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 March 31, 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 April 26, 2000, the number of outstanding shares of the registrant's common
stock, par value $.01 per share, was 33,652,513 shares of Common Stock.
<PAGE>
MARVEL ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents....................... $ 57,804 $ 64,814
Accounts receivable, net........................ 38,352 55,841
Inventories, net................................ 35,868 39,385
Deferred income taxes, net...................... 7,042 7,042
Deferred financing costs........................ 1,372 1,384
Prepaid expenses and other...................... 5,776 4,443
----------- ----------
Total current assets........................ 146,214 172,909
Goodwill and other intangibles, net.............. 434,369 440,361
Molds, tools and equipment, net.................. 17,611 17,226
Product and package design costs, net............ 7,847 6,949
Income tax receivable............................ 1,327 1,327
Deferred charges and other assets................ 5,755 6,512
Deferred financing costs......................... 9,009 9,353
----------- ----------
Total assets............................... $ 622,132 $ 654,637
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 4,464 $ 9,613
Accrued expenses and other..................... 43,736 53,380
Administrative claims payable.................. 8,320 9,507
Unsecured creditors payable.................... 8,606 8,490
----------- ----------
Total current liabilities.................. 65,126 80,990
----------- ----------
Long-term liabilities:
Senior notes................................... 250,000 250,000
Deferred income taxes.......................... 1,094 1,094
----------- ----------
Total long-term liabilites................. 251,094 251,094
----------- ----------
Total liabilities.......................... 316,220 332,084
----------- ----------
Redeemable cumulative convertible
exchangeable preferred stock........... 190,525 186,790
Stockholders' equity:
Common stock................................... 409 409
Additional paid-in capital..................... 215,189 215,184
Retained earnings.............................. (67,256) (46,875)
----------- ----------
Total stockholders' equity before treasury stock 148,342 168,718
----------- ----------
Treasury stock.................................. (32,955) (32,955)
----------- ----------
Total stockholders' equity................. $ 115,387 $ 135,763
=========== ==========
Total liabilities, redeemable preferred stock and
stockholders' equity........... $ 622,132 $ 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
Ended March 31
2000 1999
--------- ----------
<S> <C> <C>
Net sales........................................... $ 43,187 $ 75,258
Cost of sales....................................... 22,349 32,650
--------- ----------
Gross profit........................................ 20,838 42,608
Operating expenses:
Selling, general & administrative............... 20,804 23,801
Depreciation & amortization..................... 3,319 3,446
Amortization of goodwill and other intangibles.. 5,992 6,293
---------- ----------
Total operating expenses............................. 30,115 33,540
---------- ----------
Operating (loss) income.............................. (9,277) 9,068
Interest expense, net................................ 7,200 7,350
---------- ----------
(Loss) income before provision for income taxes...... (16,477) 1,718
Income tax provision................................. 169 3,114
----------- ---------
Loss before extraordinary expense................... (16,646) (1,396)
----------- ----------
Extraordinary expense, net of tax benefit of $1,021.. -- 1,531
----------- ----------
Net loss............................................ ($16,646) ($2,927)
Less: preferred dividend requirement................ 3,735 3,443
----------- ----------
Net loss attributable to common stock............... ($20,381) ($6,370)
=========== ==========
Basic and dilutive earnings per share:
Loss from continuing operations attributable
to common stock............................. ($0.61) ($0.14)
Extraordinary expense............................. -- ($0.05)
----------- ----------
Loss attributable to common stock................. ($0.61) ($0.19)
=========== ==========
Weighted average number of common and common
equivalent shares outstanding................ 33,636 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>
Three Months
Ended March 31,
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................... ($16,646) ($2,927)
---------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation & amortization................ 9,311 9,739
Amortization of bridge loan and bond offering
costs...................................... 356 1,821
Extraordinary expense, net..................... -- 1,531
Changes in assets & liabilities:
Decrease in accounts receivable................ 17,489 2,344
Decrease in inventories........................ 3,517 5,212
Increase in prepaid expenses and other.......... (1,333) (2,127)
Decrease (increase) in deferred charges and other
assets..................................... 757 (1,385)
Decrease in accounts payable, accrued expenses
and other.................................. (14,793) (15,320)
--------- ---------
Net cash used in operating activities............... (1,342) (1,112)
--------- ---------
Cash flows from investing activities:
Payment of administrative claims, net............... (1,071) (1,932)
Net proceeds from sale of Fleer assets.............. -- 26,443
Purchases of molds, tools and equipment............. (2,704) (3,398)
Expenditures for product and package design costs... (1,898) (1,771)
Other investments................................... -- (109)
--------- ---------
Net cash (used in) provided by investing activities. (5,673) 19,233
--------- ---------
Cash flows from financing activities:
