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FINANCIAL REVIEW

FINANCIAL REVIEW. Top level review of product financial results Business trend analysis Cost analysis Supports targeting further areas to study. APPROACH. product BUSINESS TRENDS. HISTORICAL AND ANTICIPATED REVENUE GROWTH FOR product. Revenue ($MM). Source: product Earnings Detail.

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FINANCIAL REVIEW

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  1. FINANCIAL REVIEW

  2. Top level review of product financial results Business trend analysis Cost analysis Supports targeting further areas to study APPROACH

  3. product BUSINESS TRENDS

  4. HISTORICAL AND ANTICIPATED REVENUE GROWTHFOR product . . . Revenue ($MM) Source: product Earnings Detail

  5. . . . DRIVEN BY PRICE INCREASES Price ($/lb) (% Change from '88) 332 MM lb Shipments Price 2.61 316 MM lb 2.42 2.41 Shipments (% Change from '88) 2.28 317 MM lb 2.13 308 MM lb 299 MM lb '88 Shipments = 316 MM lbs. Source: product Earnings Detail

  6. VARIABLE COSTS RISING FASTER THAN PRICE Unit Variable Cost Price % Change from '88 '88 Price = $2.13/lb '88 Unit Variable Cost = $0.56/lb Source: product Earnings Detail

  7. FIXED COSTS HAVE ALSO INCREASED SIGNIFICANTLY Profit Objective '91 +15% +10% Fixed Costs ($MM) % Change from '88 +5% 0% Source: product Earnings Detail

  8. ULTIMATELY, AFTER TAX MARGINS SUFFER 7/91 Estimate ATOM (%) Source: product Earnings Detail

  9. IN THE CORPORATE CONTEXT, product HAS SHIFTEDFROM BEING A HIGH PERFORMER TO A LOW PERFORMER AND ... XXXX Industry Segment Performance XXXX 3-Year Range product ATOM 1988 1989 1990 Source: XXXX Annual Report 1990

  10. . . . COMPETES IN A LARGE INTERNAL MARKETWHERE . . . XXXX Sales Coal 5% Chemicals 9% Petroleum 40% Polymers 14% Fibers 15% Diversified Businesses 17% product = 12% of Fibers 2% of XXXX TOTAL = $40,047 MM/year Source: XXXX Annual Report 1990

  11. . . . "ATTRACTIVE" BUSINESSES APPEAR TOCAPTURE INVESTMENTS XXXX Capital Spending Pattern Fibers Annual Industry Segment Capital Expenditures (% of Sales) Segment Data XXXX Consolidated 1988 & 1989 Data Return on Assets in Previous Year • XXXX Industry Segments • Chemicals • Polymers • Diversified Business • Fibers • Petroleum • Coal Source: XXXX Annual Report 1990

  12. AGGRESSIVE IMPROVEMENTS REQUIRED TOSUSTAIN THE product BUSINESS Globalization New Products Modernization Cost Management Operating Efficiency

  13. COST ANALYSIS

  14. COST ANALYSIS IDENTIFIES MAJOR AREAS OFOPPORTUNITY Direct Factory Fixed Cost Indirect Factory Total Cost Non-Factory (Overhead) Non-Improvable Unavoidable Variable Cost Unit Cost Improvable Avoidable

  15. FIXED COSTS

  16. FIXED COSTS HAVE DROPPED AS A PERCENT OFTHE TOTAL COST BASE $570 MM $626 MM $666 MM $666 MM $707MM Variable 69% 68% 64% 64% 63% % of Total Cost Base Fixed Source: product Earnings Detail

  17. 72% OF FIXED COSTS RESIDE IN THE PLANTS Interest & Inventory 5% Other 3% FPDE 6% Marketing, Admin Research & Mfg Support 14% Period Mill (excluding Depreciation & VTI) $262 MM 62% Depreciation & VTI $45 MM 11% TOTAL Fixed Costs = $425 MM Source: product Profit Objective '91

  18. 86% OF PERIOD MILL IN U.S. FILAMENT; ONLY 8%IN NON-U.S. FACILITIES 86% TOTAL = $262 MM Period Mill* ($MM) 5% 4.5% 3.5% 1% Source: product Profit Objective '91 * Without Depreciation & VTI

  19. IT TAKES 41% OF FIXED MANUFACTURING COSTS TOPRODUCE 21% OF product OUTPUT (AT MARTINSVILLE) 41% Shipments 79 Shipments (MM/lb) Period Mill ($MM/yr) 65 50 44 26% 16% 17% 4 Plant Total: $270 MM/yr 238 MM/lbs. Source: product Profit Objective '91

  20. $38-68 MILLION POTENTIAL OPPORTUNITY IN IMPROVING FIXED MANUFACTURING COST UTILIZATION 0.87 BDP Avg Source: product Profit Objective '91

  21. MANUFACTURING INVESTMENT HAS BEEN CHANNELEDAWAY FROM THE HIGH FIXED COST CENTERS 33% Depreciation 111 30% Depreciation (% of Period Mill) Period Mill Costs ($MM/yr) 69 19% 20% 47 43 10% 7% 10% 0% Source: product Profit Objective '91

