Value Added Value Subtracted Advising the Debtor

Fixing troubled companies is primarily a matter of economics. Whether problems are
structural in origin (<i>e.g.,</i> too much debt) or result from fundamental business
issues (<i>e.g.,</i> operating losses), resolving a troubled company's problems will
ultimately depend on finding an economic solution. In negotiating and reaching successful
settlements, financial advisors can and should perform important, often central, roles.

</p><p>The type of financial advice that will be necessary depends on several key factors:
(a) The size and complexity of a troubled company's business, (b) the company's
capital structure, and (c) the industry and environment within which a company
competes. Clearly, larger, public and complex business enterprises with multiple
tranches of debt and equity require sophisticated financial analysis and advice in
formulating, negotiating and implementing a successful restructuring plan.

</p><p>The financial advisor's role is to enhance the capabilities of management and other
professionals in the restructuring process. Financial advisors should have broadly based
and specialized experience and expertise in finance, investment banking and corporate
restructurings, augmented, where possible, with specific industry knowledge relevant to
the company being restructured.

</p><p>The role of a financial advisor should specifically encompass the following:
</p><ol>
<li>Assisting the company in preparing its business plan. The financial advisor
must act as a "reality check" on the reasonableness of the assumptions underlying
a business plan and assess the likelihood that the business plan (i) is feasible,
(ii) presents a viable approach for restructuring the company, and (iii) has a
high probability of achieving the forecasted results.

</li><li>Designing debt and equity securities that (i) can be supported by the
projected cash flows, (ii) will optimize the company's capital structure, and
(iii) will maximize the value of the company.

</li><li>Valuing the business enterprise and establishing a matrix of potential
distributions to creditors, equity-holders and others, of cash, property, and debt
and equity securities. Proposed distributions should take into account, among other
factors, the relative priority and security interests of all debt and equity claims,
and provide for fair and equitable treatment to all parties-in-interest.

<blockquote><blockquote>
<hr>
<big><i><center>
...the most important elements a financial
advisor must possess to be effective are
integrity and independence.
</center></i></big>
<hr>
</blockquote></blockquote>

</li><li>Estimating the value of creditor and other stakeholder recoveries, including
the potential trading value of securities issued as part of a restructuring or
reorganization plan.

</li><li>Assisting the company with negotiating a restructuring plan with its creditors
and other stakeholders, including proposed final distributions and recoveries.

</li><li>Helping the company obtain working capital financing to fund post-restructuring
requirements.

</li><li>Testifying on behalf of the company (in the context of a chapter 11 case)
with respect to valuation, the feasibility of the company's business plan, and the
value of securities to be issued.
</li></ol>

<p>The financial advisor's role is not as simple as the abbreviated list indicates,
nor is it conducted in a vacuum indifferent to all other factors that affect a
troubled company. While the preceding analyses and tasks are being performed, two key
and interrelated principles cannot be overlooked.

</p><p>The first and most important principle is to fix the company. Many restructurings
ultimately fail because rational solutions to the company's fundamental problems are either
put off, ignored or are predicated upon unreasonable assumptions with respect to future
events. These "band-aid" restructurings often ignore the capabilities of management and
the limitations of the market for a company's products or services. The financial
advisor must realistically assess the company's management, market condition and
competitive position in order to avoid establishing a "doomed-to-fail" restructuring
program based more on hope and luck than on rational expectations and management
skills. In restructuring a company, it is important to have a business plan and
capital structure that bases its future success on reasonable assumptions and elements
that are subject to control or significant influence by company management.

</p><p>If a restructuring plan is based on a going-concern assumption and the generation
of positive cash flows, the financial advisor must be convinced that the underlying
business operations are capable of achieving this objective and that the projections
contained in the business plan can be met. Otherwise, the restructuring plan needs
to be modified. Modifications may include (1) selling the company or certain of its
divisions, (2) finding strategic partners, (3) finding equity investors (to the
extent not already contemplated), (4) changing business or product lines or
distribution channels, or (5) pursuing an orderly liquidation of company assets.

</p><p>Fixing a troubled company requires agreement among senior management and the board
as to its origin, and ideally, concurrence regarding an optimum solution. The
financial advisor should assist a company to identify the key issues that forced it
to undergo a restructuring. This requires strong problem-identification skills and deft
communication abilities in order to explain to a management and board (which may
include members with responsibility for the distressed circumstances) the origins of and
solutions to their troubles.

</p><p>The second principle is to maximize the value of the company and the recoveries
available to its creditors and other stakeholders. This may be accomplished by one or
more of the following:

</p><ul>
<li>a bootstrap reorganization exchanging debt for equity,

</li><li>extending principal debt repayments,

</li><li>raising new debt or equity capital through an underwriting or private
placement, or

</li><li>selling all or part of the company, or some combination thereof.
</li></ul>

<p>In order to determine which approach will maximize the value of a company, the
financial advisor will need to assess the financial and business implications of each
restructuring alternative, including risk/reward components and the time value of money
impact of one course of action over another. Within these constraints, the alternatives
must attempt to reconcile or choose among objectives of the company and those of
various parties-in-interest. Moreover, the financial markets' evaluation of securities
to be issued in connection with a restructuring will be a critical factor in seeking
to both reconcile differences among competing stakeholders and maximize value.

</p><p>Financial skills aside, the most important elements a financial advisor must
possess to be effective are integrity and independence. With so many competing
interests, including those of company management, gridlock can result even when all
parties are well intentioned and even purport to agree on a course of action. The
independence and integrity of a financial advisor can be an important factor in
overcoming and working through entrenched positions, balancing the needs of the various
constituencies, building consensus, and assisting in charting the best and/or most
practical course of action.

</p><p>The financial advisor's independence is a cornerstone for establishing credibility not
only with the company, but also with the company's stakeholders. Once credibility has
been established, the financial advisor can act both as an advocate for a proposed
restructuring plan and as a liaison between the company and its stakeholders. The
ability to focus management, a board of directors, creditors, equity-holders and
other parties-in-interest, on a restructuring transaction acknowledged as maximizing
value and fixing a company's problems, will be the only benchmark by which the
effectiveness of a financial advisor is ultimately established.

</p>