-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GYF3Wy4OVOCD1b3evoMO+fesIn230bA+bq8ZZkuC0Ls5yGijKcMu1vTWjqyzF6el HxHz3ip9Y+BWz0+yCQUI5Q== 0001116679-03-002418.txt : 20031110 0001116679-03-002418.hdr.sgml : 20031110 20031110171919 ACCESSION NUMBER: 0001116679-03-002418 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARVEL ENTERPRISES INC CENTRAL INDEX KEY: 0000933730 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 133711775 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13638 FILM NUMBER: 03989497 BUSINESS ADDRESS: STREET 1: 10 EAST 40TH STREET CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2125768530 MAIL ADDRESS: STREET 1: 10 EAST 40TH STREET CITY: NEW YORK STATE: NY ZIP: 10016 FORMER COMPANY: FORMER CONFORMED NAME: TOY BIZ INC DATE OF NAME CHANGE: 19941213 10-Q 1 marv10q.txt 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-13638 MARVEL ENTERPRISES, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3711775 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 East 40th Street, New York, NY 10016 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 212-576-4000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] At November 7, 2003, the number of outstanding shares of the registrant's common stock, par value $.01 per share, was 71,968,569. This number does not include 7,394,000 shares of the registrant's common stock held by a wholly owned subsidiary of the registrant. TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited)........................................ 1 Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 .................................................. 1 Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2003 and 2002....................... 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002....................................................... 3 Notes to Consolidated Financial Statements.............................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 14 General................................................................. 14 Results of Operations................................................... 15 Liquidity and Capital Resources......................................... 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................................... 20 Item 4. Controls and Procedures................................................. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................... 22 Item 6. Exhibits and Reports on Form 8-K........................................ 23 SIGNATURES ........................................................................ 24
PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Condensed Consolidated Financial Statements MARVEL ENTERPRISES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, December 31, 2003 2002 ---- ---- ASSETS (unaudited) Current assets: Cash ................................................ $ 17,733 $ 53,690 Certificates of deposit and commercial paper ........ 193,507 -- Accounts receivable, net ............................ 42,980 43,420 Inventories, net .................................... 10,269 16,036 Distribution receivable from joint venture, net ..... 1,413 3,884 Deferred Federal income tax ......................... 33,967 -- Deferred financing costs ............................ 667 667 Prepaid expenses and other current assets ........... 6,639 6,700 ---------- ---------- Total current assets ............................ 307,175 124,397 Goodwill, net ........................................ 350,500 365,604 Other intangibles, net ............................... 414 649 Molds, tools and equipment, net ...................... 6,016 6,997 Product and package design costs, net ................ 1,445 859 Accounts receivable, non-current portion ............. 19,470 17,284 Deferred charges and other assets .................... 53 65 Deferred financing costs ............................. 2,946 3,446 ---------- ---------- Total assets .................................... $688,019 $519,301 ========== ========== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 6,638 $ 11,607 Accrued expenses and other current liabilities ...... 75,853 52,708 Deferred revenue and distributions in excess of equity in joint venture ............................ 10,493 27,478 ---------- ---------- Total current liabilities ....................... 92,984 91,793 ---------- ---------- Senior notes ........................................ 150,962 150,962 Other ............................................... 3,237 897 ---------- ---------- Total liabilities ............................... 247,183 243,652 ---------- ---------- Redeemable cumulative convertible exchangeable preferred stock ................ -- 32,780 ---------- ---------- Stockholders' equity Common stock ........................................ 793 685 Additional paid-in capital .......................... 546,869 486,106 Accumulated other comprehensive loss ................ (2,442) (2,548) Accumulated deficit ................................. (71,429) (208,419) ---------- ---------- Total stockholders' equity before treasury stock 473,791 275,824 Treasury stock ....................................... (32,955) (32,955) ---------- ---------- Total stockholders' equity ...................... 440,836 242,869 ---------- ---------- Total liabilities, redeemable convertible preferred stock and stockholders' equity..... $ 688,019 $ 519,301 ========== ========== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 2 MARVEL ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (In thousands, except per share data) (unaudited)
Three Months Nine Months Ended September 30, Ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net sales .................................................... $ 84,536 $ 84,378 $ 261,878 $ 212,539 Cost of sales ................................................ 20,208 41,100 57,634 104,163 ----------- ----------- ----------- ----------- Gross profit ................................................. 64,328 43,278 204,244 108,376 ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative ..................... 22,569 16,015 70,163 55,188 Depreciation and amortization ........................... 1,051 1,675 2,808 3,897 ----------- ----------- ----------- ----------- Total operating expenses ................................ 23,620 17,690 72,971 59,085 Other Income ................................................. 870 366 1,413 1,040 Equity in net income of joint venture ........................ 1,500 1,785 8,486 7,126 ----------- ----------- ----------- ----------- Operating income ............................................. 43,078 27,739 141,172 57,457 Interest expense, net ........................................ 4,239 12,086 13,072 27,725 ----------- ----------- ----------- ----------- Income before provision for income taxes and cumulative effect of change in accounting principle ............................ 38,839 15,653 128,100 29,732 Income tax provision (benefit) - current...................... 3,212 941 6,331 1,651 - deferred...................... (27,551) 4,076 (16,384) 8,304 ----------- ----------- ----------- ----------- Income before cumulative effect of change in accounting principle .................................................... 63,178 10,636 138,153 19,777 Cumulative effect of change in accounting principle, net of income tax benefit of $2.8 million ........................... -- 175 -- (4,386) ----------- ----------- ----------- ----------- Net income ................................................... 63,178 10,811 138,153 15,391 Less: preferred dividend requirement ......................... -- 4,080 1,163 12,216 ----------- ----------- ----------- ----------- Net income attributable to common stock ................ $ 63,178 $ 6,731 $ 136,990 $ 3,175 =========== =========== =========== =========== Basic earnings per share before cumulative effect of change in accounting principle ......................................... $ 0.93 $ 0.19 $ 2.10 $ 0.21 Cumulative effect of change in accounting principle .......... -- -- -- (0.12) ----------- ----------- ----------- ----------- Basic earnings per share attributable to common stock ........ $ 0.93 $ 0.19 $ 2.10 $ 0.09 =========== =========== =========== =========== Weighted average number of basic shares outstanding .......... 67,763 36,292 65,171 35,560 =========== =========== =========== =========== Diluted earnings per share before cumulative effect of change in accounting principle ...................................... $ 0.85 $ 0.17 $ 1.84 $ 0.19 Cumulative effect of change in accounting principle .......... -- -- -- (0.11) ----------- ----------- ----------- ----------- Diluted earnings per share attributable to common stock ...... $ 0.85 $ 0.17 $ 1.84 $ 0.08 =========== =========== =========== =========== Weighted average number of diluted shares outstanding ........ 74,214 40,586 75,226 40,448 =========== =========== =========== =========== Comprehensive income Net income .............................................. $ 63,178 $ 10,811 $ 136,990 $ 15,391 Other comprehensive loss ................................ (35) 868 (105) (512) ----------- ----------- ----------- ----------- Comprehensive income .................................... $ 63,143 $ 11,679 $ 136,885 $ 14,879 =========== =========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 MARVEL ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Nine Months Ended September 30, 2003 2002 ---- ---- Cash flows from operating activities: Net income ............................................................ $ 138,153 $ 15,391 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................ 2,808 3,897 Amortization of deferred financing costs ............................. 500 11,939 Other ................................................................ 1,273 -- Deferred income taxes ................................................ (16,384) 8,304 Cumulative effect of change in accounting principle, net of income tax benefit .............................................................. -- 4,386 Equity in net income from joint venture .............................. (8,486) (7,126) Changes in operating assets and liabilities: Accounts receivable ............................................... (1,746) (168) Inventories ....................................................... 5,767 1,327 Income tax receivable ............................................. -- 334 Distributions received from joint venture ......................... 13,642 1,664 Prepaid expenses and other current assets ......................... 61 9,686 Deferred charges and other assets ................................. 12 38 Accounts payable, accrued expenses and other current .............. liabilities ....................................................... (886) 4,453 --------- --------- Net cash provided by operating activities ............................. 134,714 54,125 --------- --------- Cash flows from investing activities: Payment of administrative claims and unsecured claims, net ......... (641) (3,360) Purchases of molds, tools and equipment ............................ (814) (1,298) Expenditures for product and package design ........................ (1,484) (805) Purchases of certificates of deposit and commercial paper .......... (193,507) -- Other .............................................................. 254 (1) --------- --------- Net cash used in investing activities .................................. (196,192) (5,464) --------- --------- Cash flows from financing activities: Deferred financing costs ........................................... -- (196) Exercise of warrants and stock options ............................. 25,521 1,266 Repayment of Credit Facility ....................................... -- (13,086) --------- --------- Net cash provided (used in) by financing activities .................... 25,521 (12,016) --------- --------- Net (decrease) increase in cash and cash equivalents .................... (35,957) 36,645 Cash and cash equivalents, at beginning of period ....................... 53,690 21,591 --------- --------- Cash and cash equivalents, at end of period ............................. $ 17,733 $ 58,236 ========= ========= Supplemental disclosures of cash flow information: Interest paid during the period ..................................... $ 9,058 $ 19,955 Income taxes paid during the period ................................. 2,791 194 Non-cash transactions: Preferred stock dividends ........................................... $ 1,163 $ 12,216 Conversion of preferred stock to common stock ....................... 33,943 12,102 Warrants issued in connection with credit facility .................. -- 2,567
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (unaudited) 1. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited Consolidated Financial Statements of Marvel Enterprises, Inc. and its subsidiaries (collectively, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The Consolidated Statements of Income and Comprehensive Income and the Consolidated Statements of Cash Flows for the nine month period ended September 30, 2003 are not necessarily indicative of those for the full year ending December 31, 2003. For further information on the Company's historical financial results, refer to the Consolidated Financial Statements and Notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. Certain prior period amounts have been re-classified to conform with the current period's presentation. 2. SIGNIFICANT ACCOUNTING POLICIES SFAS 148 - Accounting for Stock Based Compensation - On December 31, 2002, the Financial Accounting Standards Board ("FASB") issued SFAS 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"), which provided alternative methods of transition to the fair value method of accounting for stock-based compensation of SFAS 123 "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 148 also amended the disclosure provisions of SFAS 123 and Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based compensation on reported net income and earnings per share in annual and interim statements. In accordance with the provisions of SFAS 148, the Company has elected to continue to account for its stock options under APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on date of grant, no compensation expense is recognized. For the purposes of SFAS 148 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in thousands, except per share data) Net income, as reported ..................................................... $ 63,178 $ 10,811 $138,153 $ 15,391 Net income attributable to common stock, as reported ........................ 63,178 6,731 136,990 3,175 Net income per share attributable to common stock - basic, as reported ...... $0.93 $0.19 $2.10 $0.09 Net income per share attributable to common stock - diluted, as reported .... $0.85 $0.17 $1.84 $0.08 Stock based employee compensation cost, net of tax, if SFAS 123 was applied . 1,489 561 4,381 1,832 Pro forma net income ........................................................ 61,689 10,250 133,772 13,559 Pro forma net income attributable to common stock ........................... 61,689 6,170 132,609 1,343 Pro forma net income per share attributable to common stock - basic ........ $0.91 $0.17 $2.03 $0.04 Pro forma net income per share attributable to common stock - diluted ....... $0.83 $0.15 $1.76 $0.03