  22. Salaries Maintenance Power Operations Support Quality Environmental Administrative Systems Technical (SMO) Other DUCs Taxes Warehouse Abnormals Management Adjustment Depreciation PERIOD MILL CAN BE CATEGORIZED AS DIRECTFACTORY OR INDIRECT FACTORY Period Mill Direct Factory (Value Chain) Indirect Factory (Supply Chain) • Labor • Off Plant Processing • Other Expenses • Operating Supplies • Contract Services • Operating Expenses

  23. SUPPLY CHAIN COSTS ARE ABOUT THE SAME ASVALUE CHAIN COSTS IN THE PLANTS Direct 52% Indirect 48% $136MM $126MM TOTAL U.S. Period Mill = $262 MM/yr Source: product Profit Objective '91

  24. WHERE THE FACTORY COSTS LIE Direct Factory = $136 MM Indirect Factory = $126 MM 69% 60% Period Mill Costs ($MM/yr) Source: product Profit Objective '91

  25. 28% OF FIXED COSTS ARE NON-FACTORY EXPENSES Interest & Inventory 5% Other 3% Non-Factory $118 MM 28% FPDE 6% Marketing, Admin Research & Mfg Support 14% Period Mill (excluding Depreciation & VTI) $262 MM 62% Depreciation & VTI $45 MM 11% TOTAL Fixed Costs = $425 MM Source: product Profit Objective '91

  26. TRANSPORTATION COSTS COMPRISE THE LARGESTSINGLE COMPONENT OF NON-FACTORY FIXED COSTS 53% of Non-Factory Fixed Costs TOTAL = $118 MM/yr Non-Factory Fixed Costs $MM/yr Source: product Profit Objective '91

  27. Value Added Non Value Added Costs to Support ALL OVERHEAD COSTS WARRANT INVESTIGATIONOF THE TASKS BEHIND THEM For example . . .

  28. 40% OF TOTAL FREIGHT BILL IS FOR BRINGING PACKAGING BACK FROM CUSTOMERS TOTAL = $26 MM/yr 10.4 Finished Product Distribution Expense ($MM/yr) 6.3 3.7 2.4 2.0 1.2 Source: product Profit Objective '91

  29. VARIABLE COSTS

  30. REPORTED VARIABLE COSTS ARE UNDERSTATEDDUE TO FIBERSTOCK CREDITS "Out-of-Pocket" Variable Cost Reported Variable Cost Fiberstock Credit We will focus on the "Out-of-Pocket" costs.

  31. SALT COST IS CONSISTENTLY ONE-HALF OF"OUT-OF-POCKET" VARIABLE COSTS $0.85/lb $0.87/lb $0.72/lb Salt Price % of Out-of-Pocket Variable Cost Chemical Loss Cost Book Yield Loss Other Material Power Energy Adjustment Source: product Cost Detail (6/91)

  32. SALT COSTS HAVE INCREASED NEARLY 20%SINCE 1989 +20% % Change from '88 Salt Cost ($/lb) +10% 0% Source: product Cost Detail (6/91)

  33. MOST VARIABLE COSTS ARE UNAVOIDABLE,BUT CAN STILL BE IMPROVED Variable Cost (Out-of-Pocket) Unavoidable* Avoidable Cost Book Yield Loss Non-Improvable Improvable • Salt Prices • Adipic Acid • Diamine • Power Energy • Chemical Loss • Adjustments • Other Material • Salt Additives • Finishes • Packaging • Tubes, etc. *Unavoidable: Cannot manufacture product without incurring these costs

  34. 27% OF VARIABLE COSTS CAN BE ADDRESSED Avoidable $38 MM/yr Avoidable Non-Improvable $195 MM/yr Cost Book Yield Loss 14% Avoidable Improvable $35 MM/yr Other Material 13% Salt 51% $73 MM/yr to Address Adjust 4% Chemical Loss 8% Energy 10% TOTAL Variable Costs (Out-of-Pocket) = $268MM/yr Source: product Profit Objective '91

  35. COSTS DUE TO COST BOOK YIELD LOSS VARYGREATLY – HOWEVER, THE TREND IS UP +80% +60% % Change from '88 Cost Book Yield Loss Cost ($/lb) +40% +20% 0% CBY*= 82% 74% 80% Source: product Cost Detail (6/91) *Calculated

  36. SIGNIFICANT OPPORTUNITIES EXIST ACROSS THETOTAL COST BASE Direct Factory $136MM Benchmarked Opportunity Fixed Cost $38-68MM Indirect Factory $425MM $126MM Total Cost $666MM Non-Factory (Overhead) } To Be Scrutinized $118MM $118MM Non-Improvable $176MM Unavoidable Variable Cost $207MM $265MM Improvable $35MM Avoidable $38MM

  37. Deteriorated financial position due to flat shipments and eroded gross margin Must improve near term performance in order to attract XXXX internal investment for the product Business Significant opportunity to reduce fixed costs, both non-factory and factory A major portion of variable costs can also be addressed and potentially reduced SUMMARY

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