Tips For Officers And Directors In The Current Economic Crisis John P. Brincko Brincko Associates, Inc. 530 Wilshire Blvd., Suite 201 Santa Monica, CA (310)

2  Lehman Brothers – Fall from grace  Lehman Brothers – Never reported a loss as a publicly held company until June 08  Watershed Events – Substantive covenant default, failure to refinance existing debt or raising additional funds for a bridge loan  These watershed events usually are critical today and lead to the point of no return making bankruptcy inevitable and imminent

3  Fiduciary Duties – Shifting Sands In A Distressed Economic Environment  Officers And Directors Must Understand Their Fiduciary Duties When Company Is Operating In A Distressed Mode  The Duty Of Care Requires That Management Exercise REASONABLE CARE In Overseeing The Activities Of The Company, Including Becoming Fully Informed Of All Material Information When Making Decisions

4  The Duty Of Loyalty Requires Management To Act In The Best Interests Of Shareholders and CREDITORS In Distressed Situations  Business Judgment Rule – Officers and Directors Are Subject To It

5  Zone Of Insolvency – Management Must Preserve The Value Of Company’s Assets For The Benefit Of Creditors  Zone Of Insolvency – Liabilities Greater Than Assets With Limited Prospects To Overcome In The Short Term; Inability To Cover Maturing Obligations As They Become Due In The Ordinary Course  Zone Of Insolvency Warning Signals – Company Experiencing Repeated Losses; Entire Business Sector Or Industry Experiencing A Downturn; Poor Cash Flow Attention; Trade Payable Extension; Aggressive Accounting Techniques

6  Contingency Planning Vital  “We Will Cross That Bridge When We Get To It” Perspective Should Be Tossed Out The Window

7 Examples Of Potential Breach Of Fiduciary Duties To Creditors:  Unviable Business Plan Approval  Raising Additional Debt To Fund Continuing Losses Or Expansion  Lack Of Cost Reduction Efforts  Failure To Consider Strategic Alternatives Quickly  Untimely Purchase Of D&O Insurance  Excessive Compensation

8 Recommendations:  Document Exercise Of Business Judgment  Management and Advisors Accountability  Board Actions Should Be Deliberative  Have Timely D&O Coverage  Hire Restructuring Professional  Consult With Creditors  Avoid Self Dealing