Unique Assets

1. Unique Assets Presenters: Craig Munro, FTI Consulting Canada Inc. Steven Dvorak, Cassels Brock & Blackwell LLP Russ Law, Crowe MacKay & Company Ltd. Aaron Stewardson, Maynards Industries Ltd.

2. Unique Assets Introduction and Overview

3. The word asset is defined as: A useful or valuable thing, person or quality; Property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies; Value considerations make assets “unique”

4. Drivers of value? Supply/demand imbalances Custom built or commodity Location Barriers to ownership (regulatory) Leading technology Market sentiment Liquidity Income stream (financial models) Speculation

5. Which asset currently is worth the most?

6. (A) Aaron’s new single detached home

7. (B) Mobile oil rig

8. (C) Honus Wagner baseball card

9. Which asset currently is worth the most? • Vancouver home • Mobile oil rig • HonusWagner baseball card

10. Types of unique assets: Arts/antiques/collectibles/jewelry Aircraft/watercraft Firearms Pharmaceutical companies Franchisees Agricultural enterprises/Food businesses Technology Life insurance/lottery tickets Resource based interests (mining, oil and gas, forestry) Privately held company vs publicly traded

11. Unique Assets Legal perspective

12. Which of the following factors is not relevant to the sale of intellectual property in insolvency proceedings?

13. (A) Status of legal protections

14. (B) Stage of development

15. (C) Cost of development

16. (D) Quality of management

17. Which of the following factors is not relevant to the sale of intellectual property in insolvency proceedings? • Status of legal protections • Stage of development • Cost of development • Quality of management

18. Basic Principles • Duty is to act impartially and in the best interests of all stakeholders. • Standard is to act in a commercially reasonable manner, having regard to all the circumstances. • Objective is to achieve the maximum net benefit from the disposition of the debtor’s assets.

19. Governing Authority Across Canada Re: Soundairestablishes the relevant considerations for the court on a sale approval application: • whether the insolvency professional made a sufficient effort to get the best price and not acted improvidently; • the interests of all affected parties; • the integrity of the sales process; • whether there was any unfairness in the performance of the process. Importantly, the court in Re: Soundair recognized that judges should not lightly second guess the business judgment of a receiver.

20. Significance of a Valuation • Frequently useful to conduct a preliminary analysis, with the benefit of expert guidance, to establish market value range. • Market data can assist in designing a sales process and in determining whether a proposed transaction is reasonable. • Alternatively, a favourable valuation might enable a debtor to obtain more time and options to restructure.

21. Valuing Intellectual Property • Increasingly, Intellectual Property (“IP”) comprises a valuable part of a debtor’s asset mix. • IP can include patents, trademarks, trade secrets and domain names. • Valuing IP presents significant issues, particularly with early stage developments. • Even mature IP, such as that held by Nortel, can present a valuation challenge. • Initial task is to determine approach: going concern or liquidation basis?

22. Valuing Intellectual Property Value drivers include several qualitative factors: • Status of legal protection • Clarity of ownership and other rights • Lifecycle • Quality and continuity of management • Stage of development/risk profile • Impact of insolvency proceedings

23. Valuation Methods Valuation methods include: • Cost approach – not particularly useful for IP; buyers are looking for a business model that reflects a future return on investment, not historical investment data. • Income approach – most widely used, but use caution when defining assumptions and discount factors. • Market approach – determines value based upon comparable transactions. • Defensive value – uniquely significant for IP; was considered a key factor in Nortel transactions.

24. Valuation Methods • Nortel decision demonstrates the difficulties in accurately projecting the market value of IP. The initial valuations were so seriously understated (at $900MM) that, had the company the benefit of appropriate guidance, it might have avoided a liquidation scenario. • Under liquidation, the assets netted $4.5B. The court was required to work backward from that value to allocate proceeds to each of the various Nortel divisions. Notoriously, the courts (both in Canada and the US) rejected all expert valuation evidence (without discrediting any particular method), and distributed the proceeds on a pro rata basis.

25. Unique Assets Issues regarding rapidly depreciating assets

26. How do you deal with inventory of a grocery store in a bankruptcy prior to the FMOC?

27. (A) Walk away

28. (B) Call for offers

29. (C) Sell to the landlord

30. (D) Sell to auctioneer to liquidate at premises

31. How do you deal with inventory of a grocery store in a bankruptcy prior to the FMOC? • Walk away • Call for offers • Sell to the landlord • Sell to auctioneer to liquidate at premises

32. What does rapidly depreciate in value mean? Trustee’s role to preserve value for the estate “Depreciate rapidly in value” are key words, not just perishable Occupation or preservation costs must be considered Consider other creditor’s interests (preservation of value) Unpaid supplier claims. No issue if resold or subject to agreement for sale (s. 81.1(1)(c), (iv. and v.)

33. Considerations for valuing depreciating assets: Rules of thumb? “Summarily dispose” in order to preserve value If in doubt contact large creditors Court application? Notice to who? Cost. Ultimately it is the trustee’s decision prior to FMOC. Document decision

34. Examples: Professional services receivables Financial advisor portfolios Food stuffs Internet services Livestock

35. Unique Assets Maximizing value from a Liquidator

36. Which of the following is the most important consideration when valuing a unique asset?

37. (A) Market Conditions

38. (B) Local and federal law

39. (C) Specialized or custom built

40. (D) Whether intellectual property or software associated with the asset

41. Which of the following is the most important consideration when valuing a unique asset? • Market Conditions • Local and federal law • Specialized or custom built • Whether intellectual property or software associated with the asset

42. Definitions/ approaches to value Appraisal Definitions Fair market value (FMV) Orderly liquidation value (OLV) Forced liquidation value (FLV) Approaches to Value Market Value Cost Approach Income Approach

43. The importance of provenance What is provenance? Why is it important? How to establish? Value implications?

44. The importance of an end user Best Alternatives: selling enbloc selling components Worst Case: scrap values

45. Questions? Aaron Stewardson 604-675-2223 astewardson@maynards.com Craig Munro 604-601-5699 Craig.Munro@fticonsulting.com Russ Law 604-697-5277 Russ.Law@crowemackayco.ca Steve Dvorak 604-691-6121 sdvorak@casselsbrock.com