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EX-32 - SECTION 906 CERTIFICATION OF CEO AND CFO - Marvel Entertainment, Inc.v164523_ex32.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - Marvel Entertainment, Inc.v164523_ex31-2.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - Marvel Entertainment, Inc.v164523_ex31-1.htm

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, 2009
 
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 ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware
 
13-3711775
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

 
417 Fifth Avenue, New York, NY
 
10016
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number, including area code: (212)-576-4000
 
 
(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 þ    No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨    No ¨  [This requirement is not yet applicable to the registrant.]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  þ
Accelerated filer  ¨
Non-Accelerated filer  ¨
(Do not check if a smaller reporting company)
Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨    No þ
 
At October 30, 2009, the number of outstanding shares of the registrant's common stock, par value $.01 per share, was 78,500,680, including 474,312 shares of restricted stock.

 
 

 
 


 
       
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(i)


Introductory Note

On August 31, 2009, Marvel Entertainment, Inc. announced that it had entered into a merger agreement with The Walt Disney Company (“Disney”).  Unless otherwise stated, the forward-looking information contained in this report does not take into account or give effect to the impact of our proposed merger with Disney.  For additional information regarding the proposed merger, please see the discussion under the heading “Description of Business and Principles of Consolidation—Recent Developments—Proposed Merger with The Walt Disney Company” in Note 2 to our condensed consolidated financial statements.


(Unaudited)


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  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


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  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
AND COMPREHENSIVE INCOME
(unaudited)

                           
Accumulated Other
Comprehensive Loss
                   
   
Common
Stock
Shares
   
Common
Stock
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Foreign
Currency
   
Pension
Liability
   
Treasury
Stock
   
Noncontrolling
Interests in
Consolidated
Joint Venture
   
Total
Equity
 
   
(in thousands)
 
Balance at December 31, 2008
    78,408     $ 1,344     $ 750,132     $ 555,125     $ (812 )   $ (3,805 )   $ (905,293 )   $ (870 )   $ 395,821  
Net settlement of employee stock options exercised
    80       1       (38 )                                   (37 )
Tax benefit of stock options exercised, net
                551                                     551  
Restricted stock vesting
    298       2       (2 )                                    
Common stock retired
    (71 )           (2,073 )                                   (2,073 )
Treasury stock, at cost
    (694 )                                   (16,407 )           (16,407 )
Compensatory stock expense
                6,051                                     6,051  
Distributions to the noncontrolling interest in consolidated Joint Venture (including non-cash distributions of $44 related to foreign tax credits)
                                                    (3,353 )     (3,353 )
Net income
                      93,919                         2,265       96,184  
Other comprehensive (loss) income
                            (74 )     234                   160  
Comprehensive income*
                                                    96,344  
                                                                         
Balance at September 30, 2009
    78,021     $ 1,347     $ 754,621     $ 649,044     $ (886 )     (3,571 )   $ (921,700 )   $ (1,958 )   $ 476,897  

*Comprehensive income attributable to Marvel Entertainment, Inc. stockholders was $94,079.
 


                           
Accumulated Other
Comprehensive Loss
                   
   
Common
Stock
Shares
   
Common
Stock
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Foreign
Currency
   
Pension
Liability
   
Treasury
Stock
   
Noncontrolling
Interests in
Consolidated
Joint Venture
   
Total
Equity
 
   
(in thousands)
 
Balance at December 31, 2007
    77,625     $ 1,333     $ 728,815     $ 349,590     $ 342     $ (3,737 )   $ (894,840 )   $ 556     $ 182,059  
Employee stock options exercised
    968       8       8,277                                     8,285  
Tax benefit of stock options exercised, net
                9,013                                     9,013  
Restricted stock vesting
    311       3       (3 )                                    
Common stock retired
    (82 )           (2,081 )                                   (2,081 )
Treasury stock, at cost
    (414 )                                   (9,945 )           (9,945 )
Compensatory stock expense
                4,743                                     4,743  
Distributions to the noncontrolling interest in consolidated Joint Venture (including non-cash distributions of $404 related to foreign tax credits)
                                                          (15,539 )     (15,539 )
Net income
                      142,528                         14,441       156,969  
Other comprehensive income
                            (1,249 )     129                   (1,120 )
Comprehensive income**
                                                    155,849  
                                                                         
Balance at September 30, 2008
    78,408     $ 1,344     $ 748,764     $ 492,118     $ (907 )   $ (3,608 )   $ (904,785 )   $ (542 )   $ 332,384  

**Comprehensive income attributable to Marvel Entertainment, Inc. stockholders was $141,408.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


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  

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(unaudited)

 
1.
BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Marvel Entertainment, Inc. and its subsidiaries have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) 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 adjustments) considered necessary for a fair statement of financial position, results of operations and cash flows for the periods presented have been included.  The unaudited Condensed Consolidated Statements of Income for the three and nine-month periods ended September 30, 2009 and the unaudited Condensed Consolidated Statements of Equity and Comprehensive Income and Cash Flows for the nine-month period ended September 30, 2009 are not necessarily indicative of those for the full year ending December 31, 2009.  The year-end 2008 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  For further information on our historical financial results, refer to the Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
 
Certain reclassifications have been made to prior periods to conform to the current period presentation.  Specifically, we have made adjustments as a result of the adoption of authoritative guidance on noncontrolling interests (see Note 2).
 
 
2.
SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Principles of Consolidation
 
Recent Developments
 
Proposed Merger with The Walt Disney Company.  On August 31, 2009, Marvel Entertainment, Inc. (“Marvel”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Walt Disney Company (“Disney”) pursuant to which Disney has agreed to acquire Marvel (the “Merger”).  The Merger Agreement has been approved by the Boards of Directors of both Marvel and Disney.
 
Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”) each share of Marvel common stock issued and outstanding immediately prior to the Effective Time (other than any dissenting shares and treasury shares and subject to adjustment for certain changes in Disney common stock or Marvel common stock such as reclassifications or stock splits) will be converted into the right to receive (i) $30 in cash (the “Cash Consideration”) and (ii) 0.7452 shares of Disney common stock (the “Exchange Ratio”, and together with the Cash Consideration, the “Merger Consideration”).  However, if the aggregate value of all shares of Disney common stock that would be issued pursuant to the Merger (other than shares issued to a subsidiary of Marvel or a subsidiary of Disney) (the “Total Stock Consideration”), valued at the Closing Date Price (as defined below), is less than 40% of the sum of the Total Stock Consideration plus the total amount of cash paid to Marvel stockholders (including cash paid in lieu of fractional shares and deemed paid in respect of dissenting shares) (the “Total Merger Consideration”), then the Exchange Ratio will be increased, and the amount of cash paid per share of Marvel common stock will be correspondingly decreased, until the total stock consideration equals 40% of the Total Merger Consideration.  The Closing Date Price is the lesser of (a) the closing price, (b) the average of the high and low sales prices and (c) the weighted average trading price, in each case, for one share of Disney common stock on the closing date of the merger as reported on the NYSE.  For every 0.0001 increase to the Exchange Ratio that is made, the amount of cash paid per share of Marvel common stock will be reduced by the product of 0.0001 multiplied by the average of $26.84 and the Closing Date Price.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

The completion of the Merger is subject to customary closing conditions, including, among other things, the approval of the Merger by the stockholders of Marvel, the receipt of antitrust approvals, compliance by Disney and Marvel with their respective obligations under the Merger Agreement, and the effectiveness of a Form S-4 registration statement filed by Disney.
 
The Merger Agreement contains certain termination rights for each of Disney and Marvel.  If the merger agreement is terminated under specified circumstances (including a termination by Marvel in response to a superior proposal to Disney’s merger proposal), Marvel may be required to pay Disney a termination fee of $140 million.
 
