The 2010 Letter
Reflections from the President

We're now officially entering into a recovery, however many CEOs I talk to are still wary. Not in the sense of a major double-dip recession but in the ability for middle-market companies to generate much greater profitability or the liquidity sufficient for meaningful growth.

My advice to these CEOs is that there is good news on these fronts, though it will take more creative thinking and activities:

• Dramatic profit improvement can be achieved and money can be generated from internal sources of creative structures.
  
  Throughout the KGI office we continue a vigorous debate on the upcoming year and how leaders can best direct their companies to success. As an output of these conversations, I have compiled a list of The 5 High-Performance Projects for 2011 that CEOs can lead right now.
  
  We compared this list against a sample of middle-market companies over the last two years to determine a 15% minimum improvement is doable. This is a list combining time-tested fundamentals alongside some real breakthrough concepts. I look forward to highlighting them later in this letter.



• Capital has started flowing.
  
  Yes, the other good news is that there are opportunities to acquire new capital, debt and equity for either those companies that are growing or those that need to refinance debt.
  
  There are new capital sources and an increased desire to place money into deals so the key is to know where to go for the best capital solutions. Companies ensure they put their best foot forward and introductions are made to the right capital source, traditional or non-traditional.

Before I say anything further on the upcoming year - including The 5 High-Performance Projects for 2011 - let me mention the year we just closed.

Looking Back at 2010
2010 was a year to get business stabilized, including the debt structures. In some cases, we helped develop forecasting models to better predict sales and costs. In other cases we restructured debt and changed the operating models dramatically. 2010 was a year of transition.

The firm had the opportunity to help drive some exceptional results, and here's a sample:

The team continued its leading-edge work transforming client organizations - rapid downsizings, radical cash flow initiatives, quick-turn restructurings, outsourcing of higher-level business functions - all situations that leverage our expertise in working shoulder-to-shoulder with management to drive holistic changes in tight timeframes.

Our Real Estate Practice, led by Jay Maddox, continues to expand rapidly on the coattails of some exceptional results his team has delivered over the last couple of years. I know Jay is eager to share some of the best practices developed and the results delivered - please give him a call if you'd like to learn more.

2010 also marked a year of dichotomy. We led restructurings and operational turnarounds on a number of smaller-market clients this year, some below the $10M level. Then, again, we had some very large, complex deals involving multiple countries and a breadth of challenges far outpacing what we normally see in the course of business.

The pace of deals has quickened recently and there are two trends I would stress:

• Companies are increasingly seeking to stabilize their capital structure.
  
  Many businesses have a stressed debt load or covenant structure that has been temporarily addressed by costly lender amendments. Beyond the immediate P&L impact, the ultimate cost is the uncertainty and inability to make any game-changing moves. Despite any choice opportunities that exist, these companies are almost certainly going to be restricted from launching new product lines, expanding into new geographies, entering strategic partnerships or making competitive acquisitions.
  
  We expect the companies that have the latitude to make these game-changing moves at this point in the economic cycle will make a sustainable leap ahead of their peers.
  
  
• Companies have a deep need to drive significant costs out of their operating structure. .
  
  CEOs realize that the incremental reductions of 2009 & 2010 which achieved 2-5% improvement, are no longer enough. To achieve the 10-15% P&L improvement, CEOs are beginning to question long-held assumptions and are seeking true transformational change in their companies, positioning them for better performance and to dominate the competition.
  
  We expect this trend to accelerate.

When it comes to our industry involvement the most common were Real Estate, Consumer Goods, Construction, Medical & Healthcare, and Industrial Goods. Considering the seismic nature of the trends that grew this clientele in 2010, I expect these trends to continue and these industries to be strong growth areas for our firm through 2011 and beyond.

Before I get to our expectations for 2011, I'll offer a reminder of a few key messages:

• We have access to capital. If you are seeking additional capital to fuel growth, we can help.
  
  
• We know how to acquire companies in distress. If you agree that this is an exceptional time to acquire a supplier or competitor, especially one in distress, we can help.
  
  
• We transform companies. If you are struggling with a tough set of industry or competitive dynamics and need to achieve significant & fundamental change, we can help.

A Few Thoughts on 2011
Many of you won't find anything groundbreaking in our thoughts on the upcoming year. Slow growth with hiring in critical need positions only. Several pockets of strength and a few industries that continue to struggle against a tremendously "bad set of facts", especially in Media and Real Estate.

We expect CEOs to continue to be very conservative in hiring with concerns over top-line stagnation. Cost management will be a differentiator, knowing that revolutionary acts that question long-held fundamental operating assumptions will be necessary for leaders to separate from the pack.

We believe that now is a once-in-a-generation opportunity to capture sizable market share by acquiring distressed competitors or other companies in the supply chain at a deep discount. This is the time, when the economic cycle has bottomed-out, that leaders have the best opportunity to make winning M&A moves. We've witnessed this among the large cap companies, have seen some limited activity in the middle-market, and expect this activity to catch fire throughout 2011. With our firm's expertise in distressed situations and knowledge of how to get these deals done at the right price and with the right risk mitigation, our involvement in this activity is accelerating quickly.

When it comes to financing and the position of the banks, we anticipate a much more robust lending environment. We believe that more deals will close, investment bankers will be engaged more frequently to sell companies, consolidations will happen and winning moves will be made.

So, other than taking significant M&A actions, what must leaders add to their 100-Day List to make meaningful progress? Here's my list of The 5 High-Performance Projects for 2011:

• Reduce overhead and indirect costs.
  
  Headcount and speed throughput with streamlined workflow processes. While most companies have done well at reducing costs through line item and function analyses, there are more companies that have not taken a structured, objective approach in order to eliminate redundancies and identify actions that deliver no tangible benefit to the customer. KGI's VMAX™ does just this; it was born from hundreds of distressed client situations that demanded rapid results and is distilled down to the measures that deliver a game-changing impact.
  
  
• Outsource non-critical functions.
  
  Transform certain functions of your business model to drive 10-40% lower costs. Companies are outsourcing more functions that are not critical value drivers to business resulting in lower costs and faster delivery of services. The risk is that most companies don't know how to negotiate an effective contract and internal management often resist change
  
  
• Change compensation models.
  
  Evolve compensation plans to be more variable, incentive-based, and drive long-term sustainable results. Consider variable compensation models or a revamped MBO system as a means to reduce costs 10-20% and drive a focused plan that commands deep commitment from across the organization.
  
  
• Use joint ventures and partnerships.
  
  Access capital and finance growth. Consider the power of teaming with other companies to leverage your operational strengths and their market penetration. Consider exclusive relationships based on product sets, geographies or channels and craft win-win business arrangements. Think of a US manufacturer that has fully tapped its home market deciding to enter the European market. Rather than going direct, they realize that teaming with a well-connected and knowledgeable local distributor is the best decision.
  
  
• Accelerate management's reaction time.
  
  Identify and react to change quickly. Accelerate management's reaction time by performing an independent review of your company's Key Driver Report (performance dashboards or cockpit charts that help manage the day-to-day operations). Ensure critical information is highlighted and acted upon, resulting in rapid identification of new profit opportunities or quickly eliminating cost or quality issues.

Rather than give you a too-lengthy letter explaining what I mean on each, I'll take my first action item for 2011 to send you a thorough explanation of these The 5 High-Performance Projects for 2011 in the next couple of months.

I am proud to start KGI's 27th year in business, and I know the entire firm wants to offer a heartfelt "thank you" for your continued support. We take pride in the results we deliver to our clients and appreciate the opportunity to serve a community that has been so good to us.

Sincerely,

Steven J. Green
President

Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.