Alternatives for a Distressed Company in Apparel and Retail

Panel:
David S. Kupetz, Partner, SulmeyerKupetz
George P. Blanco, Partner, Avant Advisory Group
Steve J. Cupingood, CPA, Partner, SingerLewak
Mitchell Cohen, EVP; CIT Trade Finance
Moderator: Alexander B. Kasdan, Managing Director, DelMorgan & Co.
Event Organized by Anna Spektor, Founder and President, Expert Presence
ALTERNATIVES FOR A DISTRESSED COMPANY
IN APPARELAND RETAIL
May 9, 2013

1
David S. Kupetz, a member of SulmeyerKupetz, specializes in troubled transactions, crisis avoidance
consultation, workouts, restructurings, reorganizations, bankruptcies, receiverships, assignments for the
benefit of creditors and other non bankruptcy insolvency proceedings. He represents debtors (in
restructurings and workouts and in chapter 11 reorganization cases), secured creditors, unsecured
creditors' committees, assignees for the benefit of creditors, buyers/sellers of businesses/assets in
distressed 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 Electric
Capital Corporation (secured lender); Litton Industries, Inc. (creditor); Boston West, LLC (Boston
Markets) (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); No
Fear 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 and
Practice, The Annual Survey of Bankruptcy Law, The Urban Lawyer, The Banking Law Journal, Los
Angeles Lawyer, California Lawyer, Commercial Law Bulletin, Los Angeles Daily Journal, The
Secured 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 Commercial
Bankruptcy Forms for many years and currently is the author of the Collier Handbook for Creditors'
Committees.
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 the
University of California, Hastings College of the Law (J.D., 1986).
333 South Hope Street
35th Floor
Los Angeles CA 90071
(213) 617-5274
dkupetz@sulmeyerlaw.com
www.sulmeyerlaw.com

2
George P. Blanco, Managing Director and Partner, Avant Advisory Group, has
more than 25 years of senior executive and consulting experience in financial and
operational management high growth and financially distressed companies. His crisis
and turnaround management experience includes operational and financial
restructuring, cost reduction programs, reorganizations in bankruptcy, negotiations
with lenders and creditors, and capital sourcing.
In addition to chief restructuring officer (“CRO”) roles, he also has served as CFO of a
public company and CEO of a telecommunications provider.
George is a Certified Insolvency and Restructuring Advisor (“CIRA”), having served
more than 12 years in the Big 4 accounting and consulting firm environment. In his 30
years of consulting and senior-level experience, he has served as partner and managing
director in consulting, financial advisory and the corporate recovery practices of
PricewaterhouseCoopers and AlixPartners.
George is experienced in manufacturing plant consolidations, supply chain/logistics,
management business process re-engineering, operational restructuring, financial and
manufacturing systems implementation, post-acquisition integration and working
capital improvement for both middle-market and “Fortune 500” companies across
multiple industries.
George has taught classes in Total Quality Management and participated on numerous
panels involving operational restructuring and profitability improvement. In addition to
being a CIRA, he earned his MBA in finance from the UCLAAnderson Graduate
School of Management and his BA in economics and accounting from Claremont
McKenna College.
601 South Figueroa Street,
Suite 4050
(213) 479-7900
GBlanco@AvantAdvisory.com
www.AvantAdvisory.com

3
Steve J. Cupingood leads SingerLewak’s firm-wide Tax practice and he
is the Los Angeles Office Lead Partner.
Steve has over 24 years of experience in individual and business entity
taxation (including with shareholders and partners). He has significant
experience with nonprofits as well as with high net worth individuals. In
addition to possessing strong technical expertise, Steve has extensive
consulting experience in tax planning, research and compliance services. A
significant portion of Steve’s professional experience includes over six
years in the tax department of a large international accounting firm.
Steve received his Bachelors of Science degree in Business Administration
with an Accounting major from California State University, Northridge, in
1984. He is a Certified Public Accountant and a member of the American
Institute of Certified Public Accountants and the California Society of
CPAs.
10960 Wilshire Blvd.
Suite 700
(310) 477-3924
scupingood@singerlewak.com
www.singerlewak.com

