This spreadsheet supports INSTRUCTOR analysis of the case “The Restructuring of Danfurn LLC”

(UVA-F-1688).

This spreadsheet was prepared by David C. Smith, Professor of Commerce at the University of Virginia. Copyright © 2014 by the University of Virginia Darden School
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Nov. 4, 2014
 Exhibit 3
Consolidated Statement of Operations
Danfurn LLC
(In thousands)

2010 ### 2008

Net sales $ 332,843 $ 425,706 $
Cost of sales 241,977 303,954

Gross profit 90,866 121,752

Selling, general and administrative 90,200 117,495
Bad debt charges 6,567 15,205
Profit (Loss) from operations -5,901 -10,948
Interest expense -7,516 -7,722
Loss before income taxes -13,417 -18,670
Income tax benefit (provision) 4,696 6,534

Net gain (loss) $ -8,721 $ -12,135 $

Depreciation & Amortization 5,966 6,604

EBITDA* 6,632 10,861
Capital Expenditures (Net of sales of PP&E) 2,234 -967

*Excludes bad debt charges

2010 2009
Assets
Current assets
Cash and cash equivalents $ 6,017 $ 10,574
Acounts receivable 33,621 38,225
Inventories 41,810 33,388
Other current assets 6,969 13,312

Total current assets 88,417 95,499

Long-term assets
Property and equipment, net 65,950 70,636
Retail real estate 27,513 28,793
Other 3,465 3,034

Total long-term assets 96,928 102,463

Total assets $ 185,345 $ 197,962

tatement of Operations

2007 2006
503,295 $ 454,905 $ 294,321
339,724 309,335 191,309

163,571 145,570 103,012

142,432 129,648 92,858
11,769 -2,135 -1,549
9,369 18,057 11,704
-9,084 -232 -125
285 17,825 11,579
-100 -6,239 -4,052

186 $ 11,586 $ 7,526

8,089 9,089 9,253

29,227 25,011 19,408
-2,698 -2,743 -5,202

2010 2009
Liabilities and Stockholders’ Eq
Current liabilities
Accounts payable $ 15,786 $ 11,523
Accrued compensation and ben 6,322 6,157
Other accrued liabilities 14,983 11,730
Current portion of bank loan 2,200 2,500

Total current liabilities 39,291 31,910

Long-term liabilities
Post employment benefit obliga 5,920 4,328
Bank debt 90,895 95,595
10.345% Senior Mezzanine Notes 30,000 30,000
Other long-term liabilities 3,256 8,877

Total long-term liabilities 130,071 138,800

Commitments and Contingenci

Stockholders’ equity
Common stock 15,733 15,733
Retained earnings 199 8,920
Additional paid-in-capital 478 481
Accumulated other comprehens -427 2,118

Total stockholders’ equity 15,983 27,252

Total liabilities and stockholder $ 185,345 $ 197,962

 Exhibit TN
THE RESTRUCTURING O
Sample Discounted Cash

2011 2012 2013

Sales 339,500 346,290 353,216
Cost of Sales 237,650 242,403 247,251
Gross Profit 101,850 103,887 105,965
SG&A 91,665 93,498 95,368
Bad Debt Charge 6,790 6,926 7,064
Profit from Operations (EBIT) 3,395 3,463 3,532

PP&E @ Beginning of Year 65,950 58,674 51,730

CAPEX (2,000) (2,250) (2,500)
Depreciation and Amortization 5,276 4,694 4,138

EBITDA (excluding Bad Debt Charge) 15,461 15,083 14,735

After-tax EBIT 2,207 2,251 2,296
After-tax EBITDA (excluding Bad Debt Charge) 14,273 13,871 13,499
Beginning Year Net Working Capital 49,126 50,925 51,943
Required Net Working Capital 50,925 51,943 52,982
Change in Net Working Capital 1,799 1,018 1,039
Free Cash Flow 10,474 10,602 9,960

Weighted-Average Cost of Capital 7.8%

Total Enterprise Value 138,473

Source: Created by case writer.

