Chartwell Litigation Trust et al v. Addus Healthcare Inc et al

1
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------------------------x
In re:
Med Diversified, Inc., et. al.,
Debtors.
___________________________________
CHARTWELL LITIGATION TRUST and
GREGORY L. SEGAL AS TRUSTEE OF
CHARTWELL LITIGATION,
Plaintiffs,
v.
ADDUS HEALTHCARE, INC., an
Illinois Corporation; W. ANDREW
WRIGHT, an Illinois Individual; MARK
S. HEANEY, an Indiana Individual;
COURTNEY E. PANZER, an Illinois
Individual; and JAMES A. WRIGHT, an
Illinois Individual,
Defendants.
-----------------------------------------------------x
FOR PUBLICATION
Case No.: 	02-88564
02-88568
02-88570
0288572
02-88573
Adv. P. No.: 04-08680
Chapter 11
Appearances:
Howard J. Steinberg, Esq. (pro hac vice)
Michael H. Strub, Jr., Esq. (pro hac vice)
IRELL & MANELLA LLP
Co-counsel to the Plaintiffs
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067-4276
Scott E. Early, Esq. (pro hac vice)
Ellen Wheeler, Esq. (pro hac vice)
Jill L. Murch, Esq. (pro hac vice)
Christopher J. Werner, Esq. (pro hac vice)
FOLEY & LARDNER LLP
Counsel for the Defendants
321 N. Clark Street, Suite 2800
Chicago, Illinois 60610
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1 Chartwell Litigation Trust v. Addus Healthcare, Inc. (In re Med Diversified), 334 B.R. 89 (Bankr.
E.D.N.Y. 2005).
2 The parties disagree on what the strike price was, but the evidence suggests it was at least $119.9 million.
2
MEMORANDUM OF DECISION AND ORDER
Introduction
In a prior decision 1, the Court disqualified the defendants’ witness, Scott P. Peltz,
C.P.A., from submitting a report and testifying as an expert on (1) the total enterprise
value of the defendant Addus Health Care, Inc. (Addus), a privately held company, as of
January 8, 2002, and (2) the exchange value of an alleged six and a half month option
and/or extension agreement between Addus, as seller, and the debtor, Med Diversified,
Inc. (Med D) as purchaser, for which Med D paid $7.5 million to purchase 100% of
Addus’ shares, as framed by an unsigned First Amendment to the Stock Purchase
Agreement (First Amendment).
A. Contentions of the Parties
If the $7.5 million were treated as the purchase price for an option, the “strike” or
“exercise price” for the shares under the Stock Purchase Agreement would have been not
less than $119.9 million.2 The plaintiffs sought to prove that the fair market value of the
shares as of January 8, 2002, the date of the execution of the Stock Purchase Agreement,
was $21 million, based solely upon the enterprise valuation according to its proposed
expert, Robert J. Cimasi (Cimasi). 	If this valuation of the shares were adopted by the
Court, the plaintiffs argue that this Court would then necessarily have to find and conclude
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3 It should be noted that both parties stipulated that Med D was insolvent on January 8, 2002 and on
February 14, 2002.
4 The defendants would prefer that this Court ignore the statement by its expert witness on the stand that it
would not make any business sense to pay $7.5 for an option if the value of the business were $89 million
and the strike price were $119.9 million. Ironically, since the Court struck Peltz’ report and testimony as
unreliable in granting the plaintiffs’ motion in limine, the plaintiffs cannot rely upon Peltz’ statement. In
point of fact, Peltz completely lacked the expertise to make an enterprise valuation, so anything he said
about value was inadmissible. In its present thinking, the Court is unlikely to preserve this terribly
prejudicial statement from the struck testimony as a party admission. In any event, the determination of
the merits of the plaintiffs’ complaint, amended to conform the pleadings to the proofs, awaits another day.
3
that the $7.5 million payment for the option and/or extension agreement was not for
reasonably equivalent or fair value.3 Alternatively, the plaintiffs argue that since the
First Amendment was never authorized by Med D’s board of directors and never signed
by Med D’s CEO, then the $7.5 million is recoverable as an ultra vires payment, and it
does not matter what the value of the option and/or extension may have been worth if the
payment had been authorized.
The defendants counter by averring that the First Amendment was substantially
performed and that the $7.5 million payment is not recoverable. Moreover, the defendants
further aver that Med D’s board did authorize the CEO to enter into any further
agreements to implement the Stock Purchase Agreement before the $7.5 payment was
made, or ratified it immediately thereafter. 	Finally, the defendants aver that the value of
the shares, according to its expert, was at least $89 million as of February 14, 2002, and
that an option price of $7.5 for a six and a half month period was for reasonably
equivalent or fair value. 4
B. A Summary of the Discussion
The Court now turns to the defendants’ cross-motion in limine to deny admission
of the expert report and testimony of Cimasi on the ground that in applying the standard
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4
methodologies for an enterprise valuation of Addus, he exhibited such a deliberate,
manifest, pervasive, and systematic bias in selecting his data points, in adjusting the data
points, and in assigning weights to the data points in order to drive his valuation opinion
toward 	its 	lowest 	levels 	that 	his 	report 	and 	testimony 	have 	to 	be 	excluded 	as
fundamentally unreliable.
After reviewing all of the evidence, the Court has determined to grant the
defendants’ cross-motion in limine and exclude Cimasi’s expert testimony and report. As
this memorandum amply attests, the deliberate, manifest, pervasive and systematic bias on
Cimasi’s part in applying the standard methodologies for estimating the total enterprise
value of Addus warrants disqualifying him and his report on the principal ground of
unreliability. 	The Court has taken considerable pains to point out the myriad ways in
which Cimasi deliberately drove his adjustments of the discount rate and other variables
toward the lowest order of value in order to accomplish his client’s implicit bidding,
notwithstanding his protestations of objectivity. 	Perhaps this memorandum of decision
may assist other bankruptcy courts in framing their decisions on motions in limine under
the evolving standards of disqualification of purported non-scientific expert witnesses
under the United States Supreme Court’s Kumho decision with respect to financial
matters.
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5 In re Med Diversified, supra (granting in part and denying in part the plaintiffs’ motion in limine to
exclude the expert report and testimony of defendants’ expert, Peltz, on the value of Addus).
6 The resolution of this dispute has yet to be determined.
5
Background and Procedural History
The background to this adversary proceeding was discussed at length in the
Court’s 	prior 	Memorandum 	and 	Decision, 5 and 	this 	Memorandum 	of 	Decision
“presupposes familiarity” with the prior Memorandum, part of which is reproduced here
as a matter for the reader’s convenience. 	The relevant transactional history is this: On
January 8, 2002, Med D and Addus entered into a Stock Purchase Agreement (SPA) in
which Med D agreed to purchase all of the privately held shares of stock of Addus. On
January 24, 2002, the parties executed a Modification to the SPA under which the sales
price was set at approximately $119.9 million. Under the Modification, the closing date
for the transaction was scheduled for February 14, 2002.
What happened next is in material dispute.6 The parties agree that sometime
before February 14, 2002, Med D and Addus began negotiating a further “amendment” to
the modified agreement. This amendment was purportedly memorialized in a document
entitled First Amendment to the SPA (First Amendment), but this document was never
signed by the parties. 	The First Amendment purportedly gave Med D an “option” to
purchase all of the Addus shares at anytime before September 1, 2002 -- a six and a half
month period -- for $7.5 million. Alternatively, this $7.5 million may also be deemed a
payment in consideration for an extension of time for Med D to perform its obligations
under the Modification. 	The $7.5 million was to be released from the joint escrow
account upon the joint execution of the First Amendment and paid to the defendants. In
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7 Med Diversified, Inc. v. Addus Healthcare, Inc., Case No. BC272609.
