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XXXXX / GEMINI JOINT PROJECT BUSINESS CASE

XXXXX / GEMINI JOINT PROJECT BUSINESS CASE. March 27, 1992. Gemini. Business Case Contents. • Workstream Summary • EPS perspective • P&L Analysis • Impact by quarter • Options comparison (chart) • Cash Flow Analysis • Options comparison (chart) • Backup

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XXXXX / GEMINI JOINT PROJECT BUSINESS CASE

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  1. XXXXX / GEMINIJOINT PROJECTBUSINESS CASE March 27, 1992 Gemini

  2. Business CaseContents • Workstream Summary • EPS perspective • P&L Analysis • Impact by quarter • Options comparison (chart) • Cash Flow Analysis • Options comparison (chart) • Backup • Individual options (chart) • Benefits detail • Business case methodology

  3. Business Case Summary Option 1 $ 3.6 14.8 18.4 14.0 0 30.0 9.5 38.4 63 % Option 2 $ 4.1 14.8 18.9 14.0 0 60.0 10.9 44.1 66 % Option 3 $ 5.0 16.6 21.6 14.0 9.0 60.0 13.5 57.8 74 % Option 4 $ 6.9 16.6 23.5 14.0 9.0 240.0 23.8 * * P&L Costs - Gemini - Internal TOTAL Benefits - Consolidation - Cost reductions - Revenue Annual PAT DCF @ 15% IRR * Unsized investments required to achieve revenue growth

  4. Effect of Compounded Product Introductions

  5. Effect of Gemini Project on XXXXX Revenue

  6. Key EPS Assumptions • Base Case per XXXXX financial organization current view (Peter Rice) • Consolidation, cost reductions, and revenue growth base case is the conservative end of the Gemini assessment • "High" case recognizes upside potential of new markets in 1996 • Revenue growth and/or protection in current markets achieves an average 20% margin due to full capacity utilization • "High" case portrays a challenging 30% average margin • Revenue growth in new markets achieves an 8% margin (in line with existing business) • "High" case portrays a challenging 20% average margin • Taxes assumed at 20% on existing business through 1993, 40% on all new business

  7. Key EPS Assumptions (con't) • The number of stock shares outstanding increases 1 million per year due to distribution plans • The price/earnings multiple increases from 8 to 12 as the commercial portion of XXX’s revenue increases from 25% to 50%

  8. Potential EPS Impact High/High = High revenue case/high margin assumption Low/Low = Low revenue case/low margin assumption

  9. Estimated P&L Impact by QuarterOption 1 2Q92 $ 5.2 0 0 0 0 5.2 21.0 3Q92 $ 5.8 1.2 3.3 0 4.5 5.8 16.5 4Q92 $ 5.8 1.2 7.5 .1 8.6 5.8 7.9 1Q93 $ 3.8 1.2 3.5 1.0 3.7 3.8 4.2 2Q93 $ 5.3 0 .9 1.7 0 6.1 4.2 Base Case Costs - Gemini - Internal Benefits Use of Reserves PBT Reserve Balance

  10. Estimated P&L Impact by QuarterOption 2 2Q92 $ 5.2 0 0 0 0 5.2 21.0 3Q92 $ 5.8 1.4 3.3 0 4.7 5.8 16.3 4Q92 $ 5.8 1.3 7.5 .1 8.7 5.8 7.6 1Q93 $ 3.8 1.4 3.5 1.0 3.9 3.8 3.7 2Q93 $ 5.3 0 .9 1.7 0 6.1 3.7 Base Case Costs - Gemini - Internal Benefits Use of Reserves PBT Reserve Balance

  11. Estimated P&L Impact by QuarterOption 3 2Q92 $ 5.2 0 0 0 0 5.2 21.0 3Q92 $ 5.8 1.7 3.6 0 5.3 5.8 15.7 4Q92 $ 5.8 1.6 8.0 .3 9.3 5.8 6.4 1Q93 $ 3.8 1.7 4.0 2.1 3.6 3.8 2.8 2Q93 $ 5.3 0 .9 3.0 0 7.4 2.8 Base Case Costs - Gemini - Internal Benefits Use of Reserves PBT Reserve Balance

  12. Estimated P&L Impact by QuarterOption 4 2Q92 $ 5.2 0 0 0 0 5.2 21.0 3Q92 $ 5.8 2.4 3.6 0 6.0 5.8 15.0 4Q92 $ 5.8 2.3 8.0 .3 10.0 5.8 5.0 1Q93 $ 3.8 2.4 4.0 2.1 4.3 3.8 .7 2Q93 $ 5.3 0 .9 3.0 0 7.4 .7 Base Case Costs - Gemini - Internal Benefits Use of Reserves PBT Reserve Balance

