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.

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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 Accounts receivable, net Inventories Deferred income taxes Income tax receivable Prepaid expenses and other Total current assets Property, plant and equipment, net Goodwill and other intangibles, net Investment in and advances to unconsolidated subsidiaries Deferred charges and other Total assets

Exhibit 4

$35.90 257.2 99.1 32.5 18.2 58.2 501.1 87.7 595.7

$37.00 ###### ###### ###### 240 189.5 77.9 69 82.4 51 23.2 16.3 50.4 7.3 8.3 12.3 24.6 42.9 31 6.1 2.2 477.3 296.9 132.5 110.4 71.3 603.6 39.7 433.6 12.4 299 10.9 302

3.2 3.2 20.6 14.2 72.7 57.6 37.9 13.9 16.7 $1,260.4 $1,213.0 $828.7 $472.0 $440.0

Liabilities and Stockholders' Equity Current Liabilities: Accounts payable Accrued expenses and other Short-term borrowings Current portion of long-term debt Total current liabilities Long-term debt Other long-term liabilities Total liabilities Minority interest in Toy Biz Stockholders' Equity: Preferred stock, $.01 par value; 50,000,000 shares authorized, none issued Common stock, $0.1 par value; 250,000,000 shares authorized, 101,702,664 and 100,655,724 shares issued and outstanding on Dec. 31, 1995 and 1994, respectively Additional paid-in capital Retained earnings Cumulative translation adjustment Total stockholders' equity Total liabilities and stockholders' equity

$95.80 $104.80 ###### ###### ###### 170.1 194.8 110.8 44.5 64.3 28.7 625.8 5.2 20.2 45.1 35.1 920.4 304.8 200.6 109.5 114.3 56.6 977 102.9 581.3 48.7 934.8 70.4 364.1 21 585.7 205.1 10.1 324.7 201.2 39.8 355.3 -

1 93.1 86.1 0.3 180.5

1 92.4 114.1 0.3 207.8

1 81.2 162.5 -1.7 243

1 47 100.7 -1.4 147.3

1 39.8 44.7 -0.8 84.7

$1,260.4 $1,213.0 $828.7 $472.0 $440.0

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Exhibit 4

Source:

Company Annual Reports

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

Exhibit 5

9 Months Ending Sept. 1996 Net revenues Cost of sales SG&A expenses Restructuring charges Amortization of goodwill, intangibles and deferred charges Interest expense, net Other income Equity in net income of unconsolidated subs. (Loss) Income before provision for income taxes, minority interest and extraordinary item

For the Years Ended December 31, 1995 1994 1993 1992 1991

$581.2 ###### ###### ###### ###### ###### 372.4 538.3 275.3 215.3 112.6 58.2 168 231.3 119.7 85.3 43.4 21.4 25 32.4 42.7 19.8 (0.6) 29.5 43.2 14.3 1.7 10.9 16.5 1.7 10.2 10.1 14.6 4.5 4.6 6.5 2.1 3.5 -

(15.1)

(22.0) 5.7 (27.7) 17.4

104.3 42.5 61.8 61.8 $61.8

94.4 38.4 56 56 $56.0

56.7 24.1 32.6 32.6 $32.6

29.9 13.4 16.5

Provision for income taxes (0.7) (Loss) income before minority interest and extraordinary(14.4) item Minority interest in earnings of Toy Biz 13.5 (Loss) income before extraordinary item Extraordinary item, net of taxes Net (loss) income (Loss) earnings per share: (Loss) income before extraordinary item Extraordinary item Net (loss) income Weighted average number of common and common equivalent shares outstanding (in millions)

($27.9) ($45.1) (3.3) ($27.9) ($48.4)

16.5 (0.4) $16.1

($0.27) ($0.45) $0.60 $0.55 $0.33 $0.17 - $0.03 - (0.01) ($0.27) ($0.48) $0.60 $0.55 $0.33 $0.16

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 Face Issue Issue Marvel Holdings Senior secured Discount notes $517.4) 11.25% $0.774 $0.175 Value Interest Rate Market Price on 10/8/1996
a

Collateral Shares (millions) 1/31/1997

Percent of Old Shares

b

Percent of New Shares

c

48.0

47.2%

9.1%

Marvel Parent Holdings $251.7) 11.875% Senior secured Discount notes Marvel III Holdings Senior secured notes Total $125.0) 9.125%

$0.781

$0.140

20.0

19.6%

3.8%

$0.899

$0.139

9.3

9.1%

1.8%

$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 b c

Market prices are quoted per dollar of face value. Total number of existing ("Old") shares was 101.8 million. Marvel Holdings held an additional 2.93 million shares of Marvel stock for other creditors.

Total number of post-reorganization ("New") shares was 528.8 million.

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Exhibit 7

Exhibit 7

Liquidation Analysis ($ millions)

Gross proceeds from disposition of operating assets Chapter 7 costs Transaction costs
b c

$447.0

4.5 6.0 10.5 436.5 192.1 244.4

d

Case related administrative expenses Total Chapter 7 costs

Net proceeds from disposition of operating assets Less Panini debt Net proceeds available for other creditors Net proceeds available for other creditors from sale of Toy Biz shares Total net proceeds available for other creditors Secured claims Percent recovery against secured claims (mainly debt) Proceeds available for other claims Other administrative claims Percent recovery against other administrative claims Unsecured deficiency claims Percent recovery against unsecured deficiency claims Proceeds available for common equity shareholders
Source: Marvel Entertainment Group, Inc., Disclosure Statement Relating to First Amended Joint Plan of Reorganization, Wilmington, Delaware, January 28, 1997.
f,g e

124.7 369.1 535.4 68.9% 0.0% 94.1 0% 166.3 0% $0.0

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. Investment banks' fees, legal fees, closing costs and other expenses were estimated at 1% of gross sales proceeds. Includes estimated Chapter 7 trustee's fees, professional costs and other associated administrative expenses 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. Amounts projected to be outstanding at March 31, 1997. Includes $5.0 million of severance payments to certain officers and employees

e f

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Exhibit 7

Includes estimates for accounts payable and other accrued liabilities.