6
simplified terms, under the First Amendment, Med D lost its right to a credit against the
Exercise Price or Purchase Price of approximately $1 million of the $7.5 million upon
expiration of each successive month until the total amount was exhausted at the end of
the six and a half-month period. If the First Amendment were valid and enforceable -- an
issue to be determined at the conclusion of the trial -- then Med D’s failure to close the
acquisition by the end of this 6 ½ month period would have the effect of Med D
forfeiting any right to recover any part of the $7.5 million.
On February 13, 2002, from the $15 million on deposit under the joint escrow
account, $7.5 million was transferred to Med D, and $7.5 million was released to Addus
and/or the defendant W. Andrew Wright (Wright). 	In fact, all of the $7.5 million was
immediately transferred to Wright. 	Within a very short period of time, he advanced $4
million of these proceeds to Addus for its urgent working capital needs, and used the $3.5
million balance for his other personal investments that were unrelated to Addus. 	Med D
did not close the deal to purchase Addus by August 31, 2002, and the defendants retained
the $7.5 million.
Within a month after the joint escrow was distributed to the parties, Med D filed
an action, based upon common law or state law claims, against the defendants in the
Superior Court of California, Central District, in the County in Los Angeles, seeking,
among other things, return of the $7.5 million.7 That action was quickly dismissed by
the plaintiffs and then refiled as an amended complaint. 	That amended action was
removed to the Federal District Court for the Central District of California, Western
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8 Case No. CV-02-03911 AHM (JTLx).
9 Manning, J.
7
Division, sitting in Los Angeles.8 That action was removed once again to the Federal
District for the Northern District of Illinois (the Chicago Action).9 Med D and several,
but not all, of its affiliates filed petitions for relief with this Court in late November of
2002, under chapter 11. 	The Chicago Action lay dormant by mutual agreement of the
parties pending the confirmation of a plan of reorganization or liquidation by Med D and
its affiliates.
Under the terms of the Second Amended Plan of Reorganization, the debtor’s pre-
petition claims, including those against the defendants, were assigned to the newly
formed Chartwell Litigation Trust. 	On November 24, 2004, the plaintiffs filed the
complaint 	beginning 	this 	adversary 	proceeding, 	alleging 	claims 	arising 	under 	the
Bankruptcy Code as well as related state law claims. 	The principal claim is that the pre-
petition payment of $7.5 million from Med D to the defendants can be recovered by the
estate either because it was for no value whatsoever, assuming the First Amendment
never became valid and enforceable, or, alternatively, because it was not for reasonably
equivalent value. 	The defendants have also raised counterclaims alleging actual and
consequential damages from an alleged breach of contract under the SPA, as modified.
In their pretrial statement, the plaintiffs listed Cimasi as their expert on business
valuation, and filed a motion in limine to exclude all of the testimony of defendants’
expert on business valuation, Scott P. Peltz (Peltz), on the ground that he does not qualify
as an expert on valuation of all of the shares of a privately held health care services
company. 	The defendants then filed a cross-motion to exclude the testimony of
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10 Under Fed. R. Evid. 702, an expert must also be qualified as an expert in order for his or her testimony to
be admissible as expert testimony. The Court found that Cimasi was qualified as an expert and defendants
did not take issue with his qualifications in this motion.
8
plaintiffs’ expert on business valuation, Cimasi, on the ground that his expert report and
testimony are unreliable because the methodology used by Cimasi in placing a value on
Addus was flawed. In support of their motion, the defendants point to numerous alleged
flaws in all three valuation methods used by Cimasi, as well as in the compilation of data
supporting these methods.
Discussion
To be admissible, expert testimony must be relevant and must rest on a reliable
foundation. 10 See Amorgianos v. National R.R. Passenger Corp., 303 F. 3d 256, 265 (2d
Cir. 2002)(relying on Daubert v. Merrill Dow Pharmaceuticals, Inc., 509 U.S. 579, 597
(1993)). Testimony is relevant if it “has any tendency to make the existence of any fact
that is of consequence to the determination of the action more probable or less probable
than it would be without the evidence.” Fed. R. Evid. 401.
Under Rule 702 of the Federal Rules of Evidence, testimony is reliable if: “(1) the
testimony is based upon sufficient facts or data, (2) the testimony is the product of
reliable principles and methods, and (3) the witness has applied the principles and
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Rule 702 of the Federal Rules of Evidence governs the admissibility of expert testimony, and provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to
understand the evidence or to determine a fact in issue, a witness qualified as an
expert by knowledge, skill, experience, training, or education, may testify thereto
in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient
facts or data, (2) the testimony is the product of reliable principles and methods, and
(3) the witness has applied the principles and methods reliably to the facts of the
case.
9
methods reliably to the facts of the case.” Fed. R. Evid. 70211 In determining reliability,
the trial court must undertake a flexible inquiry that should “focus on the principles and
methodology employed by the expert, without regard to the conclusions the expert has
reached or the . . . court’s belief as to the correctness of those conclusions.” Amorgianos
at 266.
While the Court has a duty to admit expert testimony that is reliable and will
assist the trier of fact, Daubert also charged the Court with a duty to “ensure that the
courtroom door remains closed to junk science.” 	Amorgianos at 267. 	Accordingly, the
trial court acts as a gatekeeper by ensuring that every step of the expert’s analysis is
reliable. Id. 	Acting in its gatekeeper role, the trial court has a duty to “undertake a
rigorous examination of the facts on which the expert relies, the method by which the
expert draws an opinion from those facts, and how the expert applies the facts and
methods to the case at hand.” Id.
Under the first prong of the reliability assessment under Rule 702, the trial court
must examine the sufficiency of the data or studies underlying the expert’s opinion. 	If
the Court concludes the studies or data upon which the expert relied are insufficient to
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10
support the expert’s conclusions, the Court has a duty to close the gate on admission of
the evidence as unreliable. See General Electric Co. v. Joiner, 522 U.S. 136, 146-47
(1997).
Under the second prong of the reliability assessment under Rule 702, the trial
court must determine whether the methods used by the expert are reliable. 	In doing so,
the Court may look to a number of factors, including: (1) whether a theory or technique
can be, and has been, tested; (2) whether the theory or technique has been subjected to
peer review and publication; (3) a technique’s known or potential rate of error and the
existence and maintenance of standards controlling the techniques operation; and (4)
whether a particular technique or theory has gained general acceptance in the relevant
scientific community. See Daubert at 593-94; Kumho Tire Co., Ltd. v. Carmichael, 526
U.S. 137, 149 (1999).
Even if the Court concludes the data was sufficient and the methodology used by
the expert was reliable, the inquiry does not end there. 	Under the third prong of the
reliability 	assessment 	under 	Rule 	702, 	the 	Court 	must 	also 	examine 	how 	that
methodology was applied See Lippe v. Bairnco Corp., 288 B.R. 678 (S.D.N.Y. 2003),
aff’d, 99 Fed. Appx. 274 (2d Cir. 2004) (excluding expert testimony partly because of
how the expert applied the methodology).
