The Altman Z-Score Model: Z = 1.2 X1 + 1.4 X2 + 3.3 X3 + 0.6 X4 + 1.0 X5

• X1

  = working capital/total assets

• X2

  = retained earnings/total assets

• X3

  = earnings before interest and taxes/total assets

• X4

  = market value of equity/book value of total liabilities

• X5

  = sales/total assets

• Z

  = overall Score (a score below 1.81 indicates distress)

Our screener actually incorporates two Altman models: the Altman Z-Score Model stated above (for manufacturers) and the double prime Altman Z"-Score Model stated below (for non-manufacturing, non-financial companies).

The Altman Z"-Score Model: Z" = 6.56 X1 + 3.26 X2 + 6.72 X3 + 1.05 X4

• X1

  = working capital/total assets

• X2

  = retained earnings/total assets

• X3

  = earnings before interest and taxes/total assets

• X4

  = market value of equity/book value of total liabilities

• Z"

  = overall Score (a score below 1.1 indicates distress)

Because each model has a different threshold score to indicate distress, in order to combine the results of our screening of manufacturing and non-manufacturing, non-financial stocks into one ranking list, we rank each company by its distance from its respective threshold, with distance below either threshold represented by a negative sign. So, for example, a manufacturing company with a Z-Score of 1.8 would have a distance from its distress threshold of -.01, while a non-manufacturing company with a Z”-Score of 1.8 would have a distance from its distress threshold of .7. The smaller (or more negative) the number, the more distressed the company is, according to the model used. The goal is for the combined list to represent the most distressed companies in our universe, regardless of whether they are manufacturing or non-manufacturing companies.

The majority of the companies in our universe break out all the necessary data for the Altman Z-Score and Z''-Score models quarterly; for these stocks, our screener and calculator use market cap data updated as of the close of the previous trading day; balance sheet data from each company's most recent 10-K or 10-Q as of the previous trading day; and trailing four quarters income statement data from each company's last four 10-Qs or from its last 10-K, as of the previous trading day, whichever provides the more recent data. For the minority of companies in our universe that only break out the necessary data annually, our screener and calculator use market cap data updated as of the close of the previous trading day, and balance sheet and income statement data from the companies' most recent 10-Ks.

Our universe of stocks

Our universe consists of approximately three thousand publicly-traded companies sorted by Standard Industrial Classification (SIC) codes into manufacturing and non-manufacturing stocks. This universe includes stocks that traded on the NYSE, AMEX, NASDAQ, OTC Bulletin Board, and the Pink Sheets, that had an average volume of 50,000 shares or more traded over the previous three months, and had a share price greater or equal to $0.25 for stocks on the first four markets. A daily traded value of $30,000 or greater was used instead of the minimum share price criterion for stocks on the Pink Sheets. Our universe excludes ADRs and other companies that haven't filed financial statements in the U.S. in the last four quarters. Our universe also excludes financial stocks, since the Altman models (and other models that rely on financial statement data) are generally not recommended for financial companies. This is because of the opacity of financial companies' financial statements and their frequent off-balance sheet items.