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Panel:David S. Kupetz, Partner, SulmeyerKupetzGeorge P. Blanco, Partner, Avant Advisory GroupSteve J. Cupingood, CPA, Part...
1David S. Kupetz, a member of SulmeyerKupetz, specializes in troubled transactions, crisis avoidanceconsultation, workouts...
2George P. Blanco, Managing Director and Partner, Avant Advisory Group, hasmore than 25 years of senior executive and cons...
3Steve J. Cupingood leads SingerLewak’s firm-wide Tax practice and heis the Los Angeles Office Lead Partner.Steve has over...
4Mitch Cohen is Executive Vice President - Managing Director and WesternRegional Manager of CIT Trade Finance, responsible...
5Alexander B. Kasdan is a Managing Director at DelMorgan & Co. He has morethan twenty years of investment banking, real es...
6Anna Spektor, the Founder and President of Expert Presence,specializes in digital and event marketing, public relations a...
7Alternatives for a Distressed Company inApparel and RetailDavid S. Kupetz
8Common Fatal Errors by Retailers•  Failure to engage an experienced turnaround professionals to guide areturn to profitab...
9Repositioning•  Many retail failures are caused by rapid expansion, mismanagementor too much leverage.•  A significant nu...
10Transaction Structures•  Chapter 11–  Section 363 Sale–  Plan of Reorganization•  Assignment for the Benefit of Creditor...
11Legal Developments/Issues•  Secured Creditor Cannot be Stripped of Right to Credit Bid UnderChapter 11 Plan Providing fo...
12Selected Southern CA Case Studies•  ABC – Acquisition of Assets of Fortune Fashion Industries by JerryLeigh of Californi...
13Alternatives for a Distressed Company inApparel and RetailAlexander B. Kasdan, Managing Director
14Capital Markets Overview•  As of December 31, 2012 the S&P 500 RetailingIndex and the S&P 500 Consumer Durables &Apparel...
15Annual M&A Activity•  Overall M&A activity in the Consumer & Retailindustry remains healthy with190 closedtransactions d...
16Apparel Manufacturing Employment•  Employment has declinedby more than 80% in the lasttwo decades•  The decline has been...
17Productivity-Output Per Hour•  Labor productivity in the U.S. manufacturing sector, textile mills and footwear manufactu...
18Producer Prices in Apparel•  Producer Price Index (PPI) for fabric mills, a major component in textile-related productio...
“Opportuni*es-in-Distressed-M&A:--Finding&Hidden&Value,&&Preven1ng&Surprises,&and&Winning!!”-
Discussion-Points-  Why$consider$distressed$M&A$  Current$market$condi6ons$for$buying$distressed$companies$  The$econom...
3$Why-Consider-Distressed-M&A?-  Healthy-companies-are$purchased$at$fair$market$value$with$compe66ve$bidding;$$and$withou...
4$Bankruptcy-Sales-&-The-Current-Market-  Bankruptcy-sales-increased-significantly-during-the-height-of-the-recent-U.S.-fin...
5$Window-of-Opportunity$  Impending-spike-of-loan-maturi*es-in-2012P2014-as$a$catalyst$for$increased$restructuring$ac6vit...
6$The-Future-Outlook-The-Broader-Market-View-  Standard$&$Poors$es6mates$that$around$$8.6$trillion$of$US$corporate$borrow...
7$Where-to-Find-Deals-“Alterna*ve-financing-as-a-source-of-deal-flow”-$Key-Sources:-  Investment$Bankers$–$seeking$“value$i...
Alterna*ves-To-Purchase-Distressed-Company-Assets-Alterna*ves- Opportuni*es-&-Risks-1.--OutPofPCourt-Workout-  Out$of$cou...
What-to-Consider-  Many$/distressed$acquisi6ons$have$phenomenal-economic-opportunity$  Substan*al-risk-for$those$not$exp...
Key-“TakePAway”-Considera*ons-  Due$diligence$with$an$opera6onal$focus$  Is-there-a-core-business-that-can-be-stripped-d...
Other-Informa*on-More-on-Market-Condi*ons-11$
M&A-Ac*vity-and-Mul*ples-12$  Middle@market$M&A$volume$is$picking$up$as$shown$below$  The$gap$between$seller-expecta*ons...
13$U.S.-Private-Equity-Capital-Overhang-  A$significant$driver$of$distressed$asset$sales$comes$from$the$availability$of$pr...
1TAXCONSIDERATIONSFORRETAILANDAPPARELSteve J. CupingoodTax Partner(310) 477 – 3924, Ext. 1353scupingood@singerlewak.com
2Cancellation of Indebtedness IncomeGeneralrule–adischargeofdebtforlessthantheamountduemustberecognizedastaxableincome.Cod...
3Tax Attribute ReductionWhendebtdischargeincomeisexcludedfromgrossincomeundertheinsolvencyexcepIon,therearepotenIalprices....
4What is the Research & DevelopmentTax Credit?•  Theresearchcredit( R&DCredit )isataxincenIveforperformingqualifiedresearch...
5What is Qualified Research ?•  ResearchthatsaIsfiesa fourMparttest is QualifiedResearch (mustmeetALL4parts).•  QualifiedRese...
6Research and Development Tax Incentivesfor the Apparel and Textiles IndustryIntheapparelandtexIlesindustry,R&DacIviIesare...
7Section 363 Sales of Debtor CorporationStock vs. AssetsSecIon 363 allows for the courtMapproved sale of either the assets...
8Section 363 Sales of Debtor CorporationStock vs. AssetsOntheotherhand,thedebtorcorporaIonwillgenerallywanttominimizetheta...
9Section 363 Sales of Debtor CorporationStock vs. AssetsTypically,eitherthedebtorcorporaIonassetsorstockaresoldinataxableS...
10Additional Items to Consider withAcquisitions in BankruptcyAcquisiIonsfromabankruptcyestatecanbesubjecttoanumberoftaxes,...
11Section 199 – Domestic ProductionActivities DeductionTaxpayer swhomanufactureorproducegoods,developorimprovequalifyingpr...
12IC-DISC – Interest Charge DomesticInternational Sales CorporationWhatisanICMDISC?TheICMDISC( InterestChargedDomesIcInter...
