Guiding Organizations Through Troubled Times

1. Guiding Organizations Through Troubled Times Mark Bonney Board Member Private Investor September 23, 2013

2. What we will cover • Introduction/Background • Troubles I have experienced • Case Studies • Lessons learned • Mistakes • Guiding Principles • Questions

3. Introduction/Background

4. Roles • CFO • COO • Interim CEO • Consultant • Board Member • Mostly in turnaround situations

5. Broad Industry Experience • Over 35 years experience in high technology industries: • High precision components and assemblies • Automotive components • Motors and motion control components • Optical components and systems • Telecommunications equipment • Home control semiconductors • Capital equipment • Petrochemical process equipment • Semiconductor capital equipment • Direct Marketing • Software (SAAS)

6. Personal Drivers • Passionate/high energy/hard working/love to learn and teach. • Strong desire to understand technology, markets and customers. Customers are key! • Decisions driven by facts and data. • Integrity and credibility are critical. • Strong working relationships inside and outside the company are imperative.

7. Current Roles • Board Member of three public companies • MRV Telecommunications (MRVC:OTC) [1,2] • Sigma Designs (SIGM:NASDAQ) [1,2,3] • Zix Corp. (ZIXI:NASDAQ) [1] • 1 – Audit; 2 – Compensation; 3 – Nominating and Governance;  - Chair

8. Current Roles • Philanthropic Boards • Community Health Center, Inc. - Board Chair • Capuchin Province of St. Mary

9. Types of Troubles I’ve Faced

10. Types of Troubles I’ve Faced • Default on debt securities • Management “fraud” • Loss of major customer • Dramatic market contraction • Product Failure • Law suits (Product liability, patent infringement, shareholder/proxy fights, class action, etc…) • CEO’s health issue • Owners death • Resignation of public accountants

11. A few Case Studies

12. Case Study 1 - Troubles • Joined as CFO (Recruited by new CEO) • Major issue – a patent suit against a competitor became management’s total focus for 3 years. • As a result: • 60 R&D projects and no mgt. direction • No new products past 4 years • Poor IT infrastructure • Throwing people at problems • Losses • Needed cash • The street no longer cared

13. Case Study 1 - Actions • Met with everyone to openly discuss current situation • Developed financial model that would build credibility • Sold a product line to raise cash • Met with R&D and prioritized 60 projects to 6 • Met with Operations to determine priorities • Invested in fully integrated IT platform • Reduced HC by 30% over two years • Managed the litigation process with one dedicated resource

14. Case Study 1 – More Troubles • CEO heath issue • In the middle of restructuring • Met with BOD Day 2 • Held Town Hall Day 2 • Assured people that we would follow through on the stated strategy and the restructuring to avoid back peddling. • Established and communicated the process allowing CEO to recover/rehab and mgt. to know where to go for approvals, etc. • CEO back in 5 months; we never missed a beat and the stock price rose 14% during CEO’s absence

15. Case Study 1 – Outcome • Small Public Company – too small; very broken • Sold product line – Raised Cash • Business Process Redesign, new IT structure, reduced HC 30% - returned the company to profitability by end year 2. • Pruned product line, increased GM 10 pts. by year 3. • Pruned R&D projects from 60 to 6 • Secondary offering – raised significant cash • Launched 4 new products, acquired 4 businesses • Grew the core business to $80MM and the company to $100MM (23% EBIT) in five years. • Stock price grew from $1.67 to $38.50 (post-splits) FIX RE-MARGIN GROW

16. What about the lawsuit? • Won a judgment 6 years after launching the suit • Defendant appealed • Company prevailed; awarded $1.0M 2 years after the appeal

17. Litigation Lesson Learned • Company spent nearly $3M on the litigation • Distraction was more costly • Lessons: • Your case is not as strong as you think • Their case is not as weak as you think • Courts don’t like to award big wins • Patent litigation often detracts much more value than you can possibly be awarded especially troublesome for SMB’s

18. Case Study 2 - Troubles • Hired as COO to transform the company • Issues: • Holding Company structure • Weak divisional leadership • No new products in several years • Stagnant sales and profits • Needed cash to transform the company

19. Case Study 2 - Actions • Actions: • Met with CEO and the Board - Not a quick fix, requires a 3 year implementation, secured buy-in • Met with management and employees at every division every month • Determined where divisions could work together • Sold the best performing division to raise cash • Changed 5 of 7 GM’s • Implemented Lean Principles • Consolidated and closed a high cost business unit • Redirected a new product to focus on a high growth market

20. Case Study 2 - Outcome • $100MM Multi-divisional Technology Company • Identified core competencies, sold best performing business – raised cash • Restructured leadership team, implemented Lean, closed high cost business, increased GM 7 pts., returned company to profitability, cash flow positive year 2. • Launched new venture, acquired company introduced four, high margin, products in year two. • Company initially Shrunk to $85MM by design then grew back to >$140MM • Share price rose from $15.00 to $70.00. Sold to a strategic buyer for $64.00/share. FIX RE-MARGIN GROW