5 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) The fair value for each option grant under the stock option plans was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the various grants made during 2000: risk free interest rates ranging from 6.12% to 6.72%; no dividend yield; expected volatility of 0.550; and expected life of three years. The weighted average assumptions for the 2001 grants are: risk free interest rates ranging from 2.91% to 4.90%; no dividend yield; expected volatility of 0.920; and expected life of three years. The weighted average assumptions for the 2002 grants are: risk free interest rates ranging from 3.19% to 4.92%; no dividend yield; expected volatility of 0.83; and expected life of five years. The weighted average assumptions for the 2003 grants are: risk free interest rates ranging from 2.32% to 3.17%; no dividend yield; expected volatility of 0.646; and expected life of five years. The Black Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options. The effects of applying SFAS 123 for providing pro forma disclosures are not likely to be representative of the effects on reported net income in future periods. 6 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) 3. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
September 30, December 31, 2003 2002 ---- ---- (in thousands) Accounts receivable, net, consist of the following: Accounts receivable .................................................. $60,172 $62,835 Less allowances for: Doubtful accounts .................................................. (6,474) (7,459) Advertising, markdowns, returns, volume, discounts and other ....... (10,718) (11,956) --------- --------- $42,980 $43,420 ========= ========= Inventories, net, consist of the following: Toys: Finished goods ..................................................... $2,307 $7,566 Component parts, raw materials and work-in-process ................. 94 706 --------- --------- Total toys ....................................................... 2,401 8,272 Publishing: Finished goods ..................................................... 2,163 1,786 Editorial and raw materials ........................................ 5,705 5,978 --------- --------- Total publishing ................................................. 7,868 7,764 --------- --------- Total ............................................................ $10,269 $16,036 ========= ========= Molds, tools and equipment, net, consists of the following: Molds, tools and equipment .......................................... $5,356 $4,971 Office equipment and other .......................................... 10,814 11,676 Less accumulated depreciation and amortization ...................... (10,154) (9,650) --------- --------- Total ............................................................. $6,016 $6,997 ========= ========= Product and package design costs, net, consists of the following: Product design costs ................................................ $3,730 $2,720 Package design costs ................................................ 1,612 1,138 Less accumulated amortization ....................................... (3,897) (2,999) --------- --------- Total ............................................................. $1,445 $859 ========= ========= Goodwill, net, consists of the following: Goodwill ............................................................. $426,799 $441,903 Less accumulated amortization ........................................ (76,299) (76,299) --------- --------- Total ............................................................. $350,500 $365,604 ========= ========= Other intangibles, net, consists of the following: Patents .............................................................. $3,186 $3,186 Intangibles .......................................................... 1,263 1,264 Less accumulated amortization ........................................ (4,035) (3,801) --------- --------- Total ............................................................. $414 $649 ========= ========= Accrued expenses and other current liabilities consists of the following: Royalties ............................................................ $33,063 $12,800 Inventory purchases .................................................. 5,833 4,130 Income taxes payable ................................................. 4,759 2,218 Bonuses .............................................................. 4,453 4,302 Acquisition accruals ................................................. 1,016 1,184 Accrued expenses - Fleer sale including pension benefits ............. 4,771 4,982 Pre-acquisition litigation charge .................................... -- 3,000 Litigation and legal accruals ........................................ 3,340 4,564 Interest expense ..................................................... 5,573 926 Other accrued expenses ............................................... 13,045 14,602 --------- --------- Total .............................................................. $75,853 $52,708 ========= =========
7 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) 4. SHARES OUTSTANDING The total number of shares of common stock outstanding as of September 30, 2003 was 71,896,236, net of treasury shares; assuming the exercise of all outstanding warrants and stock options, the number of shares would be 81,101,533. The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended September 30 September 30 -------------------------------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Numerator: Net income $63,178 $10,811 $138,153 $15,391 Preferred dividends ---- (4,080) (1,163) (12,216) ------------- ------------ -------------- ----------- Numerator for basic earnings per share - 63,178 6,731 136,990 3,175 Preferred dividends* ---- ---- 1,163 ---- ------------- ------------ -------------- ----------- Numerator for diluted earnings per share $63,178 $6,731 $138,153 $3,175 ============= ============ ============== ============ Denominator: Weighted average common shares outstanding 67,763 36,292 65,171 35,560 Effect of dilutive warrants/options 6,451 4,294 8,946 4,888 Effect of dilutive redeemable cumulative exchangeable preferred stock** ---- ---- 1,109 ---- ------------- ------------ -------------- ----------- Denominator for diluted earnings per share - adjusted weighted average common shares and assumed conversions 74,214 40,586 75,226 40,448 ============= ============ ============== ============ Basic earnings per share $0.93 $0.19 $2.10 $0.09 ============= ============ ============== ============ Diluted earnings per share $0.85 $0.17 $1.84 $0.08 ============= ============ ============== ============
* In accordance with the provisions of SFAS 128 "Earnings Per Share", under the if-converted method, preferred dividends applicable to convertible preferred stock are added back to the numerator and the resulting common shares are included in the denominator for the entire period being presented. ** The calculation of diluted earnings per share does not include the assumed conversion of convertible preferred stock for the three and nine months ended September 30, 2002, as such would be anti-dilutive. 8 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) 5. SEGMENT INFORMATION The Company's business is divided into three segments: Toy Merchandising and Distribution, Publishing and Licensing. Toy Merchandising and Distribution Segment The toy merchandising and distribution segment (Toy Biz) designs, develops, markets and distributes a limited line of toys to the worldwide marketplace. The Company's toy products are based upon movies and television shows featuring Spider-Man and produced by Sony Pictures, and upon the movie trilogy Lord of the Rings (New Line Cinema). The Spectra Star division of Toy Biz (which closed its manufacturing operations in March 2003) designed, produced and sold kites, and continues to sell existing inventory, in both mass market stores and specialty hobby shops. Spectra Star's sales amounted to approximately $0.6 million and $1.2 million for the three month periods ended September 30, 2003 and 2002, respectively. For the nine month period ended September 30, 2003 and 2002, Spectra Star's sales amounted to approximately $9.8 million and $10.5 million, respectively. Its total assets at September 30, 2003 of approximately $4.8 million consist principally of accounts receivable, inventory, land and buildings. Publishing Segment The publishing segment creates and publishes comic books and trade paperbacks principally in North America. Marvel has been publishing comic books since 1939 and has developed a roster of more than 4,700 Marvel Characters. The Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, the Incredible Hulk, Daredevil, newly developed Marvel Characters and characters created by other entities and licensed to the Company. Licensing Segment The licensing segment relates to the licensing of or joint ventures involving Marvel Characters for use in a wide variety of products, including toys, electronic games, apparel, accessories, footwear, collectibles and novelties in a variety of media, including feature films, television programs and destination based entertainment (e.g., theme parks), and for promotional use. Set forth below is certain operating information for the segments of the Company.
Three month period ended September 30, 2003 - ------------------------------------------- Licensing Publishing Toy Biz Corporate Total --------- ---------- ------- --------- ----- (in thousands) Net sales $41,638 $19,553 $23,345 ---- $84,536 Gross profit 41,638 10,322 12,368 64,328 Operating income (loss) *30,267 7,042 8,212 (2,443) 43,078 Three month period ended September 30, 2002 - ------------------------------------------- Licensing Publishing Toy Biz Corporate Total --------- ---------- ------- --------- ----- (in thousands) Net sales $25,007 $15,345 $44,026 ---- $84,378 Gross profit 24,008 7,140 12,130 43,278 ---- Operating income (loss) *22,514 4,433 4,151 (3,359) 27,739
(*) Includes equity in net income of joint venture of $1,500 and $1,785 for the three month periods ended September 30, 2003 and 2002, respectively. 9 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited)
Nine month period ended September 30, 2003 - ------------------------------------------ Licensing Publishing Toy Biz Corporate Total --------- ---------- ------- --------- ----- (in thousands) Net Sales $148,289 $54,300 $59,289 ---- $261,878 Gross Profit 148,289 28,525 27,430 204,244 Operating Income (loss) *120,332 18,301 16,765 (14,226) 141,172 Nine month period ended September 30, 2002 - ------------------------------------------ Licensing Publishing Toy Biz Corporate Total --------- ---------- ------- --------- ----- (in thousands) Net Sales $51,335 $47,846 $113,358 ---- $212,539 Gross Profit 50,161 24,107 34,108 108,376 ---- Operating Income (loss) *43,270 14,397 9,050 (9,260) 57,457
(*) Includes equity in net income of joint venture of $8,486 and $7,126 for the nine month periods ended September 30, 2003 and 2002, respectively. 6. COMMITMENTS AND CONTINGENCIES Commitments 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, commenced on April 1, 2001 and terminates on July 31, 2006. At September 30, 2003, approximately $4.4 million of lease payments are being guaranteed by Mr. Perlmutter. The following table sets forth the Company's Contractual Cash Obligations as of September 30, 2003:
- ----------------------------------------------------------------------------------------------------------------------- Contractual Cash Obligations Payments Due By Period - ----------------------------------------------------------------------------------------------------------------------- Less than After (in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years - ----------------------------------------------------------------------------------------------------------------------- Long Term Debt $ 150,962 $ --- $ --- $ --- $ 150,962 - ----------------------------------------------------------------------------------------------------------------------- Operating Leases 11,204 3,401 6,285 846 672 - ----------------------------------------------------------------------------------------------------------------------- Total Contractual Cash Obligations $ 162,166 $ 3,401 $ 6,285 $ 846 $ 151,634 - -----------------------------------------------------------------------------------------------------------------------
The Company has a contractual obligation under a studio agreement to spend approximately $1.0 million in advertising for the 2003/2004 broadcast years. The following table sets forth the Company's Other Commercial Commitments as of September 30, 2003:
- ------------------------------------------------------------------------------------------------------------------------ Other Commercial Amount of Commitment Commitments Total Expiration Per Period - ------------------------------------------------------------------------------------------------------------------------ Less than Over (in thousands) 1 Year 1-3 Years 4-5 Years 5 Years - ------------------------------------------------------------------------------------------------------------------------ Standby Letters of Credit $ 5,444 $ 5,250 $ 194 $ - $ - - ------------------------------------------------------------------------------------------------------------------------
10 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) The Company remains liable in connection with businesses previously sold and has been indemnified against such liabilities by the purchaser of such businesses. Legal Matters The Company is a party to certain legal actions described below. In addition, the Company is involved in various other legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, the Company believes that its legal proceedings and claims (including those described below), individually and in the aggregate, are not likely to have a material adverse effect on its financial condition, results of operations or cash flows. 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, alleging 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 parties announced their settlement of this matter on September 26, 2003 and the effects on the operating results and financial position of the Company weren't material. Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff commenced an action on behalf of himself and a purported class consisting of specialty store retailers and resellers of Marvel comic books against the Company and Marvel Entertainment Group, Inc. (a wholly owned subsidiary of the Company) (the "Marvel Defendants") in New York State Supreme Court, County of New York, alleging that the Marvel Defendants breached their own Terms of Sale Agreement in connection with the sale of comic books to members of the purported class, breached their obligation of good faith and fair dealing(s), fraudulently induced plaintiff and other members of the purported class to buy comics and unjustly enriched themselves. The relief sought in the complaint consists of certification of the purported class and the designation of plaintiff as its representative, compensatory damages of $8 million on each cause of action and punitive damages in an amount to be determined at trial. The parties have reached a proposed settlement in which the retailers and resellers would receive a credit to their account with Marvel's exclusive distributor, depending on their prior purchases of certain comic book issues. The parties have tendered that settlement to the Court for approval. It is not known when the Court will act on this matter or how long it will take for final approval of the settlement. In the event the matter does not settle, Marvel intends to defend vigorously against the claims made in this action on their merits. Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an action in the United States District Court for the Southern District of New York, alleging claims for breach of his November 1, 1998 employment agreement. Mr. Lee claims the right to a 10% profit participation in connection with the Spider-Man movie and other film and television productions that utilize Marvel characters. Pursuant to the terms of the Employment Agreement, the Company is currently paying Mr. Lee a salary of $1.0 million per year and believes that Mr. Lee's claim is without merit. Marvel has answered the complaint and denied all of its material allegations. The action is currently in the discovery phase and no trial date has been set. Marvel Characters, Inc. v. Sony Pictures Entertainment Inc. et al. On February 25, 2003, Marvel Characters, Inc. ("MCI"), a wholly owned subsidiary of Marvel Enterprises, Inc., filed suit against Sony Pictures Entertainment Inc. ("SPE") and related entities, in California Superior Court for Los Angeles County, alleging, among other things, that the 1999 license agreement for Spider-Man between MCI and SPE should be dissolved based on SPE's fraudulent representations to MCI during the negotiation of the license agreement. As the Company has previously announced, the suit is not an attempt to stop production of the Spider-Man movie sequel or to change or upset any of the merchandising deals that are in place for the sequel. On April 21, 2003, in response to Marvel's complaint, SPE filed a cross-complaint in which SPE alleges, among other things, that MCI has breached the licensing agreement with respect to the licensing of Spider-Man merchandise unrelated to Spider-Man: The Movie to SPE's financial detriment. Marvel believes 11 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) that SPE's claims are without merit and intends to defend vigorously against those claims. The action is currently in the discovery phase and no trial date has been set. Tribune Entertainment Company v. Marvel Enterprises, Inc. On October 30, 2003, Tribune Entertainment Company ("Tribune") filed a complaint against the Company in New York State Supreme Court, New York County. The complaint alleges three causes of action: fraud, negligent misrepresentation, and breach of warranty, all in connection with the license from the Company under which Tribune produced the Mutant X television series (the "Tribune License"). Prior to release of the Mutant X television series in 2001, both the Company and Tribune were sued by Twentieth Century Fox Film Corporation ("Fox"), the licensee of the X-Men properties for motion pictures, among other rights. That suit, which alleged breach of the 1993 X-Men movie license, unfair competition, copyright infringement and tortious interference with contract, all arising from the Tribune License, was settled between the Company and Fox in February 2003. According to the action filed by Tribune on October 30, 2003, Tribune settled with Fox on October 3, 2003. Tribune's October 30, 2003 complaint against the Company alleges that the Company misrepresented the rights it was granting to Tribune in the Tribune License, and that the Company breached its warranty in the Tribune License that the Mutant X property did not conflict with the rights of any third party. The Company believes that Tribune's claims are without merit and intends to defend vigorously against them. 7. INCOME TAXES The Company's effective tax rate for the nine month period ended September 30, 2003 (7.8%) was lower than the Federal statutory rate due primarily to release of a portion of the valuation allowance against deferred tax assets applicable to the anticipated utilization of net operating loss (NOL) carryforwards (principally Federal NOLs) for which benefit was not previously recognized. At September 30, 2003, the Company has Federal NOL carryforwards of approximately $70.6 million, which are scheduled to expire in 2020. All of the Company's pre-acquisition Federal NOLs have been fully utilized by September 30, 2003 and therefore, the Company's income tax credit for the nine month period ended September 30, 2003 includes a non-cash tax provision of $15.1 million that reduced goodwill, including approximately $4 million during the quarter ended September 30, 2003. Additionally, the Company has various state and local NOL carryforwards of approximately $404.6 million, which will expire in various jurisdictions in years 2004 through 2022. The state and local NOLs are not expected to be utilized in the near future, and further, the Company continues to be subject to tax in certain state and local jurisdictions. Due to the inherent difficulty of forecasting certain events and the success of certain products (e.g., release of feature films or the success of toy designs), the Company previously determined that it did not have sufficient positive evidence to recognize its deferred tax assets at such time. However, as a result of the income generated through September 30, 2003 and the Company's near-term forecasts, as of September 30, 2003, the Company has determined that it does have sufficient positive evidence to recognize its deferred tax assets and, therefore, the valuation allowance against Federal deferred tax assets (principally Federal NOLs) was released. Deferred tax assets with respect to state and local NOLs continue to be fully reserved by recorded valuation allowances. Release of the valuation allowance resulted in a one-time $31.5 million ($0.42 basic and diluted per share for the three and nine month periods ended September 30, 2003, respectively) deferred tax benefit, which was fully recognized as a credit to income tax expense in the three month period ended September 30, 2003. The Company remains under examination by the Internal Revenue Service for the 1995 through 1998 years. The IRS has proposed certain adjustments, to which the Company is responding. The effects of these adjustments are not expected to be material to the Company's financial position, results of operations or cash flows. 12 MARVEL ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) September 30, 2003 (unaudited) 8. JOINT VENTURE For the three month periods ended September 30, 2003 and 2002, the Company recognized $1.5 million and $1.8 million, in income, respectively, in connection with its share in a jointly owned limited partnership with Sony whose purpose is to pursue licensing opportunities for motion picture and television related merchandise relating to the Spider-Man: The Movie characters. For the nine month periods ended September 30, 2003 and 2002, the Company recognized $8.5 million and $7.1 million, in income, respectively. The Company accounts for the activity of this joint venture under the equity method. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURTIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The factors discussed herein concerning the Company's business and operations could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-Q Quarterly Report. When used in this Form 10-Q, the words "intend", "estimate", "believe", "expect", and similar expressions are intended to identify forward-looking statements. In addition, the following factors, among others, could cause the Company's financial performance to differ materially from that expressed in any forward-looking statements made by the Company: (i) a decrease in the level of media exposure or popularity of the Company's characters, (ii) financial difficulties of the Company's licensees, (iii) changing consumer preferences, (iv) movie- and television-production delays and cancellations, (v) toy-production delays or shortfalls, continued concentration of toy retailers, and toy inventory risk, (vi) the imposition of quotas or tariffs on products manufactured in China, (vii) any effect of Severe Acute Respiratory Syndrome on our manufacturers or licensees in East Asia, and (viii) a decrease in cash flow even as the Company remains indebted to its noteholders. These forward-looking statements speak only as of the date of this report. The Company does not intend to update or revise any forward-looking statements to reflect events or circumstances after the date of this report, including changes in business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events. General The Company's business is divided into three segments: Toy Merchandising and Distribution, Publishing and Licensing. Toy Merchandising and Distribution Segment The toy merchandising and distribution segment (Toy Biz) designs, develops, markets and distributes a limited line of toys to the worldwide marketplace. The Company's toy products are based upon movies and television shows featuring Spider-Man and produced by Sony Pictures, and upon the movie trilogy Lord of the Rings (New Line Cinema). The Spectra Star division of Toy Biz (which closed its manufacturing operations in March 2003) designed, produced and sold kites, and continues to sell existing inventory, in both mass market stores and specialty hobby shops. Spectra Star's sales amounted to approximately $0.6 million and $1.2 million for the three month periods ended September 30, 2003 and 2002, respectively, and approximately $9.8 million and $10.5 million for the nine month periods ended September 30, 2003 and 2002, respectively. Its total assets at September 30, 2003, were approximately $4.8 million, consisting principally of accounts receivable, inventory, land and buildings. Publishing Segment The publishing segment creates and publishes comic books and trade paperbacks principally in North America. Marvel has been publishing comic books since 1939 and has developed a roster of more than 4,700 Marvel Characters. The Company's titles feature classic Marvel Super Heroes, Spider-Man, X-Men, the Incredible Hulk, Daredevil, newly developed Marvel Characters and characters created by other entities and licensed to the Company. Licensing Segment The licensing segment relates to the licensing of or joint ventures involving Marvel Characters for use in a wide variety of products, including toys, electronic games, apparel, accessories, footwear, collectibles and novelties in a variety of media, including feature films, television programs and destination based entertainment (e.g., theme parks), and for promotional use. 14 Revenue recognized under license agreements during the three and nine month periods ended September 30, 2003, and 2002 were generated within the following business categories: Marvel Enterprises Inc. - Licensing Division Categories
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- (in thousands) (in thousands) -------------- -------------- Apparel and accessories $ 9,851 $ 3,831 $ 27,524 $ 7,474 Entertainment (including studios, themed attractions and electronic games) 5,059 13,440 42,339 31,248 Toys 21,744 7,162 64,538 9,023 Other 4,984 574 13,888 3,590 -------- -------- -------- -------- Totals $ 41,638 $ 25,007 $148,289 $ 51,335 ======== ======== ======== ========
Results of Operations Three month period ended September 30, 2003 compared with the three month period ended September 30, 2002 - -------------------------------------------------------------------------------- The Company's net sales of $84.5 million in the third quarter of 2003 were flat with the year-ago period, which was approximately $84.4 million in the third quarter of 2002. Sales from the Licensing segment increased approximately $16.6 million to approximately $41.6 million in the third quarter of 2003, from approximately $25.0 million in the third quarter of 2002. This improvement reflects a combination of new licenses and royalty collections above minimum royalty payment guaranties associated with continuing licenses. The major categories of the improvements in Licensing activities were toys and apparel and accessories, predominantly driven by the release of The Hulk movie. Sales from the Publishing division increased approximately $4.3 million to approximately $19.6 million in the third quarter of 2003, from $15.3 million in the third quarter of 2002, fueled by increases in sales of comics, graphic novels and advertising income. As anticipated, sales from the Toy segment decreased approximately $20.7 million to approximately $23.3 million in the third quarter of 2003, from approximately $44.0 million in the third quarter of 2002 primarily due to a decrease in the sales of action figures and accessories based on characters associated with Spider-Man: The Movie. Gross profit increased approximately $21.0 million to approximately $64.3 million in the third quarter of 2003, from approximately $43.3 million in the 2002 period. The growth in Licensing revenues, where gross profit as a percentage of sales approximates 100%, combined with the decrease in Toy sales (where gross profit as a percentage of sales approximated 53% for the three months ended September 30, 2003) increased the Company's gross profit as a percentage of sales to 76% in the third quarter of 2003, as compared to 51% in the third quarter of 2002. Selling, general and administrative (SG&A) expenses increased approximately $6.6 million to approximately $22.6 million, or approximately 27% of net sales, in the third quarter of 2003, from approximately $16.0 million, or approximately 19% of net sales, in the third quarter of 2002. The licensing division increased by $10.2 million, to $13.5 million, primarily due to higher royalty provisions for the share of merchandise license royalties owed to the Company's studio partners. Partially off-setting these increases, the Toy Biz division decreased approximately $3.3 million primarily due to lower selling expenses, specifically royalties and commissions. General Corporate expenses decreased approximately $1.0 million due to the closure of certain legal matters. For the three months ended September 30, 2003 and 2002, the Company recognized income of $1.5 million and $1.8 million, respectively, in connection with its share in a jointly owned limited partnership with Sony. The purpose of this joint venture is to pursue licensing opportunities for motion picture and television related merchandise relating to the Spider-Man: The Movie characters. The Company accounts for the activity of this joint venture under the equity method. 