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 APPAREL AND 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 UCLA Anderson Graduate School of Management and his BA in economics and accounting from Claremont McKenna College.

601 South Figueroa Street, Suite 4050 Los Angeles CA 90017 (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 Los Angeles CA 900241 (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 Los Angeles CA 90071 (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

Source: U.S. Bureau of Labor Statistics.

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

Source: U.S. Bureau of Labor Statistics.

“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$

-

5770 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 6.9x5.9x

6.7x 7.0x 7.2x8.5x 8.1x

9.3x8.3x

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/EBITDA Equity/EBITDA O thers

$419

$235 $225 $240$282

$327

$378$411

$269

$170

$281 $297

2,559

1,6111,573 1,682 1,783

2,0252,263

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 4.7x4.1x 4.0x

3.4x3.9x 3.8x

4.2x4.7x 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/EBITDA SLD/EBITDA O ther<Sr<D ebt/EBITDA Sub<D ebt/EBITDA

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'

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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.'

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In'some'cases,'I.R.C.'Sec.'108(b)'requires'an'offseVng'reducIon'of'tax'aWributes,'in'the'following'order:'

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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.'

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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.''

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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'''

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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'stepMup' can' result' in' future' depreciaIon' or' amorIzaIon' income' tax' deducIons' for' the'buyer.''

8

Section 363 Sales of Debtor Corporation 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.'

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9

Section 363 Sales of Debtor Corporation 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'

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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:'

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•  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.''

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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.'''

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13

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'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.'''

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14

IC-DISC – Interest Charge Domestic International Sales Corporation

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'

'