 Exhibit TN1
HE RESTRUCTURING OF DANFURN LLC
Sample Discounted Cash Flow Analysis

Assumption
2014 2015
360,280 367,486 2%
252,196 257,240 70%
108,084 110,246
97,276 99,221 27%
7,206 7,350 2%
3,603 3,675

45,092 38,734
(2,750) (3,000)
3,607 3,099 8%

14,416 14,123
2,342 2,389 35%
13,155 12,837
52,982 54,042
54,042 55,123 $ 0.15
1,060 1,081 Terminal Value
9,345 8,756 154,698

2.0%
Growth of sales
Percent of sales

Percent of sales
Percent of sales

Assumed need to ramp up, at least to replacement eventually

Percent of PP&E, note could be SL

Tax Rate

Amount needed per dollar of sales

Long-term growth rate of free cash flows

 Exhibit TN2
THE RESTRUCTURING OF DANFURN LLC
Sample Weighted-Average Cost of Capital Analysis

Total Debt $123,095

Assumed TEV for Weights $150,000
Weight of Debt 82.1%
Weight of Equity 17.9%
Cost of Debt 6.14%
Beta 3.61
Risk-free Rate 3.41%
Equity Premium 6%
Cost of Equity 25.0700%
Tax Rate 35%

WACC 7.8%

Source: Created by case writer.

 Exhibit TN3
THE RESTRUCTURING OF DANFURN LLC
Sample Liquidation Analysis

2010 Book Value Recovery Rate Recovery Amount

Assets
Current assets
Cash and cash equivalents 6,017 100% 6,017
Accounts receivable 33,621 80% 26,897
Inventories 41,810 50% 20,905
Other current assets 6,969 30% 2,091

Total current assets 88,417 55,910

Long-term assets
Property and equipment, net 65,950 50% 32,975
Retail real estate 27,513 80% 22,010
Other 3,465 30% 1,040

Total long-term assets 96,928 56,025

Total assets 185,345 111,934

Total Distributable Value 65,667

All would go to M&L in satisfaction of the term loan and revolver

Source: Created by case writer.

DANFURN LLC
nalysis

2010
Liabilities not including bank or mezz debt
Current liabilities
Accounts payable 15,786
Accrued compensation and benefits 6,322
Other accrued liabilities 14,983

Total current liabilities 37,091

Long-term liabilities
Postemployment benefit obligations 5,920
Other long-term liabilities 3,256

Total long-term liabilities 9,176

Total liabilities 46,267

 Exhibit TN4
THE RESTRUCTURING OF DANFURN LLC
Danfurn Pro Forma Capital Structure

Borrower: Danfurn LLC Pro Forma Capital

Financials as of: 12/31/2010
Today's date: 3/1/2011
LIBOR (three-month) 0.31%
10-year treasury 3.41%
LTM EBITDA $6.632

Secured Debt Secured? Gtys? Maturity Issue Amt. Out Amt.

Revolving Credit Facility Y Y 3/30/2014 $15.0 $8.1
Term Loan B Y Y 3/30/2015 85.0 85.0
Total Secured Debt $100.0 $93.1
Unsecured Debt
Senior 10.375% Notes N N 8/30/2015 30.0 30.0
Total Unsecured Debt 30.0 30.0
Total Debt 130.0 123.1
Less: Cash (6.0)
Net Debt 117.1
Liquidity
Total Revolver $15.0
Less: Funds Drawn (8.1)
Less: Outstanding LCs 0.0
Availability 6.9

Cash on Hand 6.0

Current Liquidty $12.9

Source: Created by case writer

 Exhibit TN4
TURING OF DANFURN LLC
o Forma Capital Structure

Pro Forma Capital Structure

Coupon/ Annual Interest

Leverage Moody's Market Market LIBOR Interest Cov.
Ratio Rating price Value Spread Expense Ratio
- - L+ 4.25% $0.37
- - L+ 4.50% $4.1
14.0× $4.5