13IC-DISC – Interest Charge DomesticInternational Sales CorporationWhatisanICMDISC?TheICMDISC( InterestChargedDomesIcInter...
14IC-DISC – Interest Charge DomesticInternational Sales CorporationEXAMPLE:Company(Without(an(IC/DISCForeignTradingGrossRe...
15Geographic Targeted EconomicsDevelopment Areas (G-TEDAs)CaliforniahasfourtypesofGMTEDAs.Eachoftheseareashaverelatedtaxin...
16Employee Hiring CreditsTheEZHiringCreditisadollar&for&dollarstateincometaxcredit:  Upto$37,440perqualifiedemployeeoverafi...
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Alternatives for a Distressed Company in Apparel and Retail

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The process of bidding for, financing and acquiring distressed companies in the Apparel and Retail space is competitive and complex. This presentation addresses the strategies and tips for success from the perspectives of an investment banker, a deal and bankruptcy lawyer, a turnaround executive, a lender and a tax accountant.

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Alternatives for a Distressed Company in Apparel and Retail

  1. 1. Panel:David S. Kupetz, Partner, SulmeyerKupetzGeorge P. Blanco, Partner, Avant Advisory GroupSteve J. Cupingood, CPA, Partner, SingerLewakMitchell Cohen, EVP; CIT Trade FinanceModerator: Alexander B. Kasdan, Managing Director, DelMorgan & Co.Event Organized by Anna Spektor, Founder and President, Expert PresenceALTERNATIVES FOR A DISTRESSED COMPANYIN APPARELAND RETAILMay 9, 2013
  2. 2. 1David S. Kupetz, a member of SulmeyerKupetz, specializes in troubled transactions, crisis avoidanceconsultation, workouts, restructurings, reorganizations, bankruptcies, receiverships, assignments for thebenefit of creditors and other non bankruptcy insolvency proceedings. He represents debtors (inrestructurings and workouts and in chapter 11 reorganization cases), secured creditors, unsecuredcreditors committees, assignees for the benefit of creditors, buyers/sellers of businesses/assets indistressed circumstances and other entities in insolvency and bankruptcy situations.A sampling of clients represented by Mr. Kupetz includes: Care Enterprises, Inc. (debtor in possession);Ocean Pacific Sunwear, Ltd. (debtor in possession); County of Los Angeles (creditor); General ElectricCapital Corporation (secured lender); Litton Industries, Inc. (creditor); Boston West, LLC (BostonMarkets) (debtor in possession); ExxonMobil Corporation (creditor); Honda Trading Co. (creditor);CKE Restaurants (creditor); San Diego Television, Inc. (debtor in possession); South Bay Pizza, Inc.(debtor in possession); Transgo Corp. (unsecured creditors’ committees); Aura Systems, Inc. (out-of-court unsecured creditors’ committee); Snow Valley, LLC (debtor in possession); Gardenburger, Inc.(debtor in possession); eStyle, Inc. (debtor in possession); American Home (debtor in possession); NoFear Retail Stores, Inc. (debtor in possession); and Ventura Port District (chapter 9 debtor).His many articles on bankruptcy related subjects have been published in The Business Lawyer,Commercial Law Journal, IDEA: The Journal of Law and Technology, Journal of Bankruptcy Law andPractice, The Annual Survey of Bankruptcy Law, The Urban Lawyer, The Banking Law Journal, LosAngeles Lawyer, California Lawyer, Commercial Law Bulletin, Los Angeles Daily Journal, TheSecured Lender, The Journal of Private Equity, The Journal of Corporate Renewal, Public Law Journal,Federal Lawyer and many other publications. Mr. Kupetz served as the author of Collier CommercialBankruptcy Forms for many years and currently is the author of the Collier Handbook for CreditorsCommittees.Mr. Kupetz is a frequent lecturer on reorganization and other insolvency topics.Mr. Kupetz was admitted to the California bar in 1986. He obtained his legal education at theUniversity of California, Hastings College of the Law (J.D., 1986).333 South Hope Street35th FloorLos Angeles CA 90071(213) 617-5274dkupetz@sulmeyerlaw.comwww.sulmeyerlaw.com
  3. 3. 2George P. Blanco, Managing Director and Partner, Avant Advisory Group, hasmore than 25 years of senior executive and consulting experience in financial andoperational management high growth and financially distressed companies. His crisisand turnaround management experience includes operational and financialrestructuring, cost reduction programs, reorganizations in bankruptcy, negotiationswith lenders and creditors, and capital sourcing.In addition to chief restructuring officer (“CRO”) roles, he also has served as CFO of apublic company and CEO of a telecommunications provider.George is a Certified Insolvency and Restructuring Advisor (“CIRA”), having servedmore than 12 years in the Big 4 accounting and consulting firm environment. In his 30years of consulting and senior-level experience, he has served as partner and managingdirector in consulting, financial advisory and the corporate recovery practices ofPricewaterhouseCoopers and AlixPartners.George is experienced in manufacturing plant consolidations, supply chain/logistics,management business process re-engineering, operational restructuring, financial andmanufacturing systems implementation, post-acquisition integration and workingcapital improvement for both middle-market and “Fortune 500” companies acrossmultiple industries.George has taught classes in Total Quality Management and participated on numerouspanels involving operational restructuring and profitability improvement. In addition tobeing a CIRA, he earned his MBA in finance from the UCLAAnderson GraduateSchool of Management and his BA in economics and accounting from ClaremontMcKenna College.601 South Figueroa Street,Suite 4050Los Angeles CA 90017(213) 479-7900GBlanco@AvantAdvisory.comwww.AvantAdvisory.com
