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Prolman Associates

Prolman Associates. WHEN GOOD COMPANIES GO BAD: TRENDS IN CORPORATE RESTRUCTURINGS AND TURNAROUNDS ASSOCIATION FOR STRATEGIC PLANNING May 12, 2009 UCLA Faculty Center Los Angeles, CA. Prolman Associates. Los Angeles San Diego Irvine.

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Prolman Associates

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  1. Prolman Associates WHEN GOOD COMPANIES GO BAD: TRENDS IN CORPORATE RESTRUCTURINGS AND TURNAROUNDS ASSOCIATION FOR STRATEGIC PLANNING May 12, 2009 UCLA Faculty Center Los Angeles, CA

  2. Prolman Associates Los Angeles San Diego Irvine Restructuring & Crisis Management Stabilizing, preserving and creating value in virtually every industry Corporate Growth Management A set of disciplines and approaches for business of all sizes and in any industry affiliated with: Getzler Henrich & Associates, LLC295 Madison AvenueNew York, NY 10017 Boston Chicago Charlotte

  3. What are the early warning signs forsuccessful companies to have difficulties? • Under capitalized • Stymied revenue growth • Cash flow problems • Bank overdrafts • Working capital credit line-maxed out • Stressed vendor relationships • Target projections continuously not met • Unacceptable market share • Unacceptable market growth

  4. What are the early warning signs forsuccessful companies to have difficulties?Continued… • Unsatisfactory earnings • Declining gross margins • Bloated SG&A expenses • Inventory issues • Imbalanced inventory • Stale inventory is growing • Product quality • Product delivery delays

  5. What are the early warning signs forsuccessful companies to have difficulties? Continued… • Organizational conflict • Low customer satisfaction • Low employee morale • High employee turn-over

  6. What are the root causes that lead successful companies to difficulties? • Financial management is weak • Ineffective financial and strategic planning • No contingency plan (“Plan B”) • Loss of focus on the highest priorities • “Can’t See the Forest Through the Trees” Syndrome • As problems become deeper, the “deer in the headlights” syndrome occurs. • Lack of sense of urgency

  7. What are the root causes that lead successful companies to difficulties? Continued… • Sacred cows • In love with inventory • Not listening to the evolving needs of the customer • Excessive investment in capital expenditures • Field of Dreams Theory: • If We Build It, They Will Come • Weak management succession planning

  8. How does the recession impact different companies? What companies are especially exposed to economic turndown? • Current recession is broad-based and effecting almost all industries. Exception: Groceries, health care/pharmaceuticals and defense. • Affected consumer-oriented industries are: • High ticket discretionary purchases (i.e., real estate, autos, jewelry, vacation travel, etc.) • Products/services directly and indirectly related to housing starts (construction, construction materials and products used to furnish new homes) • i.e. furniture, drapery, mattresses, etc.

  9. How does the recession impact different companies? What companies are especially exposed to economic turndown?Continued… • Affected “B2B” industries: • Manufacturers of equipment & other capital expenditures • Freight/logistics: truck; rail & ocean • Advertising/printing • Consumer & Business operations affected: • Hospitality: hotels, restaurants, travel, etc.

  10. How has the current credit crunch affected businesses especially in terms of availability of funds and interest rates? • Lenders are returning to prior standards of risk. • Lower advanced rates • More equity • Stronger financial management covenants • As credit lines mature or covenants are tripped, the lines are being decreased and the interest rates and points are returning back to the prior standards of risk/return. • The days of no covenant and covenant light loans are gone for now.

  11. Why is it that, with this recession, there seems to be a larger percentage of Chapter 7/Liquidations than Chapter 11/Re-organizations than in prior recessions? • Huge cash deficits caused by: • Former lack of lending standards • Credit crunch • Lack of DIP financing • Steep sales drop-off in late ’08 and Q1 ’09 (40-50% declines). How low will it go? • Deepening losses • Slowing A/R collections • Growing inventory

  12. What Are The Stages Of A Turnaround Assignment? • Assessment: • Information gathering (financial and operational data, management audit) • Analyze the situation • Complete viability analysis • Determine a near-term action plan • If viable: Analyze data discovered & develop a long-term action plan

  13. What Are The Stages Of A Turnaround Assignment?Continued… • Ensure Cash Stabilization • Implement the recovery plan: • Re-engineering the Companies' processes • Attend to vital aspects of the business • Emerge as a rehabilitated Company • Continuous Management throughout the recovery process

  14. What are the best practices of guiding companies through periods of crisis? • Have a plan! • Be candid and forthright (with the reasons for challenges and with recommendations) • Be forceful without being pushy • Act with a sense of urgency while remaining calm • Focus on the highest priority “fixes” • Make sure the client is informed of the potential ramifications of inaction or taking a direction other than what is recommended. • Do not try to fix what you don’t know!

