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, 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 November 1, 2000, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 33,702,728 shares of Common Stock.
<PAGE>
PART I. Financial Information
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
September December
30,2000 31, 1999
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $27,310 $64,814
Accounts receivable, net........................... 50,455 55,841
Inventories, net................................... 52,064 39,385
Deferred income taxes, net......................... --- 7,042
Deferred financing costs........................... 1,372 1,384
Prepaid expenses and other......................... 13,331 4,443
-------- --------
Total current assets........................... 144,532 172,909
Goodwill and other intangibles, net................. 422,369 440,361
Molds, tools and equipment, net..................... 15,290 17,226
Product and package design costs, net............... 7,914 6,949
Income tax receivable............................... 1,327 1,327
Deferred charges and other assets................... 9,608 6,512
Deferred financing costs............................ 8,325 9,353
-------- --------
Total assets................................... $609,365 $654,637
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable................................... $ 7,197 $ 9,613
Accrued expenses and other......................... 48,847 53,380
Administrative claims payable...................... 7,484 9,507
Unsecured creditors payable........................ 8,828 8,490
--------- ---------
Total current liabilities...................... 72,356 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.............................. 322,356 332,084
---------- ----------
Redeemable cumulative convertible
exchangeable preferred stock............... 198,221 186,790
---------- ----------
Stockholders' equity
Common stock....................................... 411 409
Additional paid-in capital......................... 216,068 215,184
Retained deficit................................... (94,736) (46,875)
---------- ----------
Total stockholders' equity before
treasury stock............................ 121,743 168,718
---------- ----------
Treasury stock..................................... (32,955) (32,955)
Total stockholders' equity.................... 88,788 135,763
---------- ----------
Total liabilities, redeemable preferred stock
and stockholders' equity................. $ 609,365 $ 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 Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
2000 1999 2000 1999
-------- -------- --------- ----------
<S> <C> <C> <C> <C>
Net sales................................ $ 73,461 $ 89,882 $167,690 $ 226,650
Cost of sales............................ 38,915 42,351 85,592 105,832
-------- -------- --------- ----------
Gross profit.............................. 34,546 47,531 82,098 120,818
Operating expenses:
Selling, general & dministrative........ 24,100 33,018 64,235 81,342
Depreciation & amortization............. 4,946 4,754 12,043 11,920
Amortization of goodwill and
other intangibles...................... 6,020 6,587 18,002 19,361
-------- -------- --------- ----------
Total operating expenses.................. 35,066 44,359 94,280 112,623
-------- -------- --------- ----------
Operating (loss) income................... (520) 3,172 (12,182) 8,195
Interest expense, net..................... 7,718 6,891 22,134 21,309
-------- -------- --------- ----------
Loss before provision for income taxes.... (8,238) (3,719) (34,316) (13,114)
Income tax provision...................... 958 925 1,851 1,996
-------- -------- --------- ----------
Loss before equity in net loss of
joint venture..................... (9,196) (4,644) (36,167) (15,110)
Equity in net loss of joint venture....... --- --- (263) ---
--------- -------- --------- ----------
Loss before extraordinary expense......... (9,196) (4,644) (36,430) (15,110)
Extraordinary expense, net of tax
benefit of $1,021................. --- --- --- 1,531
---------- --------- --------- ----------
Net loss.................................. (9,196) (4,644) (36,430) (16,641)
Less: preferred dividend requirement...... 3,886 3,590 11,431 10,558
--------- --------- ---------- -----------
Net loss attributable to common stock..... ($13,082) ($8,234) ($47,861) ($27,199)
--------- --------- ---------- -----------
Basic and dilutive earnings per share:
Loss from continuing operations
attributable to common stock.......... ($0.39) ($0.25) ($1.42) ($0.76)
Extraordinary expense.................. --- --- --- ($0.05)
--------- --------- ---------- ---------
Loss attributable to common stock...... ($0.39) ($0.25) ($1.42) ($0.81)
--------- --------- ---------- ---------
Weighted average number of basic and diluted
shares outstanding....................... 33,696 33,532 33,661 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>
Nine Months
Ended September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................... ($36,430) ($16,641)
----------- -----------
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation & amortization....................... 30,046 31,281
Amortization of bridge loan and bond offering
costs.......................................... 1,040 2,532
Extraordinary expense, net........................ --- 1,531
Equity in net loss of joint venture............... 263 ---
Change in assets & liabilities:
Decrease (increase) in accounts receivable.... 5,386 (16,381)
Increase in inventories....................... (12,679) (9,750)
Decrease in income tax receivable............. --- 7,396