- - 10.35% $3.1

18.6× - $7.6 0.9×

17.7× -
×
 Exhibit TN5
THE RESTRUCTURING OF DANFURN LLC
Danfurn LLC Operating Summary
(in millions of dollars)

Operating Summary 2010 2009 2008 2007 2006

Total Revenue $332,843 $425,706 $503,295 $454,905 $294,321
Cost of Goods Sold 241,977 303,954 339,724 309,335 191,309
Gross Profit $90,866 $121,752 $163,571 $145,570 $103,012
% Margin 27.3% 28.6% 32.5% 32.0% 35.0%
EBITDA $6,632 $10,861 $29,227 $25,011 $19,408
% Revenue 2.0% 2.6% 5.8% 5.5% 6.6%
Interest Expense $7,516 $7,722 $9,084 $232 $125
CAPEX (net of proceeds on sales) 2,234 (967) (2,698) (2,743) (5,202)
EBITDA—CAPEX $8,866 $9,894 $26,529 $22,268 $14,206

Balance Sheet Summary

Cash $6,017 $10,574
Total Assets $185,345 $197,962
Total Debt $123,095 $128,095
Total Liabilities $169,362 $170,710
Total Equity $15,983 $27,252
Total Capitalization $185,345 $197,962

Leverage and Coverage Ratios

EBITDA/Interest 0.9× 1.4×
(EBITDA—CAPEX)/Interest 1.2× 1.3×
Total Debt/LTM EBITDA 18.6× 11.8×
Net Debt/LTM EBITDA 17.7× 10.8×

Source: Created by case writer.

 Exhibit TN6
THE RESTRUCTURING OF DANFURN LLC
Preliminary Waterfall Model as of March 2011

Recovery
($ in USD millions)
Low Case Mid Case
Run Rate EBITDA $10.0 $15.0
EBITDA Multiple 7.5x 8.5x
TEV $75.0 $127.5
Plus: Cash 6.0 6.0
Distributable Value $81.0 $133.5
Less: Administrative Claims (3.7) (3.7)

Residual Value Available for Secured Creditors $77.3 $129.8

Secured Debt
Revolver $8.1 $8.1
TL B 85.0 85.0
Total Secured Debt $93.1 $93.1
Recovery Rate for Secured Creditors 83.1% 100.0%

Residual Value Available for Unsecured Creditors at

Opco (Danfurn LLC) $0.0 $36.7
Post Employment Benefit Claims $5.9 $5.9
Trade creditors $15.8 $15.8
Other accrued liabilities $15.0 $15.0
Other long-term liabilties $3.3 $3.3
Total Unsecured Danfurn LLC $39.9 $39.9
Recovery Rate for Unsecured Danfurn LLC 0.0% 91.9%

Residual Value Available for Unsecured Creditors at

Topco (Danfurn Mgmt LLC) $0.0 $0.0
Unsecured Debt
Sr 10.375% Notes $30.0 $30.0
Total Unsecured Debt Danfurn Management $30.0 $30.0
Recovery Rate for Unsecured Creditors 0.0% 0.0%

Residual Value Available for Equity Holders $0.0 $0.0

Source: Created by case writer.

 DANFURN LLC
as of March 2011

Notes
High Case
$20.0
9.0x From Cap IQ Comp Range for TEV using TTM EBITDA as of March 2011 (Median TEV multiple = 8
$180.0
6.0
$186.0 TEV + Cash on balance sheet
(3.7)
### Assume: 3% of 2010 Debt. Anything from 1-3% is OK

$182.3 Distributable Value - Admin Claims

$8.1 This equals Exhibit 4 balance sheet debt (Long-term + currently maturuing long term) less $85 mm
85.0 Amt. of TL outstanding. Assumes no principal paydown has occurred
$93.1
100.0% Distributable Value available to secured holders
as a % of Total Secured Debt

$89.2
$5.9 Danfurn LLC creditors, including trade creditors and pension claimants,
$15.8 are structurally senior to mezz holders, who have claims against Danfurn Mgmt LLC
$15.0 I assume that "other accrued" and "other long term" are also structurally senior
$3.3
$39.9
100.0%