Proceeds from senior notes offering, net of
offering costs of $11,022........................ -- 239,797
Repayment of Bridge Facility........................ -- (200,000)
Exercise of stock options........................... 5 --
-------- ---------
Net cash provided by financing activities........... 5 39,797
-------- ---------
Net (decrease) increase in cash and cash equivalents... (7,010) 57,918
-------- ---------
Cash and cash equivalents, at beginning of period...... 64,814 43,691
-------- ---------
Cash and cash equivalents, at end of period............ $57,804 $101,609
-------- ---------
Supplemental disclosures of cash flow information
Interest paid during the period..................... $97 $5,320
Income taxes, net paid during the period............ $11 $1,272
Non-cash transaction
Preferred stock dividends.......................... $3,735 $3,443
</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 three
months ended March 31, 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 the current year's presentation. For further information on the
Company's historical financial results, refer to the consolidated financial
statements and footnotes thereto contained in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
5
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(unaudited)
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
March 31, December 31
2000 1999
---------- ----------
Description
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................................ $ 60,444 $ 84,353
Less allowances:
Doubtful accounts........................................... (3,829) (3,951)
Advertising, markdowns, returns, volume discounts and other. (18,263) (24,561)
----------- ----------
Total........................................................ $ 38,352 $ 55,841
=========== ==========
Inventories, net:
Toys:
Finished goods............................................... $ 27,395 $ 31,397
Component parts, raw materials and
work-in-process.......................................... 5,035 4,787
---------- ----------
Total toys................................................... $ 32,430 $ 36,184
Publishing:
Finished goods............................................... $ -- $ --
Component parts, raw materials and
work-in-process.......................................... 3,438 3,201
---------- ----------
Total publishing............................................. $ 3,438 $ 3,201
---------- ----------
Total.................................................. $ 35,868 $ 39,385
========== ==========
Molds, tools and equipment, net:
Molds, tools and equipment................................... $ 25,641 $ 23,047
Office equipment and other................................... 10,299 10,189
Less accumulated depreciation and amortization............... (18,329) (16,010)
---------- ----------
Total..................................................... $ 17,611 $ 17,226
========== ==========
Product and package design costs, net:
Product design costs........................................ $ 10,000 $ 8,856
Package design costs........................................ 4,622 3,868
Less accumulated amortization............................... (6,775) (5,775)
---------- ----------
Total..................................................... $ 7,847 $ 6,949
========== ==========
Goodwill and other intangibles, net:
Goodwill..................................................... $ 471,993 $ 470,729
Patents and other intangibles................................ 2,638 3,902
Less accumulated amortization................................ (40,262) (34,270)
---------- ----------
Total...................................................... $ 434,369 $ 440,361
========== ==========
Accrued expenses and other:
Accrued advertising costs.................................... $ 2,250 $ 6,787
Accrued royalties............................................ 3,913 8,197
Inventory purchases.......................................... 2,625 5,547
Income taxes payable......................................... 4,483 4,366
Deferred income taxes payable................................ 5,948 5,948
Other accrued expenses....................................... 24,517 22,535
---------- ----------
Total...................................................... $ 43,736 $ 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. 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
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. The Company has never borrowed under this facility. The amount
available under this facility is reduced by the amount of letters of credit
outstanding, which is approximately $385,000 as of April 26, 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. SHARES OUTSTANDING
The Condensed Consolidated Statement of Operations presents operations
of the Company for the three months ended March 31, 2000. During the first three
months of 2000, the Company issued 80,000 shares of common stock as annual
compensation to its non-employee directors and issued 272 shares of common stock
upon the exercise of warrants. The total number of shares of common stock
outstanding as of March 31, 2000 is 33,637,513, excluding treasury shares
(assuming no conversion of the 8% cumulative convertible exchangable preferred
stock ("8% Preferred Stock") and no exercise of any warrants or employee stock
options); assuming conversion of all of the 8% Preferred Stock, the number of
shares outstanding as of March 31, 2000 would have been 53,431,490; assuming
conversion of all of the 8% Preferred Stock and exercise of all warrants and
employee stock options, the number of shares as of March 31, 2000, would have
been 72,176,859.
5. 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, 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
(In thousands)
(unaudited)
Set forth below is certain operating information for the divisions of the
Company.