  4. 4. 3Steve J. Cupingood leads SingerLewak’s firm-wide Tax practice and heis the Los Angeles Office Lead Partner.Steve has over 24 years of experience in individual and business entitytaxation (including with shareholders and partners). He has significantexperience with nonprofits as well as with high net worth individuals. Inaddition to possessing strong technical expertise, Steve has extensiveconsulting experience in tax planning, research and compliance services. Asignificant portion of Steve’s professional experience includes over sixyears in the tax department of a large international accounting firm.Steve received his Bachelors of Science degree in Business Administrationwith an Accounting major from California State University, Northridge, in1984. He is a Certified Public Accountant and a member of the AmericanInstitute of Certified Public Accountants and the California Society ofCPAs.10960 Wilshire Blvd.Suite 700Los Angeles CA 900241(310) 477-3924scupingood@singerlewak.comwww.singerlewak.com
  5. 5. 4Mitch Cohen is Executive Vice President - Managing Director and WesternRegional Manager of CIT Trade Finance, responsible for client service andretention, business development and client credit quality. He has more than 30 yearsexperience in the financing industry. His responsibilities include client service andretention, ensuring client credit quality and profitability, and new businessdevelopment throughout the Western United States, as well as CIT’s Hong Kongoffice.Mitch’s areas of expertise include factoring and credit protection solutions forcompanies that want to increase sales, improve cash flow, reduce operating expensesand eliminate customer credit losses, and financing solutions for consumer productscompanies (apparel, footwear, housewares, furniture and home furnishings).Mitch has more than 30 years of experience in the financing industry. Prior to joiningCIT, he served as Senior Vice President for Bank of Newport. Prior to this, he wasSenior Vice President with Mitsui Manufacturers Bank. In 2004, Cohen was honoredwith the Spirit of Life Award by the Apparel Industries Group for the City of Hope andwas the recipient of the 1999 Humanitarian Award from the National Jewish Medicaland Research Center.Mitch earned a bachelor’s degree in accounting from the State University of New Yorkand is a graduate of the University of Washington’s Pacific Coast Banking School. Healso completed the Wharton Executive Development Program.300 S Grand Ave #12Los Angeles CA 90071(213) 613-2416mitchell.cohen@cit.comwww.cit.com
  6. 6. 5Alexander B. Kasdan is a Managing Director at DelMorgan & Co. He has morethan twenty years of investment banking, real estate, corporate law and corporatestrategy experience. Alex has executed over 100 domestic and cross-bordertransactions totaling more than $10 billion in overall volume in a variety of industries.Prior to joining DelMorgan, Alex founded and ran Convergence Capital Partners, LLC,a boutique investment banking advisory firm and was an investment banker atBarrington Associates in Los Angeles, where he headed the restructuring group, PeterJ. Solomon Company, Credit Suisse First Boston and Merrill Lynch.Alex practiced law with O’Melveny & Myers LLP (formerly O’Sullivan Graev &Karabell LLP) and Paul, Hastings, Janofsky & Walker LLP (formerly Battle FowlerLLP), where he specialized in mergers and acquisitions, private equity and corporatefinance transactions. In addition, Alex served as Corporate Counsel in charge ofbusiness development at Schlumberger Ltd., a global oilfield and information servicescompany.Alex graduated magna cum laude from Middlebury College with a B.A. degree inEconomics and Italian and was elected to Phi Beta Kappa during his junior year. Inaddition, he holds a J.D. degree from Columbia University Law School and has studiedat the University of Florence in Italy. Alex is admitted to the Bar in the State of NewYork.Alex is a Senior Advisor to Governance and Transactions LLC, an advisory firmestablished in 2003 by Mr. James L. Gunderson, former Secretary and General Counselof Schlumberger Limited, to assist boards, management and owners with corporategovernance, compliance, structuring and strategic transactions.100 Wilshire Blvd.Suite 750Santa Monica, CA 90401(310) 980-1718www.delmorganco.comwww.cvgpartners.comak@cvgpartners.com
  7. 7. 6Anna Spektor, the Founder and President of Expert Presence,specializes in digital and event marketing, public relations andbrand communications programs for professional services firms. Asa business development consultant, Anna helps clients develop andimplement comprehensive strategies designed to generate new andsolidify existing referral relationship, elevate profile, and buildbrand awareness. Anna is also the founder of Expert Forum andExpert Webcast, affiliate companies focused on providing theprofessional community with quality educational content,continuing professional education and targeted networkingopportunities.1999 Avenue of the StarsSuite 1100Los Angeles, CA 90067(310) 995-6579www.expertpresence.comanna@expertpresence.com
  8. 8. 7Alternatives for a Distressed Company inApparel and RetailDavid S. Kupetz
  9. 9. 8Common Fatal Errors by Retailers•  Failure to engage an experienced turnaround professionals to guide areturn to profitability•  Failure to quickly arrest cash hemorrhaging•  Failure to engage merchandisers to refocus the marketing strategy•  Insufficient focus on core business strength•  Closing too few stores and taking too long to close them•  Failure to rationalize the administrative structure of the operations•  Failure to integrate different concepts in the same managementinformation system•  Disastrous acquisitions
  10. 10. 9Repositioning•  Many retail failures are caused by rapid expansion, mismanagementor too much leverage.•  A significant number of failures occur as a result of being out of stepwith the market and losing touch with the client base that made acompany successful in the first place.•  The fashion industry is particularly susceptible.
