Financial Framework

Financial Framework 1.1 - 2 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Approach

• Worked with client and his team to gather data and reports

• Conducted a financial decomposition to understand cost drivers

• Validate data with client and his team

• Develop findings

Note - Reminder

• Data is as of end of May 1993, which represents 48 out of 53 fiscal weeks

Financial Framework 1.1 - 3 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

XXXX has Maintained Over the Last Five Years Strong Financial Results

Source: Annual Reports (1988 - 1992) and Consolidated Financial Statements for the Four and Forty-Eight Weeks Ended May 29, 1993.* 1993 results annuallized ** As a percentage of Net Sales.

However, Selling Expense has grown at a faster rate than Net Sales.However, Selling Expense has grown at a faster rate than Net Sales.

1993*1988 1989 1990 1991 1992($ Million)

Sales $958 $1,176 $1,475 $1,608 $1,751 $2,257

Cost of Sales 778 947 1,183 1,339 1,425 1,810

Gross Margin 180 229 292 269 326 44718.8%** 19.5% 19.8% 16.7% 18.6% 19.8%

Selling Expense 72 86 106 121 139 1927.5%** 7.3% 7.2% 7.5% 7.9% 8.5%

G&A Expense 35 45 53 59 67 843.7%** 3.8% 3.6% 3.7% 3.8% 3.7%

Operating Income 73 98 133 89 120 1707.6%** 8.4% 9.0% 5.5% 6.8% 7.6%

Interest Expense 19 22 27 35 26 272.0%** 1.9% 1.8% 2.2% 1.5% 1.2%

Income Before Taxes 54 76 106 54 94 1446.0%** 6.0% 7.0% 4.0% 5.0% 6.0%

Provision IncomeTaxes 20 28 41 21 36 5437%** 37% 39% 39% 43% 38%

Net Income 34 48 65 33 58 903.5%** 4.0% 4.4% 2.1% 3.3% 4.0%

Financial Framework 1.1 - 4 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Residential’s Net Sales Amount to 73% of XXXX Revenues

Source: Consolidated Financial Statements for the Four and Forty-Eight Weeks Ended May 29, 1993.

83% of Net Divisional Contribution comes from the Residential group.83% of Net Divisional Contribution comes from the Residential group.

0% 5% 10% 15% 20% 25% 30% 35% 40%

OtherNetworxExportsNational

SearsPromotional GoodsPermacolor Fibers

ShawMarkContract

SuttonSalem

Cabin CraftsPhiladelphia

% of Net Sales

c Residential

Other

Financial Framework 1.1 - 5 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

XXXX ’ Net Income Represents 4.1% of Net Sales

$172.6M8.4%

$1,564.7M75.7%

$19.3M0.9%

$74.1M3.6%

$38.4M1.9%

Information Services

General & Administrative

Sales & Marketing Manufacturing* Outbound

Logistics

$14.6M0.7%

$56.8M2.7%

Claims**Distribution

Value Chainas of end of May 1993

Source: Consolidated Financial Statements for the Four and Forty-Eight Weeks Ended May 29, 1993.* Includes R&D of 10.3 M and $5.1M for Drop Style Write Down. ** Includes Credit Memos of $34.6M and Claims (G&A) of $3.8M.

$41 million, for interest expense and taxes, are added to the cost of doing business.$41 million, for interest expense and taxes, are added to the cost of doing business.

Financial Framework 1.1 - 6 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Selling and Sample Expenses Year-to-Date Amount to $154 Million, or 7.4% of Net Sales

Note: Sample Expense: Discounted sample sales + freight for all samples; No Charge Sample Expense: Free samples (finished good cost); Merchandising Expense: Advertising expense paid by XXXXto large volume customers (% varies based on volume).Source: Consolidated Selling Expense , Report RE-344, May 1993.

Total Selling Expense shows wide variances among Selling Styles.Total Selling Expense shows wide variances among Selling Styles.