Increase in prepaid expenses and other........ (8,888) (2,261)
Increase in deferred charges and other
assets.................................... (3,096) (4,047)
(Decrease) increase in accounts payable....... (2,435) 1,668
Increase (decrease) in accrued expenses and
other..................................... 1,171 (2,920)
---------- -----------
Total adjustments................................. 10,808 9,049
---------- -----------
Net cash used in operating activities.......... (25,622) (7,592)
---------- -----------
Cash flows from investing activities:
Payment of administrative claims, net..................... (1,685) (3,374)
Purchases of molds, tools and equipment................... (6,092) (10,226)
Expenditures for product and package design costs......... (4,980) (5,239)
Other investments......................................... (11) (141)
Net proceeds from the sale of Fleer assets................ --- 22,885
---------- -----------
Net cash (used in) provided by investing activities... (12,768) 3,905
---------- -----------
Cash flows from financing activities:
Net proceeds from senior notes offering................... --- 238,987
Repayment of bridge facility.............................. --- (200,000)
Compensatory stock issued................................. 500 ---
Stock warrants exercised.................................. 5 191
Employees stock options exercised......................... 381 ---
---------- -----------
Net cash provided by financing activities............ 886 39,178
---------- -----------
Net (decrease) increase in cash and cash equivalents........... (37,504) 35,491
Cash and cash equivalents, at beginning of period.............. 64,814 43,691
---------- -----------
Cash and cash equivalents, at end of period.................... 27,310 79,182
---------- -----------
Supplemental disclosures of cash flow information
Interest paid............................................. $ 15,348 $ 14,673
Income taxes, net paid.................................... 208 4,802
Non-cash transaction
Preferred stock dividends................................ $ 11,431 $ 10,558
</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 nine
months ended September 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>
September 30, December 31,
2000 1999
------------- ------------
Description
<S> <C> <C>
Accounts receivable, net:
Accounts receivable.................................................. $ 72,525 $ 84,353
Less allowances for:
Doubtful accounts................................................ (3,955) (3,951)
Advertising, markdowns, returns, volume discounts and other...... (18,115) (24,561)
------------ ------------
Total $ 50,455 $ 55,841
============ ============
Inventories, net:
Toys:
Finished goods..................................................... $ 41,538 $ 31,397
Component parts, raw materials and work-in-process................. 6,781 4,787
------------ ------------
Total Toys......................................................... $ 48,319 $ 36,184
Publishing:
Finished goods..................................................... $ -- $ --
Component parts, raw materials and work-in-process................. 3,745 3,201
------------- -------------
Total Publishing................................................... $ 3,745 $ 3,201
------------- -------------
Total......................................................... $ 52,064 $ 39,385
============= =============
Molds, tools and equipment, net:
Molds, tools and equipment........................................... $ 28,815 $ 23,047
Office equipment and other........................................... 10,027 10,189
Less accumulated depreciation and amortization....................... (23,552) (16,010)
------------- -------------
Total.............................................................. $ 15,290 $ 17,226
============= =============
Product and package design costs, net:
Product design costs................................................. $ 11,968 $ 8,856
Package design costs................................................. 5,736 3,868
Less accumulated amortization........................................ (9,790) (5,775)
-------------- -------------
Total............................................................. $ 7,914 $ 6,949
============== =============
Goodwill and other intangibles, net:
Goodwill............................................................. $ 470,729 $ 470,729
Patents and other intangibles........................................ 3,912 3,902
Less accumulated amortization........................................ (52,272) (34,270)
-------------- -------------
Total.............................................................. $ 422,369 $ 440,361
============== =============
Accrued expenses and other:
Accrued advertising costs............................................ $ 778 $ 6,787
Accrued royalties.................................................... 4,940 8,197
Inventory purchases.................................................. 10,951 5,547
Income taxes payable................................................. 5,892 4,366
Deferred income taxes payable........................................ --- 5,948
Other accrued expenses............................................... 26,286 22,535
-------------- -------------
Total............................................................. $ 48,847 $ 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 during June, July and August 2000 and $20.0 million at all
other times. 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 $15.3 million as of September 30, 2000. The Citibank Credit
Facility is secured by a lien on all of the Company's inventory and receivables.