  11. 11. 10Transaction Structures•  Chapter 11–  Section 363 Sale–  Plan of Reorganization•  Assignment for the Benefit of Creditors (ABC)•  Friendly Foreclosure•  Receiverships•  Out-of-court workouts/debt restructurings•  Acquisition of secured debt to be followed by foreclosure or one ofother distressed transaction structures•  Chapter 7
  12. 12. 11Legal Developments/Issues•  Secured Creditor Cannot be Stripped of Right to Credit Bid UnderChapter 11 Plan Providing for Sale–  RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct.2065 (2012)•  Uncertainty Regarding Trademark Licensee’s Right to RetainLicense if Licensor Files Bankruptcy–  Lubrizol (4th Cir. 1985)–  Bankruptcy Code § 365(n) (1988)–  Sunbeam (7th Cir. 2012)•  Cap on Time (210 days) to Decide Whether to Assume or RejectLeases under Which Debtor is Lessee•  Administrative Priority for § 503(b)(9) Reclamation Claims
  13. 13. 12Selected Southern CA Case Studies•  ABC – Acquisition of Assets of Fortune Fashion Industries by JerryLeigh of California–  Apparel Manufacturer–  Secured Lenders Undersecured and Consented to ABC Transaction–  Seamless Transaction Executed Upon Commencement of ABC•  Section 363 Sales by No Fear Retail Stores–  Apparel Licensor & Retailer–  Expedited Sale Process–  Separate, Contemporaneous Sales Completed for IP Rights and RetailAssets•  Chapter 11 Plan by American Home–  Furniture Retailer–  Liquidated Arizona Stores Upon Commencement of Case to Pay OffSecured Lender–  Reorganized Around Core New Mexico locations and RestructuredUnsecured Debt Under Chapter 11 Plan
  14. 14. 13Alternatives for a Distressed Company inApparel and RetailAlexander B. Kasdan, Managing Director
  15. 15. 14Capital Markets Overview•  As of December 31, 2012 the S&P 500 RetailingIndex and the S&P 500 Consumer Durables &Apparel Index increased by 25% and 19%,respectively, over prior year levels whileoutperforming the S&P 500 by 11% and 6%,respectively•  The equity markets displayed overall strength andinvestor demand•  Several initial and secondary public equityofferings were completed in 2012
  16. 16. 15Annual M&A Activity•  Overall M&A activity in the Consumer & Retailindustry remains healthy with190 closedtransactions during 2012•  The total value of completed M&A transactions inthe Consumer & Retail industry increased 41% to$66.6 billion•  Transactions with values less than $500 millionrepresented approximately 86% of total dealvolume and 32% of total deal value
  17. 17. 16Apparel Manufacturing Employment•  Employment has declinedby more than 80% in the lasttwo decades•  The decline has beenproportional throughout thecomponent industriesSource: U.S. Bureau of Labor Statistics.
  18. 18. 17Productivity-Output Per Hour•  Labor productivity in the U.S. manufacturing sector, textile mills and footwear manufacturingmore than or nearly doubled from1987 to 2010•  Labor productivity in apparel manufacturing grew at about the same rate as overallmanufacturing productivity from 1987 to 2000 but generally declined from 2000 to 2010Source: U.S. Bureau of Labor Statistics.
  19. 19. 18Producer Prices in Apparel•  Producer Price Index (PPI) for fabric mills, a major component in textile-related production,increased significantly from October 2010 until September 2011•  PPI increases for other industries such as footwear manufacturing and for accessories and otherapparel were more muted until December 2011Source: U.S. Bureau of Labor Statistics.
  20. 20. “Opportuni*es-in-Distressed-M&A:--Finding&Hidden&Value,&&Preven1ng&Surprises,&and&Winning!!”-
  21. 21. Discussion-Points-  Why$consider$distressed$M&A$  Current$market$condi6ons$for$buying$distressed$companies$  The$economic$recovery$has$not$salvaged$underperforming$companies$  More$defaults$on$the$horizon$as$companies$lack$liquidity$  Their$capital$structures$remain$over@leveraged$and$expected$revenue$increases$have$not$transpired$  Are$there$“Zombie$companies”$that$can$be$returned$to$life?$$$  Where$do$you$find$them$and$how$do$you$return$them$to$value?$  Diligence$on$distressed$company$assets$is$different$than$the$more$typical$quality$of$earnings$report$  Beware&of&the&“mel1ng&ice&cub”&2$
  22. 22. 3$Why-Consider-Distressed-M&A?-  Healthy-companies-are$purchased$at$fair$market$value$with$compe66ve$bidding;$$and$without-organic-growth-or$simple$roll@up$strategies,$incremental-value-is-hard-to-obtain-  Substan*al-Economic-Upside-  Financially$distressed$–$i.e.,$good$company$with$bad$balance$sheet$  Opera6onally$distressed$–$e.g.,$6ghtening$margins,$broken$economic$model,$bad$management,$slow$reac6on$to$economic$market$condi6ons$  Distressed$companies$have$fewer-buyers-due-to-perceived-risk-  Distressed$acquisi6on$can-be-very-risky-for$the$less$experienced$  Requires-special-skill-set-and$investment$criteria$/$risk$tolerance$  Assets$can$be$purchased$at$deep-discounts-
  23. 23. 4$Bankruptcy-Sales-&-The-Current-Market-  Bankruptcy-sales-increased-significantly-during-the-height-of-the-recent-U.S.-financial-crisis;-but$subsequently,$ the$ pace$ has$ decreased,$ consistent$ with$ trends$ in$ loan$ default$ rates$ and$bankruptcy$filings$  Lenders-pulled-back-from-calling-defaults-and-threatening-remedies-in-light-of-the-decline-in-middlePmarket-valua*on-mul*ples,-and-weak-collateral-values-  Forces$that$con6nue$to$drive$bankruptcy$sales,$include:$$  Increasing-amounts-of-private-capital-seeking-higher$returns$from$distressed$situa6ons$  Increasing-cost-/-complexity-of-the-Chapter-11-process,$which$mo6vates$diverse$groups$of$creditors$to$push$for$the$speed$and$certainty$achieved$in$a$distressed$sale$-5770 6775100125173153 15713616810312514710791610204060801001201401601802001Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12Number of Bankruptcy SalesSource: Capital IQ.Note: Includes all domestic targets and sellers that have filed for bankruptcy.