Concurrently with the execution of the Merger Agreement, Disney entered into a voting agreement (the “Voting Agreement”) with Isaac Perlmutter, our Chief Executive Officer, several of his affiliates and Marvel.  Pursuant to the terms of the Voting Agreement, Mr. Perlmutter and those affiliates agreed, among other things, to vote their respective shares of Marvel common stock (representing approximately 37% of the outstanding shares of Marvel common stock) in favor of the adoption of the Merger Agreement and approval of the Merger and against the approval of any alternative transaction.  Additionally, pursuant to the terms of the Voting Agreement, Mr. Perlmutter and those affiliates have agreed not to sell or transfer their respective shares of Marvel common stock, subject to certain exceptions, or to solicit any alternative transaction.  The Voting Agreement will terminate upon the earliest to occur of the Effective Time of the Merger and the termination of the Merger Agreement in accordance with its terms.
 
The Merger Agreement, the Merger and the Voting Agreement are described in greater detail in Amendment No. 1 to the Registration Statement on Form S-4 filed by Disney with the Securities and Exchange Commission on October 27, 2009.
 
General
 
Marvel Entertainment, Inc. and its subsidiaries constitute one of the world’s most prominent character-based entertainment companies, with a proprietary library of over 5,000 characters.
 
We operate in three integrated and complementary operating segments: Licensing, Publishing and Film Production.
 
We are party to a joint venture with Sony Pictures Entertainment Inc., called Spider-Man Merchandising L.P. (the “Joint Venture”), for pursuing licensing opportunities, relating to characters based upon movies or television shows featuring Spider-Man and produced by Sony.  The Joint Venture is consolidated in our financial statements as a result of our having control of all significant decisions relating to the ordinary course of business of the Joint Venture and our receiving the majority of the financial interest of the Joint Venture.  The operations of the Joint Venture are included in our Licensing segment.
 
The accompanying condensed consolidated financial statements include our accounts and those of our subsidiaries, including the Film Slate Subsidiaries (as defined in our Form 10-K) and, the Joint Venture.  Upon consolidation, all inter-company accounts and transactions are eliminated.
 
Supplemental Disclosure of Cash Flow Information

   
Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
   
(in thousands)
 
             
Interest paid during the period
  $ 7,964     $ 17,207  
Income taxes paid during the period
    41,826       52,186  
Income tax refund
    45        


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

Our film-production expenditures, including expenditures funded by draw-downs from our film facility, appear on our condensed consolidated statements of cash flows as cash used in operating activities.  Those draw-downs appear on our condensed consolidated statements of cash flows as cash provided by financing activities.  Likewise, cash collections from our film productions are reflected in cash provided by operating activities; however, the related increase in restricted cash funded by these collections is reflected as cash used in our investing activities.
 
For the nine-month period ended September 30, 2009, the impairment of long-term assets principally includes a $1.8 million charge to write-off certain animation production costs in the Licensing segment and a $1.7 million write-off of abandoned script costs and associated pre-production costs in the Film Production segment.
 
For the nine-month period ended September 30, 2008, the impairment of long-term assets represented a $1.7 million write-off of costs associated with an abandoned script in the Film Production segment.
 
Recent Accounting Standards Adopted in 2009
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance (the “Codification”), which was launched on July 1, 2009 and became the single source of authoritative nongovernmental GAAP, superseding existing FASB, AICPA, Emerging Issues Task Force (EITF) and related literature.  The Codification eliminates the GAAP hierarchy and establishes one level of authoritative GAAP.  All other literature is considered non-authoritative.  This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The implementation of this guidance changed how we disclose authoritative accounting pronouncements in the notes to our consolidated financial statements.
 
In December 2007, the FASB issued authoritative guidance on noncontrolling interests.  The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements and requires disclosure, on the face of the consolidated statements of income, of the amounts of consolidated net income attributable to the company and to the noncontrolling interests.  This guidance is effective for fiscal years beginning on or after December 15, 2008.  On January 1, 2009, we adopted the provisions of this guidance.  The implementation of this guidance did not have a material impact on our consolidated financial statements or results of operations.  The 2008 financial information has been revised so that the basis of presentation is consistent with the 2009 financial information.
 
In February 2008, the FASB issued amendments to authoritative guidance on fair value measurements, which deferred the effective date of authoritative guidance on fair value measurements for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.  On January 1, 2009, we adopted these amendments to this authoritative guidance.  On January 1, 2008, we adopted the provisions of this authoritative guidance on fair value measurements related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis.  The implementation of this authoritative guidance and its amendments did not have a material impact on our consolidated financial statements or results of operations.
 
In December 2007, the FASB issued authoritative guidance on business combinations.  The guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired and any noncontrolling interest in the acquiree.  This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination.  This guidance is effective for fiscal years beginning after December 15, 2008.  On January 1, 2009, we adopted the provisions of this guidance.  The implementation of this guidance did not have any impact on our consolidated financial statements or results of operations.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

The FASB issued additional authoritative guidance on business combinations in March 2009, specifically, for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing contingent consideration assumed as part of the business combination.  This guidance was effective as of January 1, 2009.  The implementation of this authoritative guidance did not have any impact on our consolidated financial statements or results of operations.  However, any business combinations entered into in the future may impact our consolidated financial statements as a result of the potential earnings volatility due to the changes described above.
 
In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes the accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued.  This guidance was effective beginning with our second quarter financial reporting and did not have a material impact on our consolidated financial statements or results of operations (see Note 13).
 
In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments, which was effective for the Company on June 30, 2009.  The amended guidance requires a publicly traded company to include disclosures about fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods.  In addition, the guidance requires an entity to disclose either in the body or in the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position.  The adoption of this amended guidance did not have any impact on our consolidated financial statements or results of operations.
 
Recent Accounting Standards Not Yet Adopted
 
In December 2008, the FASB amended authoritative guidance on retirement benefits and provided guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan.  The amended guidance is effective for fiscal years ending after December 15, 2009.  We are currently evaluating the potential impact of this amended guidance on our consolidated financial statements.
 
In September 2009, the EITF reached a consensus related to revenue arrangements with multiple deliverables.  The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition and will be effective for the Company on January 1, 2011. The updated guidance will revise how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value.  In addition, the revised guidance will require additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements.  We are currently evaluating the potential impact of the amended guidance on our consolidated financial statements or results of operations.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

 
3.
DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Accounts receivable, net, consists of the following:
           
Licensing:
           
Accounts receivable
  $ 9,051     $ 9,434  
Less allowances for doubtful accounts
    (261 )     (278 )
Total licensing
    8,790       9,156  
Publishing:
               
Accounts receivable
    27,540       30,474  
Less allowance for:
               
Doubtful accounts
    (334 )     (266 )
Allowance for returns
    (12,096 )     (14,460 )
Total publishing
    15,110       15,748  
Film Production
               
Accounts receivable
    4,917       119,459  
All Other:
               
Accounts receivable
    36       124  
Total
  $ 28,853     $ 144,487  
Inventories, net, consists of the following:
               
Finished goods
  $ 5,686     $ 5,734  
Editorial and raw materials
    6,670       5,628  
Total
  $ 12,356     $ 11,362  
Accounts receivable , non-current portion, are due as follows:
               
2011
  $ 5,241     $ 1,381  
Present value discount
    (84 )     (60 )
Total
  $ 5,157     $ 1,321  
Film inventory, net, consists of the following:
               
Theatrical Films:
               
Released, net of amortization
  $ 60,541     $ 172,224  
In production
    133,056       4,752  
In development or pre-production
    12,774       2,505  
Total theatrical films
    206,371       179,481  
Animated television productions:
               
Released, net of amortization
    465        
Completed and not released
    929        
In production
    8,255        
In development or pre-production
    1,396       2,083  
Total animated television productions
    11,045       2,083  
Total
  $ 217,416     $ 181,564  
Accrued royalties consists of the following:
               
