11

TREFICA OF TREFICA OF HONDURASHONDURAS

Andres HernandezAndres Hernandez

Sharon UdaniSharon Udani

Tianyuan WangTianyuan Wang

2

COMPANY PROFILECOMPANY PROFILE

►Trefiladora Centroamericana►Production and commercialization of

wire-related products►Actively participates in the U.S.,

Mexican, Caribbean, South American and Central American markets

►Strategically located in Choluteca, Choluteca, HondurasHonduras

3

LOCATIONLOCATION

4

COMPANY PROFILECOMPANY PROFILE

►Annual plant capacity exceeds 72,000 metric tons

►Galvanize over 36,000 metric tons of wire

►8,400 metric tons in barb wire►18,000 metric tons of wire rod and

rebar

5

PRODUCTS & BRANDSPRODUCTS & BRANDS

Chain-link fencing

High-resistance rebar

Nails

6

EMERGING MARKETEMERGING MARKET

► Profit from a substantial economic growth Profit from a substantial economic growth based onbased on• significant productivity gainssignificant productivity gains• technological changetechnological change• change in their economic philosophy change in their economic philosophy

► Frequently characterized byFrequently characterized by• political instabilitypolitical instability• strong currency turbulencestrong currency turbulence• high foreign debthigh foreign debt

High risk and returnHigh risk and return

7

COMPANY BACKGROUNDCOMPANY BACKGROUND

►Founded in 1969Founded in 1969►Sold to the Vente family in the 1980sSold to the Vente family in the 1980s►Virtual monopoly in Honduras, El Virtual monopoly in Honduras, El

Salvador and Nicaragua in the 1980sSalvador and Nicaragua in the 1980s►Short-term, high interest loans to Short-term, high interest loans to

increase capacity in the 1990sincrease capacity in the 1990s►Main supplier LAEI acquired 45% Main supplier LAEI acquired 45%

ownership to lower interestownership to lower interest

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OVERVIEWOVERVIEW

► Increasing losses and cash flow Increasing losses and cash flow shortfallsshortfalls

► Foreign competitorsForeign competitors► International competitionInternational competition► Family-owned businessFamily-owned business► Decision on capitalization and futureDecision on capitalization and future

SELLSELL or or RESTRUCTURERESTRUCTURE

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ISSUESISSUES

► Financing ResourcesFinancing Resources► Ownership & Ownership &

ControlControl

► Foreign CompetitionForeign Competition► Quality StandardsQuality Standards► Local EconomyLocal Economy► Marketing StrategyMarketing Strategy► COGSCOGS

IMMEDIATE BASIC

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IMMEDIATE ISSUE MATRIXIMMEDIATE ISSUE MATRIX

Importance

Urgency

Ownership Ownership &&

ControlControlFinancing Financing ResourcesResources

LOW HIGH

LOW

HIGH

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BASIC ISSUE MATRIXBASIC ISSUE MATRIX

Importance

Urgency

Marketing Marketing Strategy &Strategy &

Local EconomyLocal EconomyCOGSCOGS

Quality Quality StandardsStandards

Foreign Foreign CompetitionCompetition

LOW HIGH

LOW

HIGH

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COMBINED ISSUE MATRIXCOMBINED ISSUE MATRIX

Importance

Urgency

Marketing Marketing StrategyStrategy

COGSCOGS

Ownership & Ownership & ControlControl

FINANCING FINANCING RESOURCESRESOURCES

LOW HIGH

LOW

HIGH

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MARKET DOMINANCE 1984–MARKET DOMINANCE 1984–19921992

Virtual Monopoly

Lack of Competition

High Tariffs High Import Duties

Running at Full Capacity

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EXPORTSEXPORTS

Opened Borders

Government Exports Strategy

Tariff Structure

Accelerated Local-currency

Depreciation

Exports Growth

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GLOBAL TRANSITION 1993-GLOBAL TRANSITION 1993-19961996

International Quality

Standards

Opened Borders

Additional Production Capacity

Anemic Local Economy

Illiquid Financial Sector

Foreign Banks (Regional

Political Risk)

Borrow LocallyShort-term Financing

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BORROWING LOCALLYBORROWING LOCALLY

High Political

Risk

No Foreign Banks

Devaluating Currency

High Inflation Rates

Illiquid Financial Sector

High Interest Rates

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INCURRING LOSSINCURRING LOSS

Big Expansio

n

Machinery

High Interest Loans

Reneged Government Aid

Reluctant Investors

Accounting Loss

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PRECENT OF SALES PRECENT OF SALES COMPARISIONCOMPARISION

BenchmarkBenchmark TreficaTrefica

Net SalesNet Sales 100.0%100.0% 100.0%100.0%

COGSCOGS 89.489.4 79.779.7

Gross profitGross profit 10.610.6 20.320.3

Selling ExpSelling Exp 1.31.3 8.88.8

G&A ExpG&A Exp 5.15.1 3.63.6

Op IncomeOp Income 4.24.2 7.97.9

Interest ExpInterest Exp 2.22.2 10.810.8

Currency FluctuationsCurrency Fluctuations 0.00.0 0.40.4

Income b/taxIncome b/tax 4.84.8 -3.3-3.3

TaxTax 1.31.3 0.00.0

Net IncomeNet Income 3.53.5 -3.3-3.3

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ALTERNATIVESALTERNATIVES

1.1. Stay the courseStay the course

2.2. Find a US partnerFind a US partner

3.3. Sell control to a Mexican SupplierSell control to a Mexican Supplier

4.4. Sell control to LAEISell control to LAEI

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1. STAY THE COURSE1. STAY THE COURSE