  24. 24. 5$Window-of-Opportunity$  Impending-spike-of-loan-maturi*es-in-2012P2014-as$a$catalyst$for$increased$restructuring$ac6vity$  AmendPtoPextend-ac*vity-and$new$bond$issuances$con6nue$to$push$out$the$maturity$schedule$  The-amount-of-loans-coming-due-is-s*ll-high,-but-declining-@@$by$the$end$of$2014,$volume$fell$to$$90$billion,$from$$145$billion$and$$260$billion$at$the$end$of$2011$and$2010,$respec6vely$  Constrained-capital-availability-@@$significant$loan$volume$coming$due$just$as$the$CLO’s$reinvestment$windows$close$(assuming$the$market$for$new$CLO’s$remains$virtually$dead)$  Impact$of$low-interest-rates-$0B$50B$100B$150B$200B$250B$300BYE*2010 YE*2011 YE*2012 YE*2013Source:(LCD(Es.mates(CLO-Vehicles-S*ll-in-Reinvestment-Period-Loan-Distribu*on-by-Year-of-Maturity-Source:(Standard(&(Poor’s(LCD($0B$50B$100B$150B$200B2012 2013 2014 2015 2016 2017 2018 201912/31/2010 12/31/2011 6/1/2012The&broader&market&has&a&direct&impact&on&middle&and&lower&middle&market&transac1ons&
  25. 25. 6$The-Future-Outlook-The-Broader-Market-View-  Standard$&$Poors$es6mates$that$around$$8.6$trillion$of$US$corporate$borrowings$(including$both$rated$and$unrated$debt,$but$excluding$securi6zed$loans)$will$mature$and$require$refinancing$over$the$next$5$years$  An$addi6onal$need$for$between$$2.5$to$$3$trillion$of$funding$for$corporate$growth,$depending$on$the$level$of$GDP$growth$$  The$uncertain$economic$climate$creates$doubt$as$to$whether$the$capital$markets$will$be$able$to$meet$this$$11$to$$11.5$trillion$capital$need$for$both$refinancing$and$growth$Impact-on-the-Middle-Market-  The&resul1ng&capital&adequacy&constraints&and&uncertain1es&are&likely&to&create&financial&distress&for&the&weak&and&overGlevered&  Opportuni1es&for&the&distressed&investor&GG&the&need&for&valueGmaximizing&transac1ons&will&drive&capital&structures&  Alterna1ve&financing&as&an&op1on&for&geLng&invited&to&the&party?&&LoanGtoGOwn?&  Interest&rates&con1nue&to&be&low&except&for&alterna1ve&financing&op1ons&The&broader&market&has&a&direct&impact&on&middle&and&lower&middle&market&transac1ons&
  26. 26. 7$Where-to-Find-Deals-“Alterna*ve-financing-as-a-source-of-deal-flow”-$Key-Sources:-  Investment$Bankers$–$seeking$“value$investors”;$broken$refinancing$deals$  Quasi$Investment$Bankers$–$finders$and$brokers$$@@$“Beware-of-incredible-projec*ons”$  Turnaround$Consultants$–$“rifle$shot$opportuni6es”$  Corporate$disposi6ons$–$usually$low$profile$with$a$high$opportunity$for$return$Other-Sources:-  Commercial$lenders;$but$probably$through$a$“refinancing$opportunity”$that$turns$into$a$sale$transac6on$  Finance$companies$that$provide$higher$leverage$with$higher$interest$rates;$more$inclined$to$liquidate$for$force$a$“quick$sale”$Opportunis*c-Sources:-  Akorneys$  CPA$/$audit$firms$
  27. 27. Alterna*ves-To-Purchase-Distressed-Company-Assets-Alterna*ves- Opportuni*es-&-Risks-1.--OutPofPCourt-Workout-  Out$of$court$workout$is$more$cost$effec6ve$than$alterna6ves$  Success$is$dependent$upon$all$par6cipants$agreeing$to$nego6ate$coopera6vely$throughout$the$process$2.--Chapter-11-Reorganiza*on-  Secured$creditors$and$antagonis6c$unsecured$creditors$  May$dissipate$going$concern$/$value$of$estate$  Ability$to$deal$with$executory$contracts$  Purchase$assets$free$and$clear$@@$Bankruptcy$Code$Sec6on$363$–$Sale$Process$3.--Ar*cle-9-PP-“Friendly-Foreclosure”--  Secured$creditor$has$right$under$UCC$to$foreclose$and$sell$its$collateral$  Company$wants$to$sell$assets$quickly$to$a$friendly$buyer$who$will$con6nue$business$as$a$going$concern$  Subject$to$“commercial$reasonableness,”$e.g.,$fair$value,$which$can$be$shown$on$its$face,$if$secured$lender$discounts$its$debt$4.--Assignment-for-Benefit-of-Creditors-(ABC)--  Debtor$may$choose$assignee,$and$lender$may$have$input$into$debtor’s$choice$  Unhappy$creditors$may$s6ll$file$an$involuntary$bankruptcy$  Consent$of$landlords$and/or$other$par6es$may$be$necessary$to$sell$or$assign$debtor’s$rights$under$contracts$(as$opposed$to$bankruptcy$court)$5.--OutPofPCourt-Liquida*on-–-Self-Liquida*on--  Reorganiza6on$is$not$possible$  No$discharge$of$liabili6es$  May$lose$value$of$opera6ng$company$6.--Chapter-7-Liquida*on--  Company$is$too$weak$or$prospect$of$success$unlikely$(plan$or$reorganiza6on$not$feasible)$  Management$no$longer$involved,$as$Trustee$is$appointed$8$
  28. 28. What-to-Consider-  Many$/distressed$acquisi6ons$have$phenomenal-economic-opportunity$  Substan*al-risk-for$those$not$experienced$or$that$do$not$understand$the$unique$complex$legal,$opera6ng/business,$and$cash$flow$issues$in$this$space-  Don’t$venture$into$distressed$without$good-advisors-$$  Poor-/-inadequate-due-diligence$onen6mes$results$from$the$accelerated-*me-frames$imposed$by$the$“mel*ng-ice-cube”-environment$of$these$companies$  Risks$areas,$con6ngencies$and$“cash$burn”$are$onen$uniden6fied$or$misunderstood$by$those$investors$/$buyers$acquiring$those$companies$$  Go-beyond-the-numbers-as$the$accoun6ng$is$onen$broken$$$  “Quality$of$earnings”$and$adjusted$EBITDAs$may$not$apply$in$a$turnaround$$  Do$not$underes6mate$that$distressed$situa6ons$require$significantly$greater$6me,$effort,$and-a-different-kind-of-management-skill-set$9$