Merchandise royalty obligations
  $ 1,545     $ 1,556  
Freelance talent
    3,618       4,005  
Studio and talent share of royalties
    79,192       71,019  
Total
  $ 84,355     $ 76,580  


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(in thousands)
 
Accrued expenses and other current liabilities consists of the following:
           
Inventory purchases
  $ 1,907     $ 2,030  
Bonuses
    10,607       12,860  
Legal fees and litigation accruals
    4,312       2,111  
Licensing common marketing funds
    12,624       9,441  
Interest
    2,137       3,675  
Other accrued expenses
    8,596       10,518  
Total
  $ 40,183     $ 40,635  

 
4.
EARNINGS PER SHARE

Basic earnings per share attributable to Marvel Entertainment, Inc. is computed by dividing the net income attributable to Marvel Entertainment, Inc. for the period, attributable to common stock, by the weighted average number of common shares outstanding during the period.  Diluted net earnings per share attributable to Marvel Entertainment, Inc. is computed by dividing the net income attributable to Marvel Entertainment, Inc. for the period by the weighted-average number of common and potential common shares, if dilutive, outstanding during the period.  The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share attributable to Marvel Entertainment, Inc. by application of the treasury stock method, which includes consideration of stock-based compensation.
 
The total number of shares of our common stock outstanding as of September 30, 2009 was 78,021,369, net of treasury shares and restricted stock; assuming the exercise of all outstanding stock options (1,839,869) and the vesting of all outstanding restricted shares (474,312), the total number outstanding would be 80,335,550.  During the three and nine-month periods ended September 30, 2009, 2,750 and 391,831 shares of common stock, respectively, were issued through stock option exercises.
 
Options to purchase 0.1 million shares of common stock were not included in the calculation of diluted net earnings per share attributable to Marvel Entertainment, Inc. for the nine-month period ended September 30, 2009, respectively, and 0.2 million  and 0.7 million shares of common stock were not included in the calculation of diluted net earnings per share attributable to Marvel Entertainment, Inc. for the three and nine-month periods ended September 30, 2008, because they were antidilutive.
 
 
5.
COMPREHENSIVE INCOME

Comprehensive income includes all changes in equity during a period except those resulting from the investments by, and distributions to, stockholders.

   
For the three months ended
 
   
September 30,
 
   
2009
   
2008
 
   
(in thousands)
 
Net income
  $ 20,920     $ 52,760  
Other comprehensive (loss) income:
               
   Foreign currency
    39       (1,371 )
   Pension liability
    78       42  
           Total other comprehensive income (loss)
    117       (1,329 )
Comprehensive income
    21,037       51,431  
Comprehensive income attributable to noncontrolling interest
    (504 )     (2,134 )
Comprehensive income attributable to Marvel Entertainment, Inc.
  $ 20,533     $ 49,297  


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

 
6.
DEBT FINANCING

Film Facility
 
MVL Film Finance LLC, a wholly owned bankruptcy-remote subsidiary of ours, maintains a $525 million credit facility for producing theatrical motion pictures based on certain of our characters.  Our ability to borrow under the film facility expires on September 1, 2012.  We are required to repay all borrowings under the film facility by September 1, 2014, subject to extension by up to ten months under certain circumstances.  The film facility’s final expiration date is September 1, 2016, subject to extension by up to ten months under certain circumstances.  The expiration date and final date for borrowings under the film facility occur sooner if the films produced under the facility fail to meet certain defined performance measures.  The film facility consists of $465 million in revolving senior bank debt and $60 million in mezzanine debt, which is subordinated to the senior bank debt.  During 2008, we repurchased, and are now holding, all of the mezzanine debt related to the film facility.

Ambac Assurance Corporation has insured repayment of the senior bank debt.  In exchange for the repayment insurance, we pay Ambac a fee calculated as a percentage of used and unused senior bank debt, but in no event less than $3.4 million per year.  The weighted average interest rate of our senior bank debt was 3.28% at September 30, 2009, inclusive of the percentage fee owed to Ambac (without consideration of that fee’s minimum).  In addition, commitment fees on unused senior bank debt are charged at the rate of 0.90% per annum, inclusive of the percentage fee owed to Ambac (without consideration of that fee’s minimum).
 
Debt service under the film facility must be paid from the films’ net collections, rather than from any of our other sources of cash.  The film facility requires us to maintain certain interest and liquidity reserves to cover future debt service payments in the event that the films’ net collections are not sufficient to make such payments.  As of September 30, 2009, total reserves were $27.9 million, and are included in non-current restricted cash.
 
The film facility also requires us to fund a minimum of 33% of the budget of each film distributed under our 2008 distribution agreement with Paramount.  The film facility will provide a maximum of 67% of the budget (reduced by the proceeds of any third-party co-financing).  During the first quarter of 2009, we funded 33% of the Iron Man 2 budget, all of which was spent, as of September 30, 2009 to fund production costs.
 
In the first quarter of 2009, we amended the film facility to allow us, at our option, to utilize a lower cost completion bond structure.  In order to take advantage of this structure, we funded into escrow approximately $31.5 million for Iron Man 2 for the duration of production.  This amount (plus interest accrued) is included in current restricted cash as of September 30, 2009.
 
Our films’ net collections may only be used to service debt under the film facility, fund production costs of other films produced under the film facility or pay certain administrative costs of the film facility, and are therefore included in restricted cash (see Note 7).
 
As of September 30, 2009, we had $21.5 million of outstanding borrowings under the film facility.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)

Corporate Line of Credit
 
We maintain a $100 million revolving line of credit with HSBC Bank USA, National Association (the “HSBC Line of Credit”) with a sub-limit for the issuance of letters of credit.  The HSBC Line of Credit, as amended, expires on March 31, 2011.  Borrowings under the HSBC Line of Credit may be used for working capital and other general corporate purposes and for repurchases of our common stock.  In March 2009, the HSBC Line of Credit was amended and now provides for an unused commitment fee of 0.45% commencing April 1, 2009.  The HSBC Line of Credit contains customary event-of-default provisions and a default provision based on our market capitalization.  We continue to be in compliance with the covenants of the facility, which include covenants related to net income, leverage and free cash flow.  The HSBC Line of Credit is secured by a lien on (a) our accounts receivable, (b) our rights under our toy license with Hasbro and (c) all of our treasury stock repurchased by us after November 9, 2005.  Borrowings under the HSBC Line of Credit bear interest at HSBC’s prime rate or, at our option, at LIBOR plus 1.25% per annum.  As of September 30, 2009, 32.1 million of our shares held in treasury are pledged as collateral under the HSBC Line of Credit.  As of September 30, 2009, we had $1.1 million (related to a letter of credit) outstanding under the HSBC Line of Credit.
 
 
7.
RESTRICTED CASH

Cash that has been contractually restricted as to usage or withdrawal is included in the caption “Restricted cash”.  Restricted cash attributable to our Film Production segment includes our net film collections, borrowings under the film facility and any other funds designated to be used for film inventory costs, for debt service, for various reserves required under the film facility and for certain amounts required under our completion bond arrangements.  Restricted cash in the Film Production segment was $73.3 million as of September 30, 2009 and $39.6 million as of December 31, 2008.  Restricted cash not expected to be released within one year of the balance sheet date and restricted cash designated to be used for film inventory costs is classified as a non-current asset in the accompanying condensed consolidated balance sheets.
 
Restricted cash in the Licensing segment includes cash balances of the Joint Venture that are not freely available to either Sony Pictures or to us until distributed.  Distributions are made no less frequently than quarterly.
 
