Assignment

ARTHUR ANDERSEN & CO, SC

The Empire Globe Corporation Case

Business Policy and Economic Analysis

This case was developed by Dr. Clarence Walton and Dr. Edwin M. Epstein. Arthur Andersen & Co, SC thanks the authors for their substantial contributions to the Business Ethics Program.

Dr. Walton is a Lamont Post Distinguished Professor at the American College. Dr. Epstein is a Professor of Business and Public olicy at the School of Business Administration, University of California at Berkeley. Arthur Andersen & Co, SC also thanks Mr. John Swanson, Manager of Internal and Management Communications of Dow Corning, and Mr. Ted Weymouth of Lake Forest Graduate School of Management for their input and thoughtful reviews.

Arthur Andersen & Co, SC has sponsored and funded this project to promote discussion and awareness of ethical issues arising in the usiness world. Arthur Andersen & Co, SC takes no positions and expresses no views with respect to the myriad of ethical issues reflected in this case but hopes that users will facilitate and promote a dialogue on these important issues.

©1991 ARTHUR ANDERSEN & CO. SC All rights reserved. 008889 A- 007

BUSINESS ETHICS PROGRAM

EMPIRE GLOBE CORPORATION

SITUATION I

Overview

This case presents a developing situation encountered by Susan Bond, a recent MBA graduate now working as a corporate economist for the Empire Globe Corporation. This situation arises when senior management at Empire announce that for “economic” reasons they are considering moving their operations out of the town of Feldport unless several concessions can be obtained from the local constituents.

Susan Bond’s involvement in Empire Globe's negotiations with local political, business, and union representatives in Feldport challenges her professional integrity and forces her to reevaluate the company’s “partnership” philosophy. As a key member of the negotiating team and as one of Empire Globe’s economic advisors, Susan Bond finds herself in a difficult position.

Key Players

John Treadstone - After completing his degree in chemical engineering, Treadstone joined Empire Globe in the summer of 1955. Hard work and dedication to corporate and civic duties earned him the CEO position by 1973. While deeply aware of his fiduciary responsibilities, Treadstone remained firmly convinced that the legal definition of his managerial responsibilities, provided him by corporate counsel, constituted only the foundations upon which a more sophisticated concept of his obligations could be constructed.

It didn’t take long as CEO for Treadstone to realize that managing relationships within his organization is as important as managing external relationships. Conflicting motives and interests within organizations such as Empire Globe are inevitable. Stockholders, managers, trustees, and the CEO all have agendas and objectives which are not shared consistently. Such divergences of interest must be kept to a minimum. Minimizing, however, means policing, and policing means costs. Treadstone knew that by reducing these costs, Empire Globe could gain a significant competitive advantage. The best way to reduce these costs is by creating an atmosphere of trust. This one word led Treadstone to articulate the corporate philosophy: “Partners who trust one another prosper.”

To Treadstone, extending this “partnership” to those parties outside of, yet affected by, Empire was logical and natural. So as Empire grew, Treadstone fostered this sense of trust and cooperation with his management team, his employees, and the communities where Empire Globe engaged in business.

Shortly after his appointment as CEO, Treadstone appointed a Partnership Conduct Team (PCT) consisting of four experienced managers. The team was charged with the tasks of:

• Drafting ethical guidelines that would go beyond the requirements of the law to define the company’s behavior around the world,

• Developing a practical way to monitor and to report the company’s business operations and practices, and

• Recommending ways to prevent ethical/legal slippage.

Stressed consistently to the PCT was Treadstone’s conviction that a partnership philosophy meant that partners had to be involved in decisions affecting their vital interests, had to be treated equitably, and had to share in the costs and benefits of local operations. Without such treatment, the partnership would soon dissolve.

One result of the PCT’s efforts was the establishment of schedules to provide for regular visits to the company’s operations. Initially, field managers felt that PCT visits represented a hidden agenda. Was the local enterprise in trouble with the government? Had a colleague squealed to headquarters about something or other? Were bribes being taken--or given? Were there informants assigned to various plants? Sensing these fears, the PCT sought to establish a basis of trust between field and headquarters.