  29. 29. Key-“TakePAway”-Considera*ons-  Due$diligence$with$an$opera6onal$focus$  Is-there-a-core-business-that-can-be-stripped-down-to-profitability?$$Buyers$frequently$hope$they’ll$be$able$to$grow$their$way$back$out$  Is-there-sufficient-capital-to-get-to-a-closing;$before$you$lose$key$employees,$contracts$and$customers?$  “Does-this-business-have-a-right-to-exist?”$$Is$there$sufficient$intellectual$property$and$branding$to$support$future$opera6ons?$$  What$are$the$working-capital-requirements-for$aner$the$acquisi6on,$and$what$is$the$6meline$to$complete$the$turnaround?$  Is$there$a$defensible-tac*cal-plan-and$a$viable$long@term$strategy?$  Think$about$successor-liability-and$how$to$mi6gate$  ”Peel$away$the$layers$of$the$onion”$before$you$commit,$and$know$when$to$cut$your$losses$  Beware&of&the&“mel1ng&ice&cub”$  Ensure$the$Company$has$or$you$bring$in$strong-and-ethical-management-that$is$experienced$and$comfortable-turning-around-a-company-  $That$is$more$cri6cal$than$ever$in$distressed$acquisi6ons$and$turnarounds$  The$100$day$plan$$ 10$
  30. 30. Other-Informa*on-More-on-Market-Condi*ons-11$
  31. 31. M&A-Ac*vity-and-Mul*ples-12$  Middle@market$M&A$volume$is$picking$up$as$shown$below$  The$gap$between$seller-expecta*ons-(~8x-EBITDA)-and$leverage-availability-(~4x-EBITDA),-remains$a$challenge$for$financial$sponsors$with$high$return$targets$  An6cipate$an$increase$in$distressed$M&A$ac6vity$as$this$gap$closes,$and$lenders$begin$to$view$this$as$a$feasible$alterna6ve$for$recovery$Middle-Market-M&A-Volume-(1)-Middle-Market-LBO-Purchase-Price-Mul*ples-Source:(LCD(Comps(Source:&Thomson&One&Banker&Notes:&Includes&all&U.S.&announced&deals&with&transac1on&values&between&$20&mm&and&$1bn.&&&7.6x 7.5x7.1x 6.9x5.9x6.7x 7.0x 7.2x8.5x 8.1x9.3x8.3x6.6x8.4x 8.2x0.0x2.0x4.0x6.0x8.0x10.0x1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Senior3D ebt/EBITDA Sub3D ebt/EBITD A Equity/EBITDA O thers$419$235 $225$240$282$327$378$411$269$170$281$2972,5591,6111,5731,6821,7832,0252,2632,2501,6801,1071,561 1,60605001,0001,5002,0002,5003,000$0B$50B$100B$150B$200B$250B$300B$350B$400B$450B2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Deal2Value Number2of2Deals4.8x4.7x4.1x 4.0x3.4x3.9x 3.8x4.2x4.7x 4.7x5.6x4.5x3.3x4.2x 4.3x0.0x2.0x4.0x6.0x1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011FLD /EBITD A SLD /EBITDA O ther<Sr<D ebt/EBITD A Sub<D ebt/EBITD ASource:(LCD(Comps(Debt-Mul*ples-of-Middle-Market-LBO-Loans-(First-Lien-/-Second-Lien-Debt)-
  32. 32. 13$U.S.-Private-Equity-Capital-Overhang-  A$significant$driver$of$distressed$asset$sales$comes$from$the$availability$of$private$equity$capital$  The$quan6ty$of$“dry$powder”$in$the$hands$of$private$equity$groups$seeking$distressed$and$other$opportuni6es$is$currently$close$to$$450$billion$of$total$private$equity$capital$(i.e.$uncalled$commitments)$  Accordingly,$it$maybe$an$opportunis6c$6me$for$secured$creditors$to$consider$the$sale$alterna6ve$to$mone6ze$their$exposure$in$certain$situa6ons$$PP-Selling&the&Zombie&Companies&$ U.S. Private Equity Overhang($ in billions)Source: PitchBook Data – 2012 Capital Overhang and Fund Cash Flow Report.$463$530$576 $561$477$456$67)$46)($16)($83)($21)($150)$0$150$300$450$600$7502006 2007 2008 2009 2010 2011Cumulative)O verhang Annual)O verhang
  33. 33. 1TAXCONSIDERATIONSFORRETAILANDAPPARELSteve J. CupingoodTax Partner(310) 477 – 3924, Ext. 1353scupingood@singerlewak.com
  34. 34. 2Cancellation of Indebtedness IncomeGeneralrule–adischargeofdebtforlessthantheamountduemustberecognizedastaxableincome.CodifiedinIRCSec.61(a)(12)–grossincomeincludesincomefromthedischargeofindebtedness.Incomerecognizedisgenerallythedifferencebetweenthefaceamountoftheinstrumentandtheamountpaidondischarge.Thedebtdischargeincomeisgenerallytaxedatordinaryincometaxrates.IRCsec.108(a)(1)listsfoursituaIonsinwhichrealizeddebtdischargeincomemaynotberecognizedforfederalincometaxpurposes.Subjecttonumerousotherrulesandrequirements,nonMrecogniIonmayoccurif:(A)thedischargeoccursinaItle11case;(B)thedischargeoccurswhenthetaxpayerisinsolvent;(C)thedischargeddebtisqualifiedfarmindebtedness;or(D)thedischargeddebtisqualifiedrealpropertybusinessindebtednessTheIRCdefinesinsolvencytomeantheexcessofliabiliIesoverthefairmarketvalueofassetsimmediatelybeforethedebtdischarge.
  35. 35. 3Tax Attribute ReductionWhendebtdischargeincomeisexcludedfromgrossincomeundertheinsolvencyexcepIon,therearepotenIalprices.Insomecases,I.R.C.Sec.108(b)requiresanoffseVngreducIonoftaxaWributes,inthefollowingorder:1.  NOLsforthecurrenttaxableyearandanyNOLcarryovers.2.  GeneralbusinesscreditsunderI.R.C.Sec.38.3.  MinimumtaxcreditsavailableunderI.R.C.Sec.53(b).4.  Capitallosscarryovers.5.  Basisinproperty,withorderingrulesinI.R.C.Sec.1017.6.  PassiveacIvitylossandcreditcarryoversunderI.R.C.Sec.469(b).7.  Foreigntaxcreditcarryovers.