 
8.
FAIR VALUE MEASUREMENTS
 
Authoritative guidance on fair value measurements and disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The guidance classifies the inputs used to measure fair value into the following hierarchy:
 
Level 1:  Unadjusted quoted prices in active markets for identical assets or liabilities
 
Level 2:  Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
 
Level 3: Unobservable inputs for the asset or liability
 
We endeavor to utilize the best available information in measuring fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The following table sets forth our assets measured at fair value on a recurring basis as of September 30, 2009:


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
   
Recurring Fair Value Measurements Using
 
   
Total Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
   
(in thousands)
 
Financial Assets:
                       
Interest rate cap
  $ 735           $ 735        
 
We are exposed to market risks from changes in interest rates, which may adversely affect our operating results and financial position.  When deemed appropriate, we minimize our risks from interest rate fluctuations using derivative financial instruments.  We use derivative financial instruments to manage risk and not for trading or other speculative purposes.  We do not use leveraged derivative financial instruments.  The interest rate cap is valued using broker quotations, or market transactions either in the listed or over-the counter markets.  This derivative instrument is therefore classified within level 2.  Gains and losses from changes in the fair value of the interest rate cap are recorded within other income in the accompanying condensed consolidated statements of income.
 
The estimated fair value of certain of our financial instruments, including cash equivalents, current portion of accounts receivable, accounts payable and accrued expenses, approximate their carrying amounts due to their short-term maturities.  The non-current portion of accounts receivable has been discounted to its net present value, which approximates fair value.  The carrying value of our film facility debt approximates its fair value because the interest rates applicable to that debt are based on floating rates identified by reference to market rates.
 
Non-Financial Instruments
 
The majority of our non-financial instruments, which include goodwill, inventories and fixed assets, are not required to be carried at fair value on a recurring basis.  However, our goodwill is required to be evaluated for impairment annually, and all of our non-financial instruments are required to be evaluated for impairment if certain triggering events occur.  An evaluation that results in asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.

We account for film production costs in accordance with the guidance on Entertainment-Films, which requires that upon the occurrence of an event or change in circumstance that may indicate that the fair value of a film is less than its unamortized costs, an entity should determine the fair value of the film and write off the amount by which the unamortized capitalized costs exceed the film’s fair value.  Some of these events or changes in circumstance include: (i) an adverse change in the expected performance of a film prior to its release, (ii) actual costs substantially in excess of budgeted costs, (iii) substantial delays in completion or release schedules, (iv) changes in release plans, (v) insufficient funding or resources to complete the film and to market it effectively and (vi) the failure of actual performance subsequent to release to meet that which had been expected prior to release.  When required to determine the fair value of our films, we estimate the timing of ultimate cash to be received and apply a discounted cash flow methodology.
 
 
9.
SEGMENT INFORMATION

We operate our businesses in three segments: Licensing, Publishing and Film Production.
 
Licensing Segment
 
Our Licensing segment, which includes the operations of the Joint Venture, licenses our characters for use in a wide variety of products and media, the most significant of which are described below.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
Consumer Products.  We license our characters for use in a wide variety of consumer products, including toys, apparel, interactive games, electronics, homewares, stationery, gifts and novelties, footwear, food and beverages and collectibles.
 
Studio Licensing: Feature Films.  We have licensed some of our characters to major motion picture studios for use in motion pictures. For example, we currently have a license with Sony to produce motion pictures featuring the Spider-Man family of characters.  We also have outstanding licenses with studios for a number of our other characters, including The Fantastic Four, X-Men (including Wolverine), Daredevil/Elektra and Ghost Rider.  Under these licenses, we retain control over merchandising rights and retain more than 50% of merchandising-based royalty revenue.  We intend to self-produce, rather than license, all future films based on our characters that have not been licensed to third parties.
 
Studio Licensing: Television Programs. We license our characters for use in television programs.  Several television shows based on our characters are in various stages of development including animated programming based on Iron Man, X-Men (including Wolverine), and Black Panther.  Since January 2009, the new animated series “Wolverine and the X-Men” has been airing on Nicktoons Network in the United States and on various other international channels in Canada, United Kingdom, Latin America, Europe, Australia, Asia Pacific, and the Middle East.  In addition, as part of our efforts to build demand for our licensed consumer products, the Licensing segment has begun to self-produce animated television programming featuring Marvel characters.  By controlling the content and distribution of self-produced animation, we hope to increase our consumer products licensing activities more than is possible through animation whose content and distribution is under the control of animation licensees.
 
Studio Licensing: Made-for-DVD Animated Feature Films.  We have licensed some of our characters to an entity controlled by Lions Gate Entertainment Corp. to produce up to eight feature-length animated films for distribution directly to the home video market.  To date, six of these titles have been distributed under this arrangement.
 
Destination-Based Entertainment.  We license our characters for use at theme parks, shopping malls and special events.  For example, we have licensed some of our characters for use at Marvel Super Hero Island, part of the Islands of Adventure theme park at Universal Orlando in Orlando, Florida, and for use in a Spider-Man attraction at the Universal Studios theme park in Osaka, Japan.  We have also licensed our characters for the development of theme parks in South Korea and Dubai.
 
Promotions.  We license our characters for use in short-term promotions of other companies’ products and services.
 
Publications.  Our Licensing segment licenses our characters to publishers located outside the United States for use in foreign-language comic books and trade paperbacks and to publishers worldwide for novelizations and a range of coloring and activity books.
 
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 5,000 characters.  Our titles include Spider-Man, X-Men, Fantastic Four, Iron Man, the Incredible Hulk, Captain America, the Avengers, and Thor.  In addition to revenues from the sale of comic books and trade paperbacks, the Publishing segment generates revenues from sales of advertising and subscriptions and from other activities, such as custom comics and digital media.  Our digital media activities have had a small but growing impact on our Publishing segment revenues, mostly through online advertising and digital comic subscription sales.  We expect continued moderate growth and diversification in Marvel digital media revenues as we continue to increase our online presence.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
Film Production Segment
 
Until we began producing our own films, our growth strategy was to increase exposure of our characters by licensing them to third parties for development as movies and television shows.  The increased exposure creates revenue opportunities for us through increased sales of toys and other licensed merchandise.  Our self-produced movies, the first two of which were released in 2008, represent an expansion of that strategy that also increases our level of control in developing and launching character brands.  Our self-produced movies also offer us an opportunity to participate in the films’ financial performance to a greater extent than we could as a licensor.
 
Our self-produced films are financed primarily with our $525 million film facility.  The first two films produced by the Film Production segment were Iron Man, which was released on May 2, 2008, and The Incredible Hulk, which was released on June 13, 2008.  We are currently in post production on one film, Iron Man 2, scheduled to be released May 7, 2010, and we are in pre-production on another film, Thor, scheduled to be released May 20, 2011.  In addition, we are developing two other films, The First Avenger: Captain America and The Avengers, scheduled to be released on July 22, 2011 and May 4, 2012, respectively.

Set forth below is certain operating information of our segments.

   
Licensing
(1)(2)(3)
   
Publishing
   
Film
Production
   
All Other
(4)(5)
   
Total
 
   
(in thousands)
 
Three months ended September 30, 2009
                             
Net sales
  $ 48,863     $ 31,975     $ 24,825     $     $ 105,663  
Operating income (loss)
    37,531       10,240       (2,273 )     (8,858 )     36,640  
                                         
Three months ended September 30, 2008
                                       
Net sales
  $ 58,071     $ 34,064     $ 90,180     $ 184     $ 182,499  
Operating income (loss)
    42,477       12,700       40,422       (7,397 )     88,202  
                                         
Nine months ended September 30, 2009
                                       
Net sales
  $ 181,524     $ 89,464     $ 147,905     $     $ 418,893  
Operating income (loss)
    130,494       28,153       25,001       (20,864 )     162,784  
                                         
Nine months ended September 30, 2008
                                       
Net sales
  $ 237,479     $ 92,322     $ 119,105     $ 3,019     $ 451,925  
Operating income (loss)
    205,386       34,334       40,569       (19,397 )     260,892  

 
(1)
In the first quarter of 2008, operating income included $19.0 million classified as Other Income from settlement payments received in connection with the early termination of two interactive licensing agreements.
 