15 Net interest expense decreased approximately $7.8 million to approximately $4.2 million in the third quarter of 2003, as compared to approximately $12.0 million in the third quarter of 2002. The prepayment of the HSBC term loan in the fourth quarter of 2002 eliminated future amortization of all related deferred financing costs associated with such loan. Such amortization expense, classified as interest expense in the accompanying statement of operations, aggregated approximately $6.4 million during the third quarter of 2002. The Company's effective tax rate for the three month period ended September 30, 2003 (62.7%) was lower than the Federal statutory rate due primarily to release of a portion of the valuation allowance against deferred tax assets applicable to the anticipated utilization of net operating loss (NOL) carryforwards (principally Federal NOLs) for which benefit was not previously recognized. At September 30, 2003, the Company has Federal NOL carryforwards of approximately $70.6 million, which are scheduled to expire in 2020. All of the Company's pre-acquisition Federal NOLs have been fully utilized by September 30, 2003 and therefore, the Company's income tax credit for the three month period ended September 30, 2003 includes a non-cash tax provision of $3.9 million that reduced goodwill. Additionally, the Company has various state and local NOL carryforwards of approximately $404.6 million, which will expire in various jurisdictions in years 2004 through 2022. The state and local NOLs are not expected to be utilized in the near future, and further, the Company continues to be subject to tax in certain state and local jurisdictions. The Company expects to provide for a normal income tax rate (roughly 37%) commencing on October 1, 2003. Due to the inherent difficulty of forecasting certain events and the success of certain products (e.g., release of feature films or the success of toy designs), the Company previously determined that it did not have sufficient positive evidence to recognize its deferred tax assets at such time. However, as a result of the income generated through September 30, 2003 and the Company's near-term forecasts, as of September 30, 2003, the Company has determined that it does have sufficient positive evidence to recognize its deferred tax assets and, therefore, the valuation allowance against Federal deferred tax assets (principally Federal NOLs) was released. Deferred tax assets with respect to state and local NOLs continue to be fully reserved by recorded valuation allowances. Release of the valuation allowance resulted in a one-time $31.5 million ($0.42 basic and diluted per share for the three and nine month periods ended September 30, 2003, respectively) deferred tax benefit, which was fully recognized as a credit to income tax expense in the three month period ended September 30, 2003. The Company remains under examination by the Internal Revenue Service for the 1995 through 1998 years. The IRS has proposed certain adjustments, to which the Company is responding. The effects of these adjustments are not expected to be material to the Company's financial position, results of operations or cash flows. Nine month period ended September 30, 2003 compared with the Nine month period ended September 30, 2002 - -------------------------------------------------------------------------------- The Company's net sales increased approximately $49.4 million to $261.9 million for the nine month period ended September 30, 2003 from approximately $212.5 million for the nine month period ended September 30, 2002. The increase is primarily due to improved performance within the Licensing segment. Sales from the Licensing segment increased approximately $97.0 million to approximately $148.3 million for the nine month period ended September 30, 2003 from approximately $51.3 million for the nine month period ended September 30, 2002. This improvement reflects a combination of new licenses and royalty collections above minimum royalty payment guaranties associated with continuing licenses. The major categories of the improvements in Licensing activities were toys, entertainment and apparel and accessories, predominantly driven by the release of major movies released in 2003, and an extension of an interactive video game license in the period ending March 31, 2003 that added a significant amount of sales. Sales from the Publishing division increased approximately $6.4 million to approximately $54.3 million for the nine month period ended September 30, 2003 from $47.9 million for the nine month period ended September 30, 2002 primarily due to an increase in custom publishing and advertising income. As anticipated, sales from the Toy segment decreased approximately $54.1 million to approximately $59.3 million for the nine month period ended September 30, 2003 from approximately $113.4 million for the nine 16 month period ended September 30, 2002 primarily due to a decrease in the sales of action figures and accessories based on characters associated with Spider-Man: The Movie. Gross profit increased approximately $95.8 million to approximately $204.2 million for the nine month period ended September 30, 2003 from approximately $108.4 million in the 2002 period. The growth in Licensing revenues, where gross profit as a percentage of sales approximates 100%, combined with the decrease in Toy sales (where gross profit as a percentage of sales approximated 46% for the nine month period ended September 30, 2003) increased the Company's gross profit as a percentage of sales to 78% in the nine month period ended September 30, 2003, as compared to 51% for the nine month period ended September 30, 2002. Selling, general and administrative (SG&A) expenses increased approximately $15.0 million to approximately $70.2 million or approximately 27% of net sales for the nine month period ended September 30, 2003 from approximately $55.2 million or approximately 26% of net sales for the nine month period ended September 30, 2002. The licensing division increased by $23.2 million, to $37.2 million, primarily due to higher royalty provisions for the share of merchandise license royalties owed to the Company's studio partners. The Toy Biz division partially off-set this increase, decreasing approximately $12.8 million due to lower selling expenses, specifically advertising and royalties. General Corporate expenses increased approximately $5.0 million to $14.2 million, primarily due to active litigation. For the nine month period ended September 30, 2003 and 2002, the Company recognized $8.5 million and $7.1 million in income, respectively, in connection with its share in a jointly owned limited partnership with Sony. The purpose of this joint venture is to pursue licensing opportunities for motion picture and television related merchandise relating to the Spider-Man: The Movie characters. The Company accounts for the activity of this joint venture under the equity method. During the first half of 2002, the Company completed the first of the impairment tests of goodwill required under SFAS 142, which was adopted effective January 1, 2002. As a result of completing the required test, the Company recorded a charge retroactive to the adoption date (effective to the quarter ended March 31, 2002) for the cumulative effect of change in accounting principle in the initial amount of $4.6 million, net of tax benefit of $2.6 million, representing the excess of the carrying value of the toy merchandising and distribution reporting unit as compared to its fair value. In the third quarter of 2002, the Company recorded an adjustment of $0.2 million to the income tax provision related to this charge so as to properly reflect year-end taxes. As of September 30, 2002, the net cumulative effect of adopting this accounting principle was $4.4 million. Net interest expense decreased approximately $14.6 million to approximately $13.1 million for the nine month period ended September 30, 2003 as compared to approximately $27.7 million for the nine month period ended September 30, 2002. The prepayment of the HSBC term loan in the fourth quarter of 2002 resulted in the elimination of amortization of deferred financing costs associated with such loan, which amounted to approximately $11.4 million during the nine month period ended September 30, 2002, as well as cash interest savings of approximately $1.4 million. The Company's effective tax rate for the nine month period ended September 30, 2003 (7.8%) was lower than the Federal statutory rate due primarily to release of a portion of the valuation allowance against deferred tax assets applicable to the anticipated utilization of net operating loss (NOL) carryforwards (principally Federal NOLs) for which benefit was not previously recognized. At September 30, 2003, the Company has Federal NOL carryforwards of approximately $70.6 million, which are scheduled to expire in 2020. All of the Company's pre-acquisition Federal NOLs have been fully utilized by September 30, 2003 and therefore, the Company's income tax credit for the nine month period ended September 30, 2003 includes a non-cash tax provision of $15.1 million that reduced goodwill. Additionally, the Company has various state and local NOL carryforwards of approximately $404.6 million, which will expire in various jurisdictions in years 2004 through 2022. The state and local NOLs are not expected to be utilized in the near future, and further, the Company continues to be subject to tax in certain state and local jurisdictions. The Company expects to provide for a normal income tax rate (roughly 37%) commencing on October 1, 2003. Due to the inherent difficulty of forecasting certain events and the success of certain products (e.g., release of feature films or the success of toy designs), the Company previously determined that it did not have sufficient positive evidence to recognize its deferred tax assets at such time. However, as a result of 17 the income generated through September 30, 2003 and the Company's near-term forecasts, as of September 30, 2003, the Company has determined that it does have sufficient positive evidence to recognize its deferred tax assets and, therefore, the valuation allowance against Federal deferred tax assets (principally Federal NOLs) was released. Deferred tax assets with respect to state and local NOLs continue to be fully reserved by recorded valuation allowances. Release of the valuation allowance resulted in a one-time $31.5 million ($0.42 basic and diluted per share for the three and nine month periods ended September 30, 2003, respectively) deferred tax benefit, which was fully recognized as a credit to income tax expense in the three month period ended September 30, 2003. The Company remains under examination by the Internal Revenue Service for the 1995 through 1998 years. The IRS has proposed certain adjustments, to which the Company is responding. The effects of these adjustments are not expected to be material to the Company's financial position, results of operations or cash flows. Liquidity and Capital Resources The Company's primary sources of liquidity are cash and certificates of deposit on hand, cash flows from operations and from the $15.0 million HSBC letter of credit and $15.0 million credit line facilities. The Company anticipates that its primary needs for liquidity will be to: (i) conduct its business; (ii) meet debt service requirements; (iii) make capital expenditures; and (iv) pay administration expense claims. Net cash provided by operating activities was approximately $134.7 million for the nine month period ended September 30, 2003 as compared to net cash provided by operating activities of $54.1 million for the nine month period ended September 30, 2002. At September 30, 2003, the Company had working capital of $214.2 million. In an effort to reduce the redemption and dividend requirements associated with the Company's 8% Preferred Stock, the Company completed an Exchange Offer on November 18, 2002, when approximately 17.6 million (85%) shares of its 8% Preferred Stock were tendered in exchange for its common stock. Under the Exchange Offer, 1.39 shares of common stock were issued for every share of 8% Preferred Stock tendered. In the fourth quarter of 2002, the Company recorded a non-cash charge of $55.3 million (representing the fair value of the additional common shares issued in the Exchange Offer) as a preferred dividend in connection with this exchange. Under the terms of the 8% Preferred Stock, the Company was able to force the conversion of all outstanding shares of 8% Preferred Stock following the completion of 10 consecutive trading days (ending March 18, 2003) on which the closing price of the Company's common stock exceeded $11.55 per share. As a result, and as the Company announced on March 19, 2003, the Company forced the conversion of all of the outstanding 8% Preferred Stock. The conversion extinguished the Company's obligation to redeem any remaining shares of 8% Preferred Stock for $10.00 per share in cash in 2011. The conversion was effective on March 30, 2003. Earnings per share in 2003 will be impacted by a full-year effect of the additional common shares and the elimination of the preferred stock dividend associated with those shares exchanged. The Company will be required to make a cash payment, at such time as the amount thereof is determined, to parties who were unsecured creditors of Marvel Entertainment Group, Inc., prior to that company's emergence from Chapter 11 proceedings on October 1, 1998. The Company initially deposited $8 million into a trust account to satisfy the maximum amount of such payment. Cumulatively, through September 30, 2003, the Company received approximately $2.2 million back from the trust account, primarily as a result of a settlement with the National Basketball Association. The balance in the trust account as of September 30, 2003 is approximately $3.0 million. On February 25, 1999, the Company completed a $250.0 million offering of senior notes in a private placement exempt from registration under the Securities Act of 1933 (the "Securities Act") pursuant to Rule 144A under the Securities Act. On August 20, 1999, the Company completed an exchange offer under which it exchanged virtually all of those senior notes, which contained restrictions on transfer, for an equal principal amount of registered, transferable senior notes (the "Senior Notes"). 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 18 the principal amount, plus accrued interest, beginning June 15, 2007. 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 November 30, 2001, the Company and HSBC Bank USA entered into the HSBC Credit Facility comprised of a $20 million revolving letter of credit facility renewable annually for up to three years and a $37.0 million multiple draw three year amortizing term loan facility, which was used to finance the repurchase of a portion of the Company's Senior Notes. On August 30, 2002, the Company prepaid $10.0 million of the term loan. In connection with this early repayment of the term loan, the Company recorded a charge of $4.1 million for the write-off of a proportionate share of unamortized deferred financing costs associated with the facility. On December 12, 2002, the Company prepaid the remaining $22.4 million of the term loan and recorded an additional charge of $7.7 million for the write-off the remaining unamortized deferred financing costs associated with this facility. On December 18, 2002, the Company amended the HSBC Credit Facility to provide for a $15.0 million revolving credit facility and a $15.0 million letter of credit facility. As of September 30, 2003, $5.4 million of letters of credit were outstanding and there were no borrowings under the HSBC revolver. The HSBC Credit Facility contains customary event of default provisions and covenants restricting the Company's operations and activities, including the amount of capital expenditures, and also contains certain covenants relating to the maintenance of minimum tangible net worth and minimum free cash flow. The HSBC Credit Facility is secured by (a) a first priority perfected lien in all of the assets of the Company; and (b) a first priority perfected lien in all of the capital stock of each of the Company's domestic subsidiaries. Borrowings would bear interest at prime or LIBOR-plus-two percent per annum. In consideration for the HSBC Credit Facility in 2001, the Company issued warrants to HSBC to purchase up to 750,000 shares of the Company's common stock. These warrants had an exercise price of $3.62 and a life of five years. The fair value for the warrants was estimated at the date of issuance using the Black-Scholes pricing model with the following assumptions: risk free interest rate of 4.16%; no dividend yield; expected volatility of 0.924; and expected life of five years. The aggregate value of approximately $2.0 million was initially included in deferred financing costs. Due to the prepayment of the term loan, the related unamortized deferred financing costs which were being amortized over the initial three-year term of the HSBC Credit Facility using the effective interest method were subsequently written off on an accelerated basis as of December 31, 2002. In December 2002, HSBC exercised 500,000 warrants and received 295,110 shares of common stock under a Cashless Exercise Ratio provision of the warrants. Warrants to purchase 250,000 common shares were exercised in February 2003 and no warrants issued to HSBC were outstanding at September 30, 2003. In connection with the HSBC Credit Facility, the Company and Isaac Perlmutter entered into a Security Agreement. Under the terms of the Guaranty, Mr. Perlmutter has guaranteed the payment of the Company's obligations under the HSBC Credit Facility in an amount equal to 25% of all principal obligations relating to the HSBC Credit Facility plus an amount, not to exceed $10.0 million, equal to the difference between the amount required to be in the cash reserve account maintained by the Company and the actual amount on deposit in such cash reserve account at the end of each fiscal quarter; provided that the aggregate amount guaranteed by Mr. Perlmutter will not exceed $30.0 million. Under the terms of the Security Agreement, Mr. Perlmutter has provided the creditors under the HSBC Credit Facility with a security interest in the following types of property, whether currently owned or subsequently acquired by him: all promissory notes, certificates of deposit, deposit accounts, checks and other instruments and all insurance or similar payments or any indemnity payable by reason of loss or damage to or otherwise with respect to any such property. This guaranty continues with the current HSBC revolving and letter of credit facilities. 19 The following table sets forth the Company's Contractual Cash Obligations as of September 30, 2003:
