Copyright

Bankruptcy and Restructuring at Marvel Entertainment Group

Harvard Business School Case 9-298-059
Case Software 2-298-715

Copyright © 1998 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation and
was prepared using only public sources and has not been approved by
Marvel Entertainment Group.

Page 1
 Exhibit 4

Exhibit 4 Marvel Entertainment Group, Inc.—Consolidated Balance Sheets ($ millions)

9 Months
Ending For Years Ended December 31,
Sept. 1996 1995 1994 1993 1992

Assets
Current Assets:
Cash $35.90 $37.00 ###### ###### ######
Accounts receivable, net 257.2 240 189.5 77.9 69
Inventories 99.1 82.4 51 23.2 16.3
Deferred income taxes 32.5 50.4 7.3 8.3 12.3
Income tax receivable 18.2 24.6 - - -
Prepaid expenses and other 58.2 42.9 31 6.1 2.2
Total current assets 501.1 477.3 296.9 132.5 110.4

Property, plant and equipment, net 87.7 71.3 39.7 12.4 10.9
Goodwill and other intangibles, net 595.7 603.6 433.6 299 302
Investment in and advances to
unconsolidated
subsidiaries 3.2 3.2 20.6 14.2 -
Deferred charges and other 72.7 57.6 37.9 13.9 16.7
Total assets $1,260.4 $1,213.0 $828.7 $472.0 $440.0

Liabilities and Stockholders' Equity

Current Liabilities:
Accounts payable $95.80 $104.80 ###### ###### ######
Accrued expenses and other 170.1 194.8 110.8 44.5 64.3
Short-term borrowings 28.7 - - - -
Current portion of long-term debt 625.8 5.2 20.2 45.1 35.1
Total current liabilities 920.4 304.8 200.6 109.5 114.3

Long-term debt - 581.3 364.1 205.1 201.2

Other long-term liabilities 56.6 48.7 21 10.1 39.8
Total liabilities 977 934.8 585.7 324.7 355.3
Minority interest in Toy Biz 102.9 70.4 - - -
Stockholders' Equity:
Preferred stock, $.01 par value;
50,000,000
sharesstock,
Common authorized, none
$0.1 par issued
value; - - - - -
250,000,000
shares authorized, 101,702,664
and
100,655,724 shares issued and
outstanding on Dec. 31, 1995
and 1994,
respectively 1 1 1 1 1
Additional paid-in capital 93.1 92.4 81.2 47 39.8
Retained earnings 86.1 114.1 162.5 100.7 44.7
Cumulative translation adjustment 0.3 0.3 -1.7 -1.4 -0.8
Total stockholders' equity 180.5 207.8 243 147.3 84.7
Total liabilities and stockholders'
equity $1,260.4 $1,213.0 $828.7 $472.0 $440.0

Page 2
 Exhibit 4

Source: Company Annual Reports

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 Exhibit 5

Exhibit 5 Marvel Entertainment Group, Inc.—Consolidated Statement of Operations ($ millions)

9 Months
Ending For the Years Ended December 31,
Sept. 1996 1995 1994 1993 1992 1991

Net revenues $581.2 ###### ###### ###### ###### ######

Cost of sales 372.4 538.3 275.3 215.3 112.6 58.2
SG&A expenses 168 231.3 119.7 85.3 43.4 21.4
Restructuring charges 25 - - - -
Amortization of goodwill, intangibles
and deferred charges 32.4 29.5 10.9 10.1 4.6 2.1
Interest expense, net 42.7 43.2 16.5 14.6 6.5 3.5
Other income 19.8 14.3 1.7 - - -
Equity in net income of unconsolidated subs. (0.6) 1.7 10.2 4.5 -

(Loss) Income before provision for

income taxes, minority interest and
extraordinary item (15.1) (22.0) 104.3 94.4 56.7 29.9

Provision for income taxes (0.7) 5.7 42.5 38.4 24.1 13.4
(Loss) income before minority interest and extraordinary(14.4)
item (27.7) 61.8 56 32.6 16.5
Minority interest in earnings of Toy Biz 13.5 17.4 - - -

(Loss) income before extraordinary item ($27.9) ($45.1) 61.8 56 32.6 16.5

Extraordinary item, net of taxes - (3.3) - - - (0.4)

Net (loss) income ($27.9) ($48.4) $61.8 $56.0 $32.6 $16.1

(Loss) earnings per share:

(Loss) income before extraordinary item ($0.27) ($0.45) $0.60 $0.55 $0.33 $0.17
Extraordinary item - $0.03 - - - (0.01)
Net (loss) income ($0.27) ($0.48) $0.60 $0.55 $0.33 $0.16

Weighted average number of common

and common equivalent shares outstanding
(in millions) 101.8 101.3 103.7 102.6 98.6 97.7

