The Anatomy of a Turnaround World Bank Conference March 24, 2004

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Transcript The Anatomy of a Turnaround World Bank Conference March 24, 2004

The Anatomy of a Turnaround

A Seminar prepared by FTI Consulting, Inc. and the ALTMA Group for the

World Bank Conference Corporate Restructuring: International Best Practices

March 24, 2004 1

Agenda

I.

II. Introduction Stages of Business Decline III. Case Study: LaRoche Industries • Primary Conditions Leading to Insolvency IV. Turnaround Options V.

Stages of the Turnaround Process VI. Case Study: LaRoche Industries • Turnaround Options and Plan Formulation VII. Role of Professionals VIII. Appendices

Presenters

• Randall S. Eisenberg, FTI Consulting, Inc.

• Elliot Fuhr, FTI Consulting, Inc.

• Sean A. Gumbs, FTI Consulting, Inc. • Peter L. Tourtellot, Anderson Bauman Tourtellot Vos & Co.

Introduction

• • • • High visibility corporate failures in the United States and other countries have heightened awareness of the corporate restructuring field. While these particular companies may be news worthy, the reality is that business failures of all sizes occur in all regions of the world with significant impacts on local and global economies.

The foundational issue affecting how these business failures are dealt with is the country-specific willingness to rehabilitate distressed companies versus liquidate them. Assuming this willingness, countries must have in place (or develop): – Mechanisms to support direct restructuring negotiations with major creditors (Out-of-court workouts); and – A legal / government structure to provide oversight for in-court restructurings The are a host of critical policy issues to be considered during business rehabilitation, including: – Local regulations regarding the displacement of employees (an unfortunate potential outcome) – Local regulations regarding discharge of debt via restructuring – Local regulations regarding payment of government obligations (e.g., taxes) This seminar will provide participants with frameworks for identifying the stages of business decline and the stages of the turnaround process. The goal is to provide the tools to assist both companies and their creditors to institute corrective measures earlier and to avoid the high costs of insolvency.

Stages of Business Decline

Chart of the Causes of Business Failure

Sheer bad luck

External factors beyond management’s control

Internally generated problems within management’s control

52%

Real balance of external and internal factors

24%

Internal problems triggered by external factors

15%

Source: Association of Insolvency and Restructuring Advisors 6

Stages of Business Decline

The Corporate Demise Curve

Expected Performance

Infancy Stage – Stagnation (Stage 1) Early Stage – Underperforming (Stage 2) Midstage - Significant Performance Impairment (Stage 3) Late Stage – Crisis (Stage 4)

Stages of Business Decline

Infancy Stage – Stagnation (Stage 1)

• Operating margins and other key ratios falling behind industry averages • Period-over-period revenues flat or declining • Increased inventory write-downs • Lack of (or misguided) product investment • Problems with integration of acquisitions Changes in the environment (e.g., economic, competitive or regulatory) combined with internal shortcomings (e.g., poor, fraudulent or unbalanced management) can cause a company’s problems to incubate during this stage.

Stages of Business Decline

Early Stage – Underperforming (Stage 2)

• Significant declines in revenue and/or EBITDA as variable costs grow and fixed costs remain constant • Assets are not sufficiently liquid • Underutilization of fixed assets • Needed capital is tied up in receivables and inventories • Management attention is diverted from traditional functions due to cash shortage This is the time to keep a grass fire from turning into a forest blaze…but management may not be willing to accept that problems exist or appreciate the severity of these problems.

Stages of Business Decline

Midstage – Significant Performance Impairment (Stage 3)

• Credit and merchandise shortages occur • Cash and credit difficulties become apparent to both insiders and the general business community – Creditors unwilling to advance further credit – Suppliers may refuse to ship altogether • Increased risk of loan covenant defaults • Potential loss of key customers and/or suppliers • Potential loss of key employees Without proper forecasting, a cash shortage may be the first time management acknowledges a problem. With insolvency looming, action must be taken immediately.

Stages of Business Decline

Late Stage – Crisis (Stage 4)

• Company cannot pay obligations as they come due – Inability to service long-term debt • Overall payables growth with delinquent payables becoming significant and unmanageable • Actual or appearance of insolvency • Public acknowledgement of business failure In some countries, legal systems are not structured for a turnaround at the crisis stage, therefore a company’s only option is to liquidate.

Potential Areas to Search for Warning Signs

Stakeholders Accounting/ Accounts Receivable Management/ Board of Directors

Warning Signs

Late or Nonpayment of Obligations

Operating Trends

Potential Areas to Search for Warning Signs

• • • • • •

Stakeholders – Creditors, Lenders, Customers, Investors and Employees

Loss of financial backing Loss of major supplier where special relationships existed, such as extended credit terms Excessive negotiations regarding credit issues Increased stock trading and/or declining stock price (public company) Excessive staff turnover/loss of key employees Increased vendor concerns cause management to spend more time preserving relationships • • • •

Management/Board of Directors

Loss of key officers and/or members of the Board of Directors Ineffective leadership (i.e. lack of vision, rigidity among management) Cash management becoming a primary activity at the expense of traditional management functions Not capitalizing on potential synergies after mergers or acquisitions • • • • • • •

Late or Nonpayment of Obligations

High percentage of payables over 90 days past due Inability of the company to make timely deposits of trust funds such as employee withholding taxes and pension plans Inability to service long term debt Vendor canceling terms and requiring cash on delivery Difficulty meeting payroll Line of credit at or near ceiling with no recent decreases Frequent or continued extensions of credit 13

Potential Areas to Search for Warning Signs

• • • • • • • •

Operating Trends

Loss of major customer with no apparent redirection or operational changes by management Increasing operating costs Key operating ratios continue to decline Decreasing or inadequate margins Loss in market share/Increasing competition Cash flow shortage Unusual or extraordinary litigation and events not customarily encountered in the industry Significant discrepancies between actual and projected results over the last three years • • • • • • • • •

Accounting/Accounts Receivable

Default on payment by major customers Creative accounting and beneficial adjustments to the books Poor record keeping or inadequate financial records No internal operating controls (i.e. lack of cash flow budgets or contingency plans) Change in accounting firm Major bad debt Excessive receivables unpaid over 90 days Lack of collection policy and lack of significant controls Insufficient segregation of duties in the collections department 14

Case Study LaRoche Industries Company History and Primary Conditions Leading to Chapter 11 Filing

LaRoche Industries, Inc.

Background

• By 1999, LaRoche Industries, Inc. was an international diversified producer and distributor of inorganic and organic chemicals operating in three principal segments, including Nitrogen Products and Electrochemical Products both in the North American and European Markets.

• The Company operated eight plants including four Ammonium Nitrate plants, one Ammonia plant, one plant producing both fluorocarbon and Chlor-alkali products, and two Chlor-Alkali facilities in Europe.

• Also operated 23 national ammonia/AN distribution centers throughout the continental United States.

A Brief History….

1986-1990 1991-1995

1986 Founded by William LaRoche through a management buyout of U.S. Steel Corporation’s Nitrogens, mixed fertilizers, and retail business 1988 LaRoche acquires certain chemical production operations of Kaiser Aluminum and Chemical Corp in Gramercy, Louisiana 1994 Establishment of Joint Venture with Avondale Ammonia 1995 Construction of Seneca, IL blasting grade ammonium nitrate facility 1990 Strategic capacity investments at Cherokee, Alabama AN facility 1990 Phase out of CFC, replace with HCFC

1996-1999

1997 / 1998 Expansion into Western Europe by purchasing a 50% joint venture interest in a Rhodia Chlor-Alkali operation in France ("ChlorAlp"), and by purchasing a Chlor-Alkali facility in Frankfurt from Hoechst Celanese 1998 March Initial downturn in ammonia and Chlor-Alkali prices 1998 November Company begins corporate reorganization efforts 1999 Purchase of the remaining 50% interest of ChlorAlp 1999 Refocus on core AN and Chlor Alkali business including the sale of Aluminas business and related Joint Ventures, strategic review of options 17

Diversified Products and Markets

A closer look at the chemistry reveals a high dependence on natural gas for raw materials necessary to make end products.