 
(2)
During the second quarter of 2008, we recorded a non-recurring credit of $8.3 million in SG&A expense to reflect a reduction in our estimate of royalties payable to actors starring in the Spider-Man movies for the use of their likeness in licensed products.
 
 
(3)
During the third quarter of 2009, we recorded the effects of a favorable settlement of a studio licensee audit, which resulted in a reduction of $7.6 million to SG&A expense for amounts previously accrued.
 

MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
 
(4)
Operating loss in “All Other” for the nine-month period ended September 30, 2009 is net of $3.1 million received from a litigation trust established in connection with our emergence from bankruptcy proceedings in 1998 and a settlement reached by this trust and other third parties.  The amounts for the three months ended September 30, 2008 include $0.2 million of direct toy sales and $0.3 million of related operating income associated with our toy manufacturing operations, which we exited in early 2008.  The amounts for the nine months ended September 30, 2008 include $3.0 million of direct toy sales and $2.2 million of related operating income associated with our toy manufacturing operations.  The balance of “All Other” operating loss in the three and nine-month periods is primarily unallocated corporate overhead.
 
 
(5)
Operating loss in “All Other” for the three and nine-month periods ended September 30, 2009, includes $2.9 million of costs (principally legal fees) we incurred associated with the proposed merger with Disney (see Note 2).
 
 
10.
BENEFIT PLAN

In connection with the 1999 sale of a subsidiary, we retained certain liabilities related to the Fleer/Skybox International Retirement Plan, a defined benefit pension plan for employees of that subsidiary (the “Fleer/Skybox Plan”).  This plan has been amended to freeze the accumulation of benefits and to prohibit new participants.
 
Assumptions used for the 2009 and 2008 expense include a discount rate of 5.62% and 5.88%, and an expected rate of return on plan assets of 4.82% and 5.25%, respectively.
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in thousands)
 
Total cost for plan period:
                       
Service cost
  $     $     $     $  
Interest cost
    283       291       849       872  
Expected return on plan assets
    (197 )     (257 )     (590 )     (770 )
Amortization of:
                               
Unrecognized net loss
    53       50       159       151  
Unrecognized prior service credit
    (13 )     (13 )     (40 )     (40 )
Unrecognized net asset obligation
                       
Net periodic pension cost
  $ 126     $ 71     $ 378     $ 213  
 
 
11.
INCOME TAXES

At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our ordinary quarterly earnings.  The tax expense or benefit related to each significant, unusual, or extraordinary item that will be separately reported, or reported net of its related tax effect, is recognized in the interim period in which it occurs.  In addition, the effect of changes in tax laws, rates or tax status is recognized in the interim period in which the change occurs.
 
Estimation of the annual effective tax rate at the end of each interim period requires estimates of, among other things, the amount of our pre-tax income for the year, what portion of our income will be earned and taxed in foreign jurisdictions, what permanent and temporary differences we will record, and which of the deferred tax assets generated in the current year we will recover.  Each of those estimates requires significant judgment.  These estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or as the tax environment changes.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
Our effective tax rates for the three and nine-month periods ended September 30, 2009 (38.6% and 37.6%, respectively) and for the three and nine-month periods ended September 30, 2008 (36.4% and 37.6%, respectively) were higher than the federal statutory rate due primarily to state and local taxes partially offset by the benefit associated with the earnings of the Joint Venture, as further described below.  The three and nine-month periods ended September 30, 2009 also include a charge related to a change in the New York City tax law enacted in the third quarter of 2009 and interest relating to certain proposed IRS adjustments, as discussed below.
 
We are not responsible for the income taxes related to the noncontrolling interest in the Joint Venture’s earnings.  The tax liability associated with the noncontrolling interest in the Joint Venture’s earnings is therefore not reported in our income tax expense, even though all of the Joint Venture’s revenues and expenses are consolidated in our reported income before income tax expense.  Joint Venture earnings therefore have the effect of lowering our effective tax rate.  This effect is more pronounced in periods in which Joint Venture earnings are higher relative to our other earnings.
 
We retain various state and local net operating loss ("NOL") carryforwards of $307.0 million, which will expire in various jurisdictions in the years 2009 through 2026.  As of September 30, 2009, there is a valuation allowance of $0.6 million against state NOL and capital loss carryforwards, as we believe it is more likely than not that those assets will not be realized in the future.
 
Our 2003 through 2006 federal income tax returns are currently under examination by the Internal Revenue Service (“IRS”).  During the quarter ended June 30, 2009, the IRS proposed an adjustment to the amount of federal NOL carryforwards that we utilized in the years under examination.  We determined the amount of available NOL carryforwards upon our emergence from bankruptcy in 1998 using a methodology consistent with our interpretation of then-current federal tax law and IRS guidance available at the time.  In 2003, the IRS issued a regulation that prospectively required a different methodology.  The basis of the IRS position is that, in 1998, we should have used a methodology similar to the approach of the 2003 regulation.  If the IRS were to prevail in its position, federal NOL carryforwards used in the examination period would be disallowed and we would owe approximately $23 million in additional income tax and interest.  We firmly believe the methodology we employed to calculate available NOL carryforwards from 1998 was appropriate and plan to aggressively contest the proposed adjustment.
 
In addition, during the quarter ended September 30, 2009, the IRS proposed certain other adjustments, which are substantially timing in nature.  Tax expense for the nine months ended September 30, 2009 includes a charge for interest relating to the proposed adjustments.
 
Unrecognized tax benefits totaled $90.8 million and $57.0 million at September 30, 2009 and December 31, 2008, respectively.  The increase for the nine-months ended September 30, 2009 was the result of: (i) tax positions we claimed during that period in various jurisdictions in which we operate; and (ii) $29 million related to proposed IRS tax adjustments for the 2003 through 2006 period that are timing in nature and would be substantially recovered by December 31, 2009.  The above liability for unrecognized tax benefits is reported gross of this recoverable tax asset.  The Company believes it is reasonably possible that our balance of unrecognized tax benefits at September 30, 2009 could be reduced by as much as $34 million over the next twelve months due to possible IRS settlements and the expiration of certain state and local statutes of limitations.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
 
12.
COMMITMENTS AND CONTINGENCIES

Legal Matters

Marvel, its board of directors and Disney are named as defendants in purported class action lawsuits brought by alleged Marvel stockholders challenging Marvel’s proposed merger with Disney.  The stockholder actions were filed in the Supreme Court of the State of New York, County of New York (Michael Golombuski v. Marvel Entertainment, Inc., et al., filed August 31, 2009 and Alan W. Meerow v. Marvel Entertainment, Inc. et al., filed September 15, 2009) and in the Delaware Court of Chancery (Christine Vlatos v. Sid Ganis, et al., filed September 1, 2009; Paul W. Morand v. Morton F. Handel et al., filed on September 8, 2009; and Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union v. Isaac Perlmutter, et al., filed on September 10, 2009).  The stockholder actions generally allege, among other things, that (i) each member of the Marvel board of directors breached his fiduciary duties to Marvel and its stockholders by authorizing the sale of Marvel to Disney, (ii) the merger does not maximize value to Marvel stockholders, (iii) the defendants failed to provide stockholders with allegedly material information related to the proposed transaction and (iv) Disney and Marvel aided and abetted the breaches of fiduciary duty allegedly committed by the members of the Marvel board of directors.  The stockholder actions seek class action certification and equitable relief, including judgments enjoining the defendants from consummating the merger on the agreed-upon terms.  The two actions in the Supreme Court of the State of New York, County of New York were consolidated on October 8, 2009 under the new caption In re: Marvel Entertainment, Inc. Shareholder Litigation.  The Vlatos and Morand actions in the Delaware Court of Chancery were consolidated on October 26, 2009 under the new caption In re: Marvel Entertainment, Inc. Shareholder Litigation.  On October 9, 2009, the plaintiffs filed in the Delaware Court of Chancery a Notice and Proposed Order of Dismissal without prejudice of the action entitled Port Authority of Allegheny County Retirement and Disability Allowance Plan for Employees Represented by Local 85 of the Amalgamated Transit Union v. Isaac Perlmutter, et al.  We believe all claims asserted by the plaintiffs to be without merit.