  13. Key P&L Assumptions Consolidation Cost Reductions Market Growth • Investment is scrubbed down version of D. Aldrich assessment • Investment - move costs = $ 13 M - leasehold investments capitalized - buildings sold at book value • Restructuring payout concentrated in 1H93 • Executive/Management actions exploit all identified opportunities • XXXXX investments in teams, systems, etc = $ 7.5 M • Half is capitalized hardware/software • Recurring $ 2 M annual cost for internal systems/talent • Pre-tax margins on all new revenue 8% base case • Tax at 40% rate • Low end of identified enhancement and growth ranges

  14. Option 1 P&L Impact

  15. Option 2 P&L Impact

  16. Option 3 P&L Impact

  17. Option 4 P&L Impact

  18. Quarterly Project P&L Impact

  19. Alternative Cases P&L Impact

  20. Key Cash Flow (Payback) Assumptions Consolidation Cost Reductions Market Growth • Investment is scrubbed down version of D. Aldrich assessment • Investment - move costs = $ 13 M - leasehold investments = $ 10 M - buildings sold 4Q94 for $ 10 m • Restructuring payout concentrated in 1H93 • Executive/Management actions exploit all identified opportunities • XXXX investments in teams, systems, etc = $ 7.5 M • Half is capitalized hardware/software • Recurring $ 2 M annual cost for internal systems/talent • Pre-tax margins on all new revenue 8% base case • Tax at 40% rate • Low end of identified enhancement and growth ranges

  21. Option 1 Cash Flow (Payback)

  22. Option 2 Cash Flow (Payback)

  23. Option 3 Cash Flow (Payback)

  24. Option 4 Cash Flow (Payback)

  25. Quarterly Project Cash Flow (Payback)

  26. Alternative Cases Cash Flow (Payback)

  27. XXXXXX's Performance Improvement OpportunitiesCome in Three Categories Annualized Revenue/Cost Benefits • Consolidation • Cost Reductions • Revenue Growth $ 14 M $ 9 M $ 240 - 480 M

  28. Opportunity SizingWorkstream: All $ M Cost Reduction Revenue Growth Workstream Consolidation Organization Change Executive Change Facilities/Mfg Strategy Product Profit Improvement Product Realization Corporate Growth Customer/Market Focus Corporate Challenges TOTAL $ 12 2 $ 14 $ 1 3 5 $ 9 $ 30 - 40 + 30 - 40 130 - 265 50 - 135 + $240 - 480

  29. ConsolidationWorkstream: Organization Change $ M Cost Reduction Revenue Enhancement Market Growth FOCUS ITEM 1. Noah Team estimates 2. Internal customer service support $ 8.5 3.0 $ 11.5

  30. Workstream: Organization ChangeFocus Item: Noah Team Estimates ASSUMPTIONS Per D. Aldrich model (base case). CALCULATIONS Per base case $ 8.5 M Estimated savings $ 8.5 M

  31. Workstream: Organization ChangeFocus Item: Internal Customer Service Support ASSUMPTIONS Division (inside) sales personnel significantly overlap the efforts of external sales. Focussing the internal effort on the most productive activities, establishing administrative processes and taking advantage of scale economies across XXXXX provide a significant savings/redeployment opportunity. CALCULATIONS Division sales support staff Estimated non-productive * Reduction target (h/c) Estimated average salary ** Improvement target 220 20 - 50 % 44 - 110 $ 36 K $ 1.6 - 4.0 M Estimated savings $ 3.0 M * Based on internal/external sales judgment, and observation of the sales process. ** XXXX has budgeted $24 M for operating division sales & marketing in 1992, an average of $109 K per inside sales/marketing individual. The opportunity may be greater than stated.

  32. Cost ReductionWorkstream: Executive Change $ M Cost Reduction Revenue Enhancement Market Growth FOCUS ITEM + + 1. Initiative Rationalization $ 1.0

  33. Workstream: Executive ChangeFocus Item: Initiative Rationalization ASSUMPTIONS The Gemini Survey sugge sts that 846 persons worth of effort is applied to a variety of business improvement initiatives in XXXXX. Respondents indicated that 25% of this effort is applied to medium priority and 8% to low priority initiatives. Further, initiatives appear to overlap among divisions affording an alternative basis for reducing this effort. CALCULATIONS Priority LowMedium Overlap Current equivalent resource applied Reduction target Work effort redirected Average salary w/fringes Estimated savings 69 25 % 17 $ 36 K $ 620 K 209 5 % 10 $ 36 K $ 360 K 846 10 % 85 $ 36 K $ 3,060 K Estimated savings $ 1.0 M