Nitrogen Products Electrochemical Products

Products

• Ammonium Nitrate • UAN Solutions • Industrial Ammonia

Markets

• Fertilizers • Blasting Products • Industrial Products

European Chlor-Alkali Products

• Chlorine • Caustic Soda • Chlorinated Methanes • Hydrochloric Acid • Calcium Chloride

Markets

• Pharmaceuticals • Agrochemicals • Water Treatment • Pulp and Paper • Detergents • Silicones, fluoropolymers and solvents

US Chlor-Alkali Products

• Chlorine • Caustic Soda • Fluorocarbons

Markets

• Vinyls • Water Treatment • Chemicals • MDI/TDI • Titanium Dioxide 18

Diversified Geographic Presence

LaRoche had several small manufacturing facilities acquired through a “roll-up” strategy.

Geneva Seneca Crystal City Cherokee Gramercy Fortier Atlanta Pont-de Claix Frankfurt Corporate Headquarters Manufacturing Facilities: Nitrogen Products Industrial Ammonia Distribution Center Nitrogen Products Terminal Chlor-Alkali Products Chlorinated Methanes 19

Past Performance

Historical Sales

$400 $390 $380 $370 $360 $350 $340 $330 $320 $310 $361.0

1995 $386.9

1996 $339.0 $342.6

1997 1998 $389.5 $398.6

1999 2000PF

EBITDA

$30 $20 $10 $0 $70 $60 $50 $40 $46.4

$57.8

1995 1996 $35.0

$30.5

$33.1

1997 1998 $17.3

1999 2000PF

Sales over the five years prior to 2000 remained at relatively consistent or improving levels.

Yet, profitability slumped due to the increased costs of production and depressed pricing.

Notes:

(1) Pro Forma for the divestiture of Aluminas and the purchase of the remaining 50% interest in ChlorAlp.

Factors Contributing to Poor Performance

Decreasing Prices for Products Increasing Costs of Raw Materials High Debt / Interest Burden Inappropriate Overhead Capital Spending Catastrophic Event Approximately two years of depressed market prices for its domestic Nitrogen and Chlor-alkali products.

• Supply/Demand imbalances compounded by foreign imports Natural Gas, both the raw material and source of energy for Ammonia and Ammonium Nitrate products grew steadily from mid-1998, and increased dramatically in the first 5 months of 2000 immediately before filing.

High levels of debt due to the purchase of European operations. Cyclical nature of business does not promote even debt repayment strategy.

Overhead levels in place for a large company with multiple layers of management.

Although strategic acquisitions were made, most were non-accretive to value. Maintenance capital expenditures were above normal due to the age of facilities.

Explosion in July 1999 at Kaiser plant idled Gramercy electrochemical facility for six months resulting in accumulated loss on income and damages in excess of $16mm.

1. Pricing Market Impact

250 225 200 Domestic prices for Nitrogen and Chlorine / Caustic Soda dropped to lower levels than in the previous profitable years. Hedging strategies were not sufficient to offset the sharp increase in natural gas prices. Ammonium Nitrate Historical Pricing

Ammonium Nitrate

400 LaRoche Chlor-Alkali Historical Selling Price

ECU

300

Caustic Soda

200 175 150

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

100

Chlorine

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

A commodity business with little control over product pricing.

2. Natural Gas Market Impact

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Natural Gas Prices Sold to Industrial Consumers 1997-2001 $ per ton Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 – Natural Gas, a precursor for most of LaRoche’s products, experienced an unprecedented 4-fold increase in price in a matter of months directly after filing.

– Natural Gas contributed to 56-67% of unit cost for production of ammonia, while ammonia contributed to up to 79% of unit cost for various ammonium nitrate products.

– The Company was unable to hedge its risk against the rising costs due to liquidity reasons.

Source: Natural Gas Monthly LaRoche was unable to pass along higher raw material prices to customers and found it difficult to compete with better capitalized, more efficient competitors.

3. Debt Position

Debt increased due to two major factors: • Europe Plant acquisitions required a total of $75-$80 million from 1997 through 1999 • Early debt retirement and new debt issues cost of $17 million in 1997

Debt (a) to EBITDA Debt to Free Cash Flow (b) Debt to Assets Enterprise Value to EBITDA Debt to Enterprise Value (c) Agrium, Inc.

Mississippi Chemical Geon Co.

Georgia Gulf Olin Corp.

Pioneer Cos, Inc.

Average LaRoche (d) 1.5x

6.0x

1.2x

2.6x

1.1x

7.1x

3.3x

9.7x

3.2x

28.1x

2.0x

3.1x

1.1x

12.2x

8.3x

n/a 0.3x

0.3x

0.2x

0.7x

0.1x

0.8x

0.4x

0.7x

4.0x

8.9x

8.4x

7.3x

4.1x

7.1x

6.7x

1.7x

0.4x

0.7x

0.2x

0.4x

0.3x

1.0x

0.5x

1.7x

(a) Debt includes all interest-bearing debt obligations.

(b) Free cash flow is defined as EBITDA minus capital expenditures.

(c) Enterprise value is defined as debt plus market value of equity less cash.

(d) EBITDA ratios calculated on projected FY 2000 peformance. Enterprise value based on Chase debt plus market value of notes.

Source: Bloomberg  As credit markets tightened, deleveraging through a sale of assets or refinancing became increasingly more difficult.

The message: Don’t take on debt unless you can pay it back.

4. Other Expenditures

• Overhead levels were in place for a much larger company: − Legacy Issues – Due to the Company’s creation from ancillary parts of USX and Kaiser, there were certain contract stipulations binding LaRoche which mirrored the pension and medical benefits plans of those legacy employers. LaRoche was burdened with high costs of labor.

• Certain investments and expenditures occurred which added little accretive value: − LaRoche Air and Filter Business - $14 million − Personnel Team Building Program - $4 million − Dividend Payments - $3 million − Stock Repurchase Program of approximately $25 million • Capital spending was above normal: − Replacement of brine line for Gramercy operations - $12 million − Cherokee Plant expansion - $31 million. Expansion yielded little if any payback. Further, LaRoche did not have a “look-back” procedure to monitor return on investment from capital projects.

• Explosion at Gramercy Plant site resulted in $16 million in damages and losses.

− The thinly capitalized company could not overcome the lost revenue. Although LaRoche ultimately did recover business interruption insurance, the time delay was significant.

Result: Stages of Business Decline

• Infancy Stage – Stagnation (Stage 1) − Due to increased costs, certain production facilities were idled short-term.

− Operational revenues declined along with EBITDA as variable costs were growing and fixed costs remained constant.

• Early Stage – Underperforming (Stage 2) − Vendors tightened existing credit.

− Cash shortage ensued.

• Midstage – Significant Performance Impairment (Stage 3) – Weak operating performance left Company in violation of certain debt covenants included in its senior credit facility beginning in mid-1998 resulting in amendments and reduction in borrowing bases from this point through filing.

• Late Stage – Crisis (Stage 4) − Company defaulted on bond interest payment in March 2000.

Turnaround Options

Foundations for a Successful Turnaround

The foundations of a successful turnaround are:

– The overall environment must be receptive to business restructuring. Government, companies and creditors each play important roles in shaping this environment.

– The specific business under consideration must be worth restructuring.

Overall Environment Government Role

–

Regardless of the country, a legal system must be in place for dealing with distressed or financially troubled companies.