Further, 	the 	trial 	court 	must 	determine 	whether 	the 	methodology 	was
appropriately applied to the data at issue. The testimony must be “sufficiently tied to the
facts of the case that it will aid the [trier of fact] in resolving a factual dispute.” Daubert
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at 591 (quoting United States v. Downing, 753 F.2d 1124, 1142 (3d Cir 1985)). 	This
consideration was described by the Daubert Court as “fit,” and is “another aspect of
relevancy.” Daubert at 591. Simply because a method is valid for one purpose does not
mean it is valid for another. 	Id. 	“A court may conclude there is simply too great an
analytical gap between the data and the opinion offered.” Joiner at 146.
If the court determines that the data, methodology or studies upon which the
expert’s opinion is based are inadequate to support the expert’s conclusions, the court
must 	exclude 	the 	expert’s 	testimony. 	Id. 	at 	266. 	While 	minor 	flaws 	will 	not
automatically bar expert testimony, the court must exclude the evidence “if the flaw is
large enough that the expert lacks ‘good grounds’ for his or her conclusions.” Id at 267
(quoting In re Paoli R.R. Yard PCB Litig., 35 F.3d 717, 745 (3d Cir. 1994)).
Findings of Fact
As a preface to this part of the Court’s Decision, this case presents a vexing
intuitive difficulty. 	The audited financial statements for Addus for the calendar year of
2001 report $234,070,611 in gross revenues, yet due to the alleged non-recurring
adjustment of approximately $13 million in allowances for doubtful receivables and
reserves for workers’ compensations insurance in Addus’ Home Medical Equipment
Division, the earnings before interest, taxes, depreciation and amortization was negative
for the year at $157,340. 	No matter what industry multiple was used for estimating the
value of Addus based upon the standard metric of EBITDA (earnings before interest,
depreciation, taxes, and amortization), quite apart from the disconcerting disparity
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12
between Peltz’ valuation of $89 million and Cimasi’s valuation of $21 million, the Court
had serious reservations how, based upon a negative EBIDTA number, the company
could have any positive value. According to the old math, (0) x (n), with n = EBITDA, is
always 0.
Of course, one could avoid this estimation of “no value” by using a base for
computing value other than EBITDA, or one could materially adjust EBITDA to remove
the allegedly one-time or non-recurring adjustments, especially in a discounted cash flow
valuation, and to make other adjustments to “normalize” other expenses, such as
reducing excessive executive compensation. In this case, Cimasi’s discounted cash flow
valuation is predicated upon “free cash” or “unlevered cash” flow of the “subject
company” for a four to five year projected period, discounted to present value, following
the 2001 calendar year, and then adding the terminal value, which is again discounted to
present value, and adding these two components of value to arrive at the enterprise value.
But it is not this Court’s function to perform an analysis that saves the plaintiffs’ case in
chief (or the defendants’ answer, affirmative defenses, and counterclaims, for that matter)
from the unreliable and excluded testimony of the plaintiffs’ expert on valuation (or the
defendants’ expert). 	If a party does not sustain its burden of proof because its expert’s
report and testimony are excluded, then the conventions of American civil trial practice
have to be respected: a judgment has to be entered for the defendants. However tempting
it may be for a bankruptcy judge to show the parties how the valuation analysis should be
done, a bankruptcy judge has to direct the law clerks to tie up the judge to the mast like
Ulysses and plug the judge’s ears from heeding the Sirens’ calls.
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12 Cimasi used results from the benchmarking analysis in his calculation of (1) the cost of sales and
operating expenses component of Addus’s projected net cash flow; (2) the cost of equity component of the
discount rate; and (3) the weight of equity and debt components of the discount rate. See Tr., August 26,
13
With this as background, Cimasi used three different methods of valuation to
support his conclusion that Addus was worth only $21 million at the time the parties
entered into the transaction for the sale of Addus to Med Diversified (Med D) for
approximately $119 million: 	(1) the discounted cash flow (DCF) method; (2) the
Guideline Company Valuation (GCV) or Comparable Company method; and (3) the
Direct Market Comparable Transactions (DCT) or Comparable Transaction method. See
“Valuation Related to Addus Healthcare, Inc., as of January 8, 2002", by Robert James
Cimasi, dated July 11, 2005 (Cimasi Report). 	Each of the three methods yielded
different values for Addus: (1) the DCF method yielded a value of $18,772,961; (2) the
GV method yielded a value of 26,108,195; and (3) the DCT method yielded a value of
$20,830,171. 	See Cimasi Report at Section 5, p. 26 of 28. 	After considering the
limitations of each method, Cimasi determined that the results reached using the DCF
method should constitute 60% of the value determination, the GCV method results
should represent 30%, and the DCT method results should make up only 10%.
Accordingly, he arrived at a weighted average value for Addus of $21 million.
I. 	The Benchmarking Analysis
A benchmarking analysis compares the historical performance of the company to
that of companies in the same industry and is used as a tool to measure the relative risk of
the investment. 	See Cimasi Report, section 5, at p. 2 of 28. 	Cimasi performed a
benchmarking analysis for Addus and used portions of this analysis in his DCF
analysis.12 He also used results from his benchmarking analysis in his GCV anaysis,
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2005, at p. 223.
13 The 13 public companies compared were: Almost Family, Inc.; Amedisys, Inc.; American Home Patient,
Inc.; Apria Healthcare, Inc.; Coram Healthcare, Inc.; Gentiva Health Services; Lincare Holdings, Inc.; Mid-
Atlantic Home Health Network, Inc.; National Home Health Care Corporation; New York Health Care,
Inc.; Option Care, Inc.; Pediatric Services of America, Inc.; and Transworld Healthcare, Inc.
14 The two private company studies utilized by Cimasi in his analysis were: (1) “Business Profiler” (2001),
by Integra Information, Inc., which gets its information from a number of government surveys of closely
held businesses, see Tr., Aug. 26, 2005, at p. 165; and (2) “Annual Statement Studies” (2001/2002) by Risk
Management Association (RMA), which gets its information from financial statements submitted in support
of bank loans. Id. at 168.
14
based 	upon 	which 	he 	determined 	that 	Addus’s 	performance 	was 	comparable 	to
companies who performed in the lower quartile performance range.
Unfortunately, Cimasi’s benchmarking analysis relied heavily on a very small
database of publicly held companies and was applied in a manner that was skewed to
disfavor Addus, thereby rendering not only the benchmarking analysis unreliable, but
also tainting his DCF and GCV analyses.
Cimasi’s benchmarking analysis compared Addus’s performance to the weighted
average performance results from: (a) the 10k Reports from 13 public companies, 13 and
(b) two studies of private companies in the same industry (RMA & Integra studies).14 See
Cimasi Report, Table 3. Based on these comparisons, he concluded that Addus was “less
profitable, solvent, efficient and more leveraged than the industry benchmarks.” Cimasi
Report, Section 5, p. 2 of 28.
In performing his analysis, Cimasi 	assigned weights to each of the public
companies and each of the two studies used in the benchmarking analysis, which were
based on his admittedly subjective determination of how similar the companies were to
Addus with respect to the specialties of each of the companies, the types of services they
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15
provided, and the size of each company. See Tr., August 26, 2005, at p. 170-71. During
his testimony, he stated the weighting process was “not a purely empirical scientific
formulaic process,” and that there were “subjective considerations in trying to apply that
weighting.” Id. Based on such subjective considerations, he chose to assign a weight of
2 to the values obtained for the RMA and Integra studies, the only private company data
used by Cimasi, even though this weight was lower than the weights assigned to 7 of the
public benchmark companies, which were 4 or 5. See Cimasi Report at Table 3; see also
Tr., Aug. 29, 2005, at p. 35. 	This weighting scheme had the effect of favoring a small
database of publicly held companies and suppressing the data from the two private
company studies.