Susan Bond - She considers herself fortunate to have landed a position with a firm such as Empire Globe. As one of the leaders in its industry, Empire offered career opportunities many of her fellow graduates could only dream of. Economics aside, Susan was attracted by a firm with such a noteworthy reputation among the business community and the general public. Treadstone’s articulation of the company’s “philosophy” struck a significant chord with her.

Fresh out of graduate business school (the same university her CEO John Treadstone attended), Bond is bright, eager, yet still a bit insecure about her role at Empire Globe. Still, she knows what she wants and pursues it with determination. Even though she’s been at Empire for less than a year, her skills and sense of professionalism have won Treadstone’s confidence. Treadstone created the Corporate Economist position so he could have someone like Bond help him identify looming economic problems and interpret the economic validity of major reports and proposals. Officially, Bond reports to the VP of Finance, Jim Doran, but functionally she serves as consultant to the CEO and the other members of senior management. She has no vested interest or commitment to any department, person, or group. Treadstone uses her feedback to analyze and question the information he receives from senior managers. In this sense, Susan Bond acts as a “filter” for her CEO and a liaison to the rest of senior management.

Susan has several remarkable qualities useful to Treadstone. She knows how to read people as well as financial statements. She knows how to watch, how to listen, and how to remember every detail of what she sees and hears. Above all, Susan knows how to keep her mouth shut. Shrewd and cultivated, Susan would inevitably be in line for promotion to a top job. Susan is capable of doing a first rate job in both economic analysis and finance. Knowledge of her skills is bound to spread throughout the industry, and Treadstone wants to be sure he will not lose her. Assuring her of the opportunities Empire can provide is the best way to prevent that possibility.

Jim Doran - Vice President of Finance and a twenty- year veteran of Empire Globe, Jim is respected throughout the firm as a financial genius, yet his surly demeanor often restricts his work relationships to just that--respect. For some reason, however, he and Treadstone are almost inseparable. Perhaps it is because Treadstone understands his own limitations as the “chemical engineer” in charge of Empire. It is certainly true that Doran understands those limitations.

Ted Bates - A senior financial analyst under Jim Doran, Ted believes he has reached the limits of his career path at headquarters. Several opportunities for promotion have come and gone with no result. Frustrated and somewhat bitter, Ted has become increasingly vocal in his displeasure and belligerent towards his superiors.

The Community

Feldport was once a thriving community. Two hospitals provided good medical care; two public high schools and three small parochial institutions served the community’s educational needs. Three small refining facilities, an automotive assembly plant, a modest manufacturing plant run by Cove Industries, and a large railroad yard provided employment opportunities sufficient to meet the needs of the local labor market.

Powerful and vocal unions had extracted so many concessions from employers that Feldport was seen as a tough union town.

By the mid 1960s, however, several economically distressing developments caused Feldport to fall upon hard times. Two of the refining operations had all but closed; the automotive assembly plant was relocated to a city 300 miles distant; the railroad terminal was much smaller as Mack trucks had successfully challenged diesel engines; union muscle had weakened considerably. The result: A once thriving community had entered what was to be an extended period of economic and civic stagnation.

The Company

Founded in 1947 as a result of a 50/ 50 joint venture between the Empire Chemical Company and Globe International, Empire Globe has grown to become an industry leader. A diverse line of products and significant processing and distribution networks worldwide require Empire Globe to employ approximately 3,000 individuals. Many of Empire Globe's employees are well trained in computer technology, and the natural sciences, especially chemistry. Regular investment in research and development has paid off handsomely in the form of numerous patents and several rather unique commercial products. Unlike the common divisionalized structure, Empire Globe has what it calls a “matrix system.” On one axis are the functional units: production/ distribution, marketing, finance, R& D, and human resources. Along another axis are the different product lines. The third dimension of Empire Globe's matrix are the geographical areas, which contain both functional and product groups. When serious problems or promising opportunities arise unexpectedly, senior management quickly identifies the product/ functional areas most directly involved and, from them, establishes an ad hoc working group (task force) to analyze the situation and make recommendations to the CEO.