<TABLE>
<CAPTION>
Three months ended March 31, 2000:
- ----------------------------------
Licensing Publishing Toy Biz Corporate Total
--------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Sales $ 2,326 $ 9,941 $30,920 $ - $ 43,187
Gross Profit 2,256 4,609 13,973 - 20,838
Operating (Loss) Income (5,700) 1,643 (3,351) (1,869) (9,277)
EBITDA(1) (828) 2,537 194 (1,869) 34
Three months ended March 31, 1999:
- ---------------------------------
Licensing Publishing Toy Biz Corporate Total
--------- ---------- -------- ---------- ----------
Net Sales $ 15,294 $ 10,400 $49,564 $ - $ 75,258
Gross Profit 15,163 4,586 22,859 - 42,608
Operating Income (Loss) 8,327 1,241 2,100 (2,600) 9,068
EBITDA(1) 13,325 2,414 5,668 (2,600) 18,807
</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.
6. 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.
Certain Bankruptcy Proceedings. As a result of the consummation of the
Plan on October 1, 1998, all claims against MEG with respect to orders issued by
the District Court in connection with the Plan have been released, as have all
claims by MEG against the Company and all claims against the Company concerning
the effect of the June 1997 change of control of MEG on the voting power of the
stock in the Company owned by MEG.
9
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Spider-Man Litigation. The Company's subsidiaries Marvel Entertainment
Group, Inc. 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 it's 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
10
<PAGE>
MARVEL ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
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:
11
<PAGE>
The Marvel Licensing division licenses the Marvel characters for use in
television programs, motion pictures, 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 March 31, 2000 compared with the three months ended March 31,
1999
The Company's net sales decreased 43% from approximately $75.3 million in
the first quarter of 1999 to approximately $43.2 million in the first quarter of
2000. The decrease is mainly due to the recognition, in the first quarter of
1999 of a substantial licensing fee relating to the licensing of the Spider-Man
character to Sony Pictures Entertainment. In addition, Toy Biz sales decreased
$18.6 million from 1999 to 2000 primarily due to a decline in sales of World
Championship Wrestling ("WCW") and Marvel related product.
Gross profit decreased from approximately $42.6 million in the first
quarter of 1999 to approximately $20.8 million in the first quarter of 2000. The
decrease in gross profit from 1999 to 2000 is partly due to the one-time
licensing fee received in 1999 for the Spider-Man character referred to above,
in addition to a decrease in the gross profit of the Toy Biz division, which
amounted to approximately $8.9 million of the decrease. Gross profit as a
percentage of net sales decreased from approximately 57% in the 1999 period to
approximately 48% in the 2000 period. Gross margins for the Licensing and Toy
Biz divisions decreased from 99% and 46% in the first quarter of 1999 to 97% and
45%, respectively in the first quarter of 2000, while the gross margin for the
Publishing division increased from 44% in the first quarter of 1999 to 46% in
the first quarter of 2000.
Selling, general and administrative expenses decreased 13% from
approximately $23.8 million or approximately 32% of net sales in the first
quarter of 1999 to approximately $20.8 million or approximately 48% of net sales
in the first quarter of 2000. The Toy Biz division accounted for approximately
$3.4 million in selling, general and administrative expense decreases as a
result of lower royalties and advertising costs relating to the decreased
revenue. The Licensing division experienced a $1.0 million increase in selling,
general and administrative expenses as a result of production costs related to
the Avengers animated television series, which was partially offset by a
decrease of $.7 million in selling, general and administrative expenses in the
Corporate division.
Amortization of goodwill and other intangibles decreased from
approximately $6.3 million in the first quarter of 1999 to approximately $6.0
million in the first quarter of 2000 due to the final adjustment of the Marvel
purchase price allocation which resulted in a net decrease in goodwill of $21.7
million in December 1999.
Net interest expense decreased from $7.4 million in the first quarter
of 1999 to $7.2 million in the first quarter of 2000 due to lower interest and
deferred financing costs from the Senior Notes as compared to the Bridge
Facility, which was partially offset by lower interest and other income.
12
<PAGE>
In connection with the repayment of the Bridge Facility in 1999, the
Company recorded an extraordinary charge of approximately $1.5 million, net of
any tax benefit, for the write-off of the Bridge Facility deferred financing
costs. There was no such charge in the first quarter of 2000.
The provision for income taxes is due primarily to non-deductible
goodwill, other intangibles and state income taxes. The Company expects this to
continue. The Company has Net Operating Loss Carryforwards ("NOLs") of $96.7
million related to the acquisition of MEG. Benefits from the NOLs, if realized,
will be a reduction in goodwill in the period realized.
Liquidity and Capital Resources
Net cash used in operating activities remained consistent with the
first quarter of 1999 as compared to the first quarter of 2000 amounting to
approximately $1.1 million and $1.3 million, respectively.