On January 26, 2009, in the United States District Court for the Southern District of New York, four purported shareholders of Stan Lee Media, Inc. (“SLM”), individually and on behalf of all SLM shareholders, filed a derivative action against several Marvel entities, Isaac Perlmutter (our President and Chief Executive Officer), Avi Arad (a former officer and director), Stan Lee, Joan C. Lee, Joan Lee and Arthur Lieberman.  On April 28, 2009, two of the original four plaintiffs filed an amended complaint, which supersedes the original complaint and alleges only derivative claims on behalf of SLM.  The amended complaint eliminated all claims against Mr. Perlmutter, Mr. Arad, Joan C. Lee and Joan Lee.  The amended complaint alleges that SLM is the owner of rights and property, including the Marvel name and trademarks and rights in characters co-created by Mr. Lee while he was employed by our predecessors (the “Intellectual Property”).  The plaintiffs allege that prior to the date Mr. Lee entered into a new employment agreement with us in 1998, Mr. Lee transferred his interest in the Intellectual Property to a predecessor of SLM.  Mr. Lee has denied that he had any ownership interest in any Marvel intellectual property and that any transfer of those rights to SLM ever took place.  The amended complaint alleges claims against us for violations of section 43(a) of the Lanham Act, tortious interference with a contract between Mr. Lee and an alleged predecessor of SLM, aiding and abetting alleged breaches by Mr. Lee of fiduciary duties owed to SLM and an accounting. The relief sought against us in the amended complaint includes damages in an amount to be determined at trial, and the imposition of a constructive trust on and an accounting for the profits derived from our exploitation of our intellectual property.  We believe all claims in the amended complaint are without merit.
 
On January 2, 2009, in the New York State Supreme Court, New York County, Marvel and the Joint Venture filed separate actions against MGA Entertainment, Inc. ("MGA").  Those lawsuits alleged that MGA owed several million dollars in unpaid royalties and had otherwise breached license agreements between the parties.  On or about March 2, 2009, MGA filed a separate action against Marvel and Isaac Perlmutter and served counterclaims against the Joint Venture, Marvel and Mr. Perlmutter.  MGA's action and counterclaims assert causes of action for breach of contract, breach of the covenant of good faith and fair dealing, malicious prosecution, abuse of process, and intentional infliction of economic harm.  MGA is seeking damages in excess of $100 million.  We believe all of MGA's claims in the actions are without merit.


MARVEL ENTERTAINMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)
September 30, 2009
(unaudited)
 
On March 30, 2007, in the United States District Court for the Southern District of Illinois, Gary Friedrich and Gary Friedrich Enterprises, Inc. (“Friedrich”) filed a lawsuit against us and numerous other defendants including Sony Pictures Entertainment, Inc., Columbia Pictures Industries, Inc., Hasbro, Inc. and Take-Two Interactive Software, Inc.  That suit has been transferred to the Southern District of New York.  The complaint alleges that Friedrich is the owner of intellectual property rights in the character Ghost Rider and that we and other defendants have exploited the Ghost Rider character in a motion picture and merchandise without Friedrich’s consent.  Friedrich has asserted numerous claims including copyright infringement, negligence, waste, state law misappropriation, conversion, trespass to chattels, unjust enrichment, tortious interference with right of publicity, and for an accounting.  We believe Friedrich’s claims to be without merit.
 
We are also involved in various other legal proceedings and claims incident to the normal conduct of our business.  Although it is impossible to predict the outcome of any legal proceeding and there can be no assurances, we believe that our legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition, results of operations or cash flows.
 
 
13.
SUBSEQUENT EVENTS

We have evaluated subsequent events through the filing of this Form 10-Q on November 3, 2009, and determined there have not been any events that have occurred that would require adjustments to our consolidated financial statements or results of operations.



Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements that Marvel or its representatives make.  Statements that are not statements of historical fact, including comments about our business strategies and objectives, growth prospects and future financial performance, are forward-looking statements.  The words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “guidance,” “forecast,” “plan,” “outlook” and similar expressions, in filings with the SEC, in our press releases and in oral statements made by our representatives, also identify forward-looking statements.  The forward-looking statements in this report speak only as of the date of this report.  We do not intend to update or revise any forward-looking statements to reflect events or circumstances after the date on which the statements are made, even if new information becomes available.
 
The following risk factors, among others, could cause our actual results to differ significantly from what is expressed in our forward-looking statements:
 
 
·
Exposure to a continuing economic downturn
 
·
Exposure to a sustained tightening of credit markets
 
·
Dependence on a single distributor to the direct comic book market
 
·
Financial difficulties of licensees
 
·
A decrease in the level of media exposure or popularity of our characters
 
·
Changing consumer preferences
 
·
Movie- and television-production delays and cancellations
 
·
Concentration of our toy licensing in one licensee
 
·
Uncertainties to do with the film production business, such as:
 
o
We might be unable to attract and retain creative talent
 
o
Our key talent might become incapacitated or suffer reputational damage
 
o
Our films might be less successful economically than we anticipate
 
o
Our film productions might be disrupted or delayed
 
o
We might be disadvantaged by changes or disruptions in the way films are distributed
 
o
We might lose potential sales because of piracy of films and related products
 
o
We will be primarily dependent on a single distributor for each film
 
o
We will depend on our studio distributors for information related to the accounting for film-production activities
 
o
We might fail to meet the conditions imposed by the lenders for the funding of individual films
 
o
We might be unable to obtain financing to make more than four films if an interim asset test related to the economic performance of the film slate is not satisfied
 
o
Cash flows from our films might be insufficient to service our debt under the film facility
 
o
The film facility’s lenders might default

The risk factors above are discussed more fully in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.
 
In addition, our forward-looking statements relating to the merger described below are subject to the risks described in Part II, Item 1A of this Quarterly Report on Form 10-Q, beginning on page 42.

 
Management Overview of Business Trends
 
Recent Developments
 
Proposed Merger with The Walt Disney Company. For information relating to our proposed merger with The Walt Disney Company (“Disney”), please see the discussion under the heading “Description of Business and Principles of Consolidation—Recent Developments—Proposed Merger with The Walt Disney Company” in Note 2 to our condensed consolidated financial statements, which discussion is incorporated herein by reference.

General
 
We operate in three integrated and complementary operating segments: Licensing, Publishing and Film Production.
 
Licensing
 
Our Licensing segment is responsible for the licensing, promotion and brand management for all of our characters worldwide.  We pursue a strategy, where feasible, of concentrating our licensee relationships with fewer, larger licensees who demonstrate the financial and merchandising capability to manage our portfolio of both classic and movie properties.  A key focus is negotiating strong minimum guarantees while keeping royalty rates competitive.
 
Another strategy of the Licensing segment’s consumer products program is to create new revenue opportunities by further segmenting our properties to appeal to new demographic profiles.  Initiatives such as Marvel Super Hero Squad, Marvel Extreme, Marvel Heroes and Marvel Comics (the retro depiction of our characters) have all helped the licensing business expand beyond its traditional classic and event-driven properties.
 