Source: Company Annual Reports

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 Exhibit 6

Exhibit 6 Marvel Public Debt at the Time of the Reorganization Plan

Promised Collateral Percent Percent

a
Face Interest Market Price on Shares of Old of New
b c
Issue Value Rate 10/8/1996 1/31/1997 (millions) Shares Shares

Issue

d
Marvel Holdings $517.4) 11.25% $0.774 $0.175 48.0 47.2% 9.1%
Senior secured
Discount notes

Marvel Parent Holdings $251.7) 11.875% $0.781 $0.140 20.0 19.6% 3.8%
Senior secured
Discount notes

Marvel III Holdings $125.0) 9.125% $0.899 $0.139 9.3 9.1% 1.8%
Senior secured notes

Total $894.1) 77.3 75.9% 14.6%

Source: Bloomberg, Marvel Entertainment Group, Inc., Disclosure Statement Relating to First Amended Joint
Plan of Reorganization, Wilmington, Delaware, January 28, 1997.

Notes:

a
Market prices are quoted per dollar of face value.
b
Total number of existing ("Old") shares was 101.8 million.
c
Total number of post-reorganization ("New") shares was 528.8 million.
d
Marvel Holdings held an additional 2.93 million shares of Marvel stock for other creditors.

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 Exhibit 7

Exhibit 7 Liquidation Analysis ($ millions)

a
Gross proceeds from disposition of operating assets $447.0

Chapter 7 costs
b
Transaction costs 4.5
c
Case related administrative expenses 6.0
Total Chapter 7 costs 10.5

Net proceeds from disposition of operating assets 436.5

Less Panini debt 192.1

Net proceeds available for other creditors 244.4

d
Net proceeds available for other creditors from sale of Toy Biz shares 124.7
Total net proceeds available for other creditors 369.1

e
Secured claims 535.4
Percent recovery against secured claims (mainly debt) 68.9%

Proceeds available for other claims 0.0%

f,g
Other administrative claims 94.1
Percent recovery against other administrative claims 0%
Unsecured deficiency claims 166.3
Percent recovery against unsecured deficiency claims 0%

Proceeds available for common equity shareholders $0.0

Source: Marvel Entertainment Group, Inc., Disclosure

Statement
Relating to First Amended Joint Plan of
Reorganization,
Wilmington, Delaware, January 28, 1997.

Notes:

a
Assumes that purchasers discount the low end of the going concern value by 20% to reflect the "fire sale"
nature of the liquidation. The disposition is assumed to be completed at the end of the third quarter of 1997.
b
Investment banks' fees, legal fees, closing costs and other expenses were estimated at 1% of gross
sales proceeds.
c
Includes estimated Chapter 7 trustee's fees, professional costs and other associated
administrative expenses
d
Assumes sale of 7.39 million shares at $17.75 per share, the closing price of Toy Biz stock on
November 11, 1996. Gross proceeds are reduced by 5% to reflect the costs associated with such sales.
e
Amounts projected to be outstanding at March 31, 1997.
f
Includes $5.0 million of severance payments to certain officers and employees

Page 6
 Exhibit 7

g
Includes estimates for accounts payable and other accrued liabilities.

Page 7
 Exhibit 8

Exhibit 8 Marvel Entertainment Group, Inc. - Projected Pro Forma Consolidated Balance Sheet

Proposed Proposed Projected Pro

Projected Toy Biz Bank Debt Forma as
Preconfirmation Investment Agreement Reorganized

ASSETS
Current assets:
a c
Cash $13.3 $33.5 $52.0 $98.8
Accounts receivable, net 210.0 210.0
Inventories, net 77.5 77.5
b,2
Deferred income taxes 40.1 48.5 88.6
Income tax receivable 11.1 11.1
Prepaid expenses and other 55.0 55.0
Total current assets $407.0 $541.0

Property, plant and equipment, net 78.7 78.7

b
Goodwill and other intangibles, net 317.4 202.3 519.7
c
Deferred charges and other 65.9 8.0 73.9
Total assets $869.0 $1,213.3

LIABILITIES AND
STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $99.4 $99.40
b,1
Accrued expenses and other 143.1 10.0 153.1
Short-term borrowings 40.0 40.0
c
DIP financing 50.0 (50.0) —
d
Current portion of long-term debt 635.4 (624.7) 10.7
Total current liabilities $967.9 $303.2
b d
Long-term debt — 20.0 624.7 754.7
c
110.0

b
Other long-term liabilities 49.7 (1.7) 48.0
Total liabilities $1,017.6 $1,105.9

b
Minority interest in Toy Biz $109.0 (109.0)

Stockholders’ equity:
Common stock 1.0 1.0
a
Additional paid-in capital 93.1 365.0 458.1
Retained earnings (351.7) (351.7)
Total stockholders’ equity ($257.6) $107.4

Total liabilities and stockholders’ equity $869.0 $1,213.3

Source: Marvel Entertainment Group, Inc., Disclosure Statement Relating to First Amended Joint Plan of
Reorganization, Wilmmington, Delaware, January 28, 1997.