–

The “model” for a successful legal structure should weigh many variables although the decisions and ultimately the outcome will differ for every country. For instance:

–

Stance of the government concerning creditor issues – Favorable/Non favorable?

–

Stance of the government concerning company/debtor issues – Favorable/Non-favorable?

–

Stance of the government on financial issues such as monetary backing and other monetary policies for troubled companies – The most favorable option for a government may consider a combination of both creditor and debtor concerns.

Foundations for a Successful Turnaround

• • • • • •

Corporate Role

Recognize when a turnaround/workout is necessary. Prolonging this will likely only decrease chances for success.

Make a commitment to the task and the time and get appropriate crisis management and legal advice.

Define roles and responsibilities of key employees and communicate.

Quantify the problem and evaluate options and resources, understand advantages, disadvantages, opportunities and consequences.

Establish control over financial data and performance requirements, include deadlines for reports.

Require clearly written and defined plans, quantified and in time sequence with resources identified and obtain any relevant accurate and timely information.

•

Creditor Role

Make a commitment to work with the company to return maximum value to the stakeholders.

Foundations for a Successful Turnaround

The Business Must be Worth Restructuring

• Identify one or more viable core businesses – Shrink company back to segments that provide positive cash flow – May involve selling profitable business segments unrelated to the core business • Ensure sources of adequate bridge financing – Seek internal sources first to lessen the need for external financing – Form collections team – Factor receivables – Utilize trade credit – Evaluate inventory – Reduce costs – Secure outside financing – Banks – Asset lenders – Other An informal survey conducted at a national meeting of the Turnaround Management Association suggests that only approximately 20% of all distressed companies recover.

Turnaround Options

• Factors to consider when choosing a viable turnaround option include: – Sophistication, size, and history of company – Quality / integrity of company’s management – Types and sizes of creditors’ claims – Attitudes, leverage and positions of other parties-in-interest that will play a role in negotiations – Fundamental business circumstances and prevailing economic conditions – Depth of the company’s financial problems and the future outlook • Analyzing the above factors will help to choose: – Reorganization or complete liquidation – Reorganization via direct negotiation with major creditors (Workout) – Reorganization with government oversight (e.g., U.S. – Chapter 11, U.K. – Administration under the Insolvency Act) By committing to a turnaround effort and analyzing the situation, management can begin to choose the appropriate turnaround option.

Advantages of Workouts

• Conservation of Resources – With planning and focus, efforts directed towards a successful workout – Avoid costly professional fees which frequently occur in governmental cases – Agreement is usually faster, directed to be more sensible and fair • Continuation of Business and Maximization of

Value

– Less disruptive to business, no court/trustee to which to attend – Management maintains decision-making control – Considerable asset base maintained, future cash flows less compromised • Facilitated Negotiations – More trust and less hostility in negotiations – More informal, speedier, and less frustrating than court hearings – Goodwill and public relations preserved • Governmental provisions avoided – Some type of government approval may be necessary, depending on legal structure – Management loses some control and efficiency in decision making ability, more flexibility without court system – Depending on a country’s legal system, management can possibly lose control over company to creditors or lenders – Formal process, court hearings, and attention to detail complicates turnaround • More Time for Rehabilitation – New funding possibly easier to obtain and may be granted better terms • Forgiveness of Debt – Debt unpaid may be forgiven if this is part of a previous agreement 32

Advantages of Turnarounds with Government Oversight

• Negotiations with Several Parties – If a larger number of creditors exists, consensus may be difficult and opposition can occur at any point, rendering past work useless • Prevent Imminent Threat of Attack while

Settlement is Pending

– Additional lawsuits, foreclosures, or seizure of assets may impair workout efforts – There may be protection in the automatic stay provisions depending on the legal structure in place • Priority Debts and Income Tax Laws – Certain tax provisions may make government-assisted turnaround more advantageous – Cancellation of debt taxable income may deter creditors from this course and make liquidation more attractive • Terminal Business – If there is no hope, remedies to repossess monies increasing the value of the estate may be available depending on the legal structure in place – Recovery of preferential payments – Fraudulent transfers/conveyances • Legal Provisions – Depending on the country’s legal system a company may be able to reduce or eliminate certain obligations (e.g., in the US it may reject executory contracts) or modify rights of secured creditors 33

Stages of the Turnaround Process

1 2

Management Change Situation Analysis

Emergency Action

4 5

Business Restructuring Return-to Normal

Stabilize Restructure Position for Growth

Stages can overlap and some tasks may impact more than one stage. Overall, moving through all stages can take 12 – 36 months.

Stage 1: Management Change

• Select a CEO (current or new) who can successfully lead a turnaround – Proven track record – Ability to assemble a management team that can restructure and implement effective turnaround strategies • Weed out obstructionists – May require replacement of some or all of top management including weak Board members • Once appropriate management is in place, management must first address issues related to the following four major stakeholder groups: – Human Resources • Executives • Employees – Vendors – Lenders – Customers • It is essential for communication with the major stakeholders to take place initially, as well as through each stage of the turnaround process 36

Stage 2: Situation Analysis

• The objectives that should be set and accomplished during the Situation Analysis stage include: – Determine viability of business – Determine the severity of the situation • Create a 13-week cash flow forecast to understand cash usage (See Exhibit A) – Identify an effective turnaround strategy • Operational – Revenue increasing strategies – Cost reduction strategies – Asset reduction and redeployment strategies – Competitive repositioning strategies • Strategic – Specific goals and objectives – Sound corporate and business strategies – Competitive repositioning strategies • Combination strategies 37

Stage 2: Situation Analysis

• Objectives (continued) – Understand the life cycle of the business in relation to the chosen strategy – Identify and document key issues in order to establish framework for integration of strategy into Business Plan • What products/business segments are most profitable?

• What are strengths and weaknesses of the Company?

• What areas should be expanded? Liquidated?

• In what areas do the real potential for this business lie?

• What direction should this business take?

– Develop preliminary action plan • Communicate to all key parties in the company as well as bankers, major creditors and vendors outside the company 38

Stage 2: Situation Analysis

• Turnaround strategies will likely be impacted by public policy considerations. For example, if a turnaround strategy will include employee displacement, local regulations must be considered. Some examples follow: – United States • WARN Act requires employers who are planning massive lay-offs to give affected employees at least 60 days notice of such an action.

– United Kingdom • The employer must consult the employee’s representatives (this includes unions) if 20 or more people are going to be made redundant (lay-offs). Failure to do so can result in the employer being forced to pay Protective Awards (wages) to laid-off employees for a period of time. • The employer must also consult the Department of Trade and Industry (D.T.I.) prior to dismissals (30 days before dismissal of 20 - 99 employees, 90 days prior to dismissal of 100 or more employees) – Germany • For operational-driven lay-offs (e.g., plant closings or general reductions in the work force), a so-called “Social Selection” is a prerequisite. The employer must consider the personal and social circumstances of all comparable employees when deciding which to terminate. A company might be forced to terminate the most capable employee, if this employee is, by the applicable standards, least deserving of protection under social considerations. 39

Stage 2: Situation Analysis

Examples (continued) – France • Employment in France is not “at will”. Dismissals can only be made based on demonstrably and limited objective grounds which must be brought to the attention of the employee in writing. Dismissals are subject to stringent, and often bureaucratic, procedural statutory constraints.

• Redundancies, or lay-offs on economic grounds, are subject to separate and complex procedural and substantive constraints particularly in the case of multiple dismissals. • The French entity (as opposed to the group to which it may belong) must be in a sufficiently severe economic situation to justify laying off staff or making them redundant. • There are a number of French State Agencies which have a statutory right to be advised of, and in some cases to authorize, proposed dismissals by private sector employers. – Republic of Lithuania • For operational-driven lay-offs (e.g., plant closings or general reductions in the work force) that will affect at or around 10% of its workforce, an employer must notify the relevant territorial labor exchange, the municipal institution and the employees’ representatives.

