1. VALUING A DISTRESSED BUSINESS:
ABI 22nd ANNUAL SPRING MEETING
VALUING A DISTRESSED BUSINESS:
CONCEPTS EVERYONE NEEDS TO KNOW
April 17, 2004
William Q. Derrough Jefferies & Company, Inc.
Sanford L. Edlein Glass & Associates Inc.
Melissa K. Knoll KPMG LLP
Jamie G. Pierson FTI Consulting
Lynette R. Warman Jenkens & Gilchrist PC

2. VALUING A DISTRESSED BUSINESS
Foundation
The Business Plan
Business Plan Components
Valuation
Uses of valuation in bankruptcy
Basics, Approaches, Drivers
Issues to consider in distressed valuation
Art vs. Science
Subjectivity: where does it impact valuation methods?
Lessons Learned

3. VALUATION FOUNDATION The Business Plan
The plan comes first, then the capital structure and related valuation.
Plan components:
Management
Core business units
Projected financial results

4. MANAGEMENT Old management Are they the same who put it in the ditch?
Are they capable of operating under the revised operating structure?
What is their end game and reward?
Motivations
New management
Can they achieve their goals and objectives?

5. CORE BUSINESS
What business or segments are part of the on going business?
What has changed given the bankruptcy?
Products
Services
Cost
Operating processes
What external factors must be considered?
Competition
Strengths/weaknesses
Long-term dynamics
Production shifting offshore?
Currency /interest rate outlook
Commodity prices
Trade policies

6. PROJECTED RESULTS Review and challenge basic assumptions: Revenue
Operating results
EBITDA
Free cash flow
Working capital and the balance sheet
Past performance vs. projected future performance
Other
Market Share
What do projections imply? Realistic?
The telecom conundrum: 100 companies cannot each achieve 5% market share

7. USES OF VALUATION IN BANKRUPTCY
Secured Creditor Issues
Adequate protection (Section 361)
Relief from the automatic stay (Section 362)
Use, sale or lease of property – cash collateral (Section 363)
Obtaining credit – priming (Section 364)
Claim determination
Secured versus unsecured (Section 506)
Recourse versus non-recourse (Section 1111(b))

8. USES OF VALUATION IN BANKRUPTCY
Plan of Reorganization
Feasibility
Recovery for various creditor classes (i.e. “dividing up the pie”)
New equity contribution
Cram down – fair and equitable
Best interests test – liquidation value
Sale of Assets (Section 363)

9. USES OF VALUATION IN BANKRUPTCY
Accounting Treatment
SOP 90-7: Fresh start accounting – reorganization value
FAS 142: Goodwill and other intangible assets
FAS 144: Impairment or disposal of long-lived assets
Recovery Actions - Solvency Analysis
Preferences (Section 547)
Fraudulent conveyances (Section 548 and 544)
Reclamation (Section 546)

10. VALUATION – INTRODUCTION
General Premise
Present value of future benefits
Investor should only pay what one thinks benefits are worth given a rate of return
Rate of return varies depending on type of investor, asset, risk, etc.
Enterprise Approach vs. Equity Approach

11. Preferred Shareholders
VALUATION
Distribution Of Cash Flow Among Constituents
Government
Lenders
Preferred Shareholders
Company
EBIT
EBT
Earnings
Common Shareholders $
Interest
Dividends
Taxes
Dividends $

12. HYPOTHETICAL COMPANY, INC.
VALUATION
How Do You Calculate Enterprise Value?
HYPOTHETICAL COMPANY, INC.
($ in millions, except share price)
Fully Diluted Shares
100.0
Share price
$20.00
Market Value of Equity
$2,000.0
plus:
Total Debt (book)
1,500.0
less:
Converted Debt
<0.0>
Preferred Stock
200.0
Converted Preferred
Cash & Cash Equivalents
<100.0>
Minority Interest in Subsidiaries
0.0
Enterprise Value
$3,600.0

13. Non-Marketable Minority
VALUATION
Theories Behind Premiums and Discounts
Maximum value
attributable to a
strategic buyer
Sale value
MBO
LBO
IPO
Public trading
Non-public stock
Premium for
control
Minority interest
discount
Discount for lack of
marketability
Premium for strategic
value / synergies
Controlling interest
value
Discount for lack of marketability / liquidity
[NYSE vs. OTC:BB]
Non-Marketable Minority
Value
Marketable Minority
Controlling Interest
Investment Value

14. VALUATION Approaches Market approach
Comparable company – marketable minority basis
Transaction – controlling basis
Discounted Cash Flow (“DCF”) approach
Liquidation / Asset approach

15. VALUATION Drivers Quantitative characteristics Cash flow Profitability
Growth (historical and projected)
Size
Reinvestment
Liquidity
Capitalization / leverage – financial flexibility
Fixed charge coverage
Activity ratios (e.g. asset and inventory turnover, accounts receivable and accounts payable DSO, ROI, ROE, etc.)