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. 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 the UBS Credit Facility, 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.
13
<PAGE>
On April 1, 1999, the Company and Citibank entered an agreement for a
$60.0 million 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. The Company has never borrowed under
this facility. The amount available under this facility is reduced by the amount
of letters of credit outstanding, which is approximately $385,000 as of April
26, 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.
Certain Bankruptcy Proceedings. As a result of the consummation of the
Plan on October 1, 1998, all claims against MEG with respect to orders issued by
the District Court in connection with the Plan have been released, as have all
claims by MEG against the Company and all claims against the Company concerning
the effect of the June 1997 change of control of MEG on the voting power of the
stock in the Company owned by MEG
Spider-Man Litigation. The Company's subsidiaries Marvel Entertainment
Group, Inc. 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.
14
<PAGE>
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 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 December 1999 and the Company is qwaiting 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. Exhibits and Reports on Form 8-K.
a) Exhibits. See the Exhibits Index immediately below.
EXHIBIT INDEX
Exhibits No.
10.1 Amendment to Revolving Credit Facility between the Company and Citibank
N.A. dated March 21, 2000
10.2 Employment Agreement, dated January 2000 between the Company and Bill
Jemas.
12 Statement re: Computation of Ratios dated as of March 31, 2000.
27 Financial Data Schedule .
b) Reports on Form 8-K.
The Registrant did not file any reports on Form 8-K during the
quarter ended March 31, 2000:
15
<PAGE>
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: May 10, 2000 By: /s/ F. Peter Cuneo
-------------------
F. Peter Cuneo
Chief Executive Officer
EXHIBIT 10.1
FIRST AMENDMENT
Dated as of March 21, 2000
This FIRST AMENDMENT among MARVEL ENTERPRISES, INC. (the "Borrower"), the
GUARANTORS party hereto, the LENDERS party hereto and CITIBANK, N.A., as Agent,
Collateral Agent and Issuer.
PRELIMINARY STATEMENTS:
(1) The Borrower, the Guarantors, the Lenders, the Agent, the Collateral
Agent and Issuer have entered into a Credit Agreement dated as of April 1, 1999
(the "Credit Agreement"). Unless otherwise defined herein, the terms defined in
the Credit Agreement are used herein as therein defined.
(2) The parties have agreed to amend the Credit Agreement as hereinafter
set forth.
NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES, THE PARTIES HERETO
AGREE AS FOLLOWS
SECTION 1. Amendment to Credit Agreement. Article 5 of the Credit
Agreement is, effective as of the date hereof and subject to the satisfaction of
the conditions precedent set forth in Section 2, hereby amended by adding the
following proviso prior to the colon at the end of the preamble to such Article:
"; provided that the financial covenants contained in
Sections 5.13, 5.14 and 5.15 will not be tested so long as
(i) the Total Outstanding Amounts does not exceed
$20,000,000 and (ii) the Borrowing Base less the Total
Outstanding Amount exceeds $20,000,000".
SECTION 2. Conditions of Effectiveness. This First Amendment will
become effective when the Agent shall have received counterparts of this First
Amendment executed by the Borrower, the Guarantors and the Required Lenders.
SECTION 3. Representations and Warranties of the Borrower. The Borrower
and each Guarantor represents and warrants as follows:
(a) After giving effect to this First Amendment, all of the
representations and warranties contained in Article 4 of the credit agreement
and in other Loan Documents will be true in all material respects.
<PAGE>
(b) After giving effect to this First Amendment, no Default or Event of
Default shall have occurred and be continuing.
SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon the
effectiveness of this First Amendment, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", or
words of like import referring to the Credit Agreement, and each reference in
the other Loan Documents to "the Credit Agreement", "thereunder", thereof", or
words of like import referring to the Credit Agreement, will mean and be a
reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended above, the Credit Agreement and all
other Loan Documents are and will continue to be in full force and effect and
are hereby in all respects ratified and confirmed. Without limiting the
generally of the foregoing, the Loan Documents and all of the Collateral
described therein do and will continue to secure the payment of all obligations
of the Borrower and the Guarantors under the Credit Agreement, the Notes and the
other Loan Documents, in each case as amended hereby.
(c) The execution, delivery and effectiveness of this First Amendment
will not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of any Lender or the Agent under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. Execution in Counterparts. This First Amendment may be
executed in any number of counterparts, each of which when so executed and
delivered will be deemed to be an original and all of which taken together shall
constitute but one and the same agreement.