  15. Common roadblocks to change: • Management that is not willing to admit the need for help • No advisor or board member willing to ask for help • No visionary within the company • Culture in the company does not allow for openness • Skills are lacking within the company • Lack of cash: It’s too late

  16. Case studies of successful turnarounds: • Manufacturer Case Study: • The Mexmil Company • Situation: Chapter 11 • Sales: $60 Million • Problems: • Losses: – over $1 million per month • Balance sheet: - Liquidating Assets: receivables & inventory • Total Debt: - $25 Million • Employees: - Mexico - Almost 3,000

  17. Case studies of successful turnarounds: Case studies continued… Manufacturer Case Study: The Mexmil Company – Irvine Solutions: Operational • Mexico: 1,100 employees • Manufacturing: Costs under control • Sales: Boeing Company contract • Profitability: Including all professional costs • Results: Non-Impairment Plan of Reorganization

  18. Case studies of successful turnarounds: Case studies continued… Retail ChainCase Study: Crazy Shirts, Inc. – Hawaii • Sales: $75 Million • Problems: • Sales: Negative 16.5% (comp stores) • Losses: – $3.6 million • Non-Core Assets: $25 million in expenditures • Inventory: Stale inventory over 3 years old • Total Debt: $48 million • Cash: Expected to exhaust cash in 4 months

  19. Case studies of successful turnarounds: Case studies continued… • Solutions: • Stores: Closed 18 and reduced G&A staff ($2.7 MM) • Debt: Restructured $4.8 MM unsecured debt • Inventory: Liquidated stale ($1 million) • Non-core assets: Sold off ($20 million) • Leases: Re-negotiated ($1.6 million) • Results: • Company sold through a Ch. 11/Section 363. • Owner avoided filing for personal Ch. 7 • Sales: $55 million • Profitability: $+3.5 million EBITDA

  20. BiographyDavid A. Prolman David A. Prolman is the president of Prolman Associates, founded in 1987. Prolman’s 30 plus years of corporate business experience have focused on commercial finance, operations management, turnarounds, loan workouts, bankruptcy reorganizations and crisis management. Over the past 20 years, he has focused primarily on assisting companies in financial and/or operational distress. Having worked with a diverse client base, Prolman has experience in manufacturing, distribution, retailing, professional services and other industries including a variety of high technology companies. He and his associates have worked with clients from family owned and operated businesses to large public companies, as well as provided services at the request of, or in conjunction with, Big Four accounting firms. Additionally, Prolman has had successful experience managing debtors in possession, including working under collective bargaining agreements (“CBA’s”). Clients with CBA issues managed by Prolman and his associates include the Chapter 11 bankruptcies of Hoffman Bros. Packing Co., Inc., the Holsum Baking Company of California, Fornaca Bakeries, Inc. and Pacific Multigrain Foods, Inc. In addition to his experience, Prolman has developed a proven network of financial and professional resources to support clients in a variety of situations. His associates form a specialized team of experienced business executives with proven knowledge and skills in assisting troubled businesses. Under his leadership, his team has led hundreds of clients through the workout, turnaround, bankruptcy and/or bankruptcy reorganization process, as well as through periods of crisis management. Prolman has served as an adjunct professor and has lectured on banking and finance for graduate and undergraduate programs. Additionally, he was a founding sponsor of the University of California at San Diego’s “Connect” program in High Technology and Entrepreneurship. He has served on the Boards of Directors of the San Diego Bankruptcy Forum and the Southern California Turnaround Management Association and is a member of the American Bankruptcy Institute and the Association of Insolvency and Restructuring Advisors. Prolman holds a Bachelor of Science in Business Administration from Boston University’s School of Management and an M.B.A. from the University of Southern California, Marshall School of Business.

  21. Biography Bette Hiramatsu Focusing primarily on mid-sized businesses facing financial and/or operational challenges or seeking guidance to get to the “next level” since 1988, Bette Hiramatsu has repeatedly demonstrated a proven track record of improving companies into entities with stronger earnings and cash flow through creative problem solving, strategic planning and financial forecasting, current asset management, process improvements, cost cutting and strengthened balance sheet management. Additional areas of expertise include the restructuring of unsecured debt and the re-negotiation of leases. Hiramatsu’s prior consulting engagements range from family-owned and operated mid-sized businesses to public corporations with sales over $100 million. Bette has experience covering a broad breadth of industries including retail, manufacturing, distribution, restaurants, construction and services. Prior to becoming a management consultant, Hiramatsu spent ten years in commercial banking as a Vice President – lending funds to privately-held, mid-sized businesses and to major, publicly-held corporations with both Union Bank and Chemical Bank. Hiramatsu earned a B.S. in Business Administration from the University of Southern California and a MBA from the John E. Anderson Graduate School at UCLA. Bette also attended Waseda University, International Division in Tokyo, Japan. A member of the Turnaround Management Association, the Association for Insolvency and Restructuring Advisors, the Association for Corporate Growth and All Cities Resources Group, Hiramatsu serves as a member of the Executive Committee of the Apparel Industries for the City of Hope which supports the City of Hope National Medical Center. Bette has previously served on the board of the Executive MBA Alumni Association at UCLA and on the advisory board of a privately-held, educational travel service company.

  22. Prolman Associates • 1011 Camino Del Mar, Suite 252, Del Mar, CA 92014Tel # 858-259-5555 # 800-300-1887 • www.Prolman.com • Info@Prolman.com Bette Hiramatsu bhiramatsu@prolman.com David A. Prolman dprolman@prolman.com

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