16. VALUATION Drivers (cont.) Qualitative characteristics
Quality and depth of management
Customer and vendor concentration
Industry dynamics [Market share, competition, raw materials/commodities]
Company’s position / reputation in the industry
Diversification
Product offering
Geography
Vendor relationships
Seasonality / cyclicality
Power over vendors / customers
Ability to expand
Emergence / intensification of foreign competition

17. VALUATION Issues to Consider in Distressed Valuation
Is it financial or operational distress?
Operational distress much more difficult to rectify
Reliance on the DCF approach versus the market
“Reasonable” projection assumptions
“Hockey stick” projections
Percentage of value from terminal period
Unreliability of using beta for calculation of equity cost of capital
Capital structure – general reduction in debt as a component of the capital structure
If top line growth, how achieve results and are the cash expenses / expenditures included in the projections?
Increased capx
Increased R&D
Increased marketing

18. VALUATION Issues to Consider in Distressed Valuation (cont.)
Subjectivity
Discount to public multiples
Inclusion of small cap premium and company specific risk in cost of equity
Normalization of representative cash flows – often only way to get to positive earnings metrics
Inclusion of net operating losses (“NOLs”) – limited by cancellation of debt (“COD”) income and change of control provisions of the Internal Revenue Code
Inclusion of other non-operating assets (real estate, plants, facilities that have been previously closed)
Judges’ / courts’ recent decisions regarding valuations and the application of subjectivity (e.g. Exide)

19. VALUATION: ART VS. SCIENCE
Judge Carey’s opinion in Exide Technologies clearly stated preference for minimizing subjectivity
Does this mean valuation is a pure science? Can you just input numbers into formulas?
NO!
Subjectivity and judgment are often required, but must be grounded in analysis, reason and contextual considerations

20. WHERE DOES SUBJECTIVITY IMPACT VALUATION MOST?
Discounted Cash Flow Analysis
Discount rate used
Cost of equity
Cost of debt
Terminal Value
Multiple chosen
- Based on market comparables?
- Choosing time to sell –buy low, sell high
Market Comparables and M&A
Period for analysis (LTM, Projected)
Choice of comparables
Size, Business, Competitors not Comparables
Choice of M&A Comps
How do you look back?
“Perfect” comps?

21. LESSONS LEARNED FROM EXIDE
A company’s expected improvement in performance must be considered (LTM results vs. Projected)
Adjustments (discounts / premiums) to results of analysis must be explainable and based in some reason / fact
Consideration of macro and micro economic drivers is appropriate, but application of adjustments must be understandable
Currency, commodities, GNP, etc.
“Lack of liquidity” due to Chapter 11 may not be used to discount value
Supports  Traditional Investment Banking Valuation Theory
Art vs. science
Consideration of unquantifiable qualitative issues
Subjective, yet reasonable and supportable adjustments

22. SPEAKER BIOGRAPHIES

23. WILLIAM Q. DERROUGH
Managing Director & Co-head of Recapitalization & Restructuring Group - Jefferies & Company, Inc.
520 Madison Ave., 12th Fl. New York, NY
Bill Derrough is Managing Director, co-head of Jefferies’ Recapitalization and Restructuring Group and head of the firm’s New York Investment Banking office. At Jefferies, he works with a diverse group of clients and investors in a wide range of industries. Since joining Jefferies in early 1998, he has been actively involved in restructurings, recapitalizations, financings, mergers, acquisitions, divestitures, asset sales and other transactions. His practice is particularly focused on providing creative non-bankruptcy solutions to balance sheet and liquidity problems through exchange offers, refinancings and other capital market driven solutions. Since 1988, he has personally led the restructurings of over $30 billion in liabilities on behalf of companies, creditors and other investors.
Prior to joining Jefferies, Mr. Derrough was Principal with the private investment firm of Doyle & Boissiere where he focused on distressed investments. Prior to Doyle & Boissiere, Mr. Derrough was Senior Vice President of Chanin and Company, where he led a number of complex restructuring and M&A transactions. Prior to Chanin, Mr. Derrough worked at Salomon Brothers on numerous finance and merger transactions for a wide variety of companies in retailing.
Mr. Derrough has serves as a Director of Strategic Partners, Inc., and was the bondholder representative on the Board of Directors of Scott Cable Communications.