Net Sales (Million)

% of Net Sales

Salaries & Wages

Commissions

Travel & Enternainment

Merchandising Expense

Sample Expense

No Charge Sample Exp.

Other

Total

SalemPhiladelphia

$73.0

1.5

0.5

0.4

0.6

1.0

0.4

1.8

6.2

Cabin/E&B Residential

$41.6

2.2

0.7

0.5

0.7

1.9

0.5

1.9

8.4

$20.3

2.9

1.0

1.0

0.5

1.5

0.5

2.9

10.3

$194.6

2.2

0.5

0.5

0.4

1.2

0.6

1.9

7.3

Shaw

$142.1

2.0

0.6

0.5

0.6

1.4

0.5

2.1

7.7

Contract

$14.9

0.3

0.7

1.3

--

0.3

1.5

3.0

7.1

Sutton

$7.3

4.1

0.3

0.8

--

2.2

1.0

3.8

12.2

For the Month of May

Financial Framework 1.1 - 7 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Both Selling and Sample Expenses Vary Widely per Selling Style

Sample Expense as a % of Net Sales

Selling Expense as a % of Net Sales

Selling and Sample Expenses per Selling Style for the year are estimates, due to the recent decision to look at those expenses per Selling Style.

Selling and Sample Expenses per Selling Style for the year are estimates, due to the recent decision to look at those expenses per Selling Style.

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

Philadelphia

Cabin/E&B

Salem

Sutton

Residential

Contract

Shaw

4.7%

6.0%

7.9%

8.9%

5.7%

8.1%

5.5%

1.5%

2.5%

2.5%

3.3%

2.0%

2.0%

1.8%

For the Month of May 1993

Source: Consolidated Financial Statements for the Four and Forty-Eight Weeks Ended May 29, 1993.

Financial Framework 1.1 - 8 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Reducing Selling and Sample Expenses to the Best-In-Class in Residential and Contract would Reduce Costs by $29M Y-T-D

Today

Selling Expense

Sample Expense

Shaw’s Best-In-Class

Selling Expense

Sample Expense

Delta

Selling Expense

Sample Expense

SalemPhiladelphia

4.7%

1.5%

4.7%

1.5%

Cabin/E&B Contract

28.7

8.3

21.5

6.9

7.2

1.4

TotalSutton($ Million)

16.0

5.8

10.3

3.3

5.7

2.5

6.8

2.7

3.5

1.1

3.3

1.6

14.3

2.8

7.7

2.5

6.6

0.3

63.8

19.6

43.0

13.8

22.8

5.8

Source: Consolidated Financial Statements for the Four and Forty-Eight Weeks Ended May 29, 1993.

Economies of scale might explain why Philadelphia’s Selling and Sample Expenses are lower than the other Selling Styles.

Economies of scale might explain why Philadelphia’s Selling and Sample Expenses are lower than the other Selling Styles.

Financial Framework 1.1 - 9 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Total Manufacturing Costs Amount to $1,569 Million

Source: Statement of Operations for the Month and Year to Date of May 1993, Report No. 134A. Material Use Variances, Report No. 710A.

* Includes Warehouse cost of $19.3 Million ** Excludes Raw Materials, worth $65.1M.

Manufacturing costs are allocated to Selling Styles, based onstandard costs and volume sold, not on actual costs.

Manufacturing costs are allocated to Selling Styles, based onstandard costs and volume sold, not on actual costs.

1,362.3

211.488.6

118.943.064.5

526.4

1,888.7

320.1

1,568.6

Raw Materials LaborLabor RelatedControllable VariableControllable FixedUncontrollable Fixed

Y-T-D Total Processing Costs*

Y-T-D Total Manufacturing Costs

Y-T-D Total Inventories**

Total Manufacturing Costs of Volume Sold

72%

11%5%7%2%3%

28%

$ Million% of Y-T-D Mfg. Costs

Financial Framework 1.1 - 10 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Research & Development Expenses Represent 0.5% of Total Net Sales

Source: R&D Summary Total Company - Report RE-344, May 1993.