21. Case Study 3 - Troubles • Small public company in the security products field • Joined as CFO. Restructured operations, Closed two facilities and relocated to one modern facility – retained or found jobs for all employees. • Used ISO and SOX processes to drive process improvements and streamline closing process, staff and order to cash processes. • Gross margins increased 12 pts. in 3 years driving consistent profitability and cash flow. • Introduced new product and doubled revenues in 2 years. • On track for doubling again in 2 years. FIX RE-MARGIN GROW

22. Case Study 3 - Troubles • Customer reports product failures on our new product • Immediately notified our manufacturing partner of the issue and created a cross company task force to develop a solution • Pulled together a team of experts; bought equipment to test our product under every conceivable set of environmental conditions • CEO traveled to every region of the world to ease fears • Our data and customer data indicated the failure rate averaged 1 failure in 10 million uses • Three months later, despite the data, customer cancels orders and threatens litigation • Product development discovered a solution; New product introduced within 5 months of first notice, eliminated the issue completely • Signed a new customer and renewed a second • Litigation threat is lifted, customer agrees to pay for certain inventory….crisis averted!

23. Case Study 3 – More Trouble • Issues: • Share price declined >30%. • Activist shareholder demands replacement of board • Actions: • Negotiated a settlement - board increased by 3 activist appointees. • Led the Company through an auction process • Result: • Fixed the product issues. • Sales more than doubled to $30MM. • Sold to a strategic buyer -- nearly a 1000% return for shareholders.

24. Case Study 4 - Troubles • Distributer of Books, Movies and Music • Hired as CFO by new CEO • Issues: • Introduction of the iPod • iPad causing erosion in Book market • DVD sales shrinking fast • Company nearly out of cash • High cost business model and infrastructure

25. Case Study 4 - Actions • Met with everyone that knew the business, what had been done before? What should we try now? • Took control of everything affecting cash • Implemented Policy and Governance improvements…know what we are doing. • Direct marketing is all about analysis and testing…Restructured Financial and Marketing Analysis operations. • Changed the payments model to credit card…immediate cash. • Implemented a major restructuring. • Closed two facilities, sublet 200,000 sq ft. • Exited the music biz • Stopped the bleeding

26. Case Study 4 - Outcome • Stopped the bleeding – cash at $60M within 9 months. • Restructuring yielded > $25M annual savings. • Changed the payments model to all credit card…immediate cash. • Sublet 200,000 sq ft. – generated nearly $2M annual rent. • Outsourced non-strategic activities saving > $10M annually. • Worked with Marketing to optimize mail dates, drive revenue and cash. • Increased gross margins by 4 pts. to drive profitability and cash flow. More troubles: • Customer acquisition couldn’t outpace attrition without greater investment • IT systems were fixable and were key to growth but PE wouldn’t write the check • Found an equity partner and Owners exited…6x return on investment….and I exited too. FIX RE-MARGIN GROW – Not this time

27. Case Study 5 - Troubles • $80M profitable business • Owner dies without a spouse or a will • Two sons in business want out; one not in wants in • IRS claims business is worth >$120M • Requires ≈$80M immediate cash to buy out sons and pay estate taxes • Bank lines are exceeded without this requirement • CFO Fired

28. Case Study 5 – Action Plan • Asked by auditors to see what I could do • Met with CEO and his team • I agreed to become acting CFO for four months and: • Get the IRS and CT DRS off their backs • Get the bank off their backs • Higher a permanent CFO

29. Case Study 5 – Actions/Results • Actions/Results: • Step 1: Negotiated the business valuation from >$100M to $60M; Tax drops to $30M from >$60M • Step 2: IRS agreed to 10 year payment plan with a one year moratorium. Paid State Tax in full • Step 3: Negotiated new term loan and bank lines with existing bank • Step 4: Hired a new CFO started 4 months to the day after I arrived….still there 10 years later • Company received a clean opinion that year • CEO able to keep the business in the family

30. Lessons Learned

31. Lessons Learned • In a crisis, time is not on your side • Important to differentiate between a crisis and a CRISIS, amount of time to fix is very different • Ask “what’s the worst that can happen” • Plan for worst but develop all possibilities • Fully develop alternatives • I use a Fix, Re-Margin and Grow model • Communicate the possible outcomes • Create an atmosphere of confidence • Find out who can really help you

32. Lessons Learned • Know who you can count on and rely on them • Act decisively • Adjust rapidly and own the changes • Communicate often and directly with the board, employees, customers, analysts, etc. • Use your learning in future situations • Teach through examples, stories convince

33. Major mistakes • Impatience while learning • Firing too fast • Firing too slow • Not respecting history • Giving history to much credence • Over-achieving • Under communicating • Over communicating (not quantity but content) • Not believing in a potential outcome • Not managing expectations upward

34. Guiding Principles • People will watch your every move! • Be respectful of everyone. • Work harder than anyone. • Be visible. Be accessible. Talk with people about their lives not just their work. • Communicate and cascade appropriately. Expression needs to match words. • Base decisions on facts and data.

35. Guiding Principles Cont’d • When you know what to do “do it”. • Good results come from your team’s efforts. • Bad results come from bad decisions…don’t be afraid to say that you made a mistake…makes you human…earns respect. • Managing up is as important as managing across and down. • It’s not “just business”. It is about people and the relationships that you form and maintain that will define you. • Trust your gut, enjoy the ride and have fun.

36. Questions