Cimasi based his benchmarking analysis on only 15 samples, and 86% of the
data upon which he drew inferences was from 13 public companies. 	He also excluded
certain “outliers” and negative ratios from portions of his analysis, which, apart from
skewing the data, further narrowed the already objectionably small sample size. In some
instances, these exclusions resulted in inferences being drawn about Addus’s financial
performance based on as few as seven public companies.
As reflected in the record of Cimasi’s testimony, the Court repeatedly questioned
the reliability of drawing inferences from such a small sample size. 	Cimasi did not
satisfy the Court that the “peer-reviewed literature” accepts a sample size of carefully
selected public or private companies as few as three or four. But more fundamental is the
Court’s skepticism that it is methodogically sound to compare the data from public
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15 Although some of the data came from two studies of closely held healthcare companies, the Court was
given no specific information about the private companies represented by these two studies.
16 Cimasi uses the following designations after his name: ASA (Accredited Senior Appraiser, Designated in:
Business Valuation, American Society of Appraisers); CBA (Certified Business Appraiser, Institute of
Business Appraisers); AVA (Accredited Valuation Analyst, National Association of Certified Business
Analysts); FCBI (Certified Business Intermediary, Fellow, International Business Brokers Association);
CM&A (Alliance of Mergers & Acquisition Advisors); and CMP (Certified Medical Planner, Institute of
Medical Business Advisors, Inc.). See Cimasi Report, Appendix A.
17 Further, Cimasi’s benchmarking analysis measured only one year’s performance for all of the companies
involved, including Addus. On rebuttal, defendants’ expert, Peltz, testified that the standard way of
performing a benchmarking analysis would be to analyze three years of data. See Tr., November 17, 2005,
at p. 28. Cimasi’s failure to do so further exacerbated the negative effect of the nonrecurring expenses
being included in Addus’s performance measures because all of the experts testified that at least a portion
of the operating expenses on Addus’s 2001 financials were attributable to the previous two years.
16
companies with that of a closely-held private business.15 That is a huge quantum leap
that this Court is unwilling to make. 	The literature cited by Cimasi is severely limited
and little of it appears to satisfy the rigorous standard of peer-reviewed publications. The
dominant citations are to the writings of two or three consulting firms which hold
themselves out as valuation experts either by self-designation or by designation through
the very small professional valuation societies they have formed for themselves. 	This is
evidenced by the number of acronyms for the six professional designations Cimasi adds
after his name, each of which is awarded by one of these professional valuation
societies.16
Cimasi also excluded extraordinary and nonrecurring events from the operating
expenses of the benchmarking companies, but not from Addus’s operating expenses. He
testified that he did not normalize the data for Addus in the benchmarking analysis
because it is customary to do the benchmarking first, and then use the results to
determine how to normalize. Tr., August 29, 2005, at p. 50. However, as set forth below
in more detail, his failure to normalize the data for Addus had a disproportionate negative
impact on a number of critical variables in his DCF and GCV analyses that were not
adequately supported by any of his explanations. 17 His failure to normalize the data for
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18 In Exide, the court rejected the business valuation expert’s unequal weighting of the DCF and Comparable
Company methodologies, and held when multiple methods are employed in a business valuation, each
should be given equal weight in the valuation analysis. 303 B.R. at 65.
17
Addus substantially contributed to the unreliability and resulting inadmissibility of his
DCF and GCV analyses.
II. 	The Discounted Cash Flow Analysis
The discounted cash flow method measures “the present value of the anticipated
future economic benefits of ownership” of the company. 	Tr., Aug. 8, 2005, at p. 65.
Specifically, valuation under the DCF method entails projecting a future stream of
economic benefits, and then discounting that future economic benefit to reflect its present
value. 	Critical to the reliability of the results obtained from a DCF analysis is the
determination and calculation of: (1) the future economic benefit to be measured, and (2)
the rate at which that future benefit should be discounted to reflect its present value.
Using the DCF method, Cimasi determined that the value of 100% of the shares
of Addus was $18,772,961. 	This figure constituted 60% of his final determination that
Addus was only worth $21 million at the time it entered into the sale transaction with
Med D. By the by, he offers no adequate explanation why this Court should not require
equal weights to the results obtained by each of the three standardized methods. See In re
Exide Technologies, 303 B.R. 48, 65 (Bankr. D. Del. 2003).18 It has not escaped the
Court’s attention to the fact that the values derived from applying the other two methods
were higher than that from the DCF method. By reducing the weights of the results from
the other methods, once again he shoved the data to a lower value. 	This Court is not
prepared to adopt the suggestion in the plaintiffs’ supplemental memorandum that it
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18
should either change the assigned weights or adopt the highest of the three values.
Either the valuation is reliably prepared or it is not; this Court does not serve to control
against the plaintiffs’ expert witness’ bias in order to save its case in chief. 	If a court of
record cannot rely upon its “officers” to ensure it that their retained experts prepare
valuation reports in as objective and unbiased manner as can reasonably be achieved
under the current state of the appraisal art, then those officers will suffer the adverse
consequences from an excess of vigorous advocacy that impairs the truth-seeking duties
of the court. 	The whole point of experts is to assist the court in determining the relevant
facts, not in adding to the court’s burden in having to redeem unreliable testimony by its
own lights.
A. 	The Cash Flow Projections
The future benefit Cimasi chose to measure was Addus’ net cash flow. There are
two components critical to the determination of projected net cash flow: 	(1) projected
revenue, and (2) projected costs and expenses.
1. 	The Revenue Projections
Cimasi based his revenue projections on two variables: 	“(1) the projected
increase/decrease in reimbursement for services, and (2) projected increase/decrease for
services measured by the combination of utilization demand for services and market
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19 Cimasi sets out his revenue projection calculations in Table 4 of his report. Table 4 shows the historical
revenue figures for the years 1999, 2000 and 2001, and his projected revenue calculations going five years
forward.
20 Cimasi’s projected revenue calculations were as follows: Years 1& 2 = -1% (decrease in reimbursement
payments) + 6% (increase in utilization demand & market share) = 4.94% projected revenue increase; Year
2 = -1% (decrease in reimbursement payments) + 5% (increase in utilization demand & market share) =
3.95% projected revenue increase; Year 4 = 0% (decrease in reimbursement payments) + 5% (increase in
utilization demand & market share) = 5% projected revenue increase; and Year 5 = 1% (increase in
reimbursement payments) + 4% (increase in utilization demand & market share) = 5.04% projected revenue
increase. (The Court will assume the final revenue projection figures are the exact figures calculated,
whereas some of the earlier calculations were rounded off.)
21 For post acquisition year 1, Cimasi applied the 1st year projected revenue increase of 4.94% to Addus’
actual revenue for 2001. For post acquisition year 2, Cimasi applied the 2nd year projected revenue increase
of 4.94% to the post acquisition revenue figure he calculated for year 1, etc.