$49.3
###

$30.0 From Ex. 4 balance sheet

$30.0
100.0%

$19.3 Note that there is only one "reasonable" case here in

which equity is in the money.
011 (Median TEV multiple = 8.5x)

uing long term) less $85 mm TL

urn Mgmt LLC

 Exhibit TN7
THE RESTRUCTURING OF DANFURN LLC
Sample Incentives/Constraints/Remedies Table for Stakeholders

Stakeholder Group Incentives/Priorities

M&L Bank Cash paydown
Less leverage in Danfurn
Full recovery

Edina Group Own majority equity

Replace board
Cash paydown
Less debt above them

Birchtree Capital Still be “in”

Own as much equity as possible
Hold onto board
Cash payout

Rasmussens Still be involved in company

See company continue as a going-concern
Own some equity
Cash payout

Source: Created by case writer.

 Exhibit TN7
ESTRUCTURING OF DANFURN LLC
es/Constraints/Remedies Table for Stakeholders

Constraints Remedies
Don’t wish to own company Foreclosure on assets/equity
Will not take a haircut Force Chapter 7
Force Chapter 11

$5–$10 million in cash Block out of court restructure

Structural subordination
Contractual subordination

$5–$10 million in cash Block out of court restructure

In violation of covenants
Little cash in company to make payments

No cash Remove themselves from company

 Danfurn Income Statement

2010 2009 2008 2007 2006

Net sales 332,843 425,706 503,295 454,905 294,321
Cost of sales 241,977 303,954 339,724 309,335 191,309

Gross profit 90,866 121,752 163,571 145,570 103,012

Selling, general, and administrative expenses
excluding bad debt and notes receivable
valuation charges 90,200 117,495 142,432 129,648 92,858
Bad debt charges 6,567 15,205 11,769 (2,135) (1,549)
Profit (Loss) from operations (5,901) (10,948) 9,369 18,057 11,704
Interest expense (7,516) (7,722) (9,084) (232) (125)
Loss before income taxes (13,417) (18,670) 285 17,825 11,579
Income tax benefit (provision) 4,696 6,534 (100) (6,239) (4,052)

Net gain (loss) (8,721) (12,135) 186 11,586 7,526

Depreciation & amortization 5,966 6,604 8,089 9,089 9,253

EBITDA* 6,632 10,861 29,227 25,011 19,408
Capital expenditures (net of sales of PP&E) 2,234 (967) (2,698) (2,743) (5,202)

*Excludes bad debt charges.

Data source: Company documents.

 Exhibit 4
Consolidated Balance Sheet
(in thousands of dollars)

2010 2009
Assets Liabilities and Stockholders’ Equity
Current assets Current liabilities
Cash and cash equivalents $ 6,017 10,574 Accounts payable
Accounts receivable 33,621 38,225 Accrued compensation and benefits
Inventories 41,810 33,388 Other accrued liabilities
Other current assets 6,969 13,312 Current portion of bank loan

Total current assets 88,417 95,499 Total current liabilities

Long-term assets Long-term liabilities

Property and equipment, net 65,950 70,636 Post-employment benefit obligations
Retail real estate 27,513 28,793 Bank debt
Other 3,465 3,034 10.345% senior mezzanine notes
Other long-term liabilities
Total long-term assets 96,928 102,463
Total long-term liabilities
Total assets $ 185,345 197,962
Commitments and Contingencies

Stockholders’ equity
Common stock
Retained earnings
Additional paid-in capital
Accumulated other comprehensive income (loss)

Total stockholders’ equity

Total liabilities and stockholders’ equity

Data source: Company documents.
 2010 2009

$ 15,786 11,523 332,843 425,706

6,322 6,157 49,126 63,589 -14,463
14,983 11,730 0.1475951 0.149373
2,200 2,500

39,291 31,910

5,920 4,328
90,895 95,595
30,000 30,000
3,256 8,877

130,071 138,800

15,733 15,733
199 8,920
478 481
(427) 2,118

15,983 27,252

$ 185,345 197,962