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
7
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 that is
outstanding at September 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 that is outstanding at September 30, 2000.
5. SHARES OUTSTANDING
The Condensed Consolidated Statement of Operations presents operations of
the Company for the three months and nine months ended September 30, 2000.
During the nine months ended September 30, 2000, the Company issued 80,000
shares of common stock as annual compensation to its non-employee directors,
issued 64,750 shares of common stock upon the exercise of employee stock
options, issued 275 shares of common stock upon the exercise of warrants and
issued 4 shares of common stock upon the conversion of 4 shares of preferred
stock. The total number of shares of common stock outstanding as of September
30, 2000 is 33,702,270, 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
September 30, 2000 would have been 54,295,841; 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 72,262,202.
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.
Three months ended September 30, 2000
<TABLE>
<CAPTION>
Licensing Publishing Toys Corporate Total
----------- ---------- --------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net Sales $ 5,768 $ 11,477 $ 56,216 $ --- $73,461
Gross Profit 5,614 5,952 22,980 0 34,546
Operating (Loss) Income (848) 2,364 175 (2,211) (520)
EBITDA(1) 4,252 3,059 5,346 (2,211) 10,446
Three months ended September 30, 1999
Licensing Publishing Toys Corporate Total
---------- ----------- ---------- ---------- --------
(in thousands)
Net Sales $ 6,240 $ 10,885 $72,757 $ --- $89,882
Gross Profit 6,039 5,269 36,223 --- 47,531
Operating (Loss) Income (881) 1,552 5,562 (3,061) 3,172
EBITDA(1) 4,116 2,725 10,733 (3,061) 14,513
Nine months ended September 30, 2000
Licensing Publishing Toys Corporate Total
---------- ---------- ---------- ---------- ---------
(in thousands)
Net Sales $ 15,138 $ 32,829 $119,723 $ --- $167,690
Gross Profit 14,671 16,253 51,174 0 82,098
Operating (Loss) Income (7,327) 5,905 (4,749) (6,011) (12,182)
EBITDA(1) 7,518 8,387 7,969 (6,011) 17,863
Nine months ended September 30, 1999
Licensing Publishing Toys Corporate Total
--------- ---------- --------- --------- ----------
(in thousands)
Net Sales $ 28,673 $ 32,043 $165,934 $ --- $226,650
Gross Profit 28,219 14,680 77,919 --- 120,818
Operating Income (Loss) 7,380 3,917 7,809 (10,911) 8,195
EBITDA(1) 22,371 7,436 20,580 (10,911) 39,476
(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.
</TABLE>
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 nine months ended
September 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.
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.,
10
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
not Wolfman, is the lawful owner of the rights claimed by Wolfman. A trial on
the merits was held in December 1999 and on November 6, 2000, the judge issued
an opinion and order finding in favor of the Company and holding that the
Company is the lawful owner of the rights claimed by Wolfman. As of this date,
the time in which Wolfman may file an appeal has not expired.
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.
11
<PAGE>
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
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.
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Results of Operations
Three months ended September 30, 2000 compared with the three months ended
September 30, 1999
The Company's net sales decreased 18% to approximately $73.5 million for
the three months ended September 30, 2000 from approximately $89.9 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.
Gross profit decreased 27% to approximately $34.5 million in the three
months ended September 30, 2000 from approximately $47.5 million in the
corresponding 1999 period. The decrease was due primarily to a decline in gross
profit from the Toy Biz division of approximately $13.2 million. The gross
margin for the Licensing division remained at approximately 97% as compared to
the 1999 period while the gross margin for the Publishing division increased to
approximately 52% in the 2000 period from 48% in the 1999 period primarily due
to increased direct order sales of comic books. The gross profit margin for the
Toy Biz division decreased to 41% in the 2000 period from 50% in the 1999 period
due primarily to a decline in sales of higher margin WCW products during the
2000 period.