Stage 2: Situation Analysis

Examples (continued) – India • If the reason for termination is a commercial decision taken by the employer (for example, to reduce his workforce), the employer is obliged (depending on the number of workmen employed by him) to retrench the workman or provide retrenchment compensation.

• Under the Industrial Disputes Act, the employer is also obliged to pay compensation to workmen in the event of laying off such workmen or upon the closure of an undertaking in which such workmen are employed.

– Philippines • The authorized causes for terminations of employment are 1) installation of labor saving devices; 2) Redundancy; 3) retrenchment to prevent losses; and 4) the closing or cessation of operation of the establishment or undertaking. • In each of the cases, the employer must serve a written notice on the workers and the Department of Labor and Employment at least one month before the intended date of termination.

• Termination pay must also be paid to the workers affected. Severance amounts are driven by the reason for termination (higher for termination due to the installation of labor-saving devices or redundancy).

Stage 3: Emergency Action

• • • The objectives that should be set and accomplished during the Emergency Action stage are: – Stabilize the business by gaining control over the situation • Analyze 13-week cash flow forecast and evaluate which areas to improve • Centralize the cash management function to ensure control – Stop cash bleed and enable the organization to survive Raise cash internally and externally – Review balance sheet for sources of cash – Sell unprofitable business entities – Secure asset-based loans (if needed) Lay-off employees and eliminate unnecessary departments quickly and fairly – Stretching out lay-offs is poor for employee morale – Better to cut too deeply all at once than make small cuts repeatedly • Remaining employees tend to lose focus of necessary functions when there is job uncertainty 42

Stage 4: Business Restructuring

• • • • • The objectives that should be set and accomplished during the Business Restructuring stage are: – Enhance profitability through remaining operations – Restructure business for increased profitability and return on assets At this point, turnaround actions increase to full force – Change focus from cash to profits – Conduct product profitability / customer profitability analyses – From information collected during situation analysis, a turnaround strategy should be identified, developed and implemented • Evaluate employee compensation and reward dedicated employees Fix the capital structure – Renegotiate debt (short and long term) Ensure meaningful financial / information systems are in place – Operationalize certain emergency stage actions (e.g., 13-week cash flow) – Ensure accurate cost data (direct / indirect) is available Fully involve employees to save the business – Create team power to root out inefficiencies and promote profitability – Maximize workforce efficiency and cut out unnecessary work 43

Stage 5: Return-to-Normal

• The objectives that should be set and accomplished during the Return-to-Normal stage are: – Institutionalize emphasis on profitability, ROI, and value-added philosophy – Seek opportunities for profitable growth – Build competitive strengths – Shift from cash flow concerns to maintaining a strong balance sheet, long-term financing and control systems – Improve customer service and relationship 44

Case Study LaRoche Industries Turnaround Options and Plan Formulation

Stage 1: Management Change

• • • • Management was focused and prepared to lead the Company through a turnaround Professionals were hired to assist management in the turnaround process Management’s compensation was tied to performance Management accepted the challenge to fix what was broken – All restructuring options were to be considered – Workdays got longer and the intensity / effort level increased 46

Stage 2: Situation Analysis

To stabilize business, an infusion of capital or a significant reorganization was necessary. Several financial options were considered with the hope of avoiding a major operational restructuring. Financial options considered were: – Equity Infusion – $75 million second secured debt offering (increases liquidity but raises leverage) – $40 million private placement of second secured debt with bondholders and asset based lenders – Pre-arranged subordinated notes restructuring – Chapter 11 protection and reorganization 47

Stage 2: Situation Analysis

Financial Restructuring Option

$75mm second secured debt offering $40mm private placement of second secured debt with bondholders and asset based lenders

Primary Advantage

Resolves short-term liquidity issues, retires some existing secured debt

Primary Disadvantage

Does not resolve leveraged capital structure or cash burn issues

Type of Cost

Closing Costs, excess interest, and a subsequent restructuring Reduces short term financial burden by covering amortization payments for one year and reducing revolver Does not resolve leveraged capital structure or cash burn issues Closing Costs, excess interest, and a subsequent restructuring Pre-arranged subordinated notes restructuring Chapter 11 protection and reorganization De-levers the Company Immediate liquidity needs to be addressed through a bridge loan while a consensus between parties is reached Professional fees and fees in relation to bridge loan De-levers the Company and allows protection and liquidity for management to implement operational improvements Negative reaction from public (vendors, employees, customers), also a costly process Professional fees for estimated 18 months plus fees on DIP 48

Stage 2: Situation Analysis

• Cyclical nature of industry required the flexibility of a revolver.

• Availability of capital had to be sufficient to cover operating losses, debt service costs and capital expenditures during down cycles.

− Current Interest Costs − Plus: Projected Maintenance CapEx / Turnarounds − Equals: Non-Operating Cash Needs − Equals: Minimum EBITDA Plus Capital Availability Requirement

$30 million $30 million $60 million

• This requirement would be reduced by lower debt service costs if bonds were restructured.

• Ultimately, a pre-arranged bankruptcy was not an option due to time and liquidity constraints. Moreover, bonds were held by par holders seeking status quo and not a restructuring. • Out of cash and credit, LaRoche Industries used the Chapter 11 process in May, 2000 to effectuate its turnaround.

Stage 3: Emergency Action

Stabilize business Resolve Company’s short term cash need (then ensure long term liquidity)

Time Horizon

Immediate Identify and implement cost savings initiatives

REORGANIZATION

Focus on core businesses, exit / sell non-core businesses Re-position in marketplace with appropriate strategy and structure to ensure profitability De-lever the Company’s balance sheet Later stages of Reorganization 50

Stage 3: Emergency Action

• Secure a DIP facility loan to provide initial necessary funding of the business.

• Initiate negotiations with key vendors to ensure continued services.

• Create a comprehensive employee retention plan.

• Focus management efforts towards cash management issues: – Analyze 13-week cash flow and evaluate areas in which to improve. – Evaluate controls throughout cash management process including purchasing, collections, payables, etc. – Monitor extensively the Company’s cash inflows and outflows, accelerate collections and contact vendors to negotiate a stretch in payment terms.

• Work with European site partners to gain concessions and improvements in site economic balance.

• Communication is key to customers, employees, vendors, creditor, and any other related parties.

• Implement a Fix, Sell or Keep strategy for all assets on a plant by plant basis.

Stage 3: Emergency Action

Management recognized the need for significant changes and with its advisors began to focus on cost reductions both before and after filing for Chapter 11 protection: Action Corporate consolidation and reduction from 110 to 40 people Result $5 million annual savings Suspension of dividend and ownership consulting payments Reduction in discretionary capital spending programs FY 2000 Strategic review of operations to identify possible operational improvements (yet most required additional capital to implement) $1.2 – 2 million annual savings $15 – 20 million cut Sale of AN plants and Gramercy facility Management realized that the most efficient method of cutting cost would be to sell certain assets, reducing unnecessary losses and expenses and infusing the Company with cash.

Stage 4: Business Restructuring

The sale of multiple divisions provides a necessary capital infusion and allows the Company to focus on profitable business segments, reducing cash burn and future obligations.

Determine which assets to dispose of through profitability analysis, review of past performance and analysis of future market attractiveness.

Determine appropriate method of disposition to reap the most benefit (monetary, reducing liability, etc.) Implement decisions, dispose of assets, apply cash to most appropriate sources (e.g., paydown of DIP, additions to working capital).

