which is
now a wholly owned subsidiary of the Company) is the rightful owner of Blade and
Deacon Frost and a number of other characters. In the context of this
proceeding, the Company has sought a declaration that Marvel Characters, Inc.,
not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial on
the merits was held in December 1999 and the Company is awaiting the judge's
decision.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character.
Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material to
the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows, although there can be no
assurances.
Item 2.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURTIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" could cause actual results to differ materially from those contained
in forward-looking statements made in this form 10-Q Quarterly Report and in
oral statements made by authorized officers of the Company. When used in this
Form 10-Q, the words "intend", "estimate", "believe", "expect", and similar
expressions are intended to identify forward-looking statements. In addition,
the following factors, among others, could cause the Company's financial
performance to differ materially from that expressed in any forward-looking
statements made by, or on behalf of, the Company: (i) the Company's potential
need for additional financing, (ii) the Company's potential inability to
integrate Toy Biz's operations with those of MEG, (iii) the Company's potential
inability to successfully implement its business strategy, (iv) a decrease in
the level of media exposure or popularity of the Company's characters resulting
in declining revenues from products based on those characters, (v) the lack of
commercial success of properties owned by major entertainment companies that
have granted the Company toy licenses, (vi) the lack of consumer acceptance of
new product introductions, (vii) the imposition of quotas or tariffs on toys
manufactured in China as a result of a deterioration in trade relations between
the U.S. and China, (viii) changing consumer preferences, (ix) production delays
11
<PAGE>
or shortfalls, (x) continued pressure by certain of the Company's major retail
customers to significantly reduce their toy inventory levels, (xi) the impact of
competition and changes to the competitive environment on the Company's products
and services, (xii) changes in technology (including uncertainties associated
with Year 2000 compliance), (xiii) changes in governmental regulation, and (xiv)
other factors detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
General
The Company operates in the licensing, comic book publishing and toy
businesses. The Company owns the copyrights to over 4,700 fictional characters,
including Spider-Man, X-Men, Captain America, Fantastic Four and The Incredible
Hulk. The Company operates through the following four divisions:
The Marvel Licensing division licenses the Marvel characters for use in
television programs, motion pictures, publishing, destination-based
entertainment (such as theme parks), on-line media, consumer products and
promotions.
The Marvel Publishing division publishes comic books and paperbacks based
upon the Company's library of over 4,700 characters as well as certain licensed
material.
The Toy Biz division designs, develops, markets and distributes both
innovative and traditional toys worldwide. The toy products fall into three
categories: toys based on the Company's characters, proprietary toys designed
and developed by the Company and toys based on properties licensed to the
Company by third parties.
The Corporate division monitors the three operating divisions, manages
external debt and equity holders, outlines business strategy and generally
conducts the corporate governance functions of the Company.
Results of Operations
Three months ended June 30, 2000 compared with the three months ended June 30,
1999
The Company's net sales decreased 17% to approximately $51.0 million
for the three months ended June 30, 2000 from approximately $61.5 million in the
corresponding 1999 period. The decrease was due primarily to a decline in sales
of World Championship Wrestling ("WCW") products within the Toy Biz division.
This was partially offset by a 6% increase in net sales in the Publishing
division due primarily to a custom comic produced for Toys R Us relating to the
X-Men motion picture.
Gross profit decreased 13% to approximately $26.7 million in the three
months ended June 30, 2000 from approximately $30.7 million in the corresponding
1999 period. The decrease was due primarily to a decline in gross profit from
the Toy Biz division of approximately $4.6 million. However, gross profit as a
percentage of net sales increased to approximately 52% in the 2000 period from
approximately 50% in the 1999 period. The Licensing and Publishing divisions
produced gross margins of approximately 97% and 50%, respectively. The gross
profit margin for the Toy Biz division increased to 44% in the 2000 period from
43% in the 1999 period due primarily to a higher percentage of lower-margin
goods sold during the 1999 period.