4
Mitch Cohen is Executive Vice President - Managing Director and Western
Regional Manager of CIT Trade Finance, responsible for client service and
retention, business development and client credit quality. He has more than 30 years
experience in the financing industry. His responsibilities include client service and
retention, ensuring client credit quality and profitability, and new business
development throughout the Western United States, as well as CIT’s Hong Kong
office.
Mitch’s areas of expertise include factoring and credit protection solutions for
companies that want to increase sales, improve cash flow, reduce operating expenses
and eliminate customer credit losses, and financing solutions for consumer products
companies (apparel, footwear, housewares, furniture and home furnishings).
Mitch has more than 30 years of experience in the financing industry. Prior to joining
CIT, he served as Senior Vice President for Bank of Newport. Prior to this, he was
Senior Vice President with Mitsui Manufacturers Bank. In 2004, Cohen was honored
with the Spirit of Life Award by the Apparel Industries Group for the City of Hope and
was the recipient of the 1999 Humanitarian Award from the National Jewish Medical
and Research Center.
Mitch earned a bachelor’s degree in accounting from the State University of New York
and is a graduate of the University of Washington’s Pacific Coast Banking School. He
also completed the Wharton Executive Development Program.
300 S Grand Ave #12
(213) 613-2416
mitchell.cohen@cit.com
www.cit.com

5
Alexander B. Kasdan is a Managing Director at DelMorgan & Co. He has more
than twenty years of investment banking, real estate, corporate law and corporate
strategy experience. Alex has executed over 100 domestic and cross-border
transactions 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 at
Barrington Associates in Los Angeles, where he headed the restructuring group, Peter
J. 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 Fowler
LLP), where he specialized in mergers and acquisitions, private equity and corporate
finance transactions. In addition, Alex served as Corporate Counsel in charge of
business development at Schlumberger Ltd., a global oilfield and information services
company.
Alex graduated magna cum laude from Middlebury College with a B.A. degree in
Economics and Italian and was elected to Phi Beta Kappa during his junior year. In
addition, he holds a J.D. degree from Columbia University Law School and has studied
at the University of Florence in Italy. Alex is admitted to the Bar in the State of New
York.
Alex is a Senior Advisor to Governance and Transactions LLC, an advisory firm
established in 2003 by Mr. James L. Gunderson, former Secretary and General Counsel
of Schlumberger Limited, to assist boards, management and owners with corporate
governance, compliance, structuring and strategic transactions.
100 Wilshire Blvd.
Suite 750
Santa Monica, CA 90401
(310) 980-1718
www.delmorganco.com
www.cvgpartners.com
ak@cvgpartners.com

6
Anna Spektor, the Founder and President of Expert Presence,
specializes in digital and event marketing, public relations and
brand communications programs for professional services firms. As
a business development consultant, Anna helps clients develop and
implement comprehensive strategies designed to generate new and
solidify existing referral relationship, elevate profile, and build
brand awareness. Anna is also the founder of Expert Forum and
Expert Webcast, affiliate companies focused on providing the
professional community with quality educational content,
continuing professional education and targeted networking
opportunities.
1999 Avenue of the Stars
Suite 1100
Los Angeles, CA 90067
(310) 995-6579
www.expertpresence.com
anna@expertpresence.com

7
Alternatives for a Distressed Company in
Apparel and Retail
David S. Kupetz

8
Common Fatal Errors by Retailers
•  Failure to engage an experienced turnaround professionals to guide a
return 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 management
information system
•  Disastrous acquisitions

9
Repositioning
•  Many retail failures are caused by rapid expansion, mismanagement
or too much leverage.
•  A significant number of failures occur as a result of being out of step
with the market and losing touch with the client base that made a
company successful in the first place.
•  The fashion industry is particularly susceptible.

10
Transaction 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 of
other distressed transaction structures
•  Chapter 7

11
Legal Developments/Issues
•  Secured Creditor Cannot be Stripped of Right to Credit Bid Under
Chapter 11 Plan Providing for Sale
–  RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct.
2065 (2012)
•  Uncertainty Regarding Trademark Licensee’s Right to Retain
License 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 Reject
Leases under Which Debtor is Lessee
•  Administrative Priority for § 503(b)(9) Reclamation Claims

12
Selected Southern CA Case Studies
•  ABC – Acquisition of Assets of Fortune Fashion Industries by Jerry
Leigh 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 Retail
Assets
•  Chapter 11 Plan by American Home
–  Furniture Retailer
–  Liquidated Arizona Stores Upon Commencement of Case to Pay Off
Secured Lender
–  Reorganized Around Core New Mexico locations and Restructured
Unsecured Debt Under Chapter 11 Plan

