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March 24, 2004

March 24, 2004

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March 24, 2004

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  1. The Anatomy of a TurnaroundA Seminar prepared by FTI Consulting, Inc. and the ALTMA Group for theWorld Bank ConferenceCorporate Restructuring: International Best Practices March 24, 2004

  2. Agenda • Introduction • Stages of Business Decline • Case Study: LaRoche Industries • Primary Conditions Leading to Insolvency • Turnaround Options • Stages of the Turnaround Process • Case Study: LaRoche Industries • Turnaround Options and Plan Formulation • Role of Professionals • Appendices

  3. 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.

  4. Introduction

  5. 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.

  6. Stages of Business Decline Chart of the Causes of Business Failure External factors beyond management’s control 8% Sheer bad luck 1% 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

  7. Stages of Business Decline Expected Performance Infancy Stage – Stagnation (Stage 1) Early Stage – Underperforming (Stage 2) Midstage - Significant Performance Impairment (Stage 3) Late Stage – Crisis (Stage 4) The Corporate Demise Curve

  8. 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.

  9. 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 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

  10. 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 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

  11. In some countries, legal systems are not structured for a turnaround at the crisis stage, therefore a company’s only option is to liquidate. 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

  12. Potential Areas to Search for Warning Signs Accounting/Accounts Receivable Stakeholders Warning Signs Management/Board of Directors Operating Trends Late or Nonpayment of Obligations

  13. 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

  14. 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

  15. Case Study LaRoche IndustriesCompany History and Primary Conditions Leading to Chapter 11 Filing

  16. 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.

  17. A Brief History…. 1986-1990 1991-1995 1996-1999 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 1990 Strategic capacity investments at Cherokee, Alabama AN facility 1990 Phase out of CFC, replace with HCFC 1994 Establishment of Joint Venture with Avondale Ammonia 1995 Construction of Seneca, IL blasting grade ammonium nitrate facility 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

  18. 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. Electrochemical Products Nitrogen Products Products European Chlor-Alkali Products US Chlor-Alkali Products • Ammonium Nitrate • UAN Solutions • Industrial Ammonia • Chlorine • Caustic Soda • Chlorinated Methanes • Hydrochloric Acid • Calcium Chloride • Chlorine • Caustic Soda • Fluorocarbons Markets Markets Markets • Pharmaceuticals • Agrochemicals • Water Treatment • Pulp and Paper • Detergents • Silicones, fluoropolymers and solvents • Vinyls • Water Treatment • Chemicals • MDI/TDI • Titanium Dioxide • Fertilizers • Blasting Products • Industrial Products

  19. Diversified Geographic Presence Frankfurt Seneca Geneva Pont-de Claix Crystal City Cherokee Atlanta Gramercy Fortier Corporate Headquarters Manufacturing Facilities: Nitrogen Products Industrial Ammonia Distribution Center Nitrogen Products Terminal Chlor-Alkali Products Chlorinated Methanes LaRoche had several small manufacturing facilities acquired through a “roll-up” strategy.

  20. Past Performance Historical Sales EBITDA $400 $70 $398.6 $389.5 $386.9 $390 $57.8 $60 $380 $50 $46.4 $370 $361.0 $40 $360 $35.0 $33.1 $30.5 $350 $30 $342.6 $339.0 $340 $17.3 $20 $330 $10 $320 $310 $0 1995 1996 1997 1998 1999 2000PF 1995 1996 1997 1998 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.

  21. Factors Contributing to Poor Performance • Approximately two years of depressed market prices for its domestic Nitrogen and Chlor-alkali products. • Supply/Demand imbalances compounded by foreign imports Decreasing Prices for Products 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. Increasing Costs of Raw Materials High levels of debt due to the purchase of European operations. Cyclical nature of business does not promote even debt repayment strategy. High Debt / Interest Burden Overhead levels in place for a large company with multiple layers of management. Inappropriate Overhead Although strategic acquisitions were made, most were non-accretive to value. Maintenance capital expenditures were above normal due to the age of facilities. Capital Spending 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. Catastrophic Event

  22. 1. Pricing Market Impact A commodity business with little control over product pricing. 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 LaRoche Chlor-Alkali Historical Selling Price 250 400 ECU Ammonium Nitrate 225 300 Caustic Soda 200 200 $ per ton $ per ton 175 100 Chlorine 150 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

  23. 2. Natural Gas Market Impact $ per ton 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 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. Natural Gas Prices Sold to Industrial Consumers 1997-2001 • 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.

  24. 3. Debt Position The message: Don’t take on debt unless you can pay it back. 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 Source: Bloomberg • As credit markets tightened, deleveraging through a sale of assets or refinancing became increasingly more difficult.

  25. 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.

  26. 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.

  27. Turnaround Options

  28. 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.

  29. 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.

  30. Foundations for a Successful Turnaround An informal survey conducted at a national meeting of the Turnaround Management Association suggests that only approximately 20% of all distressed companies recover. 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

  31. Turnaround Options By committing to a turnaround effort and analyzing the situation, management can begin to choose the appropriate turnaround option. • 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)

  32. Advantages of Workouts • 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 • 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

  33. Advantages of Turnarounds with Government Oversight • 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 • 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

  34. Stages of the Turnaround Process

  35. Stages of the Turnaround Process 1 2 3 4 5 Management Change Situation Analysis Emergency Action 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.

  36. 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 Stage 1: Management Change

  37. 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 Stage 2: Situation Analysis

  38. 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 Stage 2: Situation Analysis

  39. 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. Stage 2: Situation Analysis

  40. 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

  41. 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 2: Situation Analysis

  42. 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 Stage 3: Emergency Action

  43. 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 Stage 4: Business Restructuring

  44. 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 Stage 5: Return-to-Normal

  45. Case Study LaRoche IndustriesTurnaround Options andPlan Formulation

  46. 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

  47. 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

  48. Stage 2: Situation Analysis

  49. 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 $30 million • Plus: Projected Maintenance CapEx / Turnarounds $30 million • Equals: Non-Operating Cash Needs $60 million • Equals: Minimum EBITDA Plus Capital Availability Requirement • 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.

  50. Stage 3: Emergency Action Resolve Company’s short term cash need (then ensure long term liquidity) Time Horizon Stabilize business Immediate Identify and implement cost savings initiatives Focus on core businesses, exit / sell non-core businesses REORGANIZATION Later stages of Reorganization Re-position in marketplace with appropriate strategy and structure to ensure profitability De-lever the Company’s balance sheet