Selling, general and administrative expenses decreased 21% to approximately
$19.3 million or approximately 38% of net sales in the three months ended June
30, 2000 from approximately $24.5 million or approximately 40% of net sales in
the three months ended June 30, 1999. The decrease was due in part to payments
of $2.6 million made in connection with the separation of the company's Chief
Executive Officer during the second quarter of 1999. Expenses for the Toy Biz
division decreased to $11.8 million in the three months ended June 30, 2000 from
approximately $14.7 million in the corresponding 1999 period due primarily to
lower than anticipated royalty and advertising costs.
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Amortization of goodwill and other intangibles decreased to approximately
$6.0 million in the quarter ended June 30, 2000 from approximately $6.5 million
in the corresponding quarter of 1999 due to the completion of the purchase price
allocation relating to the Company's purchase of MEG which resulted in a net
decrease in goodwill of $21.7 million.
Net interest expense, which remained relatively constant at approximately
$7.2 million in the three months ended June 30, 2000 as compared to $7.1 million
in the corresponding 1999 period, consisted of approximately $7.8 million in
interest and deferred financing costs attributable to the Senior Notes, offset
by approximately $600,000 in interest and other income.
Six months ended June 30, 2000 compared with the six months ended June 30, 1999
The Company's net sales decreased 31% to approximately $94.2 million for
the six months ended June 30, 2000 from approximately $136.8 million in the
corresponding 1999 period. The decrease was due primarily to a decline in sales
of WCW products within the Toy Biz division. Additionally, the recognition in
the 1999 period of a substantial licensing fee relating to the Spider-Man
character to Sony Pictures Entertainment contributed to the decrease in 2000.
Gross profit decreased 35% to approximately $47.6 million in the six months
ended June 30, 2000 from approximately $73.3 million in the corresponding 1999
period. The decrease was due to lower gross profit from the Toy Biz division of
$13.5 million, due mainly to lower WCW product sales, and from the Licensing
division of $13.2 million, due mainly to the Spider-man licensing fee in 1999.
Gross profit as a percentage of net sales decreased to approximately 50% in the
2000 period from approximately 54% in the 1999 period. The Licensing and
Publishing divisions produced gross margins of approximately 97% and 48%,
respectively. The gross profit margin for the Toy Biz division decreased to 44%
in the 2000 period from 45% in the 1999 period due primarily to a decline in the
sales of high margin WCW products.
Selling, general and administrative expenses decreased 17% to approximately
$40.1 million or approximately 43% of net sales in the six months ended June 30,
2000 from approximately $48.3 million or approximately 35% of net sales in the
six months ended June 30, 1999. The decrease was due in part to a 1999
separation agreement of $2.6 million for the company's then Chief Executive
Officer as well as lower consulting, professional and Year 2000 related
expenses. Expenses for the Toy Biz division decreased to $25.6 million in the
six months ended June 30, 2000 from approximately $31.8 million in the
corresponding 1999 period due primarily to lower than anticipated royalty and
advertising costs.
Amortization of goodwill and other intangibles decreased to approximately
$12.0 million in the six months ended June 30, 2000 from approximately $12.8
million in the corresponding period in 1999 due to the completion of the
purchase price allocation relating to the Company's purchase of MEG which
resulted in a net decrease of goodwill of $21.7 million.
Net interest expense, which remained constant at approximately $14.4
million in the six months ended June 30, 2000 as compared to the corresponding
1999 period, consisted of approximately $15.7 million in interest and deferred
financing costs attributable to the Senior Notes, offset by approximately $1.3
million in interest and other income.
The Company's effective tax rate for the six months ended June 30, 2000 was
higher than the statutory rate due primarily to tax benefit not being provided.
Benefit was not provided as the utilization of tax losses is uncertain. The
Company estimates its Net Operating Loss Carryforwards ("NOLs") to be $125.5
million at June 30, 2000 of which $95.6 million relates to the acquisition of
MEG. Benefits from these acquired NOLs, if realized, will be a reduction in
goodwill in the period realized
Liquidity and Capital Resources
Net cash used in operating activities was approximately $9.3 million in the
first six months of 2000, while net cash provided by operating activities was
approximately $5.1 million in the first six months of 1999.
