MVL Marvel Entertainment

Marvel Entertainment, Inc. (NYSE: MVL), a global character-based entertainment and licensing company celebrating the 70th anniversary of its founding, today reported operating results for its third quarter and nine months ended September 30, 2009.

Reflecting a lower level of feature film activity and related licensing compared to the year-ago period, Marvel reported Q3 2009 net sales of $105.7 million and net income of $20.4 million, or $0.26 per diluted share, compared to net sales of $182.5 million and net income of $50.6 million, or $0.64 per diluted share, in Q3 2008. The anticipated year-over-year decline in net sales and net income principally reflects approximately $65 million in lower film revenues in Q3 2009 compared to the prior year period, as well as lower licensing segment net sales related to last year’s Iron Man and The Incredible Hulk feature films as well as the Spider-Man merchandising joint venture.

Marvel Entertainment, Inc.

Segment Net Sales and Operating Income (Unaudited)

(in millions)

        Three Months

Ended September 30,

2009 2008

  Nine Months

Ended September 30,

2009 2008

Licensing:

 

Net Sales

  $ 48.9     $ 58.1     $ 181.5     $ 237.5  

 

 

Operating Income

    37.5       42.5       130.5       205.4  

Publishing:

 

Net Sales

    32.0       34.0       89.5       92.3  

 

 

Operating Income

    10.2       12.7       28.2       34.3  

Film Production:

 

Net Sales

    24.8       90.2       147.9       119.1  

 

 

Operating (Loss) Income

    (2.3 )     40.4       25.0       40.6  

All Other:

 

Net Sales

    -       0.2       -       3.0  

 

 

Operating (Loss)

    (8.8 )     (7.4 )     (20.9 )     (19.4 ) TOTAL NET SALES   $ 105.7     $ 182.5     $ 418.9     $ 451.9   TOTAL OPERATING INCOME   $ 36.6     $ 88.2     $ 162.8     $ 260.9  

Marvel's Chairman, Morton Handel, commented, “Despite the absence of any Marvel Studios feature film releases in 2009, Marvel continued to deliver solid operating performance across all our operating segments. Anticipation for the high profile Iron Man 2 feature film continues to build, and we are focusing our efforts on the film’s May 2010 release and the related licensing opportunities. At the same time, we are making solid progress on the development and pre-production of our Thor, The First Avenger: Captain America and The Avengers feature film projects.

“On August 31, 2009, The Walt Disney Company and Marvel agreed, subject to Marvel shareholder approval and other customary closing conditions, that Disney will acquire Marvel in a stock and cash transaction. Disney is the ideal home to nurture and further develop the distinctive Marvel brands because of its ability to extend the breadth, diversity and global reach of Marvel-branded entertainment and consumer products. We continue to expect this transaction will close by calendar year end.”

Third Quarter Segment Review:

• As anticipated, Q3 2009 Licensing Segment net sales declined versus the year ago period, primarily due to the recognition in Q3 2008 of merchandise licensing revenue related to the Iron Man and The Incredible Hulk feature films, as well as a decrease in revenue from the Spider-Man merchandising joint venture. Q3 2009 licensing segment net sales reflect a total contribution of $6.3 million from Hasbro, ($3.8 million within domestic consumer products and $2.5 million within international consumer products) compared to a total contribution from Hasbro of $12.0 million in the year ago period ($7.2 million in domestic consumer products and $4.8 million in international consumer products). Licensing Segment operating income also declined in Q3 2009 to $37.5 million (an operating margin of 77%) principally reflecting the lower sales level.

Marvel Entertainment, Inc.

Licensing Sales by Division (Unaudited)

(in millions)

  Three Months Ended   Nine Months Ended    

9/30/09

 

9/30/08

 

9/30/09

 

9/30/08

Domestic Consumer Products (1)   $ 25.6   $ 24.8   $ 95.9   $ 97.8 International Consumer Products     15.8     22.0     61.8     67.0 Spider-Man L.P. (Domestic and International)     2.4     8.1     10.3     50.9 Studio Licensing     5.1     3.2     13.5     21.8 Total Licensing Segment   $ 48.9   $ 58.1   $ 181.5   $ 237.5

(1) Domestic Consumer Products includes substantially all of Marvel ’s global interactive licensing business.