Page 8
 Exhibit 9

Exhibit 9 Projected Financial Data (in millions)

At
Clo s in g Year En d in g Dec em b er 31,
3/31/1997 1997 1998 1999 2000 2001

INCOME STATEMENT
Net revenues $929.8 $1,128.3 $1,155.8 $1,200.6 $1,247.5
Cost of sales 550.4 647.2 666.9 694.9 724.2
Gross profit 379.4 481.1 488.9 505.7 523.3

SG&A expense 262.4 305.4 313.4 324.5 336

Depreciation and amortization 34.5 43.4 44.1 44.8 45.9
Operating income 82.5 132.3 131.4 136.4 141.4

Reorganization expense 6.7

Amortization of goodwill 30.5 21.8 21.5 21.2 21.5
Interest expense, net 71.0 68.0 64.6 61.0 56.6
Toy Biz performance plan expenses 55
Equity in net (loss) income in unconsolidated subsidiaries (0.1) (0.2) 2.2 3.2 4.4
(Loss) income before taxes (25.8) 42.3 (7.5) 57.4 67.7

Provision for income taxes 6.9 24.8 4.6 29.8 34.1

(Loss) before minority interest (32.7) 17.5 (12.1) 27.6 33.6
Minority interest in Toy Biz 3.0
Net (loss) income (35.7) 17.5 (12.1) 27.6 33.6

CASH FL OW DATA
Provision for deferred taxes $9.8 $8.3 $6.3 $8.1 $5.8
Undistributed earnings in unconsolidated subsidiaries 0.1 0.2 (2.2) (3.2) (4.4)
Minority interest in Toy Biz earnings 3.0
Change in net working capital (75.4) (11.5) 44.3 (42.0) 2.0
Capital expenditures (83.0) (67.4) (47.4) (46.7) (45.1)

B AL ANCE SHEET DATA

Cash balance $98.8 $19.1 $2.0 $2.0 $2.0 $2.0
Goodwill and other intangibles 519.7 504.8 484.9 465.1 445.2 425.4
Total assets 1,213.3 1,213.5 1,234.5 1,230.3 1,206.6 1,191.6

Short-term debt 40.0 33.0 28.7 40.8 37.3 37.3

Long-term debt 765.4 769.5 744.4 612.2 389.8 120
Refinanced long-term debt 65.5 281.2 492.5
Shareholders' equity 107.4 102.7 120.3 108.3 135.9 169.4
Total capital 912.8 905.2 893.4 826.8 844.7 819

Debt-to-Total Capital (book value) 88.2% 88.7% 86.5% 86.9% 83.9% 79.3%

Source: Marvel Entertainment Group, Inc., Disclosure Statement Relating to First Amended Joint Plan of Reorganization,
W ilmington, Delaware, January 28, 1997.

Note: Projections assume Marvel acquires Toy Biz for $326.8 million and issues 427 million common shares to Andrews Group
Incorporated for $365 million.

Page 9
 Exhibit 9

WACC
Asset Beta 0.65
Debt 637.9
Equity 207.8
Beta 1.847213667
Rf 5.04%
Risk premium 5%
Ke 14.28%
Kd 11.25%
WACC 8.60%

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 Exhibit 9

1 2 3 4 5
1997 1998 1999 2000 2001
NI (35.7) 17.5 (12.1) 27.6 33.6
Add Dep. 34.5 43.4 44.1 44.8 45.9
Less WC change (75.4) (11.5) 44.3 (42.0) 2.0
Pre tax interest 71.0 68.0 64.6 61.0 56.6
Less Cap Ex. (83.0) (67.4) (47.4) (46.7) (45.1)
FCF 86.2 71.8 -29.5 100.1 66.0
Disount CF 79.37 71.80 -29.50 100.10 66.00
Terminal Value 1214.08956
Enterprise value 1501.86
Less debt 637.9
863.96

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 Exhibit 10

Exhibit 10 Selected Financial Market Data

January 31, 1997

Yields on U.S. Treasury Bills, Notes, and Bonds

3 month 5.04%
6 month 5.10
1-year 5.62
2-year 6.03
5-year 6.36
10-year 6.62
a
10-year inflation indexed bonds 3.33
30 year 6.89

Yields on Long-term Corporate Bonds

Aaa 7.48
Aa 7.69
A 7.75
Baa 8.12

Interest Rates
Federal Funds 5.18
3-month Commercial Paper 5.45
3-month Certificate of Deposit 5.42
Prime Rate 8.25

b
Marvel Entertainment Group Asset Beta 0.65

Source: Bloomberg, Federal Reserve Bulletin, Casewriter estimates.

Notes:

a
On January 29, 1997, the U.S. Treasury Department issued the first inflation-indexed
Treasury Notes which provide a guaranteed rate of return above the rate of inflation.

b
The equity beta used to calculate the asset beta was estimated using daily data from
1/1/95 to 6/30/96 and the Scholes-Williams adjustment for non synchronous trading.

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