- ----------------------------------------------------------------------------------------------------------------------- Contractual Cash Obligations Payments Due By Period - ----------------------------------------------------------------------------------------------------------------------- Less than After (in thousands) Total 1 Year 1-3 Years 4-5 Years 5 Years - ----------------------------------------------------------------------------------------------------------------------- Long Term Debt $ 150,962 $ --- $ --- $ --- $ 150,962 - ----------------------------------------------------------------------------------------------------------------------- Operating Leases 11,204 3,401 6,285 846 672 - ----------------------------------------------------------------------------------------------------------------------- Total Contractual Cash Obligations $ 162,166 $ 3,401 $ 6,285 $ 846 $ 151,634 - -----------------------------------------------------------------------------------------------------------------------
The Company has a contractual obligation under a studio agreement to spend approximately $1.0 million in advertising for the 2003/2004 broadcast years. The following table sets forth the Company's Other Commercial Commitments as of September 30, 2003:
- ------------------------------------------------------------------------------------------------------------------------ Other Commercial Amount of Commitment Commitments Total Expiration Per Period - ------------------------------------------------------------------------------------------------------------------------ Less than Over (in thousands) 1 Year 1-3 Years 4-5 Years 5 Years - ------------------------------------------------------------------------------------------------------------------------ Standby Letters of Credit $ 5,444 $ 5,250 $ 194 $ - $ - - ------------------------------------------------------------------------------------------------------------------------
The Company remains liable in connection with businesses previously sold and has been indemnified against such liabilities by the purchaser of such businesses. The Company believes that cash and certificates of deposit on hand, cash flow from operations, borrowings available under the HSBC letter of credit facilities and other sources of liquidity, will be sufficient for the Company to conduct its business, meet debt service requirements, make capital expenditures and pay administrative expense claims. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has operations in Hong Kong. In the normal course of business, the operations are exposed to fluctuations in currency values. Management believes that the impact of currency fluctuations do not represent a significant risk in the context of the Company's current international operations. The Company does not generally enter into derivative financial instruments in the normal course of business, nor are such instruments used for speculative purposes. Market risks related to the Company's operations result primarily from changes in interest rates. At September 30, 2003, the Company's Senior Notes bore interest at a fixed rate. A 10% increase or decrease in the interest rate on the Company's credit facility might have a significant future impact on the Company's financial position or results of operations. Additional information relating to the Company's outstanding financial instruments is included in Item 2 - Management's, Discussion and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES The Company's management, with the participation of its principal executive officer and principal financial officer, has evaluated the effectiveness of its disclosure controls and procedures (as defined in 20 Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective. The Company has not identified any changes in its internal controls over financial reporting during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. 21 PART II. OTHER INFORMATION. -------------------------------- 22 Item 1. Legal Proceedings The Company is a party to certain legal actions described below. In addition, the Company is involved in various other legal proceedings and claims incident to the normal conduct of its business. Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, the Company believes that its legal proceedings and claims (including those described below), individually and in the aggregate, are not likely to have a material adverse effect on its financial condition, results of operations or cash flows. 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, alleging 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 parties announced their settlement of this matter on September 26, 2003 and the effects on the operating results and financial position of the Company weren't material. Brian Hibbs, d/b/a Comix Experience v. Marvel. On May 6, 2002, plaintiff commenced an action on behalf of himself and a purported class consisting of specialty store retailers and resellers of Marvel comic books against the Company and Marvel Entertainment Group, Inc. (a wholly owned subsidiary of the Company) (the "Marvel Defendants") in New York State Supreme Court, County of New York, alleging that the Marvel Defendants breached their own Terms of Sale Agreement in connection with the sale of comic books to members of the purported class, breached their obligation of good faith and fair dealing(s), fraudulently induced plaintiff and other members of the purported class to buy comics and unjustly enriched themselves. The relief sought in the complaint consists of certification of the purported class and the designation of plaintiff as its representative, compensatory damages of $8 million on each cause of action and punitive damages in an amount to be determined at trial. The parties have reached a proposed settlement in which the retailers and resellers would receive a credit to their account with Marvel's exclusive distributor, depending on their prior purchases of certain comic book issues. The parties have tendered that settlement to the Court for approval. It is not known when the Court will act on this matter or how long it will take for final approval of the settlement. In the event the matter does not settle, Marvel intends to defend vigorously against the claims made in this action on their merits. Stan Lee v. Marvel. On November 12, 2002, Stan Lee commenced an action in the United States District Court for the Southern District of New York, alleging claims for breach of his November 1, 1998 employment agreement. Mr. Lee claims the right to a 10% profit participation in connection with the Spider-Man movie and other film and television productions that utilize Marvel characters. Pursuant to the terms of the Employment Agreement, the Company is currently paying Mr. Lee a salary of $1.0 million per year and believes that Mr. Lee's claim is without merit. Marvel has answered the complaint and denied all of its material allegations. The action is currently in the discovery phase and no trial date has been set. Marvel Characters, Inc. v. Sony Pictures Entertainment Inc. et al. On February 25, 2003, Marvel Characters, Inc. ("MCI"), a wholly owned subsidiary of Marvel Enterprises, Inc., filed suit against Sony Pictures Entertainment Inc. ("SPE") and related entities, in California Superior Court for Los Angeles County, alleging, among other things, that the 1999 license agreement for Spider-Man between MCI and SPE should be dissolved based on SPE's fraudulent representations to MCI during the negotiation of the license agreement. As the Company has previously announced, the suit is not an attempt to stop production of the Spider-Man movie sequel or to change or upset any of the merchandising deals that are in place for the sequel. On April 21, 2003, in response to Marvel's complaint, SPE filed a cross-complaint in which SPE alleges, among other things, that MCI has breached the licensing agreement with respect to the licensing of Spider-Man merchandise unrelated to Spider-Man: The Movie to SPE's financial detriment. Marvel believes that SPE's claims are without merit and intends to defend vigorously against those claims. The action is currently in the discovery phase and no trial date has been set. Tribune Entertainment Company v. Marvel Enterprises, Inc. On October 30, 2003, Tribune Entertainment Company ("Tribune") filed a complaint against the Company in New York State Supreme Court, New York County. The complaint alleges three causes of action: fraud, negligent misrepresentation, and breach of 23 warranty, all in connection with the license from the Company under which Tribune produced the Mutant X television series (the "Tribune License"). Prior to release of the Mutant X television series in 2001, both the Company and Tribune were sued by Twentieth Century Fox Film Corporation ("Fox"), the licensee of the X-Men properties for motion pictures, among other rights. That suit, which alleged breach of the 1993 X-Men movie license, unfair competition, copyright infringement and tortious interference with contract, all arising from the Tribune License, was settled between the Company and Fox in February 2003. According to the action filed by Tribune on October 30, 2003, Tribune settled with Fox on October 3, 2003. Tribune's October 30, 2003 complaint against the Company alleges that the Company misrepresented the rights it was granting to Tribune in the Tribune License, and that the Company breached its warranty in the Tribune License that the Mutant X property did not conflict with the rights of any third party. The Company believes that Tribune's claims are without merit and intends to defend vigorously against them. Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. 10.1 Employment Agreement, dated as of August 1, 2003, between the company and Timothy Rothwell.* 10.2 Amendment Number 1 to Employment Agreement, dated as of November 12, 2002, between the Company and Bill Jemas.* 10.3 Amendment Number 2 to Employment Agreement, dated as of October 13, 2003, between the Company and Bill Jemas.* 31.1 Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act. 31.2 Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act. 32. Certification by Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act. * Management contract or compensatory plan or arrangement. b) Reports on Form 8-K The Registrant filed the following reports on Form 8-K during the quarter ended September 30, 2003: 1. Current Report on Form 8-K dated July 29, 2003, reporting Items 7 and 12. 2. Current Report on Form 8-K dated August 12, 2003, reporting Items 7 and 12. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARVEL ENTERPRISES, INC. (Registrant) Dated: November 10, 2003 By: /s/ Allen S. Lipson ----------------------------------- Allen S. Lipson President and Chief Executive Officer Dated: November 10, 2003 By: /s/ Kenneth P. West ----------------------------------- Kenneth P. West Chief Financial Officer 25 EX-10 3 ex10-1.txt EX. 10.1: EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT, dated as of August 1, 2003, between Marvel Enterprises, Inc., a Delaware corporation (the "Company") and Timothy Rothwell (the "Executive"). WHEREAS, the Company wishes to employ the Executive, and the Executive wishes to accept such employment, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Employment, Duties and Acceptance. 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive and full-time services to the Company as President, Consumer Products Group or in such other executive position as may be mutually agreed upon by the Company and the Executive. The Executive shall report to the Company's Chief Executive Officer and Board of Directors and shall perform such other duties consistent with such positions as may be assigned to the Executive by the Company's Chief Executive Officer or the Board of Directors. 1.2 Acceptance. The Executive hereby accepts such employment and agrees to render the services described above. During the Term, the Executive agrees to serve the Company faithfully and to the best of the Executive's ability, to devote the Executive's entire business time, energy and skill to such employment and to use the Executive's professional efforts, skill and ability to promote the Company's interests. The Executive further agrees to accept election, and to serve during all or any part of the Term, as an officer or director of the Company and of any subsidiary or affiliate of the Company, without any compensation therefor other than that specified in this Agreement, if elected to any such position by the shareholders or by the Board of Directors of the Company or of any subsidiary or affiliate, as the case may be. 1.3 Location. The duties to be performed by the Executive hereunder shall be performed primarily at the principal executive office of the Company in New York City, subject to customary travel requirements on behalf of the Company. 2. Term of Employment 2.1 The Term. The term of the Executive's employment under this Agreement (the "Term") shall commence on September 3, 2003 (the "Effective Date") and shall end on the date that is two years after the Effective Date (the "Expiration Date"). The Term shall end earlier than the Expiration Date if sooner terminated pursuant to Section 4 hereof. 1 3. Compensation; Benefits. 