  36. 36. 4What is the Research & DevelopmentTax Credit?•  Theresearchcredit( R&DCredit )isataxincenIveforperformingqualifiedresearchintheU.S.•  Thenetcreditisequaltoapproximately6.5%ofqualifiedresearchexpenditures.•  About35stateshaveenactedsometypeofR&Dcredit.ProfileofR&DCandidate•  Developsandmanufacturesnewproducts•  ImprovesexisIngproducts•  Developsorimprovesmanufacturingprocess•  Hasfiledforpatents–Intellectualproperty•  Plantimprovements–newmachinery/process•  Developedsoiwareforinternaluse
  37. 37. 5What is Qualified Research ?•  ResearchthatsaIsfiesa fourMparttest is QualifiedResearch (mustmeetALL4parts).•  QualifiedResearch isresearchthatis:1.  TechnologicalinNature2.  UndertakentoEliminateUncertainty3.  UndertakenforaPermiWedPurpose;and4.  ConsistsofaProcessofExperimentaIonWhatExpensesQualifyfortheR&DCredit:•  Wages–employees WM2,box1amount•  Research,directsupervision,directsupport•  Supplies–nonMdepreciabletangiblepersonalpropertyusedorconsumedintheresearchprocess•  ContractResearch–researchperformedbynonMemployees•  65%Rule–65%ofcontractresearchiseligible
  38. 38. 6Research and Development Tax Incentivesfor the Apparel and Textiles IndustryIntheapparelandtexIlesindustry,R&DacIviIesareevidencedinthedesignanddevelopmentofnewgarments,shoes,accessories,texIles/fabrics,chemicalandtopicaltreatments,andembroiderytechniques.ApparelcompaniesatanystageinthedevelopmentchaincanhavequalifyingacIviIes,fromthetexIlemills,tothedesignhouses,tothemanufacturingplants.Ifyourcompanyoperatesintheapparel,shoe,ortexIleindustries,thereisastrongchancethatyouwouldbenefitfromanR&Dtaxcreditstudy.ExamplesofapparelandtexIleinnovaIonseligibleforR&DtaxincenIvesincludethefollowing:• Designingnewgarmentsandapparel• Designingnewshoedesigns• DesigninginnovaIveshoefitandcomforttechniques• GeneraIngprototypesandfitsamplesofnewproductsfortesIngandvalidaIon• Developingnewwoven,knit,ornonMwoventexIles• Developingneworimprovedchemicalortopicaltreatments• Developingneworimprovedmanufacturingprocesses• Designanddevelopmentofscaledupmanufacturingprocesses
  39. 39. 7Section 363 Sales of Debtor CorporationStock vs. AssetsSecIon 363 allows for the courtMapproved sale of either the assets of a debtorcorporaIonorthestockofadebtorcorporaIon. ThestructuringoftheSecIon363sale affects the immediate income tax consequences of the transacIon to both thebuyercorporaIonandthesellercorporaIon.Forexample,thebuyermaywishtokeepthedebtorcorporaIonintactand,thereby,preservethedebtorincometaxaWributessuchasitsnetoperaInglosses(NOLs). Inthatcase,thebuyerwillprefertopurchasethedebtorcorporaIonstock.However,ifthebuyercannotusethedebtorincometaxaWributes,thenthebuyermayprefertopurchasethedebtorcorporaIonassets. Thatway,thebuyercanobtainastepMupinthedepreciabletaxbasisoftheacquireddebtorassets.ThistaxbasisstepMup can result in future depreciaIon or amorIzaIon income tax deducIons for thebuyer.
  40. 40. 8Section 363 Sales of Debtor CorporationStock vs. AssetsOntheotherhand,thedebtorcorporaIonwillgenerallywanttominimizethetaxableincomerecognizedonthesaleofeitheritsstockoritsassets. Theseller sabilitytominimizethereportedincomeonthesalewilldependon:1.  Thedebtor staxbasisinthecorporaIonstockorthecorporaIonassets,2.  TheavailabilityofoffseVnglosses,and3.  The realizaIon of any cancellaIon of debt (COD) income related to thebankruptcyorreorganizaIon.ThedebtorcorporaIonmaybeabletoindefinitelydefertherecogniIonofthegainonthetransacIonbystructuringtheSecIon363saleasataxMfreereorganizaIonunderInternalRevenueCodeSecIon368.
  41. 41. 9Section 363 Sales of Debtor CorporationStock vs. AssetsTypically,eitherthedebtorcorporaIonassetsorstockaresoldinataxableSecIon363sale,thedebtorwillrecognizeeitheragainorloss.Theamountofthetaxablegainorlosswillbeequaltothedifferencebetween:1.  Theamountrealizedfromthesaleand2.  Theseller sadjustedtaxbasisofthetransferredproperty.The amount realized from the SecIon 363 sale includes all of the consideraIonreceivedbytheseller.ThisconsideraIonincludesthefollowing:1.  Cash2.  Thefairmarketvalueofanypropertyreceivedfromthebuyer3.  AnyliabiliIesassumedbythebuyer4.  Theissuepriceofanydebtinstrumentissuedbythebuyer
  42. 42. 10Additional Items to Consider withAcquisitions in BankruptcyAcquisiIonsfromabankruptcyestatecanbesubjecttoanumberoftaxes,suchasrealestatetransfertaxesandsalestaxes,thatcouldapplytotransfersofassets. TheU.S.BankruptcyCodecontainsanexcepIonforsometransfertaxes,thoughitdoesnotapplyinallcircumstances.Further, acquisiIons could trigger changeMofMcontrol provisions in property tax statutes, which may lead to arevaluaIonofrealestateandanincreaseinpropertytaxrates.InternalRevenueCodeSecIon382limitstheuseoftheacquireddebtorcorporaIonNOLsandcapitallosses(andcertainbuiltMinlosses). SecIon382appliestoatransacIonwhereagreaterthan50percentchangeinstockownershipofthelosscorporaIonoccurredduringathree–yearperiod(calledan“ownershipchange”).Ifthereisanownershipchange,SecIon382placesanannuallimitontheamountoftaxableincomeaiertheownershipchangethatmaybeoffsetbythelosscorporaIonNOLcarryoversarisingbeforetheownershipchange.