• Q3 2009 Publishing Segment net sales declined 6%, or $2 million, compared to Q3 2008 and were in line with Q2 2009 net sales. The year-over-year decline principally reflects $3.2 million in lower custom publishing and advertising revenue compared to the prior year period, partially offset by a year-over-year increase of $1.6 million in revenue from the book market. Operating income declined by $2.5 million, or 19.7%, on a year-over-year basis, to $10.2 million and operating margin decreased to 32% in Q3 2009 versus 37% in Q3 2008, principally due to an increase in talent costs and the decrease in custom publishing which carries a higher margin.
• Film Production Segment net sales declined to $24.8 million in Q3 2009 from $90.2 million in Q3 2008. Net sales in Q3 2009 primarily reflect the recognition of revenues associated with the international pay TV window for Iron Man and the domestic pay TV window for The Incredible Hulk as well as contributions from DVD sales for both Iron Man and The Incredible Hulk. Against these revenues Marvel amortized capitalized film production costs of $20.5 million. Year-ago Q3 film production segment results reflected theatrical box office revenues from Iron Man and The Incredible Hulk and the opening of the home video window in certain international pre-sold territories for Iron Man.
• In the All Other category, Marvel recorded Q3 2009 and Q3 2008 operating losses of $8.8 million and $7.4 million, respectively, reflecting respective corporate overhead expense of $9.5 million and $7.6 million. Q3 2009 corporate overhead includes a provision of $2.9 million for transaction costs (principally legal fees) associated with Disney’s proposed acquisition of Marvel.

Balance Sheet and Cash Use Update:

As of September 30, 2009, Marvel had cash and cash equivalents of $109.6 million, restricted cash of $79.0 million and no outstanding borrowings under its $100 million line of credit. Marvel’s outstanding film-facility borrowings increased to $21.5 million at September 30, 2009 compared to no outstanding film borrowings at June 30, 2009. The quarterly sequential increase in film-facility borrowings reflects ongoing production funding for the Iron Man 2 feature film.

Marvel Studios Entertainment Pipeline

(scheduled release dates are subject to change)

Feature Films Scheduled release date Iron Man 2 May 7, 2010 Thor May 20, 2011 The First Avenger: Captain America July 22, 2011 The Avengers May 4, 2012 Animated TV Series Status The Super Hero Squad 52, 30-minute episodes airing on Cartoon Network in the U.S. and launching on International broadcast channels in Q4 2009 The Avengers: Earth’s Mightiest Heroes 52, 30-minute episodes in production; timing and network TBD   Marvel Licensed Entertainment Pipeline

(scheduled release dates are subject to change)

Feature Films Scheduled Release Date Spider-Man 4 May 6, 2011 Animated TV Series Status Black Panther 6, 30-minute episodes in production for BET; timing TBD Fantastic Four: World’s Greatest Heroes 26, 30-minute episodes airing on Nicktoons in the U.S., various networks internationally and on Marvel.com and Marvelkids.com Iron Man: Armored Adventures 52, 30-minute episodes. Episodes 1-26 are airing on Nicktoons in the U.S. and are on air internationally. Episodes 27-52 are currently in development Spectacular Spider-Man 26, 30-minute episodes airing on Disney XD in the U.S. and on various networks internationally Wolverine and the X-Men 52, 30-minute episodes. Episodes 1-26 are airing on Nicktoons in the U.S. and are on air internationally. Episodes 27-52 are currently in development Marvel Anime: Iron Man 12, 30-minute episodes in production. Scheduled to launch on Animax in Japan in Q2 2010. Scheduled to launch in the U.S. in 2011 Marvel Anime: Wolverine 12, 30-minute episodes in production. Scheduled to launch on Animax in Japan in Q3 2010. Scheduled to launch in the U.S. in 2011 Licensed Broadway Musical Status Spider-Man, Turn off the Dark, Julie Taymor director; music & lyrics by U2’s Bono and The Edge Opening Night TBD Animated Direct-to-DVD Projects Status Planet Hulk Production complete. Scheduled for February 2010 release Thor: Tales of Asgard Production complete. Release date TBD Marvel Licensed Video Game Pipeline

(scheduled release dates are subject to change)

Game / Publisher Status The Punisher: No Mercy / Zen Released July 2, 2009 Marvel vs. Capcom 2 / Capcom Released July 29, 2009 for X-Box console and August 13, 2009 for PS3 console Marvel Ultimate Alliance 2 / Activision Released September 15, 2009 Marvel Super Hero Squad / THQ Released October 20, 2009 Iron Man 2 / Sega Scheduled for April 2010 release Thor / Sega Scheduled for May 2011 release Captain America / Sega Scheduled for July 2011 release

About Marvel Entertainment, Inc.

Marvel Entertainment, Inc. is one of the world's most prominent character-based entertainment companies, built on a proven library of over 5,000 characters featured in a variety of media over seventy years. Marvel utilizes its character franchises in licensing, entertainment (via Marvel Studios and Marvel Animation) and publishing (via Marvel Comics). Marvel's strategy is to leverage its franchises in a growing array of opportunities around the world, including feature films, consumer products, toys, video games, animated television, direct-to-DVD and online. For more information visit www.marvel.com.