3.1 Salary. As compensation for all services to be rendered pursuant to this Agreement, the Company agrees to pay the Executive during the Term a base salary, payable bi-weekly in arrears, at the annual rate of three hundred eighty-five thousand dollars ($385,000) less such deductions or amounts to be withheld as required by applicable law and regulations and deductions authorized by the Executive in writing. The Executive's base salary shall be reviewed no less frequently than annually by the Board of Directors and may be increased, but not decreased, by the Board of Directors. The Executive's base salary as in effect from time to time is referred to in this Agreement as the "Base Salary". 3.2 Bonus. In addition to the amounts to be paid to the Executive pursuant to Section 3.1 hereof, the Executive will be entitled to receive the following: (a) a bonus of fifty thousand dollars ($50,000), less any amounts paid to the Executive pursuant to the consultancy agreement between the Company and the Executive dated July 24, 2003, payable within ten days after the Effective Date; provided, that such bonus shall be fully refundable by the Executive to the Company in the event that the Term is terminated within six months of the Effective Date by the Executive other than pursuant to Section 4(a) hereof; and (b) a cash bonus in respect of calendar year 2003 and thereafter based in part upon the attainment of performance goals set by the Board of Directors (the "Bonus Performance Goals"). The Executive's target annual bonus amount shall be 50% of his base salary for the year; provided that for calendar year 2003, Executive shall receive the amount to which he may be entitled under the 2003 bonus program on the assumption that he has been employed for the entire year or $192,500, whichever is greater (the "2003 Bonus"). Each annual bonus, including the 2003 Bonus, shall be paid when annual bonuses are paid generally to the Company's other senior executive officers but in no event later than the ninetieth day of the next calendar year. 3.3 Business Expenses. The Company shall pay for or reimburse the Executive for all reasonable expenses actually incurred by or paid by the Executive during the Term in the performance of the Executive's services under this Agreement, upon presentation of expense statements or vouchers or such other supporting information as the Company customarily may require of its officers. 3.4 Vacation. During the Term, the Executive shall be entitled to a vacation period or periods of four (4) weeks per year taken in accordance with the vacation policy of the Company during each year of the Term. Vacation time not used by the end of a calendar year shall be forfeited. 3.5 Fringe Benefits. During the Term, the Executive shall be entitled to all benefits for which the Executive shall be eligible under any qualified pension plan, 401(k) plan, group insurance or other so-called "fringe" benefit plan which the Company provides to its employees generally, together with executive medical benefits for the Executive, as from time to time in effect for executive employees of the Company generally. 2 3.6 Additional Benefits. During the Term, the Executive shall be entitled to such other benefits as are specified in Schedule I to this Agreement. 4. Termination. 4.1 Death. If the Executive shall die during the Term, the Term shall terminate immediately. 4.2 Disability. If during the Term the Executive shall become physically or mentally disabled, whether totally or partially, such that the Executive is unable to perform the Executive's principal services hereunder for (i) a period of four consecutive months or (ii) for shorter periods aggregating six months during any twelve month period, the Company may at any time after the last day of the six consecutive months of disability or the day on which the shorter periods of disability shall have equaled an aggregate of six months, by written notice to the Executive (but before the Executive has recovered from such disability), terminate the Term. 4.3 Cause. The Term may be terminated by the Company upon notice to the Executive upon the occurrence of any event constituting "Cause" as defined herein. As used herein, the term "Cause" means: (i) the Executive's willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement; provided, however, that the Company shall not be deemed to have Cause pursuant to this clause (i) unless the Company gives the Executive written notice that the specified conduct has occurred and making specific reference to this Section 4.3(i) and the Executive fails to cure the conduct within thirty (30) days after receipt of such notice; (ii) material breach by the Executive of any of his obligations under Section 5 hereof; (iii) any willful and intentional acts of the Executive involving fraud, theft, misappropriation of funds, embezzlement or material dishonesty affecting the Company or willful misconduct by the Executive which has, or could reasonably be expected to have, a material adverse effect on the Company; or (iv) the Executive's conviction of, or plea of guilty or nolo contendre to, an offense which is a felony in the jurisdiction involved. 4.4 Permitted Termination by the Executive. (a) The Term may be terminated by the Executive upon notice to the Company of any event constituting "Good Reason" as defined herein. As used herein, the term "Good Reason" means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment of the Executive to duties materially inconsistent with the Executive's positions as described in Section 1.1 hereof, or any significant diminution in the Executive's duties or responsibilities, other than in connection with the termination of the Executive's employment for Cause or disability or by the Executive other than for Good Reason; (ii) any material breach of this Agreement by the Company which is continuing; or (iii) a change in the location of the Executive's principal place of employment to a location other than as specified in Section 1.3 hereof; provided, however, that the Executive shall not be deemed to have Good Reason pursuant to clauses (i) and (ii) above unless the Executive gives the Company written notice that the specified conduct or event has occurred and making specific reference to this Section 4.4 and the Company fails to cure such conduct or event within thirty (30) days of receipt of such notice; provided, further, that such thirty-day period shall be replaced, in the case of a breach by the Company that consists of a failure to pay the Executive his Base Salary, by a period of five (5) business days. 3 (b) The Term may be terminated by the Executive at any time by giving the Company a notice of termination specifying a termination date no less than sixty (60) days after the date the notice is given. 4.5 Severance. (a) If the Term is terminated pursuant to Section 4.1, 4.2 or 4.3 hereof, or by the Executive other than pursuant to Section 4.4(a), the Executive shall be entitled to receive his Base Salary, benefits and reimbursements provided hereunder at the rates provided in Sections 3.1, 3.5 and 3.6 hereof to the date on which such termination shall take effect. In addition, if the Term is terminated pursuant to Section 4.1 or 4.2, the Executive shall also be entitled to receive any bonus which has been awarded under Section 3.2 in respect of a previously completed fiscal year but which has not yet been paid and a pro rata portion (based on time) of the annual bonus for the year in which the termination date occurs (a "Pro Rata Bonus"). The Pro Rata Bonus to which the Executive is entitled, if any, for each year other than 2003 shall be determined by reference to the attainment of the performance goals referred to in Section 3.2 as of the end of the fiscal year in which termination of employment occurs and shall be paid when bonuses in respect of that year are generally paid to the Company's other executives but in no event later than the ninetieth day of the next fiscal year. (b) Except as provided in Section 4.5(c), if the Term is terminated by the Executive pursuant to clauses (i), (ii) or (iii) of Section 4.4(a) or by the Company other than pursuant to Section 4.1, 4.2 or 4.3, the Company shall continue thereafter to provide the Executive (i) payments of Base Salary in the manner and amounts specified in Section 3.1 until the twelve (12) month anniversary of the date of termination, (ii) if termination occurs at any time after a bonus has been awarded under Section 3.2 in respect of a previously completed fiscal year and prior to the time that the bonus has been paid, the amount of that bonus, (iii) a Pro Rata Bonus for the year in which termination occurs and (iv) fringe benefits in the manner and amounts specified in Section 3.5 until the earlier of the Expiration Date, the period ending on the date the Executive begins work as an employee or consultant for any other entity or twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest for the period specified in clause (iv) of this Section 4.5(b) (unless vesting is accelerated upon the occurrence of a Third Party Change in Control as described in Section 4.5(d)) and shall remain exercisable for ninety days after the end of that period. Bonuses payable pursuant to this Section 4.5(b), other than the Pro Rata Bonus, shall be payable in the manner described in Section 3.2. The Pro Rata Bonus to which the Executive is entitled, if any, shall be paid within the time period provided in Section 4.5(a). The Executive shall have no duty or obligation to mitigate the amounts or benefits required to be provided pursuant to this Section 4.5(b), nor shall any such amounts or benefits be reduced or offset by any other amounts to which Executive may become entitled; provided, that if the Executive becomes employed by a new employer or self-employed prior to the earlier of the Expiration Date or twelve (12) months after the date of termination, the Base Salary payable to the Executive pursuant to this Section 4.5(b) shall be reduced by an amount equal to the amount earned from such employment with respect to that period (and the Executive shall be required to return to the Company, without interest, any amount by which such payments pursuant to this Section 4.5(b) exceed the Base Salary to which the Executive is entitled after giving effect to that reduction) and, if the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan, the corresponding medical and other welfare benefits provided under this Section 4.5(b) shall be terminated. As a condition to the Executive receiving the payments under Section 4.5(b), the Executive agrees to permit verification of his employment records and Federal income tax returns by an independent attorney or accountant, selected by the Company but reasonably acceptable to the Executive, who agrees to preserve the confidentiality of the information disclosed by the Executive except to the extent required to permit the Company to verify the amount received by Executive from other active employment. 4 (c) If the Term is terminated by the Executive pursuant to Section 4.4(a), or by the Company other than pursuant to Section 4.1, 4.2 or 4.3, and, in any such event, the termination shall occur upon or within twelve (12) months following the occurrence of a Third Party Change in Control (as defined in Section 4.5(d)) or in contemplation of a Third Party Change in Control, the Company shall thereafter provide the Executive (i) an amount equal to two (2) times the sum of (x) the then current Base Salary and (y) the average of the two most recent annual bonuses paid (treating any annual bonus which is not paid as a result of the Executive's failure to attain the Bonus Performance Goals as having been paid in an amount equal to zero) to the Executive during the Term (or if only one annual bonus has been paid, the amount of that annual bonus, to be paid in a lump sum within 30 days after the date of termination), and (ii) benefits in the manner and amounts specified in Section 3.5 until twelve (12) months after the date of termination or, with respect to medical and other welfare benefits, when the Executive becomes eligible to receive medical or other welfare benefits under another employer provided plan if sooner than twelve (12) months after the date of termination. In addition, all equity arrangements provided to the Executive hereunder or under any employee benefit plan of the Company shall continue to vest until twelve (12) months after the date of termination unless vesting is accelerated upon the occurrence of the Third Party Change in Control as described in subparagraph (d) below. (d) For purposes of this Agreement, a Third Party Change in Control shall be deemed to have occurred if (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than an Excluded Person or Excluded Group (as defined below) (hereinafter, a "Third Party"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities entitled to vote in the election of directors of the Company, (ii) the Company is a party to any merger, consolidation or similar transaction as a result of which the shareholders of the Company immediately prior to such transaction beneficially own securities of the surviving entity representing less than fifty percent (50%) of the combined voting power of the surviving entity's outstanding securities entitled to vote in the election of directors of the surviving entity or (iii) all or substantially all of the assets of the Company are acquired by a Third Party. "Excluded Group" means a "group" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that includes one or more Excluded Persons; provided that the voting power of the voting stock of the Company "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such Excluded Persons (without attribution to such Excluded Persons of the ownership by other members of the "group") represents a majority of the voting power of the voting stock "beneficially owned" (as such term is used in Rule 13d-3 promulgated under the Exchange Act) by such group. "Excluded Person" means Isaac Perlmutter and Avi Arad or any of their affiliates. 