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INVESTMENT BANKING SOLUTIONS FOR THE MIDDLE MARKET

Securities offered through SFI Investments, LLC, Member FINRA, Member SIPC, and an affiliate of Raintree Capital Partners, LLC

Building Enterprise Value in a Recession – An Operating Perspective

James Lisy, Raintree Capital PartnersMichael Giuliano, Chairman certifiedlean®

Gary Giller, Raintree Capital Partners

October 27, 2009

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Introductions

• Jim Lisy– Managing Director, Corporate Finance;

Raintree Capital Partners

• Michael Giuliano– Chairman, certifiedlean®

• Gary Giller– Director, Turnaround Management;

Raintree Capital Partners

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Housekeeping Issues

• Questions will be answered at the end of the webinar, feel free to submit questions throughout the presentation via instant message

• Any unanswered questions will be addressed and emailed to all participants after the webinar

• All participants will be muted throughout the webinar, please use your instant message for questions/comments

• The audio and power point files will be available at www.raintree-capital.com following the webinar

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Agenda• Objective – communicate view and opinion on actions

that management can take to improve cash flow and profitability in a recessionary environment

• Specific questions to be addressed:– What are some high value actions that can be taken to

improve cash flow and earning as revenues decline?– How can operations be enhanced given a meager capital

budget?– What capital sources are available to fund the growth?– What are some of the early detection signs that a business

may be headed for difficult times ahead?

If you leave this presentation with a good idea that helps you improve your operations or protects you from an adverse event – then we will

have done our job!

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A Capital Markets Perspective

• Capital constrained– Banks have their own problems– M&A markets stalled– Workout area robust

• Company Metrics– Revenue and earnings shortfalls– The “constant crisis” mode

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Opportunities – M&A and Financing

• Buyers– Cash is king– Plays for market share

• Sellers– Pockets of strength– For most – wait for the cycle to swing

• Those seeking capital– Alternative sources– Search for financing is a more extensive process– Joint ventures with cash flush strategic investors

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A “To-do” List to Create Value• Get house in order

– Internal reporting– Due diligence lists– Audits– Strategic planning

• Operate for cash flow– Good times cover bad investments– 2009 will be a key comparison year– Understand how cash flows in and out (13 week CF

discipline)

• Get educated– Markets– Competitors– Resources

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A Value Checklist

• Profitability• Growth

– Historical – Perceptions

• Concentration– Product– Customer– Geography

• Management

Securities offered through SFI Investments, LLC, Member

FINRA, Member SIPC, and an affiliate of Raintree Capital

Partners, LLC

“…create value, invest in change”

Michael GiulianoChairman, certifiedlean®

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My Favorite Equation

(S)D

(F)(E)=

…credit source:  doug hall

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My Second Favorite Equation

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Current State

• Companies have become fear factories• Mass layoffs and extreme cost cutting is the norm• Paranoia, fear, and irrational thinking among management• Hopelessness and cynicism is commonplace• People do not want to take risk, be noticed, or stick out• Productivity, strategic thinking, and innovation are at an all time low

YOUR COMPETITION IS STANDING STILLTHIS IS THE BEST TIME TO GET AHEAD AND GAIN MARKET SHARE

“…it is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” -Darwin

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Cost of InactionMONEY

TIME

MONEY

TIME

TALKINGNOT INVENTED HERE

YOU DON’T UNDERSTANDWE ARE DIFFERENTWE CAN’T BECAUSEWE ALREADY DO THIS

FEAR & EGO

DOINGWORLD CLASS BENCHMARKINGFACTS/DATA NOT FEELINGSBEST KNOWN METHODS

WE CAN IFWE CAN BE BETTER AT THAT

ENCOURAGED TO CHALLENGE EVERYTHING

“...Your competition is standing still, this is the best time to get ahead and gain market share“

INACTION ACTION

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Customer Defines Value

• Who controls price? Who controls cost?• Guessing (forecasting) vs. Listening (actively

involved)• Customer defines your roadmap (Intel example)• 20 Keys Assessment Tool• Formal Product Lifecycle Program

– zero sales is enough market feedback– who has control of the market, you or the customer

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True Cost of Complexity

$ SKU’s DIRECT INDIRECT

90%

10%

25%

75%

80%

20%

25%

75%

MONEY PRODUCT LABOR LABOR

EXAMPLE & DISCUSSION

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A Real Plan

• “SHOW ME NOW”• WHAT IS YOUR COMPANY’S FINANCIAL BREAKTHROUGH

PLAN• FINANCIAL GOALS TIED DIRECTLY TO OPERATIONAL

INITIATIVES• LEADING INDICATORS (not lagging)• MEETINGS QUICK AND MEASURABLE WITH PEOPLE HELD

ACCOUNTABLE• TRUE ALIGNMENT (Management to floor is the “litmus test”)• EBITDA, free cash flow, working capital, EPS, parts per labor

hour…

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“Performance” Measurements

• Executives find performance measures difficult / threatening• They are reluctant to engage with it in a meaningful way• As a result, companies routinely fall into five traps:

– They use themselves rather than competitors as benchmarks– Focus on past indicators of success– Overvalue numbers at the expense of qualitative measures– Set easy-to-game metrics– Cling to systems that have outlived their usefulness

• Executives SHOULD be measuring:– EBITDA, free cash flow, working capital, EPS, parts per labor

hour…

…credit source: HBR 10/2009

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Hoshin Kanri“corporate objectives determine, corporate strategies supported by, local strategies that, cascade down the org”