ProsPros► 55% ownership55% ownership

► Maintain controlMaintain control

► Wait for better Wait for better opportunitiesopportunities

ConsCons► Too much high Too much high

interest debtinterest debt

► Potential loss of Potential loss of market sharemarket share

► Potential Potential bankruptcybankruptcy

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2. FIND A U.S. PARTNER2. FIND A U.S. PARTNER

ProsPros► Maintain controlMaintain control

► Access to U.S. Access to U.S. financial marketsfinancial markets

► Increase in U.S. Increase in U.S. market sharemarket share

► Rationalizing Rationalizing productionproduction

ConsCons► Loss of 20% Loss of 20%

ownershipownership

► Not enough Not enough investment to relief investment to relief debt burdendebt burden

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Historical Interest RatesHistorical Interest Rates

Short Short term term lempira lempira debtdebt

32.10%32.10%

Short Short term USD term USD debtdebt

12.50%12.50%

Long Long term USD term USD debtdebt

12.50%12.50%

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3. SELL CONTROL TO A MEXICAN 3. SELL CONTROL TO A MEXICAN SUPPLIERSUPPLIER

ProsPros► $4 million $4 million

investment to investment to relieve debt burdenrelieve debt burden

► Cheaper COGSCheaper COGS

► Stay competitive in Stay competitive in Central AmericaCentral America

ConsCons► Loss of 21% Loss of 21%

ownershipownership

► Potential loss of Potential loss of PresidencyPresidency

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4. SELL CONTROL TO LAEI4. SELL CONTROL TO LAEI

ProsPros► Walk away with $ 5 Walk away with $ 5

millionmillion

ConsCons► Complete loss of Complete loss of

ownership & controlownership & control

► Possibly bring Possibly bring shame to the familyshame to the family

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DECISION CRITERIADECISION CRITERIA

Market AccessibilityMarket Accessibility Ownership & ControlOwnership & Control Debt StructureDebt Structure

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MARKET ACCESSIBILITYMARKET ACCESSIBILITY

AlternativeAlternative MarketsMarkets

Stay the courseStay the course --

U.S. PartnerU.S. Partner U.S. and U.S. U.S. and U.S. financial marketsfinancial markets

Control to Mexican Control to Mexican suppliersupplier

MexicoMexico

Control to LAEIControl to LAEI --

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OWNERSHIP & CONTROLOWNERSHIP & CONTROL

AlternativAlternativee

VenteVente LAEILAEI U.S. U.S. PartnerPartner

Mexican Mexican SupplierSupplier

Stay the Stay the coursecourse

55%55% 45%45% 0%0% 0%0%

U.S. U.S. PartnerPartner

35%35% 45%45% 20%20% 0%0%

Control to Control to Mexican Mexican suppliersupplier

34%34% 0%0% 0%0% 66%66%

Control to Control to LAEILAEI

0%0% 100%100% 0%0% 0%0%

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55%

45%

35%

45%

20%

34%

66%

100%

0%10%20%30%40%50%60%70%80%90%

100%

Stay thecourse

U.S.Partner

Sell toMexicanSupplier

Sell toLAEI

Mexican SupplierU.S ManufacturerLAEIVentes

OWNERSHIP DISTRIBUTION

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Common Shares in Lempiras 85,000,000

Exchange Rate (Lempiras/USD) 13.50

Common Shares in USD

85,000,000 / 13.50 = $6,296,296.30

% Equity Sold (True)Value:

U.S. Partner $6,296,296.30 * 20% = $1,259,259.26

Mexican Supplier $6,296,296.30 * 66% = $4,155,555.56

Sell to LAEI $6,296,296.30 * 55% = $3,462,962.65

EQUITY VALUE

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Investment Investment OfferOffer

Equity Equity ValueValue

DifferenceDifference

Stay the Stay the CourseCourse

N/AN/A N/AN/A N/AN/A

U.S. PartnerU.S. Partner $1,900,000.0$1,900,000.000

$1,259,259.26

$640,740.74$640,740.74

Sell to Sell to Mexican Mexican SupplierSupplier

$4,000,000.0$4,000,000.000

$4,155,555.56

($155,555.5($155,555.56)6)

Sell to LAEISell to LAEI $4,000,000.0$4,000,000.000

$3,462,962.65

$537,037.35$537,037.35

EQUITYEQUITY

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PROPOSED DEBT STRUCTUREPROPOSED DEBT STRUCTUREDebt Structure: 1997 1998

Short term debt 90% 35%

% Lempiras 66% 65%

% US$ 34% 35%

Long term debt 10% 65%

Total debt 100% 100%

0%10%20%30%40%50%60%70%80%90%

100%

%

1997 1998

Year

Debt Structure

Long term debt

Short term debt

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PREFERRED ALTERNATIVEPREFERRED ALTERNATIVE

AlternativeAlternative Market Market AccessibilitAccessibilit

yy

Ownership Ownership & Control& Control

Debt Debt StructurStructur

ee

TotalTotal

Stay the courseStay the course 00 44 00 44U.S. U.S.

PARTNERPARTNER44 33 55 1212

Control to Control to Mexican Mexican suppliersupplier

33 22 33 88

Control to LAEIControl to LAEI 00 00 00 00

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IMPLEMENTATIONIMPLEMENTATION

►Let U.S. Partner invest 20% equityLet U.S. Partner invest 20% equity►Pay off short term debtPay off short term debt►Long term debt with lower interest Long term debt with lower interest

raterate►Rationalize productionRationalize production

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QUESTIONS?QUESTIONS?