SECTION 6. Governing Law. This First Amendment will be governed by, and
construed in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed by their respective authorized officers as of the date first
above written.
2
<PAGE>
MARVEL ENTERPRISES, Inc.
as Borrower
By:s/Alllen S. Lipson
-------------------------
Name: Allen S. Lipson
Title: Executive Vice President
MARVEL ENTERTAINMENT GROUP, INC.
as Guarantor
By: S/Allen S. Lipson
-----------------------
Name: Allen S. Lipson
Title: Vice President
MEI HOLDING COMPANY S CORP.,
as Guarantor
By: s/Allen S. Lipson
-----------------------
Name: Allen S. Lipson
Title: Vice President
MEI HOLDING COMPANY F CORP.,
as Guarantor
By: s/Allen S. Lipson
-----------------------
Name: Allen S. Lipson
Title: Vice President
MARVEL CHARACTERS, INC.,
as Guarantor
By: s/Allen S. Lipson
-----------------------
Name: Allen S. Lipson
Title: Vice President
MARVEL RESTURANT VENTURE CORP.,
as Guarantor
By: s/Allen S. Lipson
-----------------------
Name: Allen S. Lipson
Title: Vice President
3
<PAGE>
MRV, INC., as Guarantor
By: s/Allen S. Lipson
-----------------------
Name: Allen S. Lipson
Title: Vice President
CITBANK, N.A. as Agent and Collateral Agent
By: s/Miles D. McManus
---------------------
Name: Miles D. McManus
Title: Vice President
CITBANK, N.A. as Issuer
By: s/Miles D. McManus
---------------------
Name: Miles D. McManus
Title: Vice President
CITBANK, N.A. as Lender
By: s/Miles D. McManus
---------------------
Name: Miles D. McManus
Title: Vice President
HELLER FINANCIAL, INC., as Lender
By: s/Tara Urobel
-----------------------
Name: Tara Urobel
Title: Vice President
AMSOUTH BANK, as Lender
By: s/Patrick R. Brocker
-----------------------
Name: Patrick R. Brocker
Title: Attorney-In-Fact
5
EXHIBIT 12
Statement re: Computation of Ratios
MARVEL ENTERPRISES, INC.
RATIO OF EARNINGS TO FIXED CHARGES AND
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERENCE DIVIDENDS
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Fixed Charges and Preference Dividends:
<S> <C>
Interest Expense - Gross 7,902
Interest on Rent Expense 244
---------
Total Fixed Charges 8,146
Preference Stock Dividends 3,735
---------
Total Fixed Charges and Preference Dividends 11,881
=========
Earnings (Deficit):
Pretax Loss (16,477)
Fixed Charges 8,146
---------
Total Deficit before Preference Dividends (8,331)
Preference Dividends 3,735
---------
Total Deficit (4,596)
=========
Ratio of Earnings to Fixed Charges -
=========
Ratio of Earnings to Combined Fixed
Charges and Preference Dividends -
=========
</TABLE>
For the purposes of the ratio of earnings to fixed charges and the ratio of
earnings to combined fixed charges and preference dividends, earnings were
calculated by adding pretax loss, interest expense, the portion of rents
representative of an interest factor and, in the case of the latter ratio,
preference dividends. Fixed charges consist of interest expense and the portion
of rents representative of an interest factor. During the three months ended
March 31, 2000, (i) earnings were insufficient to cover fixed charges and the
dollar amount of the coverage deficiency was $16.5 million and (ii) earnings
were insufficient to cover combined fixed charges and preference dividends and
the dollar amount of the coverage deficiency was $16.5 million.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from Marvel Enterprises, Inc. Condensed Consolidated Balance
Sheets and Statements of Income and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000933730
<NAME> MARVEL ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 57,804
<SECURITIES> 0
<RECEIVABLES> 60,444
<ALLOWANCES> 22,092
<INVENTORY> 35,868
<CURRENT-ASSETS> 146,214
<PP&E> 35,940
<DEPRECIATION> 18,329
<TOTAL-ASSETS> 622,132
<CURRENT-LIABILITIES> 65,126
<BONDS> 250,000
0
190,525
<COMMON> 409
<OTHER-SE> 147,933
<TOTAL-LIABILITY-AND-EQUITY> 622,132
<SALES> 43,187
<TOTAL-REVENUES> 43,187
<CGS> 22,349
<TOTAL-COSTS> 22,349
<OTHER-EXPENSES> 30,115
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,200
<INCOME-PRETAX> (16,477)
<INCOME-TAX> 169
<INCOME-CONTINUING> (16,646)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,646)
<EPS-BASIC> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>