  43. 43. 11Section 199 – Domestic ProductionActivities DeductionTaxpayer swhomanufactureorproducegoods,developorimprovequalifyingproducIonpropertymayqualifyfortheDomesIcProducIonAcIviIesDeducIon(DPAD)ontheirfederalincometaxreturn.ThistaxdeducIonis9%ofthesmallerof:•  thequalifiedproducIonacIviIesincome(QPAI),or•  taxableincomefiguredwithouttheDPADQualifiedProducIonAcIviIesQualifiedproducIonacIviIeseligibleforclaimingthededucIonunderIRCSecIon199:•  ManufacturingbasedintheUnitedStates,•  Selling,leasing,orlicensingitemsthathavebeenmanufacturedintheUnitedStates,•  Selling,leasing,orlicensingmoIonpicturesthathavebeenproducedintheUnitedStates,•  ConstrucIon services in the United States, including building and renovaIon of residenIal andcommercialproperIes,•  EngineeringandarchitecturalservicesrelaIngtoaUSMbasedconstrucIonproject,•  SoiwaredevelopmentintheUnitedStates,includingthedevelopmentofvideogames.
  44. 44. 12IC-DISC – Interest Charge DomesticInternational Sales CorporationWhatisanICMDISC?TheICMDISC( InterestChargedDomesIcInternaIonalSalesCorporaIon )wasdesignedasataxincenIveforsmalltomidsizedU.S.ExporIngcompanies.TheboWomlineisthatthetaxlawsprovideanopportunityforacompanytouseanICMDISCtohavethetaxon50%ofitsexportincomereducedbymorethan50%.Profitsaretaxedatthedividendrate(currently5%or20%dependingonAGI)asopposedtoordinaryincometaxrates(topratecurrently35%).Howdoesitwork?TheexporterpaysacommissiontotheICMDISC.ThecommissionsarededucIbletotheexporter,andthedeemedoractualdividendpaymentofthecommissionincomeintheICMDISCistaxedtotheexporter sshareholders/partnersatthe23.8%rate(asopposedtobeingtaxedasordinaryincome–ex.35%rate).Attheendoftheday,theexporterreceivesadeducIonof35%onthecommissionpaymentsmadetotheICMDISCandontheotherhandonlypaysa23.8%taxrateontheincomerepatriatedfromtheICMDISC.TheboWomlineisapermanenttaxsavingsforU.S.exportersandtheirshareholdersof10%orhigherofnetexportincome.
  45. 45. 13IC-DISC – Interest Charge DomesticInternational Sales CorporationWhatisanICMDISC?TheICMDISC( InterestChargedDomesIcInternaIonalSalesCorporaIon )wasdesignedasataxincenIveforsmalltomidsizedU.S.ExporIngcompanies.TheboWomlineisthatthetaxlawsprovideanopportunityforacompanytouseanICMDISCtohavethetaxon50%ofitsexportincomereducedbymorethan50%.Profitsaretaxedatthedividendrate(currently15%)asopposedtoordinaryincometaxrates(topratecurrently35%).Howdoesitwork?InanutshellyouarecreaIngaseparateenIty(orsomeImesseveralenIIestomaximizethetaxbenefits)–the CorporaIon partofICMDISC.TheexporterpayscommissionstotheICMDISC.ThecommissionsarededucIbletotheexporter,andthedeemedoractualdividendpaymentofthecommissionincomeintheICMDISCistaxedtotheexporter sshareholders/partnersatthe23.8%rate(asopposedtobeingtaxedasordinaryincome–ex.35%rate).Attheendoftheday,theexporterreceivesadeducIonof35%onthecommissionpaymentsmadetotheICMDISCandontheotherhandonlypaysa23.8%taxrateontheincomerepatriatedfromtheICMDISC.TheboWomlineisapermanenttaxsavingsforU.S.exportersandtheirshareholdersof10%orhigherofnetexportincome.
  46. 46. 14IC-DISC – Interest Charge DomesticInternational Sales CorporationEXAMPLE:Company(Without(an(IC/DISCForeignTradingGrossReceipts $10,000,000CostofGoodsSold $6,000,000Selling,GeneralandAdministraIve $3,000,000ExportNetIncome $1,000,000TaxRate 35%TaxPaid $350,000Company(With(an(IC/DISCForeignTradingGrossReceipts $10,000,000 CostsofGoodsSold $6,000,000 Selling,GeneralandAdministraIve $3,000,000 CMCorp ICMDISCExportNetIncome $1,000,000 $1,000,000 ICMDISCCommissionDeducIon ($500,000) $500,000TaxBaseAierICMDISCCommission $500,000 $500,000TaxRate 35% 23.8%TaxPaid $175,000 $119,000IC/DISC(Net(Tax(Savings($350,000(/(($175,000(+($119,000)(=($56,000
  47. 47. 15Geographic Targeted EconomicsDevelopment Areas (G-TEDAs)CaliforniahasfourtypesofGMTEDAs.EachoftheseareashaverelatedtaxincenIvebenefits.ThemainpurposeoftheGMTEDAsistosImulateandencouragebusinessinvestmentbyallowingtheprivate market forces to revive the local economy and job creaIon for qualified disadvantagedindividualsinstatedesignatedeconomicallydistressedareas.EnterpriseZoneBenefits HiringCredits SalesorUseTaxCredits BusinessExpenseDeducIon NetInterestDeducIon  100%NetOperaIngLossCarryover(NOL)  CarryMforwardfor15years LocalAgencyIncenIvesmayalsobeavailable(e.g.,CityofLosAngelesDWPratediscounts,andreducedparkingordinances).
  48. 48. 16Employee Hiring CreditsTheEZHiringCreditisadollar&for&dollarstateincometaxcredit:  Upto$37,440perqualifiedemployeeoverafiveMyearPeriod  $12,480inthefirstyear  Thecreditisbasedonthelesserofthequalifiedemployee shourlywagepaidor150%oftheminimumwage  VoucherconfirmingeligibilityisrequiredfromthelocalEZvoucheringagencyandmaintainedforaperiodoffouryears  TaxpayerscanonlyoffsettaxpaidwithEZcredits

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