19
share.” Cimasi Report at Section 5, Page 3 of 28.19 While the actual increase in revenue
for Addus was 34.76% from 1999 to 2000, and 11.24% from 2000 to 2001, his projected
revenue increases for the prospective 5 year period were: 4.94% for years 1 & 2, 3.95%
for year 3, and around 5% for years 4 & 5.20 He calculated projected revenue for Addus
by applying these percentage increases to Addus’s actual and projected revenue figures.21
The record is devoid of any meaningful support for use of these variables to
project future revenue. Cimasi did not give a detailed explanation of how he derived the
increase/decrease percentages he used to project revenue. 	More importantly, it does not
appear that he took any other variables into account in projecting Addus’s revenue for
post acquisition years 1-5, such as the revenue generating characteristics of each segment
of Addus’s business or any future plans for the business. 	The only characteristic of
Addus’s historical performance that he considered 	in projecting revenue was Addus’s
actual 2001 revenue, without any adjustments or qualifications, upon which he added his
increase/decrease projection percentages.
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22 Both expressed as a percentage of revenue.
23 Cimasi made two separate projections for the cost of sales and expenses: (a) the cost of sales and
operating expenses, and (b) the cost of other expenses. The figure arrived at for the cost of other expenses
consisted only of the weighted average of the actual historical other expenses for Addus during the three
years prior to the sale, using the same 50%-30%-20% weights as used for the actual historical performance
portion of Addus’ cost of sales and operating expenses. Although Cimasi did not explain why he did not
include industry average figures in his calculation for these expenses, it appears these expenses are
significantly lower than the figures obtained by Cimasi for the other expenses category for the benchmark
companies.
20
2. 	The Projected Cost of Sales and Expenses
The figure Cimasi arrived at for the projected cost of sales and operating expenses
for Addus consisted of the weighted average of Addus’s historical cost of sales and
operating expenses and the corresponding industry average cost of sales and operating
expenses,22 which were obtained from the results of his benchmarking analysis, as
follows:
(i) 1/3 of the projected cost of sales and operating expenses for
Addus consisted of the weighted average of the actual historical
cost of sales and operating expenses for Addus during the three
years immediately prior to the sale. The figures were weighted as
follows: 	50% for the 2001 figure; 30% for the 2000 figure, and
20% for the 1999 figure.
(ii) 2/3 of the projected cost of sales and operating expenses for
Addus consisted of the industry average cost of sales and operating
expenses, 	which 	was 	obtained 	from 	the 	results 	of 	Cimasi’s
benchmarking analysis. See Cimasi Report, Schedule 8, Col. Q, L
27. 23
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24 For example, if Addus’s normalized cost structure was at or below the cost structure of the benchmarking
companies, Cimasi’s inclusion of Addus’s actual cost structure (including the nonrecuring items) as a 1/3
component of the projected calculation artificially increased Addus’s future costs. If Addus’s normalized
projected costs would have been below that of the benchmarking companies, this methodology artificially
increased Addus’s costs even further. The Court was not provided with enough information to make these
determinations.
25 Neilson’s testimony was restricted to the issue of false representations in Addus’s financial statements and
he repeatedly testified that he was not a valuation expert.
26 The Court also takes issue with Cimasi’s reasons for using a 1/3-2/3 weighting scheme. Cimasi testified
that he weighted his calculations in this manner to reflect the belief that once the company was under the
control of new management, it would eventually have costs and operating expenses more in line with the
industry average. According to Cimasi, this weighting reflects the belief that the typical investor would not
have simply used the actual cost figures from Addus’s historical performance in determining Addus’s
investment value, but would have instead derived a normalized cost structure for the company incorporating
the industry average based on the knowledge that some of the expenses in 2001 were non-recurring
expenses, and on the expectation that once the company was under new ownership, the cost of sales and
expenses would eventually fall in line with the industry average. See Tr., August 29, 2006, at p. 81-99. As
defendants point out, there is no support for the inference that new management would be able to achieve
industry average costs. Cimasi does not even consider the feasibility of such an achievement, which may
have justified weighting operating costs 2/3 in favor of industry average costs.
21
Cimasi 	testified 	that 	in 	calculating 	the 	operating 	cost 	figures 	for 	the
benchmarking companies, he excluded extraordinary and nonrecurring expenses, but he
did not do so when calculating the same figures for Addus. See Tr., Aug. 29, 2005, at p.
35. 	Defendants argue that had Cimasi excluded nonrecurring events from Addus’s
operating 	costs, 	Addus 	would 	have 	compared 	more 	favorably 	to 	the 	benchmark
companies.24 Yet he provided no meaningful explanation for why he did not use Addus’s
normalized cost figures. 	To the contrary, he used an audited number which was
decisively rejected by the plaintiffs’ own accountant, R. Todd Neilson (Neilson).25 The
adjustments Cimasi failed to make exceeded $13 million dollars for 2001. 	This failure
effectively wiped out what would have been a $13 million EBITDA. Accordingly, he did
not properly apply the standard methodology in this case.26
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27 This rate is called the weighted average cost of capital (WACC), and represents the rate of return an
investor would have expected to receive after purchasing Addus. The formula used to calculate the WACC
is as follows:
WACC = (Kc * Wc) + (Kd[1-t] * Wd)
Where: Kc = Cost of Equity; Wc = Weight of Equity; Kd = Cost of Debt; t = effective tax rate; Wd =
Weight of Debt.
28 The specific factors Cimasi took into consideration included: the risk-free 20-year bond rate (5.77%); the
equity risk premium, which represents the extra return that is expected by the typical investor, above the
risk-free bond rate, when investing in large company stocks, such as S&P 500 companies (+5.9%); a
healthcare industry risk premium for home health services (-4.34%); a small public company risk premium,
which represents the extra return expected by the typical investor, above the risk-free bond rate and the
equity risk premium, when investing in small company stocks, such as those in the 9th and 10th deciles of
the S&P 500 (+3.3%); and the subject entity specific risk premium, which represents the extra return that
would be expected by the typical investor if they invested in this specific company (+10%).
29 The cost of equity was calculated as follows: The risk-free 20-year bond rate (5.77%) + the equity risk
premium (5.9%) + the healthcare industry risk premium for home health services (-4.34%) + the small
public company risk premium (3.3%) + the subject entity specific risk premium (10%) = 20.63%
22
B. 	The Discount Rate
Calculation of the appropriate discount rate is critical to obtaining reliable
valuation results from the DCF method. 	The DCF method places a value on the total
invested capital of the subject entity, which includes the cost of both debt and equity.
Thus, the rate that Cimasi used to determine the present value of the future stream of net
cash flow from Addus was derived using a rate that reflected the weight and cost of both
debt and equity of the company.27
1. 	The Cost of Equity
In 	determining 	the 	cost 	of 	equity, 	Cimasi 	took 	a 	number 	of 	factors 	into
consideration, including the results of his benchmarking analysis.28 After considering all
of these factors, he concluded the cost of equity for Addus was 20.63%.29
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30 This risk premium included the following elements: operational performance risk, which reflected how
unfavorable Addus compared to the benchmarking companies used in Cimasi’s Benchmarking analysis
(3%); depth of management, based on Cimasi’s review of the case file and deposition testimony, which
revealed what he considered concerns over oversight of certain divisions (1%); market competition risk,
which revealed significant competition among 5000-7000 local and regional suppliers (1%); the financial
condition of Addus, based on Cimasi’s review of the case file and deposition testimony, which he believed
revealed significant financial and management inconsistencies in Addus’s financial and reporting systems
(2%); and reimbursement risk, which reflected what he determined was the expected effect of the
significant changes to the Medicare reimbursement system on Addus ( 3%).