On February 25, 1999, the Company completed a $250.0 million offering of
senior notes (the "Senior Notes") in a private placement exempt from
registration under the Securities Act of 1933 ("the Act") pursuant to Rule 144A
under the Act. Net proceeds of approximately $239.0 million were used for
working capital and to pay all outstanding balances under a $200 million loan
(the Bridge Facility) from UBS AG, Stamford Branch ("UBS AG") which was used to
partially finance the acquisition of Marvel Entertainment Group, Inc. ("MEG") in
1998. The Senior Notes are due June 15, 2009 and bear interest at 12% per annum,
payable semi-annually on June 15th and December 15th. The Senior Notes may be
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redeemed beginning June 15, 2004 for a redemption price of 106% of the principal
amount, plus accrued interest. The redemption price decreases 2% each year after
2004 and will be 100% of the principal amount, plus accrued interest, beginning
on June 15, 2007. In addition, 35% of the Senior Notes may, under certain
circumstances, be redeemed before June 15, 2002 at 112% of the principal amount,
plus accrued interest. Principal and interest on the Senior Notes are guaranteed
on a senior basis jointly and severally by each of the Company's domestic
subsidiaries. On August 20, 1999, the Company completed an exchange offer under
which it exchanged virtually all of the Senior Notes, which contained
restrictions on transfer, for an equal principal amount of registered,
transferable notes whose terms are identical in all other material respects to
the terms of the Senior Notes.
In February 1999, in connection with the repayment of the Bridge Facility
and the termination of a $50 million credit facility with UBS AG which was
obtained in 1998, the Company recorded an extraordinary charge of approximately
$1.5 million, net of tax benefit, for the write-off of deferred financing costs
associated with these two facilities.
On April 1, 1999, the Company and Citibank, N.A. ("Citibank") entered into
an agreement for a $60.0 million Revolving Credit Facility ("Citibank Credit
Facility"). The Citibank Credit Facility bears interest at either the bank's
base rate (defined as the higher of the prime rate or the sum of 1/2 of 1% plus
the Federal Funds Rate) plus a margin ranging from 0.75% to 1.25% depending on
the Company's financial performance or at the Eurodollar rate plus a margin
ranging from 2.25% to 2.75% depending on the Company's financial performance.
The Citibank Credit Facility requires the Company to pay a commitment fee of
0.625% per annum on the average daily unused portion of the facility unless
there is at least $20.0 million outstanding borrowings in which case the rate is
0.50% per annum for the amount outstanding above $20.0 million. In March 2000,
the parties agreed to an amendment whereby financial covenants would not be
tested as long as the total amount outstanding does not exceed $20.0 million and
the borrowing base less the total outstanding amount exceeds $20.0 million. In
April 2000, the parties agreed to reduce the Citibank Credit Facility to $40.0
million. In August 2000, the parties agreed to an amendment whereby financial
covenants would not be tested as long as the total amount outstanding does not
exceed $20.0 million and the borrowing base less the total outstanding amount
exceeds $10.0 million. In addition, the amendment requires the re-negotiation of
the financial covenants once financial projections are provided to the Lender.
The Company has never borrowed under this facility. The amount available under
this facility is reduced by the amount of outstanding letters of credit, which
total approximately $15.5 million as of June 30, 2000. The Citibank Credit
Facility is secured by a lien on all of the Company's inventory and receivables.
The Company believes that it has sufficient funds available from cash and
cash equivalents, operating activities and borrowings under the Citibank Credit
Facility to meet peak working capital needs and capital expenditure
requirements.
PART II. Other Information.
Item 1. Legal Proceedings
The Company is a party to certain legal actions described below. In
addition, the Company is involved in various other legal proceedings and claims
incident to the normal conduct of its business. Although it is impossible to
predict the outcome of any outstanding legal proceeding and there can be no
assurances, the Company believes that its legal proceedings and claims
(including those described below), individually and in the aggregate, are not
likely to have a material adverse effect on its financial condition, results of
operations or cash flows.
Spider-Man Litigation. The Company's subsidiaries MEG and Marvel
Characters, Inc., (collectively , the "Marvel Parties") have been parties to a
consolidated case, concerning rights to produce and /or distribute a live action
motion picture based on the Spider-Man character and pending in the Superior
Court of the State of California for the County of Los Angeles, to which
Metro-Goldwyn Mayer Studios Inc. and two of its affiliates ("MGM"), Columbia
Tristar Home Video and related entities ("Sony"), Viacom International Inc.