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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: Cash Accounts receivable, net Inventories, net Deferred income taxes Income tax receivable Prepaid expenses and other Total current assets Property, plant and equipment, net Goodwill and other intangibles, net Deferred charges and other Total assets LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable Accrued expenses and other Short-term borrowings DIP financing Current portion of long-term debt Total current liabilities Long-term debt $13.3 210.0 77.5 40.1 11.1 55.0 $407.0 78.7 317.4 65.9 $869.0 202.3
b

$33.5

$52.0

$98.8 210.0 77.5 88.6 11.1 55.0 $541.0 78.7 519.7

48.5

b,2

8.0

73.9 $1,213.3

$99.4 143.1 40.0 50.0 635.4 $967.9 20.0

b

$99.40 10.0
b,1

153.1 40.0 (50.0) (624.7) 624.7

c

10.7 $303.2 754.7

d c

110.0 Other long-term liabilities Total liabilities Minority interest in Toy Biz Stockholders equity: Common stock Additional paid-in capital Retained earnings Total stockholders equity Total liabilities and stockholders equity 49.7 $1,017.6 $109.0 (1.7)
b

48.0 $1,105.9

(109.0)

1.0 93.1 (351.7) ($257.6) $869.0 365.0

a

1.0 458.1 (351.7) $107.4 $1,213.3

Source:

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

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Exhibit 9

Exhibit 9

Projected Financial Data (in millions)

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

INCOME STATEMENT Net revenues Cost of sales Gross profit SG&A expense Depreciation and amortization Operating income Reorganization expense Amortization of goodwill Interest expense, net Toy Biz performance plan expenses Equity in net (loss) income in unconsolidated subsidiaries (Loss) income before taxes Provision for income taxes (Loss) before minority interest Minority interest in Toy Biz Net (loss) income CASH FL OW DATA Provision for deferred taxes Undistributed earnings in unconsolidated subsidiaries Minority interest in Toy Biz earnings Change in net working capital Capital expenditures B AL ANCE SHEET DATA Cash balance Goodwill and other intangibles Total assets Short-term debt Long-term debt Refinanced long-term debt Shareholders' equity Total capital Debt-to-Total Capital (book value) 107.4 912.8 88.2% 102.7 905.2 88.7% 120.3 893.4 86.5% $98.8 519.7 1,213.3 40.0 765.4 $19.1 504.8 1,213.5 33.0 769.5 $2.0 484.9 1,234.5 28.7 744.4 $2.0 465.1 1,230.3 40.8 612.2 65.5 108.3 826.8 86.9% $2.0 445.2 1,206.6 37.3 389.8 281.2 135.9 844.7 83.9% $2.0 425.4 1,191.6 37.3 120 492.5 169.4 819 79.3% $9.8 0.1 3.0 (75.4) (83.0) (11.5) (67.4) 44.3 (47.4) (42.0) (46.7) 2.0 (45.1) $8.3 0.2 $6.3 (2.2) $8.1 (3.2) $5.8 (4.4) (0.1) (25.8) 6.9 (32.7) 3.0 (35.7) 17.5 (12.1) 27.6 33.6 (0.2) 42.3 24.8 17.5 $929.8 550.4 379.4 262.4 34.5 82.5 6.7 30.5 71.0 21.8 68.0 21.5 64.6 55 2.2 (7.5) 4.6 (12.1) 3.2 57.4 29.8 27.6 4.4 67.7 34.1 33.6 21.2 61.0 21.5 56.6 $1,128.3 647.2 481.1 305.4 43.4 132.3 $1,155.8 666.9 488.9 313.4 44.1 131.4 $1,200.6 694.9 505.7 324.5 44.8 136.4 $1,247.5 724.2 523.3 336 45.9 141.4

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.

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Exhibit 9

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

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Exhibit 9

1
1997

2
1998

3
1999

4
2000

5
2001

NI Add Dep. Less WC change Pre tax interest Less Cap Ex. FCF Disount CF Terminal Value Enterprise value Less debt

(35.7) 34.5 (75.4) 71.0 (83.0) 86.2 79.37 1501.86 637.9 863.96

17.5 43.4 (11.5) 68.0 (67.4) 71.8 71.80

(12.1) 44.1 44.3 64.6 (47.4) -29.5 -29.50

27.6 44.8 (42.0) 61.0 (46.7) 100.1 100.10

33.6 45.9 2.0 56.6 (45.1) 66.0 66.00 1214.08956

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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 6 month 1-year 2-year 5-year 10-year 10-year inflation indexed bonds 30 year
a

5.04% 5.10 5.62 6.03 6.36 6.62 3.33 6.89

Yields on Long-term Corporate Bonds Aaa Aa A Baa Interest Rates Federal Funds 3-month Commercial Paper 3-month Certificate of Deposit Prime Rate Marvel Entertainment Group Asset Beta
b

7.48 7.69 7.75 8.12

5.18 5.45 5.42 8.25 0.65

Source: Notes:
a

Bloomberg, Federal Reserve Bulletin, Casewriter estimates.

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. 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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