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%

Philadelphia

Cabin/E&B

Salem

Sutton

Residential

Contract

Shaw

0.50%

0.51%

0.53%

1.96%

0.58%

0.03%

0.52%

Percentage of Net Sales per Selling Style

For the Month of May 1993

Financial Framework 1.1 - 11 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

XXXX ’ Inventory Turns Average 4.3

Source: Analysis of Increase (Decrease) in Inventories, Report No. 082A Consolidated Financial Statements for the Four and Forty Eight Weeks Ended May 29, 1993.

Raw MaterialsWork-In-ProcessFinished GoodsFinished Yarn

Sub-Total

Items for ResaleSamples - WIP & FinishedSamples - Uncut RollsSample RacksSample - OtherSample ReservesMfg. Supplies

ReserveVariance

Total

65.125.8

157.297.3

345.4

2.19.54.70.6

0(0.9)17.2

10.2(3.6)

385.2

25641117

4.8

790175353--- --- --- 96

163---

4.3

Current Month$ Million

XXXXInventory Turns(As of Cost of Sales)

Financial Framework 1.1 - 12 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Increasing Inventory Turns to Shaw’s Goal would Reduce Carrying Costs by at Least $22 Million Annually

Source: Summary of Inventories by Location; Analysis of Increase (Decrease) in Inventory, Report No. 702A, May 1993.* Carrying costs estimated to be 20% ** Higher goal set at 15% above Shaw’s goal.

ActualWork-In-ProcessFinished GoodsFinished Yarn

Total

Shaw’s GoalWork-In-ProcessFinished GoodsFinished Yarn

Total

Higher Goal**Work-In-ProcessFinished GoodsFinished Yarn

Total

TurnsInventories

$ Million

641117

4.8

801540

6.0

941847

7.0

25.8157.2

97.3

385.2

20.7110.5

41.5

276.4

17.692.135.3

236.9

Carrying Costs*$ Million

5.231.419.5

77.0

4.122.1

8.3

55.3

3.518.4

7.1

47.4

$29.6M

$21.7M

Financial Framework 1.1 - 13 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Warehouse Costs Are $41.3 Million, but $22 Million are Allocated Back to Local Freight Billings

Source: SKO Total warehouse Expenses - Report RE-344, May 1993.

Local Freight Billings are charges to customers. Local Freight Billings are charges to customers.

0 5 10 15 20 25

Depreciation

Telephone & Telegraph

Trucks & Auto-Gas & Oil

Rent Building

Truck Auto Leasing

Other

Salaries & Related Expenses

1.0

1.3

2.0

3.3

5.2

6.1

22.4

$ Million

Financial Framework 1.1 - 14 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Distribution Costs Amount to $42 Million

Source: Distribution/Cut Order Inc #577 & 578 , Report RE-344, May 1993.

An additional $12 million needs to be added for shrinkage, scrap and lost/found rolls.An additional $12 million needs to be added for shrinkage, scrap and lost/found rolls.

$ Million

$0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0 $16.0 $18.0 $20.0

Total Other Controllable Variable

Total Raw Material Costs

Total Controllable Fixed

Total Controllable Variable

Total Uncrotrollable Fix

Total Labor Related Expense

Total Labor 45%

17%

16%

11%

6%

3%

2%

Financial Framework 1.1 - 15 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Financial Framework 1.1 - 16 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Distribution Costs are Allocated to Centers, but not to Selling Styles

Source: Comparison of Expenses for Distribution & Cut Order, May 1993.

0 1 2 3 4 5 6 7

Distribution Transportation

Director of Distribution

OtherRinggold South

D.C. I

D.C. South

Riverbend D.C.D.C. NorthD.C. East

D.C. II

D.C. WestRinggold North

Terminal Building

$ Million

Financial Framework 1.1 - 17 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Cut Order Costs Are $21 Million

Source: Comparison of Expenses for Distribution & Cut Order, May 1993.