In the 1970s, Empire Globe's research team developed a new product they chose to call “Polerone,” after the project’s technical name, Polymer R- 1. Polerone is a highly versatile hybrid polymer that can be used in a variety of ways: as a coating, as a processing lubricant, or as an integral design material. It has been successfully and profitably- adapted as a key ingredient in the formulation of commercial paints and construction materials, as well as in the manufacture of electronic circuitry. Since the manufacture of Polerone requires a mixture of minerals, petroleum, sand, and quartz, it is important for Empire Globe to have reliable sources of supply. Although available elsewhere, these resources were initially obtained in Brazil, Uruguay, and Chile. Long- term contracts were concluded with mining companies in each of the respective countries.

Efforts with Polerone went surprisingly well until the late 1970s, when an Empire Globe task force made a startling and disturbing discovery: the sources of supply in the three countries were not nearly so ample or reliable as originally estimated. Treadstone could well remember the way he winced in shock and frustration when the news was brought to him and how the final two sentences of the task force report had been etched in his mind: “In short, Empire Globe cannot rely on a steady supply of those essential raw materials from overseas sources. Shortages, coupled with increasingly unstable political conditions, make it imperative that our company move quickly to acquire a manufacturing facility near a domestic source of supply.”

Not given to delays, Treadstone established a study group with orders to identify domestic areas that might meet company needs and to produce a report tobe in his hands within six weeks. Three small communities-- Glebe in Arizona, Gerard in Missouri, and Feldport in Oklahoma- were identified.

Detailed economic development reports were prepared on each location and then visitations were conducted to view such externalities as schools, recreation facilities, labor availability, political stability, potential involvement by the local investment community, and the like. The visitation team members who accompanied Treadstone on the three visits were asked to prioritize locations---and Feldport came in a distant third. But something intrigued Treadstone about Feldport. Job opportunities were scarce and job hunger was high; the old union truculence had vanished as prosperity had faded; a citizens’ reform movement had cleaned up City Hall; the largest local bank had a “live wire” president; the Cove Industries factory was for sale; space needed for a modest railroad siding and a trucking facility adjacent to the factory might be easily available; a good rail spur ran up to the main line; an interstate throughway skirted the edge of Feldport; and--above all--Feldport's leaders expressed the willingness to do everything possible to make Empire Globe a part of their community. Obviously, other items had to be checked at all three locations, but even when the more detailed study was evaluated, Treadstone clung to his original position: Feldport was the place to go.

The Cove plant employed approximately100 workers on a three-shift day. Treadstone saw this plant as employing a minimum of 300 workers, a view that encouraged everyone concerned with Feldport’s future.

The Cove Industries facility should be purchased for several reasons:

• The acquisition price for the facility was right.

• Space for shipping and storage was available adjacent to the facilities in a neighborhood referred to locally as “Littown.” This area was populated primarily by the semiskilled laborers employed by Cove Industries. Such an area could be obtained for a song if city officials would only exercise their powers of eminent domain.

• Even if this approach failed, the purchase price was relatively low.

His decision reinforced Treadstone's belief that Feldport was the optimal community in which to locate. After jotting down his reasons, Treadstone gave them a final check:

• Feldport had an ample labor pool eager for steady work.

• The city officials and local businesses were clearly willing--even anxious--to make whatever special arrangements were deemed necessary to attract Empire Globe. Feldportians were stable, hardworking, and honest. Locating the plant in Feldport would ensure consistent levels of production and allow Empire Globe to experiment, test, and eventually improve the quality of Polerone.

• Reasonable power rates currently community were available from the Crystal Creek Power Authority (CCPA) would offset anticipated rising freight costs.

Having completed his last appraisal, Treadstone looked at Feldport as a whole and liked what he saw. Treadstone decided he would override the task force recommendation-- something he had done only on the rarest of occasions and never when the task force was unanimous in its opinion.

