Marvel Enterprises
Conference Call Notes

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By TheArch
April 28, 2005

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I keep loosing the Webcast and so my notes are spotty; and I can't type as fast as they can talk; I apologize in advance. But the tone seemed very upbeat, both by the management team and by the analysts. Here's what I've got from the call (they said there will be a press release later):

Financial results
EPS, Margins down due to settlement; excluding this, margins would be up. Cash on the balance sheet of $245 million, more than $2 per share.

"The Slate:"
Goal is to harvest the "sizeable money" that's left on the table by licensing the films. Gives more control to Marvel. With Iron Man, for example, this gives Marvel control on when and how to release, vs. being subjected to the studio's decisions. The non-recourse aspect is very important: Marvel is not taking the risk, only providing collateral.

Excellent partner in Paramount. Agreement is to have creative input and control, build the library; films will include Captain America, Nick Fury, Avengers, big tent pole movies that will be franchises; we view this strategic alliance as valuable; first movie will be introduced end of 2007, 2008.

Our schedule:
Less than stellar performer in Elektra, but DVD made headlines and was extremely successful, this bodes well for the brand and characters.
Fantastic Four: movie is beautiful, energy is building behind it; our trailer is attached to Star Wars; Fox promoting in big way, plus X-Box, Burger King, animated show after the release of the DVD, new toy line to continue in between films

XMen 3, Memorial Day; bigger than X-2, movie will be great.
Ghost Rider, with SONY
Punisher 2
lost the connection with Avi; okay, he's back

That's all he said about 2006, (got pressed for time, had a problem with his connections?) He came back and added that Iron Man moved to 2007, maybe (emphasized that this is a big part of the reason for the change in strategy.)

David Meisel picked it up here:
Emphasized that Marvel has no exposure to the debt. It's all debt, no equity from Marvel. Paramount gets theatrical distribution, not film rights. Marvel has green light ability, and works with Paramount in marketing and distribution.

Major financial benefits:
Marvel gets the profits, from all sources.
Marvel gets to build its own film library.
Marvel gets an "off the top" producing fee, similar rates as though done through licensing.
Marvel gets all ancilliary revenues.

In addition, Marvel gets greater control of its destiny, production, scheduling.

Paramount handles distribution and marketing costs, and gets a distribution fee for their services.

Floor opened to questions:

Crockett from JP Morgan: talk a little more about the accounting for this, for example, will Marvel be flowing through the accounting through its books, and be exposed to the accounting risks?

Ken: all will be through the Marvel books, looses, if any, will be on the books but funded by the facility. We'll provide complete transparency. Won't be starting before 2007.

Crockett again: Have you done any audience testing for F$?

Avi: we haven't done any audience testing before; we do Q ratings (testing awareness); there is tremendous awareness (LA Times survey, trailers, we'll be everywhere, all the big movies.

Jefferies analyst: 1) Variety said that SONY was looking to get rights to Kill Raven; comments about building non-core characters beyond the perception that Marvel has only 10 characters? 2) Tax situation comments? 3) Will this new strategy give Marvel more leverage with other studio partners?

Avi: 1) and 3) the Kill Raven announcement; yes it's something SONY wants to do; at this point, we're not entering into an agreement on this. We know we have more than ten characters, and there's lots of interest from the studios. Many more characters we're looking to develop. We have very good relationships with the studios and we'll continue to nurture them, but under this new agreement, we can move very carefully on what we want to license, and if we do license it will be under very different terms.

Ken: 2) on the tax rate, the rate you should use going forward is 38%.

Weilel Partners analyst: 1) on the Paramount deal, is Paramount getting industry standards? 2) Comment on other revenues attached to this 3) David or Avi, staff capacity needed to handle this effort 4) looks like some overages, comment? 5) Spiderman.

David: on the Paramount deal, we're not divulging details at this point; we're very happy with them. On the revenue, it's the normal film rights connected to the film, nothing else (I didn't get this right, I don't think).

Avi: Each movie becomes its own entity, and so each movie will have its own staffing; at our studio, we'll have a head of physical production, which we don't need right a way.

Ken: No overages from Punisher here; as far as international syndication from Spiderman, nothing material yet.

Southwest Securities analyst: (not there)

S G Cowen analyst: Avi, are you comfortable that F4 will get to multiple million dollar mark worldwide. 2) what do you think internally about 2006, how it will be 3) how will terms of Paramount deal jibe with other deals? will P & A hit Marvel's income statement?

Avi: F4 is a big title, getting the full court press. We expect to do very good business. I'm not forecasting, but if you look at the title, the date, we think it will do very well, but you form your own expectations about it. I'm very comfortable with the movie, we're getting very good support for it, major marketing support (e.g., Burger King). Everything looks good.

Peter: with regards to 2006, (Avi jumped in)

Avi: Oh regarding the AVengers, If you look at it, almost everyone is a member, but the main thing, you can see Captain America, Wonder Man. It will be characters that are not currently licensed to other studios.

Peter: with regards to Iron Man, it doesn't affect the way we look at revenues. We have three films, three animated, growing wireless, a great deal of exposure for Marvel. We think we'll be as active, or more active, in 2006, and we think this will mean a very strong year.

Ken: our future costs will be net of P & A.

(analyst): 1) will debt be retained on balance sheet 2) (I missed it) 3) what drove the increase in entertainment licensing?

Peter (I think): all borrowing will be reflected on our balance sheet.

Ken (I think): all major partners paid first: first Marvel, then Paramount, then lenders. anything remaining, Marvel also receives. The fund only earns its interest, no profit participation.

Peter: the question of the upside sources) from studio activity, the various layering sources. Revenue from 9 different sources in the quarter.

(analyst): 1) we all view very positively this idea of taking greater control; any impact on toy division? 2) any idea of what size project you'll start with? 3) share buy back?

Peter: the board is very committed to buying back the shares, and that's all we can say; obviously, we're very excited about the future, but we can't disclose the strategy. We haven't been active in the past two quarters, because the "window" was closed, but now that's changed, and we will be very aggressive.

Avi: We'll probably start with something bigger, rather than smaller.

Peter: another point about the buyback: we are able to buy back outside the window in the future. There was also a question about the toy slate, how this might change things. The answer is it won't. We won't have share any with the studios, though, so very favorable impact for Marvel.

(analyst): 1) interest rate on the loan 2) incremental development costs on ______ 3) any advance payments from SONY yet for Spiderman 3? 4) Fantastic 4 ad money from Marvel

Ken (I think): you're right it's just a straight interest rate, at this point we're not disclosing;

Peter: regarding SONY, yes we did receive money from SONY, that's part of the Q1 revenue. Regarding F4, (missed answer)

(analyst): 1) Q1 results margins in toys and publishing? 2) Ghost Rider video game? 3) gross participations on the new slate, how they compare?

Peter: 1) high margins from licensing, which account for the high margins; publishing also high; 2) there will be a Ghost Rider game, but can't disclose partner yet, they want to make a big splash with it; 3) gross participations will compare very favorably, since we have participation in the profits.

(analyst): 1) collateral participation 2) does Stan Lee have an on going claim

David: the film rights are pledged, the only way the collateral becomes callable is if the whole slate...if for some reason the entire slate got into difficulties...

Peter: our settlement with Stan terminated all rights to future profits, no other claims, all settled. He'll continue to get his salary according to his contract, but both sides felt that we wanted to settle not only the past, but the future.

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