13
Alternatives for a Distressed Company in
Apparel and Retail
Alexander B. Kasdan, Managing Director

14
Capital Markets Overview
•  As of December 31, 2012 the S&P 500 Retailing
Index and the S&P 500 Consumer Durables &
Apparel Index increased by 25% and 19%,
respectively, over prior year levels while
outperforming the S&P 500 by 11% and 6%,
respectively
•  The equity markets displayed overall strength and
investor demand
•  Several initial and secondary public equity
offerings were completed in 2012

15
Annual M&A Activity
•  Overall M&A activity in the Consumer & Retail
industry remains healthy with190 closed
transactions during 2012
•  The total value of completed M&A transactions in
the Consumer & Retail industry increased 41% to
$66.6 billion
•  Transactions with values less than $500 million
represented approximately 86% of total deal
volume and 32% of total deal value

16
Apparel Manufacturing Employment
•  Employment has declined
by more than 80% in the last
two decades
•  The decline has been
proportional throughout the
component industries
Source: U.S. Bureau of Labor Statistics.

17
Productivity-Output Per Hour
•  Labor productivity in the U.S. manufacturing sector, textile mills and footwear manufacturing
more than or nearly doubled from1987 to 2010
•  Labor productivity in apparel manufacturing grew at about the same rate as overall
manufacturing productivity from 1987 to 2000 but generally declined from 2000 to 2010

18
Producer 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 other
apparel were more muted until December 2011

“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$economic$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$

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-

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$
-
57
70 67
75
100
125
173
153 157
136
168
103
125
147
107
91
61
0
20
40
60
80
100
120
140
160
180
200
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Number of Bankruptcy Sales
Source: Capital IQ.
Note: Includes all domestic targets and sellers that have filed for bankruptcy.

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
$300B
YE*2010 YE*2011 YE*2012 YE*2013
Source:(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
$200B
2012 2013 2014 2015 2016 2017 2018 2019
12/31/2010 12/31/2011 6/1/2012
The&broader&market&has&a&direct&
impact&on&middle&and&lower&
middle&market&transac1ons&

6$
The-Future-Outlook-
The-Broader-Market-View-
  Standard$&$Poor's$es6mates$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&

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$firms$

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$

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$

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$

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$seller-expecta*ons-(~8x-EBITDA)-
and$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 7.5x
7.1x 6.9x
5.9x
6.7x 7.0x 7.2x
8.5x 8.1x
9.3x
8.3x
6.6x
8.4x 8.2x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Senior3D ebt/EBITDA Sub3D ebt/EBITD A Equity/EBITDA O thers
$419
$235 $225
$240
$282
$327
$378
$411
$269
$170
$281
$297
2,559
1,611
1,573
1,682
1,783
2,025
2,263
2,250
1,680
1,107
1,561 1,606
0
500
1,000
1,500
2,000
2,500
3,000
$0B
$50B
$100B
$150B
$200B
$250B
$300B
$350B
$400B
$450B
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Deal2Value Number2of2Deals
4.8x
4.7x
4.1x 4.0x
3.4x
3.9x 3.8x
4.2x
4.7x 4.7x
5.6x
4.5x
3.3x
4.2x 4.3x
0.0x
2.0x
4.0x
6.0x
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
FLD /EBITD A SLD /EBITDA O ther<Sr<D ebt/EBITD A Sub<D ebt/EBITD A
Source:(LCD(Comps(
Debt-Mul*ples-of-Middle-Market-LBO-Loans-
(First-Lien-/-Second-Lien-Debt)-

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'
$750'
2006 2007 2008 2009 2010 2011
Cumulative)O verhang Annual)O verhang

1
TAX
CONSIDERATIONS
FOR
RETAIL
AND
APPAREL
Steve J. Cupingood
Tax Partner
(310) 477 – 3924, Ext. 1353
scupingood@singerlewak.com