Selling, general and administrative expenses decreased 27% to approximately
$24.1 million or approximately 33% of net sales in the three months ended
September 30, 2000 from approximately $33.0 million or approximately 37% of net
sales in the three months ended September 30, 1999. The decrease was due
primarily to lower advertising and royalty costs as a result of reduced sales
within the Toy Biz division. Expenses for the Corporate division decreased to
$2.2 million in the three months ended September 30, 2000 from approximately
$3.1 million in the corresponding 1999 period due primarily to the
non-recurrence of Year 2000 related costs and lower consulting/professional
fees.
Amortization of goodwill and other intangibles decreased to approximately
$6.0 million in the quarter ended September 30, 2000 from approximately $6.6
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 of approximately $7.7 million was recorded in the
three months ended September 30, 2000 and consisted of primarily $7.9 million in
interest and deferred financing costs attributable to the Senior Notes, offset
by approximately $200,000 in interest and other income.
Nine months ended September 30, 2000 compared with the nine months ended
September 30, 1999
The Company's net sales decreased 26% to approximately $167.7 million for
the nine months ended September 30, 2000 from approximately $226.7 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 received from Sony Pictures
Entertainment relating to the Spider-Man character contributed to the decrease
in 2000.
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Gross profit decreased 32% to approximately $82.1 million in the nine
months ended September 30, 2000 from approximately $120.8 million in the
corresponding 1999 period. The decrease was due to lower gross profit from the
Toy Biz division of $26.7 million, due mainly to lower WCW product sales, and
from the Licensing division of $13.5 million, due mainly to the Spider-man
licensing fee in 1999. Gross profit as a percentage of net sales decreased to
approximately 49% in the 2000 period from approximately 53% in the 1999 period.
The gross margin for the Licensing division decreased slightly to approximately
97% in the 2000 period from 98% in the 1999 period due to increased creator
royalties while the gross margin for the Publishing division increased to
approximately 50% in the 2000 period from 46% in the 1999 period primarily due
to increased advertising revenue in the comic book line. The gross profit margin
for the Toy Biz division decreased to 43% in the 2000 period from 47% in the
1999 period due primarily to a decline in the sales of high margin WCW products.
Selling, general and administrative expenses decreased 21% to approximately
$64.2 million or approximately 38% of net sales in the nine months ended
September 30, 2000 from approximately $81.3 million or approximately 36% of net
sales in the nine months ended September 30, 1999. Expenses for the Toy Biz
division decreased to $43.2 million in the 2000 period from approximately $57.3
million in the corresponding 1999 period due primarily to lower advertising and
royalty costs as a result of reduced sales. Expenses in the Corporate division
decreased to $6.0 million in the 2000 period from $10.9 million in the
corresponding 1999 period 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 fees and payroll costs and the non-recurrence of Year
2000 related expenses.
Amortization of goodwill and other intangibles decreased to approximately
$18.0 million in the nine months ended September 30, 2000 from approximately
$19.4 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 increased to approximately $22.1 million in the
nine months ended September 30, 2000 as compared to the corresponding 1999
period due to lower interest income, consisted of primarily $23.5 million in
interest and deferred financing costs attributable to the Senior Notes, offset
by approximately $1.4 million in interest and other income.
The Company's effective tax rate for the nine months ended September 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 $127.8 million at September 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 $25.6 million in
the first nine months of 2000, while net cash used in operating activities was
approximately $7.6 million in the first nine 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")
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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 during June, July and August 2000 and
$20.0 million at all other times. 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.
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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
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.
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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 on November 6, 2000, the judge issued
an opinion and order finding in favor of the Company and holding that the
Company is the lawful owner of the rights claimed by Wolfman. As of this date,
the time in which Wolfman may file an appeal has not expired.
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. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
Exhibits No.
Exhibit 12 Statement re:Computation of Ratios dated as of September 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 September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereto duly authorized.
MARVEL ENTERPRISES, INC.
(Registrant)
Dated: November 14, 1999 By: /s/ F. Peter Cuneo
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F. Peter Cuneo
Chief Executive Officer
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