Major entertainment events play an important role in driving sales of our licensed products.  In 2008, our Licensing segment revenue reflected the benefit from the release of our self-produced movies; Iron Man, which was released on May 2, 2008, and The Incredible Hulk, which was released on June 13, 2008.  Our full-year 2009 Licensing segment revenue will be lower than in 2008 as there is only one major entertainment event in 2009, X-Men Origins: Wolverine, domestically released May 1, 2009 by Twentieth Century Fox.
 
We typically enter into multi-year merchandise license agreements that specify minimum royalty payments and include a significant down payment upon signing.  We recognize license revenue when the earnings process is complete, including, for instance, the determination that the credit-worthiness of the licensee reasonably assures collectibility of any outstanding minimum royalty payments.  If the earnings process is complete with respect to all required minimum royalty payments, then we record as revenue the present value of those payments.
 
The earnings process is not complete if, among other things, we have significant continuing involvement under the license, we have placed restrictions on the licensee’s ability to exploit the rights conveyed under the contract or we owe a performance obligation to the licensee.  In the case where we have significant continuing involvement or where any restrictions remain on the licensee’s rights (e.g., no sales of products based on a specific character allowed until a future date), we recognize revenue as the licensee reports its sales and corresponding royalty obligation to us.  Where we have a performance obligation, minimum royalty collections are not recognized until our performance obligation has been satisfied.  Minimum payments collected in advance of recognition are recorded as deferred revenue.  In any case where we are unable to determine that the licensee is sufficiently creditworthy, we recognize revenue only to the extent of cash collections.  When cumulative reported royalties exceed the minimum royalty payments, the excess royalties are recorded as revenue when collected and are referred to as “overages”.


Publishing
 
The Publishing segment is focused on strengthening its Super Hero graphic fiction presence in its primary distribution channels such as the direct and mass market, and expanding its reach to a broader demographic by providing all-ages and new reader products in the book market and online.  A variety of Wolverine products were released in the second quarter of 2009 and distributed around the X-Men Origins: Wolverine film domestically released May 1, 2009 by Twentieth Century Fox.  We also released the first collection for The Stand in the first quarter of 2009 and the third collection of the Dark Tower in July 2009.  The first collections for the Ender’s Game and the Ender’s Shadow series were released in the third quarter of 2009.  In 2008, Marvel launched a major comic book crossover series, Secret Invasion, which involves many of the Marvel characters and features tie-ins to many other Marvel publications.  Secret Invasion ran from April through December 2008.  The third volume of the Dark Tower series and the first volume of The Stand series were released in October 2008.  The momentum of these efforts was followed up with the Dark Reign and Ultimatum publishing events that began in December 2008 and will continue through the remainder of 2009.  Due in part to the economic recession and tightening of credit markets, we believe that Publishing segment revenue in 2009 will be lower than in 2008 as customers’ advertising budgets and consumer spending remain constrained.
 
The Publishing segment has continued its development and investment in digital media, resulting in increased content on our Marvel Digital Comics Unlimited service, where we currently have over 7,000 previously published Marvel comic books available for viewing online in a proprietary viewer.  We have also added more content to our website, including videos, casual games, news and character biographies.  We also maintain a separate website, www.marvelkids.com, featuring Marvel characters and content developed for children ages 6-11.  Our digital media content is also distributed through arrangements with third-party websites such as YouTube, Xbox Live and iTunes.  We expect continued moderate growth and diversification in digital media revenues as we continue to increase our online presence.  However, our expectations for digital media revenue growth, planned in large part to be achieved through increased advertising revenues, have been reduced because of the current economic climate, which have had a negative impact on industry-wide online advertising.
 
Film Production
 
In 2008, we released our first two self-produced films: Iron Man on May 2 and The Incredible Hulk on June 13.  We are currently in postproduction on one film, Iron Man 2, scheduled to be released May 7, 2010, and we are in pre-production on another film, Thor, scheduled to be released May 20, 2011.  In addition, we are developing two other films, The First Avenger: Captain America and The Avengers, scheduled to be released on July 22, 2011 and May 4, 2012, respectively.  After the release of each of our films, we begin to recognize revenue and amortize our film inventory, as described below.
 
Film Inventory
 
In general, we are responsible for all of the costs of developing and producing our feature films.  The film’s distributor is responsible for the out-of-pocket costs, charges and expenses (including contingent compensation and residual costs, to a defined limit) incurred in the distribution, manufacturing, printing and advertising, marketing, publicizing and promotion of the film in all media (referred to in the aggregate as the distributor’s costs).  The distributor’s costs are not included in film inventory.
 
We capitalize all direct film production costs, such as labor costs, visual effects and set construction.  Those capitalized costs, along with capitalized production overhead and capitalized interest costs, appear on our balance sheet as an asset called film inventory.  Production overhead includes allocable costs (including salary benefits and stock compensation) of individuals or departments with exclusive or significant responsibility for the production of films.  Capitalization of production overhead and interest costs commences upon completion of the requirements for funding the production under the film facility and ceases upon completion of the production.
 
The capitalized costs of projects in development consist primarily of script development and producer costs.  In the event that a film does not begin pre-production within three years from the time of the first capitalized transaction, or if an earlier decision is made to abandon the project, all capitalized costs related to these projects are expensed.

 
Once a film is released, using the individual-film-forecast computation method, the amount of film inventory relating to that film is amortized and included in each period’s costs of revenue in the proportion that the film’s revenue during the period bears to the film’s then-estimated total revenue, net of the distributor’s costs, over a period not to exceed ten years (ultimate revenues).  Estimates of ultimate revenues for each film are regularly reviewed and revised as necessary based on the latest available information.  Reductions in those revenue estimates could result in the write-off, or the acceleration of the amortization, of film inventory in that reporting period; increases in those revenue estimates could result in reduced amortization in that period.
 
As of September 30, 2009, our Film Production segment had unamortized film inventory of $217.4 million, primarily for our film Iron Man 2, which began production in the first quarter of 2009, and Iron Man and The Incredible Hulk, which were completed and released during 2008.
 
Film Revenue
 
The amount of revenue recognized from our films in any given period depends on the timing, accuracy and sufficiency of the information we receive from our distributors.
 
After remitting to us five percent of the film’s gross receipts, the distributor is entitled to retain a fee based upon the film’s gross receipts and to recoup all of its costs on a film-by-film basis prior to our receiving any additional share of film receipts.  Any of the distributor’s costs for a film that are not recouped against receipts for that film are borne by the distributor.  Our share of the film’s receipts, as described above, is recognized as revenue when reported due to us by the distributor.  We received minimum guarantees from local distributors in five territories in connection with the release of Iron Man and The Incredible Hulk.  In those territories, revenue was recognized when the film became available for exhibition in the respective media.
 
Revenue from the sale of home video units is recognized when our distributors report as due to us the home video sale proceeds that they have collected from retailers.  We provide for future mark-downs and returns of home entertainment product at the time the related revenue is recognized, using estimates.  Our estimates are calculated by analyzing a combination of our distributors’ historical returns and mark-down practices, our distributors’ estimates of returns of our home video units, current economic trends, projections of consumer demand for our home video units and point-of-sale data available from retailers.  We periodically review our estimates using the latest information available.
 
Revenue from both free and pay television licensing agreements is recognized at the time the production is made available for exhibition in those markets.
 
Film Facility
 
The film facility enables us to independently finance the development and production costs of up to ten feature films, including films that may feature the following Marvel characters, whose theatrical film rights are pledged as collateral to secure the film facility.
 
 
·
Ant-Man
 
·
Black Panther
 
·
Captain America
 
·
Cloak & Dagger
 
·
Doctor Strange
 
·
Hawkeye
 
·
Iron Man
 
·
Nick Fury
 
·
Power Pack
 
·
Shang-Chi
 
·
The Avengers
 
·
The Incredible Hulk

 
Also included as collateral for the film facility are the theatrical film rights to many of the supporting characters that would be most closely associated with the featured characters and character families. For example, the theatrical film rights to The Incredible Hulk’s girlfriend, Betty Ross, and his nemesis, Abomination, are both pledged as collateral to the film facility.
 