Stage 4: Business Restructuring

Below are the major business units analyzed for sale or retention during the Chapter 11 proceedings:

AN Plants

Business

Avondale Ammonia JV Gramercy ChlorAlp Frankfurt IP&S

Estimated Value

$160mm $12mm $70mm $15mm - $20mm $16mm - $17mm $47mm - $66mm

Estimate Cost to Repair

$10mm -

Sale / Retain

Sale

Reasoning

Production costs too great, cash burn business, strategic buyer in place, necessary to pay down DIP Reject Agreement Non-competitive business effected by natural gas costs, sale would effectively settle claims and issues with JV partner Sale Cash burn business, sale would effectively reduce environmental liabilities, payables, and claims Retain Retain Retain Entity did not file Ch 11., no potential buyers, the marketplace had turned to the upside of the cycle, generating positive earnings Entity did not file Ch 11., no potential buyers, the marketplace had turned to the upside of the cycle, generating positive earnings Profitable business, competitive strengths, lower fixed cost burden Businesses Sold AN Plants Avondale Ammonia JV Gramercy Approx Sale / Settlement Price $44mm $800k $5mm Proceed Distribution $28.5mm to DIP lenders, $10.1mm to pre-petition lenders, $4mm in holdbacks, rest went to fees Cash to pay down DIP and for resolution of all matters and complete severing of all ties with JV party $2mm cash to pay down DIP, with non-cash reduction of $3mm of environmental liabilities transferred to buyer 54

Stage 4: Business Restructuring

Proposed New Structure

AN Manufacturing Operations Cherokee, AL Plant Crystal City, MO Plant Seneca, IL Plant Geneva, UT Plant Fortier Joint Venture Avondale Ammonia JV Gramercy Chlor-Alkali Gramercy Plant

LaRoche Operations

IP&S (formerly IPG) and Nitrogen Distribution Centers 23 IP&S Customer Service Centers 1 Agriculture Warehouse Chlor-Alkali Production Fluorocarbon Production Hydrate Partnership European Ops Frankfurt Facility Pont-de-Claix, France Facility (ChlorAlp) • • • • • Includes 23 IP&S customer service centers, located in 18 states, storing and distributing anhydrous ammonia.

11 of these centers will produce and distribute aqueous ammonia products.

Sales of related storage systems and equipment and customer services will also produce income at those centers.

Interest / ownership will be held in agricultural warehouse in Indiana from which phosphate fertilizer and other AN derivative products will be stored and distributed.

European subsidiaries will be retained and a product mix will be adjusted to take advantage of local market pricing.

Stage 5: Return-to-Normal

A premise to the Plan of Reorganization is that surviving LaRoche (“NewCo”) must be feasible: – NewCo will cover 80% of the geographical industrial ammonia market, with a current market size of $140mm per year, expected to grow to $290mm by the year 2005.

• Competition primarily has a regional focus while LaRoche’s operations extend nationally.

• Ammonia is expected to be the preferred product to facilitate removal of contaminants from the emissions of electric generating systems, mandated by government regulations.

– European businesses remain and are becoming more profitable through the upturn in the cycle in the European chemical marketplace.

The Plan must also consider the risks involved: – NewCo will face competition from two regional companies and a number of smaller companies with a local focus, that could become competitors if they elect to diversify downstream from the production of ammonia.

– Risks are inherent in implementing a strategy, including external factors such as the potential for natural gas prices to remain high.

– Capital expenditures will be necessary. Contingent maintenance expenditures can become reality…quickly.

– Government regulations may result in costly transition to new technology in the German plant.

• Mercury to membrane technology to comply with environmental mandates.

Stage 5: Return-to-Normal

Operational Solvency Funding Resolution of Outstanding Issues Costs of Emergence

All must be solved to emerge from Chapter 11

Stage 5: Return-to-Normal

Closing the Deal • U.S. Banks funded the exit financing, but required a “bankable” transaction.

– The new securities had to be priced to allow for liquidity among stakeholders.

• Alternative sources of funding were sought out to build a “cushion”.

– An attempt to repatriate funds from European entities was suggested, but European lenders were not keen on upstreaming cash to bankrupt parent.

• Bondholders and unsecured creditors sought cash and were unwilling/unable to provide funds.

• Operational solvency was proven and projected cash flows were positive.

• A schedule of emergence costs was determined and agreed upon by all constituents • All outstanding issues were resolved and settled prior to emergence • LaRoche Industries, Inc. successfully emerged from Chapter 11 Bankruptcy on September 28, 2001, with an appropriately reorganized capital and organizational structure.

Role of Professionals

Services to Underperforming Companies

Business Plan and Financial Projections

• Formulate Overall Business Strategy • Coordinate Capital Investments With Financial Liquidity • Determine Suitable Capital Structure • Develop Five-Year Projection Model • Coordinate with All Departments Contributing to Plan

Client

Development of Management Tools

• Develop Inventory Management Application • Extend Existing Systems to Include Tracking of Forecast Accuracy • Analyze Cost Components of Marketing and Distribution Programs • Estimate Financial Impact of New Products

Cost Reduction Analysis

• Identify Key Operating Drivers • Analyze Internal Value Chain • Review Supply Chain Management Strategy • Review Effectiveness of Sales and Distribution Network • Assess Ordering Procedures • Calculate Impact of Recommended Cost Reductions

Liquidity Forecasting

• Identify Relevant Data Sources • Analyze Working Capital Management • Automate Data Collection and Integration • Create Weekly Cash Flow Model • Design Short-Term Borrowing Analysis • Assist Management with Short Term Capital Spending Program 60

Services to Underperforming Companies

• The professionals role is to tailor services in all stages of the demise curve • The “right” turnaround advisory team should be able to provide all of the following services: • Performance Improvement • Lending Solutions • Turnaround & Restructuring • Transitional Management • Transaction Advisory

The Corporate Demise Curve Infancy Stage - Stagnation Expected Performance Early Stage - Underperforming Midstage - Significant Performance Impairment Late Stage - Crisis

Services to Underperforming Companies

Performance Improvement

• Operational and financial enhancement • Strategic assessment • Benchmarking • Shareholder value improvement • Cash and working capital management • Supply chain management

The Corporate Demise Curve Expected Performance Infancy Stage - Stagnation Early Stage - Underperforming Midstage - Significant Performance Impairment Late Stage - Crisis

Services to Underperforming Companies

Lending Solutions

• Raising additional lender financing • Business plan development • Cash flow modeling • Lender negotiations • Collateral assessment

The Corporate Demise Curve Expected Performance Infancy Stage - Stagnation Early Stage - Underperforming Midstage - Significant Performance Impairment Late Stage - Crisis

Services to Underperforming Companies

Turnaround & Restructuring

• Turnaround plan development and implementation • Out-of-court restructurings • Capital structure and raising of additional capital • Vendor relationship management • Cash management, projections and liquidity enhancement • Bankruptcy related services

The Corporate Demise Curve Expected Performance Infancy Stage - Stagnation Early Stage - Underperforming Midstage - Significant Performance Impairment Late Stage - Crisis

Services to Underperforming Companies

Transitional Management

• Provide Interim Management such as Chief Restructuring Officer • Provide Executive Suite with experienced resources to augment / fill critical needs • Serve in court appointed positions

The Corporate Demise Curve Expected Performance Infancy Stage - Stagnation Early Stage - Underperforming Midstage - Significant Performance Impairment Late Stage - Crisis

Appendix A Turnaround Tools 13-Week Cash Flow Forecast

Week Ended Week Number Lockbox Office Credit Card Auto Debit Cash Receipts Other Income Operating Receipts Payroll and Related Items (ie. health benefits) Programming Franchise Pole Rent Cable Data Tax (Sales/Use/Property) Professional Insurance Daily Other Office Expense Telephone Telecommunications Technical Outside Services Operating Expenses Total Expenses Restructuring Costs Capital Expenses Operating & Capital Expenses Operating Cash Flow Pre-Petition Interest Expense DIP Interest and Fees Expense Total Interest Expense Transfers from/(to) Other Cash Accounts Transfers from/(to) Credit-Linked Deposit Accounts Borrowing Activity