2
Cancellation of Indebtedness Income
General'rule'–'a'discharge'of'debt'for'less'than'the'amount'due'must'be'recognized'as'taxable'income.''
Codified'in'IRC'Sec.'61(a)(12)'–'gross'income'includes'income'from'the'discharge'of'indebtedness.'''
'
Income'recognized'is'generally'the'difference'between'the'face'amount'of'the'instrument'and'the'amount'
paid'on'discharge.'
'
The'debt'discharge'income'is'generally'taxed'at'ordinary'income'tax'rates.''
'
IRC'sec.'108(a)(1)'lists'four'situaIons'in'which'realized'debt'discharge'income'may'not'be'recognized'for'
federal'income'tax'purposes.'Subject'to'numerous'other'rules'and'requirements,'nonMrecogniIon'may'occur'
if:'
'
'(A)'the'discharge'occurs'in'a'Itle'11'case;'
'(B)'the'discharge'occurs'when'the'taxpayer'is'insolvent;''
'(C)'the'discharged'debt'is'qualified'farm'indebtedness;'or'
'(D)'the'discharged'debt'is'qualified'real'property'business'indebtedness'
'
The'IRC'defines'insolvency'to'mean'the'excess'of'liabiliIes'over'the'fair'market'value'of'assets'immediately'
before'the'debt'discharge.'
'

3
Tax Attribute Reduction
When'debt'discharge'income'is'excluded'from'gross'income'under'the'insolvency'
excepIon,'there'are'potenIal'prices.'
'
In'some'cases,'I.R.C.'Sec.'108(b)'requires'an'oﬀseVng'reducIon'of'tax'aWributes,'in'the'
following'order:'
'
1.  NOLs'for'the'current'taxable'year'and'any'NOL'carryovers.'
2.  General'business'credits'under'I.R.C.'Sec.'38.'
3.  Minimum'tax'credits'available'under'I.R.C.''Sec.'53(b).'
4.  Capital'loss'carryovers.'
5.  Basis'in'property,'with'ordering'rules'in'I.R.C.'Sec.'1017.'
6.  Passive'acIvity'loss'and'credit'carryovers'under'I.R.C.'Sec.'469(b).'
7.  Foreign'tax'credit'carryovers.'
'
'
'

4
What is the Research & Development
Tax Credit?
•  The'research'credit'( R&D'Credit )'is'a'tax'incenIve'for'performing'qualified'
research'in'the'U.S.''
•  The'net'credit'is'equal'to'approximately'6.5%'of'qualified'research'expenditures.'
•  About'35'states'have'enacted'some'type'of'R&D'credit.''
'
Profile'of'R&D'Candidate'
•  Develops'and'manufactures'new'products'
•  Improves'exisIng'products'
•  Develops'or'improves'manufacturing'process'
•  Has'filed'for'patents'–'Intellectual'property'
•  Plant'improvements'–'new'machinery/process'
•  Developed'soiware'for'internal'use'

5
What is Qualified Research ?
•  Research'that'saIsfies'a' fourMpart'test 'is' Qualified'Research '(must'meet'ALL'4'parts).'
•  Qualified'Research 'is'research'that'is:'
1.  Technological'in'Nature'
2.  Undertaken'to'Eliminate'Uncertainty'
3.  Undertaken'for'a'PermiWed'Purpose;'and'
4.  Consists'of'a'Process'of'ExperimentaIon'
'
What'Expenses'Qualify'for'the'R&D'Credit:'
•  Wages'–'employees 'WM2,'box'1'amount'
•  Research,'direct'supervision,'direct'support'
•  Supplies'–'nonMdepreciable'tangible'personal'property'used'or'consumed'in'the'research'process'
•  Contract'Research'–'research'performed'by'nonMemployees'
•  65%'Rule'–'65%'of'contract'research'is'eligible'

6
Research and Development Tax Incentives
for the Apparel and Textiles Industry
In'the'apparel'and'texIles'industry,'R&D'acIviIes'are'evidenced'in'the'design'and'development'of'new'garments,'
shoes,'accessories,'texIles/fabrics,'chemical'and'topical'treatments,'and'embroidery'techniques.'Apparel'
companies'at'any'stage'in'the'development'chain'can'have'qualifying'acIviIes,'from'the'texIle'mills,'to'the'
design'houses,'to'the'manufacturing'plants.''
If'your'company'operates'in'the'apparel,'shoe,'or'texIle'industries,'there'is'a'strong'chance'that'you'would'
benefit'from'an'R&D'tax'credit'study.''
'
Examples'of'apparel'and'texIle'innovaIons'eligible'for'R&D'tax'incenIves'include'the'following:'
'
• Designing'new'garments'and'apparel''
• Designing'new'shoe'designs''
• Designing'innovaIve'shoe'fit'and'comfort'techniques''
• GeneraIng'prototypes'and'fit'samples'of'new'products'for'tesIng'and'validaIon''
• Developing'new'woven,'knit,'or'nonMwoven'texIles''
• Developing'new'or'improved'chemical'or'topical'treatments''
• Developing'new'or'improved'manufacturing'processes''
• Design'and'development'of'scaled'up'manufacturing'processes''
'
'

