Apax expects Cengage to file for Chapter 11 bankruptcy, and emerge from bankruptcy in June 2013 with an estimated enterprise value (TEV) of $3,438 million. Assume that Apax has decided to invest $750 million of its funds to purchase senior debt. Also assume that the Chapter 11 plan of reorganization follows absolute priority in determining the distributions to pre- bankruptcy debt and equity owners (as described in paragraphs 3 and 4 of the case), and is based on the assumed $3,438 TEV for Cengage. Lastly, assume that any equity in the restructured company that Apax receives under the plan of reorganization will be sold in 2018, when Apax will exit its investment in Cengage at [7x (projected 2018 adjusted EBITDA)]. 3. What are the cash flows to Apax from its investment strategy in Cengage's senior debt? Please list the cash flow (in $ millions) followed by the date of the cash flow (month, yr) : for example, enter your answer as $xx, MMM YY; $xx, MMM YY; etc. 4. What is the return to Apax from this investment in Cengage's senior debt (you can use the excel XIRR function; enter your answer here in percent, xx.x%). 1 Exhibit 11 CENGAGE LEARNING: CAN APAX PARTNERS SALVAGE THIS BUYOUT? Management Projections of Postbankruptcy Performance Projected Income Statement (in millions of dollars) 2013E 2014E $1,713.6 FYE June 30, Net revenue Revenue growth Cost of goods sold Operating expenses, excluding depreciation Adjusted EBITDA Amortization of prepublication costs Restructuring charges Other expenses Depreciation Amortization of intangibles Operating income / (loss) Operating income growth Operating margin Reorganization cost Interest expense Interest income Total net interest expense Income / (loss) from continuing operations Income taxes? Net income / (loss) from continuing operations (427.0) (680.9) 605.7 (173.4) (12.6) (4.9) (73.9) (161.7) 179.2 n/a 10.5% (110.9) (129.4) 0.3 (129.1) (60.8) 19.5 (80.3) 2015E $1,634.1 -4.6% (413.8) (657.1) 563.2 (169.4) (10.0) (5.0) (73.5) (159.6) 145.7 -18.7% 8.9% 0.0 (125.5) 0.3 (125.2) 20.5 75.8 (55.3) 2016E 2017E 2018E $1,655.0 $1,726.3 $1,780.9 1.3% 4.3% 3.2% (420.5) (440.1) (456.0) (633.0 (644.2) (653.5) 601.5 642.0 671.4 (169.3) (168.3) (165.8) (17.5) 0.0 0.0 (5.0) (5.0) (5.0) (76.8) (71.2) (69.5) (157.7) (157.7) (156.7) 175.2 239.8 274.4 20.2% 36.9% 14.4% 10.6% 13.9% 15.4% 0.0 0.0 0.0 (114.5) (98.5) (77.4) 0.3 0.3 0.3 (114.2) (98.2) (77.1) 61.0 141.6 197.3 62.9 84.6 104.5 (1.9) 57.0 92.8 Cash Flows Net income / (loss) Add: Noncash items, net Less: Increases in cash prepublication expenditures Less: Net change in working capital Less: Increases in propery, plant, and equipment Cash available to pay down debt (80.3) 409.0 (169.7) (29.5) (86.3) 43.2 (55.3) 402.5 (171.1) 16.9 (70.5) 122.5 (1.9) 403.8 (167.1) 15.9 (73.4) 177.3 57.0 397.2 (166.7) 16.2 (69.7) 234.0 92.8 392.0 (163.7) 17.5 (65.3) 273.3 Debt balance 1,437.5 1,394.3 1,271.8 1,094.4 860.4 587.2 Apax expects Cengage to file for Chapter 11 bankruptcy, and emerge from bankruptcy in June 2013 with an estimated enterprise value (TEV) of $3,438 million. Assume that Apax has decided to invest $750 million of its funds to purchase senior debt. Also assume that the Chapter 11 plan of reorganization follows absolute priority in determining the distributions to pre- bankruptcy debt and equity owners (as described in paragraphs 3 and 4 of the case), and is based on the assumed $3,438 TEV for Cengage. Lastly, assume that any equity in the restructured company that Apax receives under the plan of reorganization will be sold in 2018, when Apax will exit its investment in Cengage at [7x (projected 2018 adjusted EBITDA)]. 3. What are the cash flows to Apax from its investment strategy in Cengage's senior debt? Please list the cash flow (in $ millions) followed by the date of the cash flow (month, yr) : for example, enter your answer as $xx, MMM YY; $xx, MMM YY; etc. 4. What is the return to Apax from this investment in Cengage's senior debt (you can use the excel XIRR function; enter your answer here in percent, xx.x%). 1 Exhibit 11 CENGAGE LEARNING: CAN APAX PARTNERS SALVAGE THIS BUYOUT? Management Projections of Postbankruptcy Performance Projected Income Statement (in millions of dollars) 2013E 2014E $1,713.6 FYE June 30, Net revenue Revenue growth Cost of goods sold Operating expenses, excluding depreciation Adjusted EBITDA Amortization of prepublication costs Restructuring charges Other expenses Depreciation Amortization of intangibles Operating income / (loss) Operating income growth Operating margin Reorganization cost Interest expense Interest income Total net interest expense Income / (loss) from continuing operations Income taxes? Net income / (loss) from continuing operations (427.0) (680.9) 605.7 (173.4) (12.6) (4.9) (73.9) (161.7) 179.2 n/a 10.5% (110.9) (129.4) 0.3 (129.1) (60.8) 19.5 (80.3) 2015E $1,634.1 -4.6% (413.8) (657.1) 563.2 (169.4) (10.0) (5.0) (73.5) (159.6) 145.7 -18.7% 8.9% 0.0 (125.5) 0.3 (125.2) 20.5 75.8 (55.3) 2016E 2017E 2018E $1,655.0 $1,726.3 $1,780.9 1.3% 4.3% 3.2% (420.5) (440.1) (456.0) (633.0 (644.2) (653.5) 601.5 642.0 671.4 (169.3) (168.3) (165.8) (17.5) 0.0 0.0 (5.0) (5.0) (5.0) (76.8) (71.2) (69.5) (157.7) (157.7) (156.7) 175.2 239.8 274.4 20.2% 36.9% 14.4% 10.6% 13.9% 15.4% 0.0 0.0 0.0 (114.5) (98.5) (77.4) 0.3 0.3 0.3 (114.2) (98.2) (77.1) 61.0 141.6 197.3 62.9 84.6 104.5 (1.9) 57.0 92.8 Cash Flows Net income / (loss) Add: Noncash items, net Less: Increases in cash prepublication expenditures Less: Net change in working capital Less: Increases in propery, plant, and equipment Cash available to pay down debt (80.3) 409.0 (169.7) (29.5) (86.3) 43.2 (55.3) 402.5 (171.1) 16.9 (70.5) 122.5 (1.9) 403.8 (167.1) 15.9 (73.4) 177.3 57.0 397.2 (166.7) 16.2 (69.7) 234.0 92.8 392.0 (163.7) 17.5 (65.3) 273.3 Debt balance 1,437.5 1,394.3 1,271.8 1,094.4 860.4 587.2