23
Of this 20.63%, Cimasi attributed 10% to the risk associated with this particular
company, which he called the subject entity specific risk premium. 	This premium was
made up of five separate elements, three of which are wholly unjustified as either
duplicative or based on his flawed benchmarking analysis.30
Three 	percentage 	points 	of 	the 	10% 	represented 	what 	Cimasi 	called 	an
operational 	performance 	risk, 	or 	the 	added 	risk 	associated 	with 	Addus’s 	poor
performance when compared to the benchmarking companies. 	As stated earlier, his
benchmarking analysis was fatally flawed. 	Another 3% was added for the risk
associated with reimbursement, which was already accounted for in his computation of
projected revenue, which was based in part on his calculated percentage projections for
the increase/decrease in reimbursement for services. He added another 1% to account for
market competition risk, which was also accounted for in his revenue projections that
specifically accounted for the increase associated with the future demand for services and
the expected increase in market share. Thus, at least 7 percentage points of the 20.63%
calculated as the cost of equity for Addus is based on a flawed application of the
methodology.
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31 Had Cimasi used a rate closer to Addus’ actual cost of debt (4.28%), the results would have differed
significantly because he would have calculated a lower discount rate, which would have yielded a higher
present value for Addus.
24
2. 	The Cost of Debt
The actual cost of Addus’ debt was 4.28%. Cimasi added 12% to that number to
account for the fact that Addus’ debt was personally guaranteed by its principal, Andrew
Wright. 	According to Cimasi, “it is reasonable to assume that in the absence of those
guarantees that there would be an incremental rise in the cost of debt attributable to the
hypothetical sale of [Addus].” Cimasi Report, Section 5, p. 19 or 28. Thus, the cost of
debt used in his WACC calculation was 16.28%.
There is simply no justification for the addition of 12% to the cost of Addus’s
debt simply because Wright personally guaranteed the debt. 	There is no reason to
believe that a hypothetical purchaser would pay an additional 12% to extend the same
credit to Addus. Indeed, other than Cimasi’s testimony that the going rate for a company
like Addus would have been around 16%, there is no other evidence to support the
conclusion that 12% should be added to the cost of debt because of Addus’s debt
structure.31
Moreover, there is nothing in the literature that sets forth the criteria for imposing
any adjustments for a personal guaranty when comparing the cost of debt for a public
company with the cost of debt for the subject private company. 	In this respect, there is
no peer recognized technical knowledge for computing the cost of debt when there is or
is not a guarantee by the controlling shareholder(s). 	Further, it is inconsistent with the
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32 Cimasi concluded that the WACC (discount rate) was 14.32%.(WACC = (20.63% * 39.33%) +
(16.28%[1-37.17%] * 60.67%) = 14.32%). He determined the weight of equity (Wc) and the weight of debt
(Wd) by calculating the weighted average of Addus’ capital structure and the industry average capital
structure, which was based on his benchmarking analysis as follows: 33% to Addus’s capital structure
(82.24% debt) and 67% to the average industry capital structure (49.88% debt), see Cimasi Report,
schedule 3, Col. Q, L. 46, which yielded Wd = 60.67% and Wc = 39.33%. The effective tax rate for Addus
was 37.17%. Cimasi attributed his choice of weighting method to the notion that a purchaser in control of
the company would have the power to change the capital structure of the company to be more in line with
industry average. Again, this assumption is based on the industry average capital structure derived from the
flawed benchmarking analysis, which consisted of primarily public companies and does not consider the
particularities of this private entity. Thus, this assumption is not supported for this particular entity.
25
practical reason for insisting upon guarantees as a “credit enhancement,” namely, the
strong incentive to induce the principal to attend to the business, to ensure the timely
performance of the reporting requirements and of the other loan agreements.
The arbitrary addition of 1200 basis points to the cost of debt component of the
discount rate is a fatal flaw in the application of the DCF method that in and of itself
renders Cimasi’s DCF analysis unreliable and therefore inadmissible.32
C. 	The Terminal Period
The DCF method is typically applied over two separate time periods, a discreet
number of years going forward and a terminal (perpetual) period that represents the
remainder of time the company is owned. 	Determination of the rate applied to this
terminal period is critical to obtaining an accurate value of the business using the DCF
method.
Cimasi used the Gordon Growth Model to place a value on the remaining period
of ownership after post acquisition year 5, “under which the net cash flow from the final
period [wa]s ‘grown’ by the selected growth rate of four percent.” Cimasi Report,
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33 The cash flow figure obtained was then capitalized at a rate of 10.32%, and then discounted back to the
present value at the discount rate of 14.32%. ( The capitalization rate is the discount rate minus the growth
rate: 14.32% - 4% = 10.32%.) The value obtained for this terminal period was $40 million, which
represented over 70% of the value Cimasi obtained for Addus under the DCF method. See Cimasi Report,
Section 5, at p. 22 of 28; see also Tr., Aug. 29, 2005, at pp. 122-23.
26
Section 5, at p. 21 of 28.33 The Court was never provided with an explanation of why the
rate of 4% was used as a growth rate in the terminal period. 	He testified that he
considered this rate “conservative in that we recognized that this was a huge growth
industry.” 	Tr., August 26, 2005, at p. 163. 	He never explained why he felt the need to
use a conservative figure in valuing a business in what he described as a huge growth
industry. 	He has simply not given the Court enough information to determine whether
the 4% growth figure used was a reliable figure. 	In light of all of the other flaws in
applying this method, the Court cannot simply give deference to professional judgement
in determining the growth figure in this instance, which represented over 70% of his
value determination under the DCF method.
D. 	The Control Premium
A control premium is the value attributed to a premium the typical investor would
be willing to pay for a controlling share in the company. 	Cimasi chose to add a 10%
control 	premium 	to 	the 	DCF 	value 	he 	calculated 	for 	Addus, 	which 	he 	claimed
represented the percentage an average investor would be expected to pay as a premium to
purchase 100% of the shares of Addus.
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34 By Applied Financial Application, LP
35 By Mergerstat.
36 102 transactions were analyzed between 1994 and 2001 as follows: 14 in 1994; 11 in 1995; 19 in 1996;
24 in 1997; 16 in 1998; 9 in 1999; 5 in 2000; and 4 in 2001.
37 60 transactions were analyzed between 1996 and 2001 as follows: 15 in 1996; 21 in 1997; 8 in 1998; 5 in
1999; 4 in 2000; and 7 in 2001.
27
Cimasi used data obtained from Mergerstat Review34 and Control Premium
Study 35 in determining the control premium that should be attributed to the value of
Addus. Both studies report control premiums for publicly traded stock. The Mergerstat
study revealed a weighted mean control premium paid in healthcare transactions from
1994 to 2001 of 34.9%.36 The Control Premium Study revealed a weighted mean control
premium paid in healthcare transactions from 1996 to 2001 of 31.1%.37 Notwithstanding
the industry means revealed by these studies, he determined that “given the facts and
circumstances of [Addus] and the public market for the home healthcare industry
segment within which it operates,” the control premium for Addus should be below the
mean. Cimasi Report, Section 5, at p. 10 of 28. Therefore, he concluded that a control
premium of 10% was more appropriate.
Cimasi failed to adequately explain why such a low premium was justified. 	He
attempted to attribute the low premium to what he perceived to be a poor quality senior
management team. 	However, even if a poor quality management team was reflected in
the marginal EBITDA before adjustments for normalized earnings, once it is reflected
there, it cannot be double-counted by reducing the control premium. More importantly,
there was no showing that he had any expertise in evaluating the quality of management.