7
Section 363 Sales of Debtor Corporation
Stock vs. Assets
SecIon' 363' allows' for' the' courtMapproved' sale' of' either' the' assets' of' a' debtor'
corporaIon'or'the'stock'of'a'debtor'corporaIon.' 'The'structuring'of'the'SecIon'363'
sale' aﬀects' the' immediate' income' tax' consequences' of' the' transacIon' to' both' the'
buyer'corporaIon'and'the'seller'corporaIon.'
'
For'example,'the'buyer'may'wish'to'keep'the'debtor'corporaIon'intact'and,'thereby,'
preserve'the'debtor'income'tax'aWributes'such'as'its'net'operaIng'losses'(NOLs).' 'In'
that'case,'the'buyer'will'prefer'to'purchase'the'debtor'corporaIon'stock.'
'
However,'if'the'buyer'cannot'use'the'debtor'income'tax'aWributes,'then'the'buyer'may'
prefer'to'purchase'the'debtor'corporaIon'assets.' 'That'way,'the'buyer'can'obtain'a'
stepMup'in'the'depreciable'tax'basis'of'the'acquired'debtor'assets.''This'tax'basis'stepM
up' can' result' in' future' depreciaIon' or' amorIzaIon' income' tax' deducIons' for' the'
buyer.'
'

8
Stock vs. Assets
On'the'other'hand,'the'debtor'corporaIon'will'generally'want'to'minimize'the'taxable'
income'recognized'on'the'sale'of'either'its'stock'or'its'assets.' 'The'seller s'ability'to'
minimize'the'reported'income'on'the'sale'will'depend'on:'
1.  The'debtor s'tax'basis'in'the'corporaIon'stock'or'the'corporaIon'assets,'
2.  The'availability'of'oﬀseVng'losses,'and'
3.  The' realizaIon' of' any' cancellaIon' of' debt' (COD)' income' related' to' the'
bankruptcy'or'reorganizaIon.'
The'debtor'corporaIon'may'be'able'to'indeﬁnitely'defer'the'recogniIon'of'the'gain'on'
the'transacIon'by'structuring'the'SecIon'363'sale'as'a'taxMfree'reorganizaIon'under'
Internal'Revenue'Code'SecIon'368.'
'
'

9
Stock vs. Assets
Typically,'either'the'debtor'corporaIon'assets'or'stock'are'sold'in'a'taxable'SecIon'363'
sale,'the'debtor'will'recognize'either'a'gain'or'loss.''The'amount'of'the'taxable'gain'or'
loss'will'be'equal'to'the'diﬀerence'between:'
1.  The'amount'realized'from'the'sale'and'
2.  The'seller s'adjusted'tax'basis'of'the'transferred'property.'
'
The' amount' realized' from' the' SecIon' 363' sale' includes' all' of' the' consideraIon'
received'by'the'seller.''This'consideraIon'includes'the'following:'
1.  Cash'
2.  The'fair'market'value'of'any'property'received'from'the'buyer'
3.  Any'liabiliIes'assumed'by'the'buyer'
4.  The'issue'price'of'any'debt'instrument'issued'by'the'buyer'
'
'