("Viacom") and others were also parties. In February 1999, the Superior Court
granted summary judgement to the Marvel Parties and dismissed MGM's claims. In
March 1999, MGM, Sony and the Marvel Parties settled all remaining claims among
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themselves. The litigation among Sony, the Marvel Parties and Viacom over claims
by Viacom to distribute on pay and free television a feature length live action
motion picture based on the Spider-Man character have not been resolved. It is
the Company's position that Viacom has no such rights. The rights asserted by
Viacom are alleged to arise under an agreement between the Marvel Parties and
21st Century Productions, Inc., which the Marvel Parties claim has expired or
was terminated, and an agreement between 21st Century and Viacom to which Marvel
was not a party. Although there can be no assurances, the Company believes that
it will ultimately be successful in establishing its television distribution
rights with respect to a Spider-Man movie and intends to litigate its claims
against Viacom vigorously.
Wolfman v. New Line Cinema Corp. et al. On August 20, 1998, Marvin A.
Wolfman commenced an action in the United States District Court for the Central
District of California against New Line Cinema Corporation, Time Warner
Companies, Inc., the Company, MEG and its wholly owned subsidiary, Marvel
Characters, Inc., and others. The complaint alleges that the motion picture
Blade, produced and distributed by New Line pursuant to an agreement with MEG,
as well as the Company's sale of related action figure toys, infringes Wolfman's
claimed copyrights and trademarks as the author of the original stories
featuring the Blade and Deacon Frost characters (collectively, the "Work") and
that Wolfman created the Work as an independent contractor engaged by MEG. The
relief sought by complaint includes a declaration that the defendants have
infringed Wolfman's copyrights, compensatory and punitive damages, an injunction
and various other forms of equitable relief. The Company believes that each
component of the Work was created for MEG as a "work for hire" within the
meaning of the applicable copyright statute and believes that all of Wolfman's
claims are without merit and intends to defend the action vigorously if the
action is allowed to proceed.
On February 24, 1999, Wolfman and the Company entered into a stipulation
pursuant to which the United States District Court for the District of Delaware
will determine the issue of whether Wolfman or Marvel Characters, Inc. (which is
now a wholly owned subsidiary of the Company) is the rightful owner of Blade and
Deacon Frost and a number of other characters. In the context of this
proceeding, the Company has sought a declaration that Marvel Characters, Inc.,
not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial on
the merits was held in December 1999 and the Company is awaiting the judge's
decision.
Marvel v. Simon. In December 1999, Joseph H. Simon filed in the U.S.
Copyright Office written notices under the Copyright Act purporting to terminate
effective December 7, 2001 alleged transfers of copyright in 1940 and 1941 by
Simon of the Captain America character to the Company's predecessor. On February
24, 2000, the Company commenced an action against Simon in the United States
District Court for the Southern District of New York. The complaint alleges that
the Captain America character was created by Simon and others as a "work for
hire" within the meaning of the applicable copyright statute and that Simon had
acknowledged this fact in connection with the settlement of previous suits
against the Company's predecessors in 1969. The suit seeks a declaration that
Marvel Characters, Inc., not Mr. Simon, is the rightful owner of the Captain
America character.
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Administration Expense Claims Litigation. The Company has initiated
litigation contesting the amount of certain Administration Expense Claims
submitted to the Company for payment. While the amounts claimed are material to
the Company's financial position, the Company believes that the ultimate
resolution of these matters will not be material to the Company's financial
condition, results of operations or cash flows, although there can be no
assurances.
Item 2. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
Exhibits No.
Exhibit 10.1 Amendment to Revolvoing Credit Facility between the Company and
Citibank N.A. dated August 9, 2000
Exhibit 12 Statement re: Computation of Ratios dated as of June 30,2000.
Exhibit 27 Financial Data Schedule.
b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter
ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Dated: August 14, 2000 By: /s/ F. Peter Cuneo
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F. Peter Cuneo
Chief Executive Officer
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