  34. Initiative RationalizationMethodology SURVEY RESULTS: # of survey respondents # of employees involved in initiatives ANALYSIS: % of employees involved in initiatives Avg time spent per respondent Avg time spent per involved respondent Equivalent persons (this sample) Category % EXTRAPOLATION: Total XXXX operations population Estimated # involved in initiatives Equivalent persons involved 196 102 52.0% 20.2% 38.7% 39.52 100.0% 4,194 2,183 845 IMPORTANCE OF STUDY 3 2 1 23.26 13.03 3.23 67.0% 24.8% 8.2% 1,463 541 178 566 209 69

  35. Cost ReductionWorkstream: Facilities/Manufacturing Strategy $ M Cost Reduction Revenue Enhancement Market Growth FOCUS ITEM 1. Noah Team estimates 2. Purchasing effective- ness 3. Inventory TOTAL $ 2.4 2.5 .6 $ 5.5 N/A N/A

  36. Workstream: Facilities/Manufacturing StrategyFocus Item: Noah Team Estimates ASSUMPTIONS Per D. Aldrich model (base case). CALCULATIONS Cost Per base case $ 2.4 Estimated savings $ 2.4 M

  37. Workstream: Facilities/Manufacturing StrategyFocus Item: Purchasing Effectiveness ASSUMPTIONS Costs of indirect materials are above optimum due to failure to leverage common commodity items across the divisions. 1991 spending on this category (excluding services) was approx- imately $25 million. Additional opportunity exists in production materials. CALCULATIONS Cost Annual indirect procurement Reduction target * Projected savings $ 25 M 10 % _______ $ 2.5 M Estimated savings $ 2.5 M * Based on inventory management judgment

  38. Workstream: Facilities/Manufacturing StrategyFocus Item: Inventory Reduction ASSUMPTIONS Inventories in ISO, RPD, CCD, and Anzac can be reduced by Cycle Time Reduction and Statistical Process Control programs. XXXXX management estimates the potential reductions as follows: CALCULATIONS ISO WIP Inventory Projected inventory reduction % Projected inventory reduction Carrying cost % Projected annual savings Anzac Inventory Projected inventory reduction % Projected inventory reduction Carrying cost % Projected annual savings 8.0 M 20 % 1.8 M 10 % $ 180 K 7.0 M 25 % 1.9 M 10 % $ 190 K RPD Inventory Projected inventory reduction % Projected inventory reduction Carrying cost % Projected annual savings CCD WIP Inventory Projected inventory reduction % Projected inventory reduction Carrying cost Projected annual savings 6.3 M 15 % 950 K 10 % $ 95 K 6.8 M 25 % 1.7 M 10 % $ 170 K Estimated ONE TIME savings $ 6.4 M Estimated ANNUAL savings .6 M NOTES • Inventory initiatives are underway throughout XXXXX. Gemini disciplines would contribute to the timing and level of improvements. • Additional reductions will be realized by combining inventories in a facilities consolidation.

  39. Cost ReductionWorkstream: Product Realization $ M Cost Reduction Revenue Enhancement Market Growth FOCUS ITEM + 1. PD&I 2. Development Cycle Length (Overruns) 3. Cost of Quality 4. Integrated Development 5. Engineering Changes TOTAL $ .7 2.1 2.0 .2 $5.0 $ 30 - 40 $ 30 - 40

  40. Workstream: Product RealizationFocus Item: Product Development & Introduction (PD&I) ASSUMPTIONS Field sales lacks an effective process for interacting with internal product development and manufacturing teams, resulting in poor communications and slow and often inappropriate responses to customer needs. CALCULATIONS Estimated sales increase * Current revenue Revenue increase 10% 383M _______ 38M Estimated added revenue $ 30 - 40 M * Based on sales/management judgment

  41. Workstream: Product RealizationFocus Item: Development Cycle Length ASSUMPTIONS Process discipline and optimization vary by division, often resulting in an unnecessarily long development cycle. Critical path scheduling, tied to direct marketing input and concurrent engineering, would result in a 25 % reduction in the cycle, reducing the cycle cost. CALCULATIONS Subsystems RPD Current typical cost Reduction target * Annual savings target Extrapolation factor ** Estimated savings $ 600 K 25% $ 150 K / .34 $ 440 K $ 624 K 25% $ 156 K / .15 $1040 K Estimated savings $ 740 K * Based on engineering/management judgment ** RPD & Subsystems were investigated in depth, and the results extrapolated across Anzac, CCD, LSO, and Surveillance divisions on the basis of revenue.

  42. Workstream: Product RealizationFocus Item: Cost of Quality ASSUMPTIONS Lack of a formal, disciplined approach to vendor and internal quality suggest significant opportunity to reduce customer returns, scrap, and rework. CALCULATIONS CCD RPD Customer returns Scrap & rework Total wasted cost Reduction target * Annual savings target Extrapolation factor ** Estimated "Actives" savings $ 1689 K 126 K $ 1815 K 25% $ 454 K / .20 $ 2270 K $ 896 K 147 K $1043 K 25% $ 260 K / .13 $ 2000 K Estimated savings $ 2,135 K * Based on engineering/management judgment ** RPD & CCD were investigated in depth, and the results extrapolated across Anzac, PHO, and Communications & Subsystems divisions on the basis of revenue.