Net Cash Increase (Decrease)

Beginning Concentrated Cash Balance (Book) Change in Cash Ending Concentrated Cash Balance (Book) 30-Jan 1 $ 36.0

15.0

3.1

7.0

61.1

2.0

63.1

9.3

32.2

8.0

1.6

3.2

1.5

0.2

2.1

10.0

0.7

0.8

71.0

6-Feb 2 18.0

3.8

7.0

70.8

2.0

72.8

16.7

5.5

4.7

1.4

0.1

0.8

0.2

0.6

9.0

0.7

0.8

42.0

13-Feb 3 $ 45.0

22.0

3.8

8.0

78.8

2.0

80.8

5.0

19.5

95.5

(32.4) 1.5

21.5

64.9

7.9

2.0

21.5

107.7

(26.9) 0.0

(1.4) (1.4) (16.3) (0.2) (16.5) 0.0

(0.1) (0.1) 0.0

0.0

1.0

$ (32.8) 0.0

0.0

9.0

0.0

18.0

$ (12.3) $ (9.0) $ 222.9

(32.8) $ 190.1

$ 190.1

(12.3) $ 177.7

$ 177.7

(9.0) $ 168.8

8.3

59.5

0.1

1.8

0.1

1.1

0.2

0.1

10.0

0.7

0.8

84.2

20-Feb 4 16.0

3.8

7.5

62.3

2.0

64.3

17.6

1.3

10.8

1.3

5.6

4.8

0.2

0.6

9.0

0.7

0.8

54.2

27-Feb 5 9.3

33.6

0.0

1.0

0.1

0.5

0.2

1.0

9.0

0.7

0.8

57.6

5-Mar 6 18.0

3.3

7.5

64.8

2.0

66.8

$ 44.0

18.0

3.8

7.0

72.8

2.0

74.8

16.7

0.0

19.0

0.5

0.1

0.0

0.2

0.6

8.0

0.7

0.8

48.1

12-Mar 7 8.3

0.0

0.1

1.0

0.1

1.4

0.2

0.1

9.0

0.7

0.8

23.3

19-Mar 8 22.0

4.8

8.0

80.8

2.0

82.8

$ 43.0

19.0

3.5

7.7

73.2

2.0

75.2

17.6

60.7

1.4

0.5

5.6

4.7

0.2

0.6

8.0

0.7

0.8

102.3

26-Mar 9 17.0

3.0

7.4

61.4

2.0

63.4

9.3

0.0

0.8

0.1

0.5

0.2

1.0

9.0

0.7

0.8

23.9

1.5

21.5

77.1

(12.8) 0.0

(0.3) (0.3) 0.0

0.0

22.0

8.9

2.0

21.5

81.1

(14.3) 0.0

(1.4) (1.4) 1.5

21.6

71.2

3.6

(14.7) (0.1) (14.9) 0.0

0.0

15.0

$ (15.7) $ (7.8) 2.0

21.6

46.9

35.9

$ 177.7

(15.7) $ 161.9

$ 161.9

(7.8) $ 154.1

$ 154.1

46.8

$ 201.0

1.5

21.6

125.4

(50.2) 0.0

(0.1) (0.1) 0.0

0.0

11.0

0.0

(0.3) (0.3) 0.0

0.0

$ (50.5) 2.0

21.6

47.5

15.9

$ 201.0

(50.5) $ 150.5

$ 150.5

29.8

$ 180.3

2-Apr 10 15.5

3.2

7.0

58.7

2.0

60.7

16.7

32.0

9.1

0.6

0.1

0.4

0.2

0.6

8.0

0.7

0.8

70.8

1.5

17.4

89.7

(29.0) 0.0

(0.1) (0.1) 0.0

0.0

14.0

(16.3) (1.5) (17.8) 0.0

0.0

$ (59.5) $ 180.3

(59.5) $ 120.8

9-Apr 11 20.0

5.0

7.8

74.8

2.0

76.8

9.0

0.7

0.8

22.6

8.3

0.0

0.1

0.2

0.1

1.6

0.2

0.1

16-Apr 12 8.0

0.7

0.8

105.9

17.6

59.6

6.8

0.2

5.6

4.3

0.2

0.6

23-Apr 13 23.0

3.9

7.5

81.4

2.0

83.4

$ 40.0

17.0

3.5

7.2

67.7

2.0

69.7

9.0

0.7

0.8

28.5

9.3

1.3

1.4

1.0

0.1

2.2

0.2

1.0

Total

$ 523.0

240.5

908.6

934.6

164.9

285.6

2.6

9.0

115.0

9.1

734.4

2.5

17.4

42.5

34.3

0.0

(0.2) (0.2) 0.0

0.0

27.0

61.1

2.0

17.4

125.3

(41.9) 0.0

(0.1) (0.1) $ 181.9

(42.0) $ 139.9

2.0

17.4

47.9

21.8

0.0

(0.4) (0.4) 0.0

0.0

9.0

$ (42.0) $ 30.4

$ 139.9

30.4

$ 170.3

261.3

1022.7

(88.1) (47.4) (6.2) (53.6) 126.0

$ (52.6) 67

Appendix B Turnaround Tools Liquidation Analysis

Estimated Hypothetical Liquidation Analysis At December 31, 2002 Scenario A: Lender Group Revolving Debt Remains at $700 million with No Collateral

($000's)

Estimated Balance

Realizable Value of Assets

Cash Net Receivables Net Inventory Prepaid and Other Current Assets PP&E Intangible Assets Other Assets Net Assets of Discontinued Operations

Estimated Proceeds before Expenses*

* Excluding Trademark $ 70,000 47,649 425,525 72,629 312,594 136,315 173,526 773,567 2,011,805

% Realization Low High

100% 42% 33% 100% 53% 47% 0% 35% 0% 3% 0% 17% 0% 52% 0% 6% 0% 23%

Realization Amount Low High

$ 70,000 20,013 140,423 $ 70,000 25,254 199,997 109,408 5,206 345,050 162,549 10,412 468,211 Professional Fees Wind Down Operating Expenses

Estimated Net Proceeds excluding Trademark Trademark Estimated Net Proceeds unknown unknown $

(15,000) (93,898) 236,151

236,151

(10,000) (65,251) 392,960

$ 392,960

Recovery Allocation: Secured Claims

Proceeds Available to Secured Claims Total Secured Claims (Mortgages) % Recovery to Secured Claims before Deficiency Claims Secured Lenders' mortgage deficiency claims

Reclamation Claims

Net Proceeds Available for Reclamation Claims Total Reclamation Claims % Recovery to Reclamation Claims

Priority Claims

Net Proceeds Available for Priority Claims Total Priority Claims % Recovery to Priority Claims

Unsecured Claims

Net Proceeds Available for Unsecured Claims Total Unsecured Claims (includes $1.105 billion unsecured Lender Group claim) Secured Lenders' mortgage deficiency claims Total Unsecured Claims % Recovery to Unsecured Claims

Realization Amount Low High

10,232 11,938 (48,000) 21% (37,768) (48,000) 25% (36,062) 236,151 (13,448) 100% 392,960 (6,724) 100% 222,703 (74,519) 100% 386,236 (41,073) 100% 148,184 (1,695,749) (37,768) (1,733,517) 8.5% 345,163 (1,620,919) (36,062) (1,656,981) 20.8%

NOTE - All recoveries are before any recovery estimate has been attributed to intangible assets.