Consistent with Empire Globe’s partnership philosophy, Treadstone sought involvement by the community itself. The company received a large loan at an interest rate 1 percent below prime; granted the company real estate tax-free status for five years; a renegotiated union contract contained a no- strike clause; relatively low energy costs were all but promised by the CCPA. Practically everything that Empire Globe wanted, Empire Globe got. In return-- again, inline with the corporate philosophy--Empire Globe pledged publicly to treat the various participants in the new venture as partners--not simply participants. The practical expression of the “partnership” involved a sharing of views on all critical decisions affecting the future of the company and the community.

In addition, through Empire Globe, Treadstone helped to arrange the financing to build public housing for the residents of the “Littown” neighborhood displaced by the company’s acquisition of ten acres adjacent to the Cove Industries plant. Empire also donated $250,000 for renovations to one of the oldest churches in town.

Early evidence of financial success (10 percent return on capital) plus the continued growth of solid relationships between Empire Globe and the community were tangible evidences that Treadstone's choice of communities had been a good one.

The Setting

During the first five years of Empire Globe’s presence in Feldport, “things” looked great. On paper, Treadstone’s original hunch to establish an operation in Feldport appeared to be sound. Return on capital was good, as it needed to be for such a capital-intensive operation. However, this was due largely to the original concessions Empire Globe negotiated with members of the local government and business community. Once the contract for the original concessions expired and new agreements were reached, profit margins slowly, steadily, and noticeably began to trail off. Treadstone was quite agitated. He often verbalized his displeasure with the fact that operations in Feldport were rather “ho-hum” in their performance.

Since contracts and agreements established for the second five-year period of Empire Globe’s presence in Feldportwere expiring, negotiations were resumed. To address this task, Treadstone identified a task force and charged the members with the responsibility of formulating strategies to be used and goals to be achieved by a negotiating team of their choice.

In addition, Treadstone emphasized that operations in Feldport would likely be discontinued unless the following five objectives were met:

1) The City of Feldport would grant an armistice on real estate taxes. At a minimum, they must agree to a maximum increase of 3 percent, held constant for the next four years.

2) Union representatives would renegotiate the three-year contract which then had a year to run, and with the clear understanding that their total compensation package would only increase 8 percent (subject only to an annual adjustment cap based on 90 percent of the CPI index). In addition, the new contract would contain a no-strike clause similar to the original agreement between Empire Globe and the unions.

3) The Feldport First National Bank would renegotiate with Empire Globe to provide a second loan at one percent below the prime rate.

4) Trucking rates for Empire Globe would be held fixed, based on present rate schedules and subject only to an annual adjustment cap based on 90 percent of the ICC index.

5) The Crystal Creek Power Authority would agree to a rate increase not to exceed 4.25 cents per kwh (subject only to 3 percent annual adjustment).

Treadstone was so strong in his conviction that concessions must be promptly made that in a recent press conference he stated: “If the concessions aren’t obtained, return on capital at Feldport will become such that I will be forced to move the production facilities to another location--either here in the U.S. or abroad through a joint venture.”

Susan's Dilemma

As a key member of the negotiation team, Susan Bond has been spending a lot of time in Feldport. In Jim Doran’s absence, Susan has assumed many of his responsibilities as lead negotiator. A willing ambassador for Empire Globe, she has been working very closely with community leaders to secure the concessions Treadstone declared essential for operations to remain in Feldport.

So far, four of the five objectives outlined in her negotiation plan book have been met. The city officials and bankers readily agreed to a cap on real estate taxes and below-market interest rates on financing needs. The truckers reluctantly agreed to “hold the line” on tonnage rates. After along and heated debate, the union finally conceded to a new three-year contract. Susan was surprised at how far the town was willing to bend to keep Empire Globe around:

In fact, Susan has become quite troubled both with the demands her employer has made upon the community and with her success in fulfilling them. Individually, these concessions seemed reasonable, but as a package they struck her as being excessive. Were all the concessions absolutely necessary for the Feldport plant to operate at an acceptable rate of return? Has Empire Globe made any commitment whatever? The balance of the “partnership” seemed to tilt almost entirely in favor of Empire Globe, and it was not the kind of “partnership” described to her as a new hire. It was in this frame of mind that Susan finished her preparations for the final round of negotiations-with the Crystal Creek Power

Authority (CCPA). The rest of the company’s negotiating team would arrive in the morning, and talks would begin after lunch. Susan Bond wasn’t looking forward to this last round.