Even if he had such expertise, no foundation was explicitly laid for him to establish that
expertise, and then apply that expertise in determining the control premium.
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28
Further, to the extent there purports to be any empirical data on the real range of
control premiums, Cimasi did not establish that this data and any inferences drawn from
the data have reached the level of peer-recognition as an accepted methodology. 	A
passing reference to some limited studies does not establish that this methodology or his
application of the methodology has reached the level of a standardized technique or
specialized knowledge.
Chartwell argues that even if the control premium was not applied, Cimasi’s
valuation analysis would not significantly differ, so a flawed application of the control
premium should not materially alter this Court’s determination. 	Chartwell misses the
point. As a gatekeeper, this Court must look to the methodology used and its application,
not the ultimate outcome, and where application of the methodology is fatally flawed, as
here, the Court must exclude the evidence, regardless of its effect on the ultimate
outcome.
E. 	The Discount for Lack of Marketability
A discount for lack of marketability reflects the added risk associated with
investing in a company whose shares are not publicly traded, and are therefore not as
liquid as the stock of a company freely traded in the public marketplace. 	According to
Cimasi, discounts for lack of marketability are often applied to private closely held
companies such as Addus. 	Thus, he decided to deduct a 30% discount to the value he
calculated 	for 	Addus 	under 	the 	DCF 	method, 	which 	he 	claimed 	represented 	the
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38 Cimasi looked at 14 different studies dating from 1966 to 1998, and reporting on over 1500 transactions,
cumulatively.
39 The two studies were: (1) the Emory Studies (also known as the Baird & Co. Studies) (1980-2000), and
(2) Willamette Management Associates Studies (annual results from 1975 to 1995).
40 1994-2001.
41 Only one of the restricted stock studies was done after 1997, when the SEC Rule requiring a holding
period before restricted stock can be freely traded reduced the period of time from 2 years to 1 year. This
study, done by Columbia Financial Advisors (May 1997-1998), yielded a discount of only 13%.
29
percentage an average investor would discount the value of 100% of the shares of Addus
because it is not as marketable (or liquid) as a company trading in the public arena.
Cimasi reviewed three types of studies in order to determine the appropriate
discount to apply to the value of Addus: 	(1) restricted stock studies;38 (2) two studies
done on the discounts attributed to businesses just prior to their initial public offering;39
and (3) analysis of the PE ratio of public and private companies from the Mergerstat
Review.40 The average discount from each of these studies was: (1) 28% from the
restricted stock studies; 41 (2) 47% from the Emory Studies and 52% from the Willamette
Studies; and (3) 18.5% (weighted mean) from the Mergerstat PE ratio data.
Cimasi also considered a number of other factors in determining what discount to
apply to Addus, such as: (1) no real prospects for a public offering; (2) control value was
100%; (3) financial performance as compared to the industry average; and (4) market for
home health care transactions. 	After reviewing all of these factors, he concluded that a
discount for lack of marketability of 30% should be applied to the value of Addus.
Cimasi’s application of a discount for lack of marketability is counterintuitive for
several reasons. 	First, it imposes a hypothetical model in which the controlling shares
would have to be freely tradable within a severely truncated period of time - two or three
business days at most - in order to approximate the trading practices of minority shares of
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30
publicly held companies. 	This is clearly an impracticably impossible standard to meet.
So the foundational premise for attributing a lack of marketability builds in a very severe
diminution in the value of the privately held shares. In this sense, the theory is entirely
suspect and inherently unreliable.
Second, there was no need to impute a lack of marketability for the subject
company because Addus had been marketed for over a year by an investment banking
firm in England and another firm in the U.S., so there was already company-specific data
on this issue, which was completely ignored by Cimasi. There is also the undeniable fact
that the shareholders already had a buyer for their shares under the Stock Purchase
Agreement with Med Diversified. 	Although the plaintiffs mocked the SPA as terribly
overpriced and made disparaging references to the history of overpayments by Med D for
its prior acquisition, the relevancy of those alleged facts to this issue was never the
subject of any testimony in this trial.
Moreover, even if a discount were appropriate, the consensus in the financial
valuation community of experts only favors use of the studies used by Cimasi to
determine a discount for lack of marketability of minority, and not controlling, interests.
Further, he has already accounted for the financial health of the company and the market
for home health care in the underlying DCF analysis. There would be no basis for further
discounting the numbers except to further depress the value of Addus.
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42 MVIC = Market Value of Invested Capital, which is: market value of common stock (stock price per
share X outstanding shares) + value of preferred shares + interest bearing debt.
43 EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization.
31
III 	The Other Valuation Methods Used
A. 	The Guideline Company Valuation Method
The 	Guideline 	Company 	Valuation 	(GCV) 	method 	“analyzes 	historical
transactional data to develop several transactional ratios of shares of common stock in
publicly traded companies that are similar to the subject entity.” Cimasi Report, Section
5, at p. 22 of 28. 	These ratios are then applied to corresponding company measures to
arrive at a value for the company.
Using the GCV method, Cimasi measured the following ratios from a database of
13 publicly traded healthcare companies: (1) MVIC42
/Revenue and (2) MVIC/EBITDA.43
The 13 publicly traded healthcare companies chosen by Cimasi were those he considered
similar to Addus. He then assigned a weight to each ratio based on his determination of
how similar the company was to Addus (i.e., revenue size, scope of services, etc.), as
reflected in his benchmarking analysis. Tr., August 29, 2005, at p. 258. 	He then
calculated a weighted mean, median, high & low, upper & lower quartile value for each
of the ratios.
The final determination of what ratio value to apply was chosen differently for
each of the ratios. For the MVIC/Revenue multiple, Cimasi used a value of 0.32, which
represented the value corresponding to ½ of the 1st percentile of the MVIC/Revenue
values calculated. 	His explanation for using this number was that both Addus’ actual
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44 The EBITDA figure used here was derived by multiplying the weighted average EBITDA of the
company as a percentage of net revenue for the years 2001, 2000, and 1999, which was 2.83%, by the
company’s 2004 net revenue of $234, 070,611. The weighting was 50-30-20 for the years 2001-2000-1999.
32
2001 operating margin (-1.95%), and its 3-year normalized operating margin (0.63), were
below the range of the 2001 operating margins of the guideline companies. See Cimasi
Report, Schedule 10, n. 2. 	In other words, Addus’ operating margin was not even on the
chart, so he gave it a value equal to just about the lowest value he could in line with all of
the others. When the Court voiced its concern that since Addus was not even on the chart
with these companies it may not be comparable, his response was to state that this is an
accepted technique to place Addus within the statistical data. Tr., August 29, 2006, at p.
272. 	He then multiplied the MVIC/Revenue multiple of .32 by Addus’s 2001 net
revenue of $234,070,611, which yielded a value of $75,531,942 for the company.
In calculating a value for MVIC/EBITDA multiple, Cimasi used a value of 7.56,
which represented the value corresponding to the 14.20 percentile of the MVIC/EBITDA
values calculated. 	His explanation for using this number was that Addus’s 3-year
weighted average operating margin (0.63) was the 14.20 percentile of the 3-year
weighted average operating margin for the guideline companies. 	See Cimasi Report,
Schedule 10, n. 3. 	He then multiplied the MVIC/EBITDA multiple of 7.56 by an
EBITDA 	figure 	calculated 	for 	Addus 	of 	$6,634,607,44 which 	yielded 	a 	value 	of
$50,148,558 for the company.