Except for any historical information that they contain, the statements in this news release regarding Marvel’s plans are forward-looking statements, including statements relating to (i) the ability to further develop the Marvel brand as a result of the proposed merger with The Walt Disney Company, (ii) the closing of the Disney merger and the expected timing of that closing and (iii) Marvel’s future movie, television, theatrical and game releases. These forward-looking statements are subject to certain risks and uncertainties, including those related to Marvel’s exposure to the current economic recession, exposure to tightening credit markets, financial difficulties of Marvel’s licensees, a decrease in the level of media exposure or popularity of Marvel’s characters, changing consumer preferences, delays and cancellations of movies and television productions based on Marvel characters, Marvel Studios’ potential inability to attract and retain creative talent, key film talent’s potentially becoming incapacitated or suffering reputational damage, the potential lack of popularity of Marvel’s films, union activity or other events which could interrupt film production, including strikes by Hollywood writers, directors and actors, piracy of films and related products, Marvel Studios’ dependence on a single distributor for each self-produced film, a possible default by the lending banks in our film facility and the risks relating to the proposed merger with The Walt Disney Company as outlined under the heading “Risk Factors” in Amendment No. 1 to the Form S-4 filed by The Walt Disney Company on October 27, 2009 (the “Disney S-4”).

These and other risks and uncertainties are described under the headings “Risk Factors” and Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Marvel’s filings with the Securities and Exchange Commission, including Marvel’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. As noted above, certain risks relating the Marvel’s proposed merger with Disney are described in the Disney S-4. Marvel assumes no obligation to publicly update or revise any forward-looking statements.

Important Merger Information and Additional Information:

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. In connection with the proposed transaction, Disney filed a Registration Statement on Form S-4 with the SEC on September 22, 2009, as amended on October 27, 2009, that includes a preliminary proxy statement of Marvel that also constitutes a preliminary prospectus of Disney. These materials are not yet final and will be further amended. Marvel will mail the proxy statement/prospectus to its stockholders once it is final. Investors are urged to read the definitive proxy statement/prospectus regarding the proposed transaction when it becomes available, because it will contain important information. You may obtain copies of all documents filed with the SEC regarding this transaction, including the definitive proxy statement/prospectus when it becomes available, free of charge at the SEC’s website, www.sec.gov, or by directing a request when such a filing is made to The Walt Disney Company, 500 South Buena Vista Street, Burbank, CA 91521-9722, Attention: Shareholder Services or by directing a request when such a filing is made to Marvel’s proxy solicitor, MacKenzie Partners, Inc., 105 Madison Avenue, New York, New York 10016 or by calling Mackenzie Partners, Inc. at (800) 322-2885 (toll free) or (212) 929-5500 (call collect).

Disney, Marvel, their respective directors and certain of their executive officers may be considered participants in the solicitation of proxies in connection with the proposed transaction. Information about the directors and executive officers of Marvel is set forth in the preliminary proxy statement/prospectus contained in the Registration Statement on Form S-4 (Amendment No. 1) filed by Disney on October 27, 2009. Information about the directors and executive officers of Disney is set forth in its definitive proxy statement, which was filed with the SEC on January 16, 2009.

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

    Three Months Ended Nine Months Ended September 30,   September 30, 2009  

2008

      2009  

2008

(in thousands, except per share amounts)     Net sales $ 105,663 $ 182,499 $ 418,893 $ 451,925   Costs and expenses: Cost of revenues (excluding depreciation expense) 35,844 60,351 153,454 108,175 Selling, general and administrative 33,633 35,596 105,777 104,175 Depreciation and amortization   401   401   1,057   1,164 Total costs and expenses 69,878 96,348 260,288 213,514 Other) income   855   2,051   4,179   22,481 Operating income 36,640 88,202 162,784 260,892 Interest expense 2,736 5,656 9,103 14,228 Interest income 155 870 481 2,812 (Loss) gain on repurchase of debt   –   (417 )   –   1,916 Income before income tax expense 34,059 82,999 154,162 251,392 Income tax expense   13,139   30,239   57,978   94,423 Net income 20,920 52,760 96,184 156,969 Noncontrolling interest in consolidated Joint Venture   504   2,134   2,265   14,441 Net income attributable to Marvel Entertainment, Inc. $ 20,416 $ 50,626 $ 93,919 $ 142,528   Basic and diluted earnings per share: Net income attributable to Marvel Entertainment, Inc. $ 20,416 $ 50,626 $ 93,919 $ 142,528 Weighted average shares outstanding: Weighted average shares for basic earnings per share 78,018 78,403 78,090 77,946 Effect of dilutive stock options and restricted stock   619   514   446   652 Weighted average shares for diluted earnings per share   78,637   78,917   78,536   78,598 Earnings per share, attributable to Marvel Entertainment, Inc.: Basic $ 0.26 $ 0.65 $ 1.20 $ 1.83   Diluted $ 0.26 $ 0.64 $ 1.20 $ 1.81  