• Promotes the involvement of all employees in the process• Desired results can only be attained if everybody in the organization:

– Fully understands the goals of the company– Is somehow involved in the plans defined to achieve them

• Strategic planning/management methodology to help an organization:– Focus on a shared goal– Communicate that goal to all leaders– Involve all leaders in planning to achieve the goal– Hold participants accountable for achieving their part of the plan– It assumes daily controls and performance measures are in place

• The planning process consists of the following steps:– Identification of critical business issues– Establishment of business objectives to address these issues– Definition of the company's over-all goals– Development of strategies that support the over-all goals– Definition of sub-goals or tactics that support each strategy– Establishment of metrics or indicators for measuring process performance– Establishment of business fundamental measures

…credit sources: LEI, LLC, NLP, wikipedia

Securities offered through SFI Investments, LLC, Member

FINRA, Member SIPC, and an affiliate of Raintree Capital

Partners, LLC

How Do You Know You Are Headed for Difficult

Times?

Gary M. GillerRaintree Capital Partners

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It’s not a Wonderful Life

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Current Credit Environment for Middle Market Businesses

• Most banks expect lending standards to remain tighter through mid 2010, according to a survey by the Federal Reserve

• Banks continue to worry about credit card and commercial real estate losses causing an assessment of overall risk – placing pressure on smaller businesses

• Over 14% of small and middle market businesses have found creditharder to secure in August 2009 than they did in July

• Less than one-third of middle market businesses state that their credit needs are being met

• These businesses rely primarily on bank financing, where as large firms have alternate sources of capital

• Companies with under 500 employees in the U.S. are responsible for more than half the jobs in the private sector

Source: NYT 10/13/09

Admit that the waters Around you have grown And accept it that soon You'll be drenched to the bone. If your time to you Is worth savin' Then you better start swimmin' Or you'll sink like a stone…Bob Dylan

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Understand the changes affecting your business

• Economic volatility is greater than most businesses have ever faced• Competitive risks and opportunities are more dramatic than ever • Government action (e.g., health care and fiscal stimulus) are likely to

have measurable impact • Social changes (e.g., environmental sustainability) are presenting

greater challenges for the future• Rapidly changing technology has severely impacted some industries,

e.g., publishing and recording

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Some warning signs of a business in trouble?

• Adverse trends, e.g., sales decline• Customer defection• Margin compression• Loss of market share• Rapid employee turnover• Inventory build up – reduced turns• Growing trade payables and tightening

working capital• Low morale

Internal Pressure

External Pressure

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A downturn could present opportunities for healthy companies

• Acquisition opportunities exist for firms with a strong cash position - historically, the best deals are made in downturns.

• Assess your competitors’ vulnerabilities• Good time to gain market share from weaker competitors• Invest for the future in product development, information

technology, operational improvements and people

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What are ways that organizations respond to distress?

• Act quickly• Reduce expenses• Change management• Lower fixed costs & reduce B-E• Rethink product mix• Aggressively manage working

capital• Eliminate surprises

– Lenders– Creditors– Employees– Customers

• Inaction and denial• Losses accumulate• Recycle old ideas• Overcapacity• Offer same product• Wait until cash is tight to respond• Adopt defensive tactics

PROACTIVE REACTIVE

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Do you have the internal structure to identify problems and turnaround the organization?

• Is your management capable of making the changes? • Is there a board of directors or outside advisors to

provide a different perspective?• Cash management tools are critical – are these in

place? • Are adequate information systems in place to make

fact based decisions?• Do you know your cost and expense structure?• Are your products and customers profitable?

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Stages of a Turnaround

• Emergency stage - where you do whatever necessary to survive– Diagnosis and identification of problems coupled with immediate

response time– Focus on critical areas: lenders, cash, suppliers and customers– Eliminate the losers: costs, divisions, product lines and customers

• Stabilization and recovery of the organization– Move from day-to-day, to thinking about the future– Planning for profitability, operational improvement and proving a

platform for growth– Building out from the core

• Return to normal operations– Business development and growth– Planning for the future

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Disclosure

Raintree Capital partners, LLC makes no representation or warranties with respect to the accuracy, reliability, or utility of information obtained from third parties. The materials included were obtained from sources believed to be reliable. Certain assumptions may have been made by these sources in compiling such information, and changes in such assumptions may have materials impact on the information presented in these materials.

These materials are made available solely for informational purposes and do not constitute an offer by Raintree Capital Partners, LLC to buy or sell any instrument or implement any trading strategy.

Past performance does not guarantee future results.

This presentation and the information contained herein is for informational purposes only, is confidential, and is intended solely for the recipient. It is not intended as, and does not constitute, and offer or solicitation for the purchase or sale of any financial instrument. Deliver of this document or any of the information herein to anyone other than the recipient or his/her designated representative is unauthorized and any other use, reproduction, distribution, or copying of this document or the information contained herein, in whole or in part, without the prior written consent of Raintree Capital Partners, LLC, is prohibited.

Securities offered through SFI Investments, LLC, Member

FINRA, Member SIPC, and an affiliate of Raintree Capital

Partners, LLC

Questions/Discussions

Thank you!www.raintree-capital.com

Securities offered through SFI Investments, LLC, Member

FINRA, Member SIPC, and an affiliate of Raintree Capital

Partners, LLC

For more information please contact our panelists:

Jim Lisy, Raintree Capital Partnersjlisy@raintree-capital.com

Michael Giuliano, certifiedlean®

michaelgiuliano@gmail.com

Gary Giller, Raintree Capital Partnersggiller@raintree-capital.com