  43. Workstream: Product RealizationFocus Item: Integrated Development ASSUMPTIONS HMIC, GMIC, and MMIC share technologies of capacitors, inductors, on wafer test, models & design, and assembly & packaging. By leveraging learning from LSO it appears possible to cut HMIC design costs, estimated at $5 M over one to two years, by up to 80%. CALCULATIONS Cost Current HMIC cost estimate Reduction target * Projected savings $ 5.0 M 40 % _______ $ 2.0 M Estimated savings $ 2.0 M * Based on engineering/management judgment

  44. Workstream: Product RealizationFocus Item: Engineering Change Notices ASSUMPTIONS In the absence of a formal, disciplined EC process, 40% - 50% * of engineering changes do not add value. Effort expended on these changes can be redirected to productive activities. CALCULATIONS Subsystems RPD Number of non-value-add ECN's Hours/ECN Hourly cost Total wasted cost Reduction target Annual savings target Extrapolation factor ** Estimated "Actives" savings 2126 4 $ 18 153 K 30% $ 46 K / .34 $ 135 K 514 9 $ 18 83 K 30% $ 25 K / .15 $ 165 K Estimated savings $ 150 K * Based on manufacturing studies of loosely-structured ECN processes. ** RPD & Subsystems were investigated in depth, and the results extrapolated across Anzac, LSO, CCD, and Surveillance divisions on the basis of revenue.

  45. Revenue GrowthWorkstream: Corporate Growth $ M Cost Reduction Revenue Enhancement Market Growth FOCUS ITEM $ 30 - 65 M $ 100 - 200 1. Core Competence N/A

  46. Workstream: Corporate GrowthFocus Item: Core Competence $ M ASSUMPTIONS By leveraging/investing in XXXX core competencies, it appears possible to protect revenue which is currently eroding, expand in existing markets, and penetrate new markets. Timing is assumed as shown. 3 - 5 YRS5 + YRS CALCULATIONS Revenue at risk Recoverable Target % Targeted recovery Expansion potential Available to XXXX Target % Targeted expansion New products Revenues Discount factor Target market growth $ 80 M 60 M 25 % 15 M $140 M 108 M 15 - 50 % 15 - 50 M 14 $ 200 - 400 50 % $ 100 - 200 Enhanced revenue (existing markets) $ 30 - 65 M Market growth 100 - 200 M

  47. Revenue GrowthWorkstream: Customer/Market Focus $ M Cost Reduction Revenue Enhancement Market Growth FOCUS ITEM 1. Market Focus 2. Field sales effectiveness $ 30 - 40 $ 30 - 40 $ 50 - 135+ $ 50 - 135 +

  48. Workstream: Customer/Market FocusFocus Item: Market Segmentation $ M ASSUMPTIONS * Gemini's analysis assumes that XXXX has the competencies/capabilities to deliver an appropriate value proposition to the cellular market by 1996, that the markets are growing in line with industry expert estimates, and that XXXXX can capture a reasonable share of the market. CALCULATIONS Systems Architecture Integrator/Commodity Base Station Sub- Scriber Base Station Sub- Scriber Estimated 1996 market Target share Projected range $ 100-160 10-20 % $ 10-30 $ 45-95 10-20 % $ 5-20 $ 170-280 8-13 % $ 15-35 $ 275-395 8-13 % $ 20-50 Estimated market growth $ 50 - 135 M * Cellular Market Only

  49. Workstream: Customer/Market FocusFocus Item: Field Sales Effectiveness ASSUMPTIONS Field salespersons spend 20-40% of their time on non-value-add activities such as expediting and reconciliations. Additionally, they lack training, tools, and marketing-oriented opportunity targeting. CALCULATIONS Sales force in field Inefficiency Equivalent persons Improvement target Projected opportunity h/c 55 30% _______ 16 50% _______ 8 Current efficiently utilized sales force % increased customer contact Estimated sales increase * Current revenue Revenue increase 39 21% 10% 383M _______ 38M Estimated added revenue $ 30 - 40 M * Based on sales force/management estimates

  50. Our Business Case Drew on Disciplined Diagnosticsand the Expertise of XXXXX Employees • Focus interviews • Brown paper flows • Surveys • "Day in the life" studies • Discussions with XXXXX personnel • Insider views and validation • Gemini experience/expertise • Financial perspective • Financial models • Cost estimate • XXXX financial team validation • XXXXX goals/visions • P&L, cash, IRR effects • Appropriate sensitivity analysis IDENTIFY OPPORTUNITIES INVESTIGATE • VALIDATE • SIZE ANALYZE PRESENT

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