24. SANFORD R. EDLEIN Principal – Glass & Associates
Mr. Edlein has been an owner and entrepreneur as well as a consultant and senior executive for privately held and public companies for more than 30 years. He has a consistent track record in the design, development and implementation of cost-containment and revenue-enhancement strategies and has assisted a wide range of companies in financial and operating matters, corporate governance, crisis management, and mergers and acquisitions. Mr. Edlein has served on the boards of directors of several public and private companies He was the recipient of the 2001Turnaround of the Year award from the Turnaround Management Association and is a past president of the Dallas Chapter of TMA and currently serves on the ABI Board of Directors. 
PROFESSIONAL EXPERIENCE
Prior to joining Glass & Associates as a principal in 1999, Mr. Edlein had been a principal with The PWS Group and president and CEO of his own consulting firm. In addition to having served as CEO,COO and CRO of several public and private companies, he was a practicing CPA for many years including five years as the managing partner of the Boston office of Grant Thornton, LLP. Mr. Edlein has extensive experience in a broad variety of situations and industries, including continuing education, distribution, family entertainment centers, franchising, golf course management, golf products and sporting goods, health services, technology, manufacturing, moving and relocation services, oil pipeline and storage, professional services, professional sports teams, property management, real estate, retail, security systems, software, and trading.
EDUCATION / PROFESSIONAL AFFILIATIONS
BBA, Accounting, City College of New York
Certified Public Accountant
Certified Turnaround Professional

25. MELISSA K. KNOLL Partner, KPMG LLP
Melissa Kibler Knoll is a partner in the Corporate Recovery practice of KPMG LLP in the Chicago office. Ms. Knoll has over thirteen years of experience providing accounting and financial advisory services in a variety of industries to companies, secured lenders, unsecured creditors and other parties in bankruptcies, restructurings, turnarounds and related litigation. Ms. Knoll has recently lead engagement teams in large, complex restructurings including Kmart Corporation (unsecured creditors’ committee), Bethlehem Steel Corporation (unsecured creditors’ committee), The Warnaco Group (pre-petition bank group), Capital Consultants LLC (receiver), The Singer Company (unsecured creditors’ committee), Iridium (debtor), and companies involved in out-of-court restructurings in the steel, healthcare, distribution and other industries.
Ms. Knoll joined KPMG LLP in June of Ms. Knoll is a Certified Public Accountant and has passed the Certified Turnaround Professional and the Certified Insolvency and Restructuring Advisor examinations. She is the co-chair of the American Bankruptcy Institute Young and New Members Committee and a former board member and treasurer of the Turnaround Management Association Northwest Chapter. Other professional and business affiliations include the Association of Insolvency and Restructuring Advisors, International Women’s Insolvency & Restructuring Confederation, American Institute of Certified Public Accountants and the Illinois CPA Society. Ms. Knoll earned her Bachelor of Business Administration summa cum laude from Texas A&M University and earned her Master of Business Administration, graduating first in her class, from Southern Methodist University. She is a frequent speaker regarding bankruptcy and restructuring topics.

26. JAMIE G. PIERSON Managing Director – FTI Consulting
Mr. Pierson is a Managing Director in the Dallas office of FTI’s Corporate Finance Practice where he concentrates on lender representation. Mr. Pierson’s expertise encompasses both in- and out-of-court restructurings which include debt capacity and capital structuring analysis, minority and change of control valuations, liquidation and recovery analysis, fairness opinions, solvency opinions, leveraged transaction analysis and merger and acquisition advisory. Mr. Pierson has also represented both secured and unsecured creditors in the 363 disposition process.
Prior to joining FTI, Mr. Pierson was with a boutique investment bank that raised private equity for public companies. Previously, Mr. Pierson was with the investment bank of Houlihan Lokey Howard & Zukin where he valued publicly traded and privately held companies, authored private placement memorandums and modeled complex change of control transactions including solvency opinions and leveraged buyouts.
EDUCATION / PROFESSIONAL AFFILIATIONS
M.B.A., University of Texas at Austin - concentrations in Finance and Entrepreneurship, 1997
B.B.A., University of Texas at Austin - concentrations in Finance and Accounting, 1992
Association of Insolvency and Restructuring Advisors, Member
Turnaround Management Association, Member
American Bankruptcy Institute, Member

27. LYNETTE R. WARMAN Managing Director – Jenkins & Gilchrist PC
Lynnette R. Warman is a shareholder in the Bankruptcy and Reorganization Section of the law firm of Jenkens & Gilchrist, a Professional Corporation. Ms. Warman received a Bachelor of Arts degree in Political Science from the University of Nebraska Omaha. She graduated magna cum laude from the Creighton School of Law.
Ms. Warman is admitted to practice in the State of Texas, the United States Court of Appeals for the Fifth Circuit and each of the four federal judicial districts in Texas. She is a longstanding member of the American Bankruptcy Institute ("ABI"), where she currently serves as a Director, and formerly served as the co chairperson of the Unsecured Trade Creditors’ Committee, the Dallas Bar Association, the Dallas Bankruptcy Bar, the American Bar Association, and the Litigation and Business Law sections of the American Bar Association. She is a former member of the Turnaround Management Association, for which she served as the secretary of the local chapter for two years.
Ms. Warman’s practice includes representing unsecured creditors' committees, secured and unsecured creditors, and debtors in Chapter 11 reorganizations and restructures. Ms. Warman frequently authors articles dealing with credit issues for publication in national credit publications. She is also a frequent speaker to various national credit groups, and often teaches in seminars on varied topics relating to credit professionals, chapter 11 reorganizations and corporate restructures.