10
Additional Items to Consider with
Acquisitions in Bankruptcy
AcquisiIons'from'a'bankruptcy'estate'can'be'subject'to'a'number'of'taxes,'such'as'real'estate'transfer'taxes'and'
sales'taxes,'that'could'apply'to'transfers'of'assets.' 'The'U.S.'Bankruptcy'Code'contains'an'excepIon'for'some'
transfer'taxes,'though'it'does'not'apply'in'all'circumstances.'
'
Further,' acquisiIons' could' trigger' changeMofMcontrol' provisions' in' property' tax' statutes,' which' may' lead' to' a'
revaluaIon'of'real'estate'and'an'increase'in'property'tax'rates.'
'
Internal'Revenue'Code'SecIon'382'limits'the'use'of'the'acquired'debtor'corporaIon'NOLs'and'capital'losses'(and'
certain'builtMin'losses).' 'SecIon'382'applies'to'a'transacIon'where'a'greater'than'50'percent'change'in'stock'
ownership'of'the'loss'corporaIon'occurred'during'a'three'–year'period'(called'an'“ownership'change”).'
'
If'there'is'an'ownership'change,'SecIon'382'places'an'annual'limit'on'the'amount'of'taxable'income'aier'the'
ownership'change'that'may'be'oﬀset'by'the'loss'corporaIon'NOL'carryovers'arising'before'the'ownership'change.'
'
'

11
Section 199 – Domestic Production
Activities Deduction
Taxpayer s'who'manufacture'or'produce'goods,'develop'or'improve'qualifying'producIon'property'may''
qualify'for'the'DomesIc'ProducIon'AcIviIes'DeducIon'(DPAD)'on'their'federal'income'tax'return.'This'tax''
deducIon'is'9%'of'the'smaller'of:'
'
•  the'qualified'producIon'acIviIes'income'(QPAI),'or''
•  taxable'income'figured'without'the'DPAD''
'''
Qualified'ProducIon'AcIviIes'
''
Qualified'producIon'acIviIes'eligible'for'claiming'the'deducIon'under'IRC'SecIon'199:'
•  Manufacturing'based'in'the'United'States,'
•  Selling,'leasing,'or'licensing'items'that'have'been'manufactured'in'the'United'States,'
•  Selling,'leasing,'or'licensing'moIon'pictures'that'have'been'produced'in'the'United'States,'
•  ConstrucIon' services' in' the' United' States,' including' building' and' renovaIon' of' residenIal' and'
commercial'properIes,'
•  Engineering'and'architectural'services'relaIng'to'a'USMbased'construcIon'project,'
•  Soiware'development'in'the'United'States,'including'the'development'of'video'games.''
'
'

12
IC-DISC – Interest Charge Domestic
International Sales Corporation
What'is'an'ICMDISC?'
'
The'ICMDISC'( Interest'Charged'DomesIc'InternaIonal'Sales'CorporaIon )'was'designed'as'a'tax'incenIve'for'small'to'midsized''
U.S.'ExporIng'companies.'The'boWom'line'is'that'the'tax'laws'provide'an'opportunity'for'a'company'to'use'an'ICMDISC'to'have''
the'tax'on'50%'of'its'export'income'reduced'by'more'than'50%.''Proﬁts'are'taxed'at'the'dividend'rate'(currently'5%'or'20%'
depending'on'AGI)'as'opposed'to'ordinary'income'tax'rates'(top'rate'currently'35%).'
'
How'does'it'work?'
'
The'exporter'pays'a'commission'to'the'ICMDISC.''The'commissions'are'deducIble'to'the'exporter,'and'the''
deemed'or'actual'dividend'payment'of'the'commission'income'in'the'ICMDISC'is'taxed'to'the'exporter s'shareholders/partners''
at'the'23.8%'rate'(as'opposed'to'being'taxed'as'ordinary'income'–'ex.'35%'rate).'''
'
At'the'end'of'the'day,'the'exporter'receives'a'deducIon'of'35%'on'the'commission'payments'made'to'the'ICMDISC'and'on'the''
other'hand'only'pays'a'23.8%'tax'rate'on'the'income'repatriated'from'the'ICMDISC.''The'boWom'line'is'a'permanent'tax'savings''
for'U.S.'exporters'and'their'shareholders'of'10%'or'higher'of'net'export'income.'''
'