Appendix C Turnaround Tools Projections

Executive Summary

Below is a summary of key financial data from the Business Plan and DIP forecast ($ in millions): Revenue Actual 2000 $ 6,013.2

Forecast 2001 $ 5,466.0

2002 $ 5,546.8

2003 $ 5,761.8

Projected 2004 $ 5,945.0

2005 $ 6,239.9

EBITDA CAPEX DIP Balance (end of year) LC Usage 825.0

313.0

530.0

295.0

259.5

18.8

518.0

375.0

337.0

25.0

695.1

361.0

330.1

25.0

857.6

380.0

963.6

318.0

2006 $ 6,457.0

1,037.0

315.0

Note: The DIP balance is presented through the term of the DIP loan, December 31, 2003.

Revenue by Year by Country

(dollars in millions) US Canada UK Mexico Germany Italy France Netherlands ROW 2000 2001 2002 2003 2004 2005 2006 $ 3,551.633

162.206

500.560

178.039

626.252

179.837

321.226

493.466

$ 3,107.611

146.126

459.986

172.772

638.036

158.352

334.544

0.030

476.904

$ 3,172.639

149.983

425.126

177.332

639.875

162.531

343.373

0.062

477.149

$ 3,295.016

155.768

441.524

184.172

664.557

168.801

356.618

0.064

495.554

$ 3,399.665

160.716

455.547

190.021

685.663

174.162

367.944

0.066

511.293

$ 3,568.361

168.690

478.152

199.451

719.686

182.804

386.202

0.069

536.664

$ 3,692.453

174.557

494.780

206.387

744.714

189.161

399.632

0.072

555.327

$ 6,013.218

$ 5,494.361

$ 5,548.071

$ 5,762.073

$ 5,945.076

$ 6,240.079

$ 6,457.082

* Sales do not include intercompany sales

Revenue Bridge 2000 – 2006 (dollars in millions)

2000 2001 2002 2003 2004 2005 2006 2000 - 2006 Total $ 6,488.0

$ 6,013.0

$ 5,466.0

$ 5,546.8

$ 5,761.8

$ 5,945.0

$ 6,239.9

6,488.0

Prior year revenue Change due to: Uncommitted business Net new business Mix Volume Discontinued operations Pricing Exchange rate Other Total change Total revenue % Change Cumulative % Change (255.8) (3.5) (250.5) 34.8

(316.0) (26.1) (158.4) (46.5) 76.6

216.8

(10.8) (39.0) (164.4) (48.4) 50.0

192.1

100.4

(12.5) (26.0) (39.0) 216.9

(1.2) (9.1) 9.8

(33.2) 392.9

(79.3) 21.0

(10.0) (29.6) (0.1) 329.0

(101.2) 8.4

8.4

(27.4) (0.1) 1,207.5

135.5

(3.0) (628.6) (164.4) (207.2) (408.9) 38.1

(475.0) (547.0) 80.8

215.0

183.2

294.9

217.1

(31.0) $ 6,013.0

$ 5,466.0

$ 5,546.8

$ 5,761.8

$ 5,945.0

$ 6,239.9

$ 6,457.0

-7.3% -7.3% -9.1% -15.8% 1.5% -14.5% 3.9% -11.2% 3.2% -8.4% 5.0% -3.8% 3.5% -0.5% -0.5%

Note: Change due to volume in 2000 and 2001 includes net new business.

EBITDA by Year by Country

(dollars in millions) US Canada UK Mexico Germany Italy France Netherlands ROW 2000 $ 421.980

27.003

104.844

65.067

113.984

28.673

27.991

2.411

41.357

$ 833.309

2001 $ 180.395

4.752

84.391

64.461

107.872

27.455

32.887

0.933

70.198

$ 573.343

2002 $ 151.501

7.900

50.655

76.100

101.575

29.300

39.700

0.900

85.840

$ 543.471

2003 $ 200.210

10.700

69.300

102.100

106.500

38.500

53.100

0.900

113.690

$ 695.000

2004 $ 291.110

13.000

85.400

122.400

126.900

30.800

60.700

0.900

126.790

$ 858.000

2005 $ 342.210

13.700

103.200

130.500

128.000

32.000

69.200

0.900

144.290

$ 964.000

2006 $ 383.610

14.100

106.000

146.600

127.900

32.500

74.700

0.900

150.690

$ 1,037.000

EBITDA Bridge 2000 – 2006 (dollars in millions)

2000 2001 2002 2003 2004 2005 2006 2000 - 2006 Total $ 1,215.0

$ 825.0

$ 530.0

$ 518.0

$ 695.1

$ 857.6

$ 963.6

1,215.0

Prior year EBITDA Change due to: Productivity Uncommitted business Restructuring Net new business One-Offs Mix Volume Pricing Inflation Exchange rate Other Total change Total EBITDA % Change Cumulative % Change (73.6) (83.8) (34.5) (93.2) (104.9) 4.4

(36.1) (36.0) (141.0) (86.3) 146.0

23.5

(3.4) 62.3

47.0

(2.3) (22.6) (48.4) (181.7) (32.4) 146.2

54.9

47.3

41.2

14.2

(3.8) (14.0) (39.0) (124.8) 54.9

119.4

60.7

59.8

11.3

6.1

7.6

(0.8) (33.2) (100.3) 31.9

109.8

105.8

10.5

(14.0) (2.0) 14.4

(3.6) (29.7) (111.3) 26.1

101.3

92.1

23.3

(18.2) (4.0) 13.3

(0.1) (27.5) (121.2) 14.4

553.5

337.0

137.5

82.6

61.3

29.2

(161.0) (248.3) (639.3) (234.2) (96.3) (390.0) (295.0) (12.0) 177.1

162.5

106.0

73.4

(178.0) $ 825.0

$ 530.0

$ 518.0

$ 695.1

$ 857.6

$ 963.6

$ 1,037.0

-32.1% -32.1% -35.8% -56.4% -2.3% -57.4% 34.2% -42.8% 23.4% -29.4% 12.4% -20.7% 7.6% -14.7% -14.7%

Note: Change due to volume in 2000 and 2001 includes net new business.

Summary of Cost Reductions and Restructuring Initiatives

• The Company’s plan includes significant cost reduction and restructuring initiatives. Below is a summary of the incremental change in EBITDA per year as a result of these initiatives (dollars in millions): SG&A reduction 2002 $ 26.0

Incremental Annual Savings 2003 2004 2005 $ 30.8

$ 27.6

$ 22.3

2006 $ 14.5

Total $ 121.2

24.6

20.5

6.3

5.0

2.3

58.7

Global purchasing initiatives Plant/facility consolidation Global Powertrain Global Seals/Gaskets/SPG Friction Americas Friction Europe Total Aftermarket Sub-total plant/facility consolidation Productivity Global Powertrain Global Seals/Gaskets/SPG Friction Americas Friction Europe Total Aftermarket Sub-total productivity Increase in EBITDA (5.1) (13.7) 12.2

2.7

8.9

5.0

11.8

12.5

8.9

9.1

42.3

9.1

27.0

10.5

2.0

6.9

55.5

0.8

(1.5) 14.1

7.8

2.0

9.0

10.3

1.6

23.5

30.7

32.1

31.6

6.7

35.5

136.6

34.9

20.7

2.8

5.7

33.2

97.3

$ 152.9

47.5

20.2

7.3

5.8

26.9

107.7

$ 201.3

44.7

20.0

5.2

2.5

26.8

99.2

$ 188.6

39.5

18.8

4.8

3.7

24.2

91.0

$ 128.6

33.4

19.4

4.6

3.6

22.7

83.7

$ 124.0

200.0

99.1

24.7

21.3

133.8

478.9

$ 795.4

• The forecasted EBITDA trends by product group resulting from the cost reductions are depicted on the following page.

Appendix D Presenter Bios

Randall S. Eisenberg

Senior Managing Director, FTI Consulting, Inc. Randall S. Eisenberg is a senior managing director in FTI’s Business Turnaround & Restructuring Services practice in New York. Specializing in the revitalization of underperforming companies, Mr. Eisenberg has over 13 years of experience advising senior management and Boards of Directors in revitalizing companies that are stagnant or are under performing.