5 (e) (i) If any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to the Executive or for the Executive's benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, the Executive's employment with the Company or a change in ownership or effective control of the Company or of a substantial portion of its assets (a "Parachute Payment" or "Parachute Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Parachute Payments. (ii) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at the Company's expense by the Company's regular outside auditors (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation to the Company and the Executive within ten days of the Termination Date if applicable, or promptly upon request by the Company or by the Executive (provided the Executive reasonably believes that any of the Parachute Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by the Executive with respect to a Parachute Payment or Parachute Payments, it shall furnish the Executive with an opinion reasonably acceptable to the Executive that no Excise Tax will be imposed with respect to any such Parachute Payment or Parachute Payments. Within ten days of the delivery of the Determination to the Executive, the Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 4.5(e)(ii) shall be paid by the Company to the Executive within ten days of the receipt of the accounting Firm's determination notwithstanding the existence of any Dispute. If there is no Dispute, the Determination shall be binding, final and conclusive upon the Company and the Executive subject to the application of Section 4.5(e)(iii) below. The Company and the Executive shall resolve any Dispute in accordance with the terms of this Agreement. (iii) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, the parties acknowledge that it is possible that a 6 Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to the Executive from any governmental taxing authority that the Executive's tax liability (whether in respect of the Executive's current taxable year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Parachute Payment or Parachute Payments with respect to which the Company has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of determination by the Company (which shall include the position taken by the Company, together with its consolidated group, on its federal income tax return) or (iv) upon the resolution of the Dispute to the Executive's satisfaction. If an Underpayment occurs, the Executive shall promptly notify the Company and the Company shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to the Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of the Executive's failure to file timely a tax return or pay taxes shown to be due on the Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final Determination" (as hereinafter defined) that the Excise Tax shall not be imposed upon a Parachute Payment or Parachute Payments (or portion thereof) with respect to which the Executive had previously received a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred when the Executive has received from the applicable government taxing authority a refund of taxes or other reduction in the Executive's tax liability by reason of the Excise Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds the Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to the Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by the Company to the Executive and the Executive shall pay to the Company on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to the Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to the Executive until the date of repayment to the Company. (iv) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Parachute Payment or Parachute Payments, the Company shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that the Company has actually withheld from the Parachute Payment or Parachute Payments or the Gross Up Payment. (f) Except as provided in this Section 4.5, pursuant to the Marvel Enterprises, Inc. Stock Incentive Plan as provided in Schedule I to this Agreement and as required by law, the Company shall have no further obligation to the Executive after termination of the Term. 7 5. Protection of Confidential Information; Non-Competition 5.1 In view of the fact that the Executive's work for the Company will bring the Executive into close contact with many confidential affairs of the Company not readily available to the public, as well as plans for future developments by the Company, the Executive agrees: 5.1.1 To keep and retain in the strictest confidence all confidential matters of the Company, including, without limitation, "know how", trade secrets, customer lists, pricing policies, operational methods, technical processes, formulae, inventions and research projects, and other business affairs of the Company ("Confidential Information"), learned by the Executive (i) in the course of his communications with the Company and its representatives heretofore with respect to his service as a consultant to the Company or his prospective employment hereunder or (ii) hereafter, and not to use or disclose them to anyone outside of the Company, either during or after the Executive's employment with the Company, except in the course of performing the Executive's duties hereunder or with the Company's express written consent; provided, however, that the restrictions of this Section 5.1.1 shall not apply to that part of the Confidential Information that the Executive demonstrates is or becomes generally available to the public other than as a result of a disclosure by the Executive or is available, or becomes available, to the Executive on a non-confidential basis, but only if the source of such information is not known by the Executive to be prohibited from transmitting the information to the Executive by a contractual, legal, fiduciary, or other obligation; and 5.1.2 To deliver promptly to the Company on termination of the Executive's employment by the Company, or at any time the Company may so request, all memoranda, notes, records, reports, manuals, drawings, blueprints and other documents (and all copies thereof) relating to the Company's business and all property associated therewith, which the Executive may then possess or have under the Executive's control. The Executive shall be entitled, however, to retain a copy of any such materials that (i) were in his possession before his employment hereunder and (ii) are in his "Rolodex"; provided that, in either case, the Company shall also retain a copy. 5.2 For a period of one (1) year after he ceases to be employed by the Company under this Agreement or otherwise, if such cessation arises pursuant to Section 4.3, or as a result of termination by the Executive which is not pursuant to Section 4.4(a) or is otherwise in breach of this Agreement, the Executive shall not, directly or indirectly, enter the employ of, or render any services to, DC Comics; and the Executive shall not become interested in DC Comics, directly or indirectly, as an individual, partner, shareholder, director, officer, principal, agent, employee, trustee, consultant, or in any other relationship or capacity; provided, however, that nothing contained in this Section 5.2 shall be deemed to prohibit the Executive from acquiring, solely as an investment, up to five percent (5%) of the outstanding shares of any publicly traded capital stock of DC Comics or any parent entity of DC Comics. 8 5.3 If the Executive commits a breach, or threatens to commit a breach, of any of the provisions of Section 5.1 or Section 5.2 hereof, the Company shall have the following rights and remedies: 5.3.1 The right and remedy to seek to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, as any such breach or threatened breach may cause irreparable injury to the Company and money damages will not provide an adequate remedy to the Company; and 5.3.2 The right and remedy to require the Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits (collectively "Benefits") derived or received by the Executive as the result of any transactions constituting a material breach of any of the provisions of Section 5.2 hereof, and the Executive hereby agrees to account for and pay over such Benefits to the Company. Each of the rights and remedies enumerated above shall be independent of the other, and shall be severally enforceable, and all of such rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. 5.4 If any of the covenants contained in Section 5.1 or Section 5.2 hereof, or any part thereof, hereafter are construed to be invalid or unenforceable, the same shall not affect the remainder of the covenant or covenants, which shall be given full effect, without regard to the invalid portions. 5.5 If any of the covenants contained in Sections 5.1 or 5.2 hereof, or any part thereof, are held to be unenforceable because of the duration of such provision or the area covered thereby, the parties hereto agree that the court making such determination shall have the power to reduce the duration and/or area of such provision and, in its reduced form, said provision shall then be enforceable. 5.6 The parties hereto intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 5.1 and 5.2 hereof upon the courts of New York State and of any other state within the geographical scope of such covenants where the Executive maintains his principal office at the time of enforcement. In the event that the courts of either such state shall hold such covenants wholly unenforceable by reason of the breadth of such covenants or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Company's right to the relief provided above in the courts of the other such state as to breaches of such covenants in such other state , the above covenants as they relate to each state being for this purpose severable into diverse and independent covenants. 5.7 In the event that any action, suit or other proceeding in law or in equity is brought to enforce the covenants contained in Section 5.1 or Section 5.2 hereof or to obtain money damages for the breach thereof, and such action results in the award of a judgment for money damages or in the granting of any injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Company in such action, suit or other proceeding shall (on demand of the Company) be paid by the Executive. In the event the Company fails to obtain a judgment for money damages or an injunction in favor of the Company, all expenses (including reasonable attorneys' fees) of the Executive in such action, suit or other proceeding shall (on demand of the Executive) be paid by the Company. 9 6. Inventions and Patents. The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. 7. Inventions and Patents; Intellectual Property. (a) The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company or for one year thereafter (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. (b) The Company shall be the sole owner of all the products and proceeds of the Executive's services hereunder, including, but not limited to, all materials, ideas, concepts, formats, suggestions, developments, arrangements, packages, programs and other intellectual properties that the Executive may acquire, obtain, develop or create in connection with and during his employment, free and clear of any claims by the Executive (or anyone claiming under the Executive) of any kind or character whatsoever (other than the Executive's right to receive payments hereunder). The Executive shall, at the request of the Company, execute such assignments, certificates or other instruments as the Company may from time to time deem necessary or desirable to evidence, establish, maintain, perfect, protect, enforce or defend its right, title or interest in or to any such properties. 10 8. Indemnification. To the fullest extent permitted by applicable law, Executive shall be indemnified and held harmless for any action or failure to act in his capacity as an officer or employee of the Company or any of its affiliates or subsidiaries. In furtherance of the foregoing and not by way of limitation, if Executive is a party or is threatened to be made a party to any suit because he is an officer or employee of the Company or such affiliate or subsidiary, he shall be indemnified against expenses, including reasonable attorney's fees, judgments, fines and amounts paid in settlement if he acted in good faith and in a manner reasonably believed to be in or not opposed to the best interest of the Company, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. Indemnification under this Section 8 shall be in addition to any other indemnification by the Company of its officers and directors. Expenses incurred by Executive in defending an action, suit or proceeding for which he claims the right to be indemnified pursuant to this Section 8 shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of Executive to repay such amount in the event that it shall ultimately be determined that he is not entitled to indemnification by the Company. Such undertaking shall be accepted without reference to the financial ability of Executive to make repayment. The provisions of this Section 8 shall apply as well to the Executive's actions and omissions as a trustee of any employee benefit plan of the Company, its affiliates or subsidiaries. 9. Arbitration; Legal Fees Except with respect to injunctive relief under Section 5 of this Agreement, any dispute or controversy arising out of or relating to this Agreement shall be resolved exclusively by arbitration in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. The parties agree to allow discovery in accordance with the Federal Rules of Civil Procedure then in effect. Judgment on the award may be entered in any court having jurisdiction thereof. The Company shall reimburse the Executive's reasonable costs and expenses incurred in connection with any arbitration proceeding pursuant to this Section 9 if the Executive is the substantially prevailing party in that proceeding. 10. Notices. All notices, requests, consents and other communications required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by overnight courier or mailed first class, postage prepaid, by registered or certified mail (notices mailed shall be deemed to have been given on the date mailed), as follows (or to such other address as either party shall designate by notice in writing to the other in accordance herewith): 11 If to the Company, to: Marvel Enterprises, Inc. 10 East 40th Street New York, New York 10016 Attention: President If to the Executive, to: Timothy Rothwell ----------------- with a copy to: Nelson Felker LLP 10880 Wilshire Boulevard, Suite 2070 Los Angeles, CA 90024 Attn: Patti Felker, Esq. 11. General. 11.1 This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. 11.2 The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 11.3 This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in this Agreement, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. This Agreement expressly supersedes all agreements and understandings between the parties regarding the subject matter hereof and any such agreement is terminated as of the date first above written. 11.4 This Agreement, and the Executive's rights and obligations hereunder, may not be assigned by the Executive. The Company may assign its rights, together with its obligations, hereunder (i) to any affiliate (provided, that the Company shall not be relieved thereby of any of its obligations hereunder) or (ii) to third parties in connection with any sale, transfer or other disposition of all or substantially all of its business or assets; in any event the obligations of the Company hereunder shall be binding on its successors or assigns, whether by merger, consolidation or acquisition of all or substantially all of its business or assets. 12 11.5 This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived, only by a written instrument executed by both of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of either party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by either party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 11.6 This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 12. Subsidiaries and Affiliates. As used herein, the term "subsidiary" shall mean any corporation or other business entity controlled directly or indirectly by the Company or other business entity in question, and the term "affiliate" shall mean and include any corporation or other business entity directly or indirectly controlling, controlled by or under common control with the Company or other business entity in question. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: MARVEL ENTERPRISES, INC. EXECUTIVE: By::/s/ Allen S. Lipson /s/ Timothy Rothwell ------------------------- ------------------------- Allen S. Lipson Timothy Rothwell President and Chief Executive Officer 13 SCHEDULE I Additional Benefits: 1. Automobile Allowance. The Executive shall be eligible for an automobile allowance in the amount of $1,100 per month in accordance with the Company's policy. 2. Relocation Expenses. The Executive shall be reimbursed for reasonable moving expenses (after receiving multiple bids) in connection with his and his family's relocating to the New York City area from California. 