We are currently in pre-production of a movie based on the character Thor and expect to obtain the consent of the film facility lenders to finance and produce that film through the film facility, in which case we will pledge the theatrical film rights to Thor and various related characters as additional collateral to secure the film facility.
 
While theatrical films featuring the characters listed above may be financed and produced by us only through the film facility, we retain all other rights associated with those characters. In addition, we may continue to license our other characters for movie productions by third parties, obtain financing to produce movies based on those other characters ourselves or with others or, with the consent of the film facility lenders, finance and produce films based on those other characters through the film facility.
 
We fund, from working capital and other sources, the incremental overhead expenses and costs of developing each film to the stage at which the conditions for an initial borrowing for the film are met under the film facility.  If the film’s initial funding conditions are met under the film facility, we are able to borrow up to 67% of our budgeted production costs including an amount equal to our incremental overhead expenses related to that film, but not exceeding 2% of the film’s budget.  If the initial funding conditions are not met, we will be unable to borrow these amounts under the film facility.  Beginning with our third film (Iron Man 2), upon meeting the film’s initial funding conditions, we are required to fund 33% of that film’s budget using non-film production operating cash.  For Iron Man 2, this amount was funded and was all spent on this production as of September 30, 2009.  In 2008, we entered into a studio distribution agreement with Paramount Pictures Corporation under which Paramount agreed to distribute five of our films (extendable to six under certain circumstances) and to provide advertising and marketing efforts for each film.
 
Critical Accounting Policies

Recent Accounting Standards Adopted in 2009
 
In June 2009, the FASB issued authoritative guidance (the “Codification”), which was launched on July 1, 2009 and became the single source of authoritative nongovernmental GAAP, superseding existing FASB, AICPA, Emerging Issues Task Force (EITF) and related literature.  The Codification eliminates the GAAP hierarchy and establishes one level of authoritative GAAP.  All other literature is considered non-authoritative.  This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The implementation of this guidance changed how we disclose authoritative accounting pronouncements in the notes to our consolidated financial statements.
 
In December 2007, the FASB issued authoritative guidance on noncontrolling interests.  The guidance clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements and requires disclosure, on the face of the consolidated statements of income, of the amounts of consolidated net income attributable to the company and to the noncontrolling interests.  This guidance is effective for fiscal years beginning on or after December 15, 2008.  On January 1, 2009, we adopted the provisions of this guidance.  The implementation of this guidance did not have a material impact on our consolidated financial statements or results of operations.  The 2008 financial information has been revised so that the basis of presentation is consistent with the 2009 financial information.
 
In February 2008, the FASB issued amendments to authoritative guidance on fair value measurements, which deferred the effective date of authoritative guidance on fair value measurements for all nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008.  On January 1, 2009, we adopted these amendments to this authoritative guidance.  On January 1, 2008, we adopted the provisions of this authoritative guidance on fair value measurements related to financial assets and liabilities as well as other assets and liabilities carried at fair value on a recurring basis.  The implementation of this authoritative guidance and its amendments did not have a material impact on our consolidated financial statements or results of operations.

 
In December 2007, the FASB issued authoritative guidance on business combinations.  The guidance establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, the goodwill acquired and any noncontrolling interest in the acquiree.  This guidance also establishes disclosure requirements to enable the evaluation of the nature and financial effect of the business combination.  This guidance is effective for fiscal years beginning after December 15, 2008.  On January 1, 2009, we adopted this guidance.  The implementation of this guidance did not have any impact on our consolidated financial statements or results of operations.
 
The FASB issued additional authoritative guidance on business combinations in March 2009, specifically, for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing contingent consideration assumed as part of the business combination.  This guidance was effective as of January 1, 2009.  The implementation of this authoritative guidance did not have any impact on our consolidated financial statements or results of operations.  However, any business combinations entered into in the future may impact our consolidated financial statements as a result of the potential earnings volatility due to the changes described above.
 
In May 2009, the FASB issued authoritative guidance on subsequent events, which establishes the accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued.  This guidance was effective beginning with our second quarter financial reporting and did not have a material impact on our consolidated financial statements or results of operations (see Note 13).
 
In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments, which was effective for the Company on June 30, 2009.  The amended guidance requires a publicly traded company to include disclosures about fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods.  In addition, the guidance requires an entity to disclose either in the body or in the accompanying notes of its summarized financial information the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position.  The adoption of this amended guidance did not have any impact on our consolidated financial statements or results of operations.
 
Recent Accounting Standards Not Yet Adopted
 
In December 2008, the FASB amended authoritative guidance on retirement benefits and provided guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan.  The amended guidance is effective for fiscal years ending after December 15, 2009.  We are currently evaluating the potential impact of this amended guidance on our consolidated financial statements.
 
In September 2009, the EITF reached a consensus related to revenue arrangements with multiple deliverables.  The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition and will be effective for the Company on January 1, 2011. The updated guidance will revise how the estimated selling price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-alone value.  In addition, the revised guidance will require additional disclosures about the methods and assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those arrangements.  We are currently evaluating the potential impact of the amended guidance on our consolidated financial statements or results of operations.



Three-month period ended September 30, 2009 compared with the three-month period ended September 30, 2008

Net Sales

   
Three Months ended September 30,
       
   
2009
   
2008
   
% Change
 
   
(dollars in millions)
       
                   
Licensing
  $ 48.9     $ 58.1       (16 )%
Publishing
    32.0       34.0       (6 )%
Film Production
    24.8       90.2       (73 )%
All Other
          0.2       N/A  
Total
  $ 105.7     $ 182.5       (42 )%

Our consolidated net sales of $105.7 million for the third quarter of 2009 were $76.8 million lower than net sales in the third quarter of 2008, primarily reflecting decreases in the Film Production segment and Licensing segment net sales.

Licensing segment net sales decreased $9.2 million during the third quarter of 2009, reflecting a $6.7 million decrease in foreign licensing revenue and a $5.8 million decrease in Joint Venture revenue (to $2.4 million) related to the 2007 release of Spider-Man 3.  These decreases were primarily due to the recognition in the third quarter of 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.  The third quarter of 2009 Licensing segment net sales included $6.3 million of royalty and service fee revenues from Hasbro compared with $12.0 million included in the third quarter of 2008, a period that benefited from the Summer 2008 releases of Iron Man and The Incredible Hulk movies.  These decreases were partially offset by a $1.9 million increase in Studio licensing revenue, primarily associated with the X-men movie properties.

Net sales from the Publishing segment decreased $2.0 million to $32.0 million for the three months ended September 30, 2009, primarily relating to a $2.7 million decrease in custom publishing sales and a $0.5 million decrease in advertising sales as compared to the same period in 2008.  These decreases were offset by a $1.6 million increase in our sales of trade paperbacks to the book market, as a result of an increase in new titles released during the current quarter.

Net sales from the Film Production segment, related to Iron Man and The Incredible Hulk, decreased $65.4 million to $24.8 million for the three months ended September 30, 2009.  Net sales from the Film Production segment in the third quarter of 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, and, in the third quarter of 2008, reflected theatrical box office revenues from the theatrical release of these films, which were both released in the second quarter of 2008, and the opening of the home video window in certain international pre-sold territories for Iron Man.

Net sales included in 2008 All Other consisted of our then remaining direct toy manufacturing operations, which we exited in early 2008.


Cost of Revenues

 
Three Months ended September 30,
 
 
2009
 
2008
 
 
Amount
   
% of Net
Segment
Sales
 
Amount
   
% of Net
Segment
Sales
 
 
(dollars in millions)