Cimasi did not explain why he used two different time periods of comparison in
choosing the two different multiples. No particular rationale was given for choosing the
MVIV/Revenue multiple by comparing Addus’s operating margin to the one year (2001)
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33
operating margin of the guideline companies, and then choosing the MVIC/EBITDA
multiple by comparing Addus’s operating margin to the 3-year weighted average
operating margin of the guideline companies.
After calculating a separate value for the company using each of the multiples,
Cimasi then assigned a weight to each value: 60% for the MVIC/Revenue multiple and
40% for the MVIC/EBITDA multiple, which yielded a value of $65,378,588. 	When
asked why he chose to weight the results of each multiple 60%-40%, he responded that
he placed greater weight on the revenue multiple because “revenue is a little cleaner
number.” Tr., August 29, 2005, at p. 273. In other words, less adjustments are made to
this number. Id. at 274. He then subtracted interest bearing debt ($31,471,841), to arrive
at a value of $33,906,747.
As with the DCF method, and for the same reasons, Cimasi then added a 10%
control premium, and subtracted 30% as a discount for lack of marketability, to arrive at
a final value under the GCV method of $26,108,195. This figure constitutes 30% of the
weight of his final determination of the value of Addus.
The low multiples Cimasi used in calculating the value of Addus under the GCV
method 	are 	the 	result 	of 	a 	flawed 	analysis. 	In 	particular, 	there 	are 	obvious
inconsistencies in calculating the multiples he used as the percentiles used in choosing
each multiple were different, even though they were based on the same data. 	No doubt
this is because these multiples were chosen based on a comparison of two different and
inconsistent time periods.
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Further, as stated earlier, Cimasi’s failure to normalize the data for Addus is a
fatal flaw in his methodology. 	In this instance, the weights assigned to each of the
guideline companies in calculating the multiples were based on his benchmarking
analysis, which compared Addus’s non-adjusted figures to the normalized figures of a
small database of primarily publicly owned companies. 	Further, his determinations of
what ratios to use were based on Addus’s unadjusted operating margin. As a result, the
methodology he used was flawed.
B. 	The Comparable Transactions Approach
The Direct Market Comparable Transaction (DCT) method compares actual
transactions involving similar companies to the company at issue to in order to place a
value on the company. This method is based on the premise that “the cost of an equally
desirable substitute, or one of equal utility, tends to set the ceiling of value” for the
company. 	Cimasi Report, Section 5, at p. 24 of 218. 	Using this method, Cimasi
analyzed transactions he determined were comparable, calculated the ratios or multiples
based on those transactions, and then applied those multiples to Addus.
The 	transactions 	used 	by 	Cimasi 	in 	his 	analysis 	included 	11 	healthcare
transactions he identified as similar to Addus. 	A purchase price/revenue (P/R) multiple
was then calculated for each. 	All P/R multiples that fell outside two standard deviations
from the mean of the P/R multiples calculated for all of the companies were then
excluded from consideration. This resulted in the exclusion of one of the transactions in
which the P/R multiple fell more than 2 standard deviations above the mean. A median
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P/R value of 0.23 was then calculated from the other 10 companies. 	This was then
applied to the Addus’ 2001 revenue of $234,070,611, which yielded a value of
$54,616,476.
Cimasi did not apply a control premium to his results from this method because
the results are based on actual transactions, which presumably incorporate any such
premium. 	Id. at p. 25 of 28. 	For the same reason, he did not apply a 30% discount for
lack of marketability, however, he did apply a 10% discount for lack of marketability
“based upon a proxy for the transactional costs, e.g., accounting costs, legal costs,
appraisals, management time and brokering fees, related to the hypothetical sale of the
subject entity.” 	Id. 	His final determination of the value of Addus under the DCT
method was $20,830,171.
There are several reasons why Cimasi’s analysis under the DCT method is
flawed. 	First and foremost, the transactions chosen by him were not comparable to
Addus. 	In particular, the revenues reported for the companies involved in those
transactions ranged from $700,000 to $87 million, as compared to Addus’s $234 million.
In addition, the purchase price of those companies was only $180,000 to $57 million. He
excluded as beyond 2 standard deviations the transaction closest to Addus (for $120
million) as an outlier. When questioned about the comparability of these transactions, he
essentially testified that incompatibility was one of the reasons he chose to give the
results of this method only a 10% weight in his final calculation of the value of Addus.
Tr., August 29, 2005 at pp. 228-33.
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Second, as stated above, by excluding outliers beyond 2 standard deviations,
Cimasi excluded the only transaction that may have been truly comparable to Addus.
Moreover, he chose to exclude outliers under this method even though he did not choose
to exclude outliers under the GCV method, notwithstanding the fact that the database he
considered in this instance had only 11 transactions that he chose because they were
comparable. If they were truly comparable, he would not have needed to exclude outliers
from such a small sample size.
Finally, Cimasi’s application of a 10% discount for lack of marketability is
completely unsupported. 	The Court notes that he did not apply a control premium
precisely because these are actual market transactions that take into account any premium
paid. The same reasoning should apply to a discount. Moreover, as defendants point out,
there is no reason to believe transaction costs are not included in the transactions
reported. 	Thus, 	there 	is 	no 	support 	for 	his 	application 	of 	a 	10% 	discount 	for
marketability under this method.
Conclusion
As the foregoing demonstrates, the deliberate, manifest, pervasive and systematic
bias on Cimasi’s part in applying the standard methodologies for estimating the total
enterprise value of Addus warrants disqualifying him and his report on the principal
ground of unreliability. As a result, the defendants’ cross-motion in limine is granted in
its entirety, and the expert testimony and report of Robert Cimasi is stricken from the
record as unreliable and therefore inadmissible.
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Plaintiffs’ counsel argues in its supplemental post-trial memorandum that this
Court should undertake to redeem Cimasi’s report by substituting Neilson’s computation
of EBITDA and ignoring the negative adjustments to the discount rate and then running
the substituted variables in the formula. First, it is not the function of this Court to fix the
errors in an expert’s report in order to save it for purposes of admission. 	Either the
expert properly applies the standard methodologies or he does not. If he does, the report
may be admitted. 	If he does not, it cannot be admitted. 	Second, Neilson repeatedly
testified he was not a valuation expert. 	He only testified about whether there were
fraudulent representations in the projected EBITDA as of the end of the third quarter of
2001. 	To reach this conclusion, he testified that the adjustments to the 2001 year-end
audit could not be found to be one-time non-recurring adjustments. 	He further testified
that in his judgment the financial statements for 1999, 2000, 2001, and 2002 would have
to be materially restated.
Under the totality of the circumstances, this Court does not believe that it falls
within the sound exercise of its discretion to redo Cimasi’s patently unreliable report.
This may be a stiff dose of medicine for the plaintiffs to swallow, but it should serve as a
warning to other litigants in future constructive fraudulent transfer cases to make sure
that their experts apply the standard methods correctly lest they find their experts’ reports
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denied admission. For if they do not heed this stricture, they may not have any evidence
in the record to sustain their burden of proof to avoid the alleged constructive fraudulent
transfers.
SO ORDERED.
Dated: Central Islip, New York
August 2, 2006
s/Stan Bernstein
Stan Bernstein
United States Bankruptcy Judge
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