3. Housing Search Expense. The Executive shall be reimbursed for up to three (3) round-trip coach-class airline tickets from California to the New York City area plus hotel, food and transportation for each of the Executive and his wife for the purpose of their searching for housing in the New York City area. 4. Temporary Housing Expense. The Executive shall be reimbursed at a rate not to exceed $6,000 per month, for a maximum of four months, for temporary housing expenses for himself and his family during the time in which they are looking for permanent housing in the New York City area. In the event of extraordinary and unforeseen circumstances, the period of such reimbursement shall be extended for a further two months. 5. Stock Incentive Plan. As set forth in the consultancy agreement between the Company and the Executive dated July 24, 2003, the Executive shall be eligible to participate in the Marvel Enterprises, Inc. 1998 Stock Incentive Plan (the "Stock Incentive Plan"). Pursuant to the consultancy agreement, the Executive has already been made entitled to receive 150,000 options to purchase shares (the "Shares") of the common stock, par value $.01 per share ("Common Stock"), of the Company pursuant to the terms of the Stock Incentive Plan and related Stock Option Agreement subject to the terms and conditions approved by the committee of the Board of Directors of the Company which administers the Stock Incentive Plan. The Executive's participation in the Stock Incentive Plan shall not be, or be deemed to be, a fringe benefit or additional benefit for purposes of Section 4.5(b)(iv) of this Agreement, and the Executive's stock option rights shall be governed strictly in accordance with the Stock Incentive Plan and the related Stock Option Agreement. In the event of any conflict among this Agreement, the consultancy agreement, the Stock Incentive Plan and the related Stock Option Agreement, or any ambiguity in any such agreements, the Stock Incentive Plan and the related Stock Option Agreement shall control. 6. Directors and Officers Insurance. In the event that the Executive serves as an officer or director of the Company or any subsidiary or affiliate of the Company in accordance with Section 1.2 hereof, the Executive shall be covered by the Company's directors' and officers' insurance policy(ies) in place at the time. 14 7. COBRA Reimbursements. The Company shall reimburse the Executive for COBRA health benefits paid for the period of the Term prior to the Executive's eligibility for medical benefits pursuant to Section 3.5 of the Agreement. 15 EX-10 4 ex10-2.txt EX. 10.2: AMEND. NO. 1, EMPLOYMENT AGREEMENT Exhibit 10.2 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This is Amendment No. 1, dated as of November 12, 2002 (this "Amendment") to the EMPLOYMENT AGREEMENT, dated as of January 26, 2000 (the "Employment Agreement"), between Marvel Enterprises, Inc., a Delaware corporation (the "Company") and Bill Jemas (the "Executive"). In consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Section 1.1 of the Employment Agreement is amended to read as follows: 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive and full-time services to the Company as President of Publishing, New Media and Consumer Products and Chief Operating Officer or in such other executive position as may be mutually agreed upon by the Company and the Executive. The Executive shall report to the Company's Chief Executive Officer and Board of Directors and shall perform such other duties consistent with such positions as may be assigned to the Executive by the Company's Chief Executive Officer or Board of Directors. 2. Change in Term. The "Expiration Date" under the Employment Agreement is extended until February 12, 2004, subject to earlier termination pursuant to Section 4 of the Employment Agreement. 3. Change in Compensation. Commencing on January 1, 2003, the Executive's Base Salary shall be increased to an annual rate of $500,000, subject to approval of such salary by the Compensation Committee of the Board of Directors. The Company agrees that the Compensation Committee shall consider and vote upon the salary increase on or before October 31, 2002. 4. 2002 Bonus. Executive acknowledges that he has received a non-refundable bonus of $150,000 in connection with signing this Amendment. The Executive's target annual bonus amount shall be 50% of his base salary for the year; provided that for calendar year 2002, Executive shall receive the amount to which he may be entitled under the 2002 bonus program or $200,000, whichever is greater. Payment of the minimum amount ($200,000) shall be made on or before December 31, 2002 and the remainder of the bonus, if any, shall be payable when annual bonuses are paid generally to the Company's other senior executive officers but in no event later than the ninetieth day of the next calendar year. 5. Section 6 of the Employment Agreement is amended to read as follows: 6. Inventions and Patents. The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company or published, distributed or offered for sale for one year thereafter (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. This provision shall not apply to original creative writing by the Executive provided that (1) the Executive writes on his own time (2) the writing is not about superheroes, and (3) the writing does not contain characters which would reasonably excepted to come within the Marvel universe of characters ("Executive Owned Writings"). A writing shall not cease to be an Executive Owned Writing solely because the Executive uses the Company's laptop computer or the writing has fantasy and/or science fiction elements. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. 6. Change in Address for Notices. The address for notices, requests, consents and other communications to the Company pursuant to Section 10 of the Employment Agreement is changed to: Marvel Enterprises, Inc. 10 East 40th Street New York, New York 10016 Attention: Chief Executive Officer with a copy to: John Turitzin, Esq. Paul, Hastings, Janofsky & Walker LLP 1055 Washington Boulevard Stamford, Connecticut 06901 7. General. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Amendment. The Employment Agreement, as amended by this Amendment, sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in the Employment Agreement as amended by this Amendment, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. Except as expressly changed by this Amendment, the Employment Agreement remains in full force in accordance with its terms. This Amendment may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Amendment and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: MARVEL ENTERPRISES, INC. By:/s/ Allen S. Lipson ---------------------------- Name: Allen S. Lipson Title: Executive Vice President EXECUTIVE: /s/ Bill Jemas ----------------------------- Bill Jemas EX-10 5 ex10-3.txt EX. 10.3: AMEND. NO. 2, EMPLOYMENT AGREEMENT Exhibit 10.3 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT This is Amendment No. 2, dated as of October 13, 2003 (this "Amendment") to the EMPLOYMENT AGREEMENT, dated as of January 26, 2000 (the "Employment Agreement"), between Marvel Enterprises, Inc., a Delaware corporation (the "Company") and Bill Jemas (the "Executive"). In consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Change in Section 1.1. Section 1.1 of the Employment Agreement is amended to read as follows: 1.1 Employment, Duties. The Company hereby employs the Executive for the Term (as defined in Section 2.1), to render exclusive and full-time services to the Company as Chief Marketing Officer or in such other position as may be mutually agreed upon by the Company and the Executive. The Executive shall report to the Company's Chief Executive Officer and Board of Directors, will not be responsible for financial reporting/projections, and shall perform such other duties consistent with such positions as may be assigned to the Executive by the Company's Chief Executive Officer or Board of Directors. 2. 2003 Bonus. The provisions of Section 3.2(b) of the Agreement, without reference to Amendment No. 1, shall apply with respect to the Executive's 2003 bonus. The Executive shall not receive any bonus with respect to 2004. 3. Resignation as Officer. The Executive hereby resigns as an officer of the Company and as an officer of any of the Company's subsidiaries or affiliates. The Executive agrees to execute and return to the Company with this Agreement two signed, undated original resignation letters on Company letterhead in the form provided in Appendix A hereto. In addition, the Executive shall take all such further steps as the Company may reasonably deem necessary or appropriate in order to accomplish the official formalities of his resignation of the officer position(s) that he holds with the Company's subsidiaries or affiliates, including but not limited to executing board resolutions. 4. Change in Section 1.3. Section 1.3 of the Employment Agreement is amended to read as follows: 1.3 Location. The duties to be performed by the Executive hereunder shall be performed primarily at the principal executive office of the Company in New York City, subject to reasonable and customary travel requirements on behalf of the Company. Executive will be permitted to work from his home two days a week consistent with the business needs of the Company and so long as Executive is able to perform his duties hereunder effectively. 1 5. Notice of Nonrenewal. The "Expiration Date" under the Employment Agreement remains unchanged as February 12, 2004, subject to earlier termination pursuant to Section 4 of the Employment Agreement, and this Amendment shall serve as mutual "Notice of Nonrenewal" by Company and Executive. 6. Change in Section 6. Section 6 of the Employment Agreement is amended to read as follows: 6. Inventions and Patents. The Executive agrees that all processes, technologies and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not, conceived, developed, invented or made by him during his employment by the Company (collectively, "Inventions") shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries, are related to the current and reasonably anticipated commercial business of the Company or any of its subsidiaries. The Executive shall promptly disclose such Inventions to the Company and shall, subject to reimbursement by the Company for all reasonable expenses incurred by the Executive in connection therewith, (a) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries; (b) sign all papers necessary to carry out the foregoing; and (c) give testimony in support of the Executive's inventorship. 7. Original Creative Writing. Sections 6 and 7 of the Employment Agreement shall not apply to original creative writing by the Executive provided that (1) the Executive writes on his own time (2) the writing is not about superheroes, and (3) the writing does not contain characters which would reasonably be expected to come within the Marvel universe of characters ("Executive Owned Writings"). A writing shall not cease to be an Executive Owned Writing solely because the Executive uses the Company's laptop computer or the writing has fantasy and/or science fiction elements. Section 7 of the Employment Agreement shall, however, apply to new characters and stories that Executive may create within the framework of any licensing arrangements the Company enters into (or prepares to enter into, or considers entering into) during the Term. The provisions of this paragraph shall apply notwithstanding anything to the contrary contained in Section 6 or Section 7 of the Employment Agreement. 8. Business Acquisitions and Opportunities. At any time commencing immediately after termination of this Agreement, Executive may pursue acquisitions and engage in businesses that involve opportunities or ideas that (i) the Company has informed Executive that it has decided not to pursue or (ii) the Company rejected during Executive's employment with the Company or (iii) are unrelated to the business of the Company as conducted, or as contemplated to be conducted by the Company in the future under its most recent business plan, at the time of such termination. Acquisitions and businesses other than those described in the preceding sentence shall not be pursued or engaged in by Executive for a period of six months from the date of the termination of the Employment Agreement unless the Executive has requested and received written approval from the Company. The Company will grant such approval within ten business days of receiving Executive's request unless the Company believes that it is reasonably likely to consider the acquisition or business in question on the Company's own behalf within six months of the Executive's notice. 2 9. Consulting Work for Third Parties. With Company's permission, Employee may undertake consulting work with for third parties during the Term, provided that all fees for such consulting work are to be agreed upon by, and paid directly to, Company. 10. General. (a) This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely in New York, without regard to the conflict of law principles of such state. (b) The section headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of this Amendment. (c) The Employment Agreement, as amended by this Amendment, sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior agreements, arrangements and understandings, written or oral, relating to the subject matter hereof. No representation, promise or inducement has been made by either party that is not embodied in the Employment Agreement as amended by this Amendment, and neither party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. Except as expressly changed by this Amendment, the Employment Agreement remains in full force in accordance with its terms. 3 (d) This Amendment may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Amendment and all of which, when taken together, will be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY: MARVEL ENTERPRISES, INC. By:/s/ Allen S. Lipson --------------------------------------- Name: Allen S. Lipson Title: Chief Executive Officer EXECUTIVE: /s/ Bill Jemas --------------------------------------- Bill Jemas EX-31 6 ex31-1.txt EX. 31.1: CEO Exhibit 31.1 CERTIFICATION I, Allen S. Lipson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Marvel Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 10, 2003 /s/ Allen S. Lipson - ----------------------- Allen S. Lipson Chief Executive Officer EX-31 7 ex31-2.txt EX. 31.2: CFO Exhibit 31.2 CERTIFICATION I, Kenneth P. West, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Marvel Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 10, 2003 /s/ Kenneth P. West - ----------------------- Kenneth P. West Chief Financial Officer EX-32 8 ex32.txt EX. 32: CEO & CFO Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Marvel Enterprises, Inc. (the "Company") for the period ended on September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Allen S. Lipson and Kenneth P. West, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Allen S. Lipson - ----------------------------------------- Allen S. Lipson Chief Executive Officer November 10, 2003 /s/ Kenneth P. West - ------------------------------ Kenneth P. West Chief Financial Officer November 10, 2003 A signed original of this written statement required by Section 906 has been provided to Marvel Enterprises, Inc. and will be retained by Marvel Enterprises, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----