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

  September 30, December 31, 2009 2008 (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 109,604 $ 105,335 Restricted cash 37,266 12,272 Short-term investments – 32,975 Accounts receivable, net 28,853 144,487 Inventories, net 12,356 11,362 Income tax receivable – 2,029 Deferred income taxes, net 27,959 34,072 Prepaid expenses and other current assets   8,442   5,135 Total current assets 224,480 347,667   Fixed assets, net 4,523 3,432 Film inventory, net 217,416 181,564 Goodwill 346,152 346,152 Accounts receivable, non–current portion 5,157 1,321 Income tax receivable, non–current portion 6,264 5,906 Deferred income taxes, net – non–current portion 22,458 13,032 Deferred financing costs, net 2,075 5,810 Restricted cash, non–current portion 41,742 31,375 Other assets   5,801   455 Total assets $ 876,068 $ 936,714   LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 1,609 $ 2,025 Accrued royalties 84,355 76,580 Accrued expenses and other current liabilities 40,183 40,635 Income tax payable 4,926 – Deferred revenue 73,159 81,335 Film facility   –   204,800 Total current liabilities 204,232 405,375 Accrued royalties, non-current portion 556 10,499 Deferred revenue, non-current portion 87,438 48,939 Film facility, non-current portion 21,537 8,201 Income tax payable, non-current portion 71,597 59,267 Other liabilities   13,811   8,612 Total liabilities   399,171   540,893   Commitments and contingencies   Marvel Entertainment, Inc. stockholders’ equity: Preferred stock, $.01 par value, 100,000,000 shares authorized, none issued – Common stock, $.01 par value, 250,000,000 shares authorized, 134,704,780 issued and 78,021,369 outstanding in 2009 and 134,397,258 issued and 78,408,082 outstanding in 2008 1,347 1,344 Additional paid-in capital 754,621 750,132 Retained earnings 649,044 555,125 Accumulated other comprehensive loss   (4,457 )   (4,617 ) Total Marvel Entertainment, Inc. stockholders’ equity before treasury stock 1,400,555 1,301,984 Treasury stock, at cost, 56,683,411 shares in 2009 and 55,989,176 shares in 2008   (921,700 )   (905,293 ) Total Marvel Entertainment, Inc. stockholders’ equity 478,855 396,691 Noncontrolling interest in consolidated Joint Venture   (1,958 )   (870 ) Total equity   476,897   395,821 Total liabilities and equity $ 876,068 $ 936,714  

MARVEL ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  Nine Months Ended September 30, 2009   2008 (in thousands) Cash flows from operating activities: Net income $ 96,184 $ 156,969 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,057 1,164 Amortization of film inventory 110,422 65,599 Provision for doubtful accounts 218 – Gain on repurchase of debt – (1,916 ) Amortization of deferred financing costs 3,735 3,736 Unrealized gain on interest rate cap and foreign currency forward contracts (635 ) (253 ) Non-cash charge for stock-based compensation 6,051 4,743 Excess tax benefit from stock-based compensation (551 ) (9,013 ) Impairment of long-term assets 3,906 1,663 Deferred income taxes (3,325 ) (16,592 ) Changes in operating assets and liabilities: Accounts receivable 111,580 (4,915 ) Inventories (994 ) (852 ) Prepaid expenses and other current assets (3,307 ) (802 ) Film inventory (150,081 ) (48,220 ) Other assets (3,111 ) (3,346 ) Deferred revenue 30,323 (5,085 ) Income taxes payable 19,303 58,847 Accounts payable, accrued expenses and other current liabilities   (154 )   (14,954 ) Net cash provided by operating activities   220,621   186,773   Cash flows from investing activities: Purchases of fixed assets (2,247 ) (441 ) Sales of short-term investments 32,983 66,055 Purchases of short-term investments (8 ) (45,039 ) Acquisition of other intangibles (1,600 ) – Change in restricted cash   (35,361 )   1,270 Net cash (used in) provided by investing activities   (6,233 )   21,845   Cash flows from financing activities: Borrowings from film facilities 33,037 75,600 Repayments of film facilities (224,501 ) (180,509 ) Distributions to the noncontrolling interest in consolidated Joint Venture (3.309 ) (15,135 ) Purchases of treasury stock (16,407 ) (9,945 ) Exercise of stock options 483 8,285 Excess tax benefit from stock-based compensation   551   9,013 Net cash used in financing activities   (210,146 )   (112,691 )   Effect of exchange rates on cash   27   (275 ) Net increase in cash and cash equivalents 4,269 95,652 Cash and cash equivalents, at beginning of period   105,335   30,153 Cash and cash equivalents, at end of period $ 109,604 $ 125,805