Mr. Eisenberg’s broad experience includes virtually all aspects of the development and implementation of turnaround plans in an out-of-court setting or through the Chapter 11 (and certain other international court-supervised) processes. His diverse background extends into airlines, distribution, financial, food service, healthcare, hospitality, manufacturing, real estate, retail, and services wherein he has served as advisor to companies, served in interim management positions, and advised secured and unsecured creditors.

Mr. Eisenberg has led many large and high profile national and international assignments for companies and their equity sponsors. His experience includes a broad range of services to underperforming companies emphasizing implementation of sound business practices that focus on rebuilding shareholder and stakeholder value. He has served as an advisor to senior management of US Airways and Kmart; a court appointed Joint Provisional Liquidator to RSL Communications, Ltd., a $1+ billion in revenue global telecommunications company with operations in more than 20 countries and 50 subsidiaries; and assisted an international fortune 500 retailer, an international software publisher and distributor, as well as many other diverse companies.

Prior to its acquisition by FTI, Mr. Eisenberg was a partner with the US division of PricewaterhouseCoopers’ Business Recovery Services practice. He is Past Chairman of the National Board of Directors of the Turnaround Management Association and member of the American Bankruptcy Institute. He received the Outstanding Contribution to the Turnaround Profession Award from the Turnaround Management Association.

Mr. Eisenberg holds a Bachelors degree from the University of the Pacific and an MBA from Northwestern University. He is a Certified Turnaround Professional and a Certified Public Accountant in the States of New York and California.

Mr. Eisenberg can be reached at [email protected]

or (212) 499-3614.

Elliot Fuhr

Senior Managing Director, FTI Consulting, Inc.

Elliot Fuhr is a senior managing director in FTI’s Business Turnaround & Restructuring Services practice in New York. Mr. Fuhr specializes in assisting senior management and Boards of Directors in the areas of financial and operational restructuring, mergers and acquisitions, divestitures, loan workouts, business planning and rapid implementation projects. He has broad industry experience including engagements with apparel, retail, technology, manufacturing, financial institutions, real estate, chemical, and oil & gas companies.

Mr. Fuhr has advised numerous clients in a variety of industries. Mr. Fuhr has assisted in the restructuring a $5 billion international wireless provider through a restructuring in chapter 11; evaluated and sold National Car Rental System, Inc. for General Motors Corporation; assisted in the restructuring a $600 million inorganic chemical company through a pre-arranged plan of reorganization; and assisted in the restructuring of a $550 million textile company both through out-of-court negotiations and through the pre-packaged chapter 11 process. His combined experience includes workflow and operational improvements, organizational restructuring, cash flow modeling, valuations, restructuring strategies, and business planning, and accounting.

Prior to joining FTI, Mr. Fuhr was a senior engineer and economist at Exxon Company, U.S.A. and Exxon Chemical Americas for six years. While at Exxon, he was project leader of a highly successful energy conservation program. Mr. Fuhr then joined a "Big Five" firm and a boutique turnaround firm where he developed an expertise in restructuring troubled companies. He has over 19 years experience in consulting.

Mr. Fuhr has published articles about troubled Company restructuring including: “Assessing the Likelihood of a

Turnaround in the High Tech Sector,” ABI Journal (August 1999), "Diagnosing Distressed Companies: A Practical

Example," ABI Journal (October 1994); and "Business Aspects of Chapter 11 Reorganization," Advanced Chapter 11 Bankruptcy Seminar, University of Michigan Law School (1995). Mr. Fuhr is also a contributing author to “Turnaround

& Workouts II – Global Restructuring Strategies for the Next Century”, Wiley, 1999.

Mr. Fuhr holds a Bachelors degree in Chemical Engineering from the University of Pennsylvania and an MBA in Finance from the Stern School of Business at New York University. He is a member of the Turnaround Management Association and is a Certified Insolvency and Reorganization Accountant (CIRA).

Mr. Fuhr can be reached at [email protected]

or (212) 499-3641.

Sean A. Gumbs

Managing Director, FTI Consulting, Inc. Sean A. Gumbs is an executive with over 12 years of experience creating and maximizing value for stakeholders of troubled companies. He has specialized in providing strategic, operational, managerial and financial solutions to distressed companies and investors in both Chapter 11 and out-of-court restructurings. Sean has experience in a wide range of industries, including financial services, retail, forest products, software publishing and real estate. Mr. Gumbs has led critical aspects of the bankruptcy process including vendor crisis management for Kmart Corporation; participated in pre-bankruptcy planning for US Airways; reviewed and refined the short-term management process for a $1 billion international software publisher / distributor; and assisted a $1 billion financial data company to create a profit improvement plan and conduct debt renegotiation discussions with its lenders.

In addition to the citations above, Mr. Gumbs has assisted underperforming companies in a variety of industries to develop restructuring plans that included financial and operational solutions. He has performed business and asset valuations (both going-concern and liquidation) to assist in the disposition of non-core assets. Mr. Gumbs has assisted companies throughout all stages of the Chapter 11 bankruptcy process, including bankruptcy contingency planning, negotiation of DIP financing and development of the plan of reorganization. He has reviewed operations and management structures to identify inefficiencies, cut costs and increase profitability. He has recommended and implemented cash management and capital budgeting systems to stabilize and improve cash flow.

Mr. Gumbs’ professional experiences prior to entering the restructuring field include shareholder value strategy consulting and financial risk management. He holds a B.S. in Economics from the University of Pennsylvania and an MBA from the Harvard Business School. He is a member of the Turnaround Management Association and the Association of Insolvency and Restructuring Advisors.

Mr. Gumbs can be reached at [email protected]

or (212) 499-3633.

Peter L. Tourtellot

Managing Director, the ALTMA Group Mr. Tourtellot is currently one of the founding principals of Anderson Bauman Tourtellot Vos & Company, a highly successful turnaround management firm created in 1989, now part of the ALTMA Group. He participated in taking 1.4 billion dollar NYSE Blue Bell (Wrangler Jeans) private through an ESOP transaction, resulting in substantial return to all participants.

As a turnaround professional he has served as CEO and President of numerous companies. He managed the turnaround of a large, respected distribution firm which was just days from filing bankruptcy before he took the helm. He was a Chapter 11 Trustee in the Color-Tex International (North Carolina Finishing) case (Boston Bankruptcy Court) and Federal Receiver for Spartan Mills, Spartanburg, SC. He has served as interim president or consultant to a number of corporations which range from manufacturers to retail chains to service firms. He has also earned the designation of Certified Turnaround Professional (CTP) from the Association of Certified Turnaround Professionals. Mr. Tourtellot served as the President and Chairman of the Turnaround Management Association. He is the current President of the Association of Certified Turnaround Professionals and is a member of their board of directors. He has co-authored "How To Save A Client" for the North Carolina State Bar Quarterly, and has written numerous articles for business publications, such as "Preserving The Family-Run Business" and “How Outsiders Find the Inside Track” for Institutional Investors. He graduated from the University of Phoenix with a degree in business administration and is a graduate of the Executive Program at the University of North Carolina at Chapel Hill. He is a member of the advisory board for the Love School of Business at Elon University where he was elected Chairman in 2003 to serve a three year term. He is a director on the national board of the Turnaround Management Association and serves on the board for the Carolinas Chapter.

Mr. Tourtellot can be reached at [email protected] or (336) 275-9110.

Sources

Information in this presentation is based upon the professional experiences of the preparers.

Other valuable sources of information used were: – the Certified Insolvency and Restructuring Advisor (CIRA) materials produced by the Association of Insolvency and Restructuring Advisors; and – The Certified Turnaround Professional (CTP) materials produced by the Turnaround Management Association.