Cut Order costs are not allocated either to Selling Styles.Cut Order costs are not allocated either to Selling Styles.

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5

Ringgold South

Riverbend D.C.

D.C. II

D.C. East

D.C. I

D.C. South

Ringgold North

D.C. West

$ Million

Financial Framework 1.1 - 18 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

General and Administrative Expenses Represent 3.6% Of Net Sales, or 75 Million Year-to-Date

Source: Consolidated Total G&A, Report RE-344, May 1993.

G&A expense is not allocated back to Selling Styles.G&A expense is not allocated back to Selling Styles.

0 2 4 6 8 10 12 14 16

Airplane ExpenseMailroom President

OtherGeneral Counsel

Industrial Relations

ClaimsAccounting

CreditOperations

Sales ServiceTreasury

Information Services

1.3

2

2.4

2.5

2.7

3.7

3.8

3.9

5.6

6

12.6

14.1

14.6

$ Million

Financial Framework 1.1 - 19 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Paid Quality Claims and Allowances Total $35 Million Year-to-Date, with Residential Representing 79% of Total

Source: Analysis of Paid Claims and Allowances (May).

Year-to-date claims as a percentage of gross sales average to 1.70% for Residential, 3% below Shaw’s 1.75% standard.

Year-to-date claims as a percentage of gross sales average to 1.70% for Residential, 3% below Shaw’s 1.75% standard.

$ Million

12.2

5.6

4.4

2.9

2.1

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0

Sutton

E&B

Salem

Cabin Crafts

Philadelphia

Financial Framework 1.1 - 20 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Lowering Paid Quality Claims and Allowances to Shaw’s Best-In-Class Ratio would Reduce Residential Costs by $6.4 Million

$11.1M

$6.4M

Today

Shaw’s Best-in-Class*

Higher Goal**

Claims as a% of Gross Sales

Philadephia Cabin Craft Salem E&B Sutton

$12.2

10.5

8.1

$5.6

4.2

3.3

$4.4

3.0

2.3

$2.9

2.1

1.6

$2.1

1.0

0.8

Million

Source: Analysis of Paid Claims and Allowances (May). * % of Gross Sales is 1.3% ** % of Gross Sales is 1.0%.

This cost reduction opportunity does not include the Claims group.This cost reduction opportunity does not include the Claims group.

Financial Framework 1.1 - 21 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

XXXX Is in the Paper Industry

Reports

What a tremendous amount of reports!

ReportSorter

Several thousand pages are generated each month to report standard and allocated costs.Several thousand pages are generated each month to report standard and allocated costs.

Financial Framework 1.1 - 22 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

Findings

• XXXX cannot calculate Selling Style profitability:

– Cost of Sales is calculated on standard costs and allocated to Selling Styles based on volume

– Information Services and rest of G&A expenses are not allocated to Selling Styles

• Applying XXXX best-in-class throughout the company represent significant dollar opportunities of at least $57 million annually:

– Selling Expense: $22.8 million year-to-date (only includes Residential and Contract)

– Sample Expense: $5.8 million year-to-date (only includes Residential and Contract)

– Inventory Turns: $21.7 million

– Quality Claims and Allowances: $6.4 million year-to-date

• Financial reporting requires a significant effort in reconciling and validating

Financial Framework 1.1 - 23 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini

XXXX ’ Net Income Represents 4.1% of Net Sales

Source: Consolidated Financial Statements for the Four and Forty-Eight Weeks Ended May 29, 1993.

Cost of Sales80.1%

Net Income4.1%

Interest Expense1.2%

G&A Expense3.6%

Selling Expense8.5%

Taxes2.5%

Financial Framework 1.1 - 24 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

XXXX , Inc./Gemini