13
What'is'an'ICMDISC?'
'
The'ICMDISC'( Interest'Charged'DomesIc'InternaIonal'Sales'CorporaIon )'was'designed'as'a'tax'incenIve'for'small'to'midsized''
U.S.'ExporIng'companies.'The'boWom'line'is'that'the'tax'laws'provide'an'opportunity'for'a'company'to'use'an'ICMDISC'to'have''
the'tax'on'50%'of'its'export'income'reduced'by'more'than'50%.''Proﬁts'are'taxed'at'the'dividend'rate'(currently'15%)'as''
opposed'to'ordinary'income'tax'rates'(top'rate'currently'35%).'
'
How'does'it'work?'
'
In'a'nutshell'you'are'creaIng'a'separate'enIty'(or'someImes'several'enIIes'to'maximize'the'tax'beneﬁts)'–'the' CorporaIon ''
part'of'ICMDISC.''The'exporter'pays'commissions'to'the'ICMDISC.''The'commissions'are'deducIble'to'the'exporter,'and'the''
deemed'or'actual'dividend'payment'of'the'commission'income'in'the'ICMDISC'is'taxed'to'the'exporter s'shareholders/partners''
at'the'23.8%'rate'(as'opposed'to'being'taxed'as'ordinary'income'–'ex.'35%'rate).'''
'
At'the'end'of'the'day,'the'exporter'receives'a'deducIon'of'35%'on'the'commission'payments'made'to'the'ICMDISC'and'on'the''
other'hand'only'pays'a'23.8%'tax'rate'on'the'income'repatriated'from'the'ICMDISC.''The'boWom'line'is'a'permanent'tax'savings''
for'U.S.'exporters'and'their'shareholders'of'10%'or'higher'of'net'export'income.'''
'

14
EXAMPLE:'
'
'
Company(Without(an(IC/DISC'
Foreign'Trading'Gross'Receipts' $10,000,000'
Cost'of'Goods'Sold' $6,000,000'
Selling,'General'and'AdministraIve' $3,000,000'
Export'Net'Income' $1,000,000'
Tax'Rate' 35%'
Tax'Paid' $350,000'
Company(With(an(IC/DISC'
Foreign'Trading'Gross'Receipts' $10,000,000' '' ''
Costs'of'Goods'Sold' $6,000,000' '' ''
Selling,'General'and'AdministraIve' $3,000,000' 'CMCorp' ICMDISC'
Export'Net'Income' $1,000,000' $1,000,000' ''
ICMDISC'Commission'DeducIon' '' ($500,000)' $500,000'
Tax'Base'Aier'ICMDISC'Commission' '' $500,000' $500,000'
Tax'Rate' '' 35%' 23.8%'
Tax'Paid' '' $175,000' $119,000'
IC/DISC(Net(Tax(Savings($350,000(/(($175,000(+($119,000)(=($56,000'

15
Geographic Targeted Economics
Development Areas (G-TEDAs)
California'has'four'types'of'GMTEDAs.'Each'of'these'areas'have'related'tax'incenIve'benefits.'The'
main'purpose'of'the'GMTEDAs'is'to'sImulate'and'encourage'business'investment'by'allowing'the'
private' market' forces' to' revive' the' local' economy' and' job' creaIon' for' qualified' disadvantaged'
individuals'in'state'designated'economically'distressed'areas.''
'
Enterprise'Zone'Benefits'
 Hiring'Credits'
 Sales'or'Use'Tax'Credits'
 Business'Expense'DeducIon'
 Net'Interest'DeducIon'
  100%'Net'OperaIng'Loss'Carryover'(NOL)''
  CarryMforward'for'15'years'
 Local'Agency'IncenIves'may'also'be'available'(e.g.,'City'of'Los'Angeles'DWP'rate'discounts,'and'
reduced'parking'ordinances).'
'

16
Employee Hiring Credits
'
The'EZ'Hiring'Credit'is'a'dollar&for&dollar'state'income'tax'credit:'
'
  Up'to'$37,440'per'qualified'employee'over'a'fiveMyear'Period'
  $12,480'in'the'first'year'
  The'credit'is'based'on'the'lesser'of'the'qualified'employee s'hourly'wage'paid'or'
150%'of'the'minimum'wage'
  Voucher'confirming'eligibility'is'required'from'the'local'EZ'vouchering'agency'
and'maintained'for'a'period'of'four'years'
  Taxpayers'can'only'offset'tax'paid'with'EZ'credits'
'

Alternatives for a Distressed Company in Apparel and Retail

Recommended

Recommended

More Related Content

What's hot

What's hot (17)

Viewers also liked

Viewers also liked (18)

Similar to Alternatives for a Distressed Company in Apparel and Retail

Similar to Alternatives for a Distressed Company in Apparel and Retail (18)

More from Expert Webcast

More from Expert Webcast (9)

Recently uploaded

Recently uploaded (20)

Alternatives for a Distressed Company in Apparel and Retail