Tired and anxious, Susan was about to call it a day when a mail room courier delivered a telex from World Headquarters to her. The front was marked “Urgent and Confidential.” Susan read its terse message:

///BEGIN MESSAGE///

“CONFIDENTIAL”

FROM: JOHN TREADSTONE

TO: SUSAN BOND (FOR YOUR EYES ONLY)

RE: CCPA RATE NEGOTIATION

NEITHER JIM DORAN NOR MYSELF WILL BE PRESENT AT TOMORROW’S MEETING. URGENT CLIENT BUSINESS REQUIRES OUR ATTENTION IN WASHINGTON D.C. YOU’RE ON YOUR OWN. ONE CHANGE IN STRATEGY: GO FOR RATE CEILING OF 3.80 CENTS PER KWH, NOT 4.25 AS OUTLINED IN PLAN BOOK. THIS IS FIRM.

GOOD LUCK. J.T.

///END MESSAGE///

Susan shook her head. The rate of 4.25 per kwh had seemed low to begin with. The new rate demanded in Treadstone’s telex shocked her. How could she possibly support it? Too tired to think anymore, Susan closed her briefcase and dejectedly headed for her car.

EXHIBIT 1 ELECTRIC ENERGY PRODUCTION

SOURCE OF ENERGY: 1960-1986

PERCENT OF TOTAL ENERGY USED - PRIME U.S. MOVERS

Total Coal Nuclear Oil Gas Hydro YEAR 1960 100.0 53.3 0.1 6.4 20.9 19.3 1970 100.0 46.0 1.4 12.1 24.3 16.2 1975 100.0 44.6 9.0 15.2 15.6 15.6 1980 100.0 51.0 11.0 10.8 15.1 12.1 1981 100.0 52.7 11.9 8.9 15.1 11.4 1982 100.0 53.4 12.6 6.6 13.6 13.8 1983 100.0 54.8 12.7 6.2 11.9 14.4 1984 100.0 55.9 13.6 4.9 12.3 13.3 1985 100.0 56.8 15.5 4.0 11.8 11.9 1986 100.0 55.8 16.6 5.5 10.0 12.1

Sources: U.S. Federal Power Commission, Electric Power Statistics (1960-1970). U.S. Energy Information Administration (1975-1980). "Power Production, Fuel Consumption and Installed Capacity" (1981-1986). "Electric Power Annual" and "Annual Energy Review."

EXHIBIT II U.S. ELECTRIC UTILITY SALES AND AVERAGE PRICES

BY END-USE SECTORS: 1976 TO 1986

AVERAGE PRICE OF ELECTRICITY SOLD (cents per kwh)

SALES (bil. kwh) Current Dollars Constant(1982) Dollars (**) Resi- Com- Indus- Resi- Com- Indus- Resi- Com- Indus-

Total dential mercial trial Total(*) dential mercial trial Total(*) dential mercial trial YEAR 1976 1,855 606 425 754 3.09 3.73 3.69 2.21 4.90 5.91 5.85 3.50 1977 1,948 645 447 786 3.42 4.05 4.09 2.50 5.08 6.02 6.08 3.71 1978 2,018 674 461 809 3.69 4.31 4.36 2.79 5.11 5.97 6.04 3.86 1979 2,071 683 473 842 3.99 4.64 4.68 3.05 5.08 5.90 5.95 3.86 1980 2,094 717 488 815 4.73 5.36 5.48 3.69 5.52 6.25 6.39 4.31 1981 2,147 722 514 826 5.46 6.20 6.29 4.29 5.81 6.60 6.69 4.56 1982 2,086 730 526 745 6.13 6.86 6.86 4.95 6.13 6.86 6.86 4.95 1983 2,151 751 544 776 16.30 7.18 7.02 4.96 6.06 6.91 6.76 4.77 1984 2,278 778 578 841 6.52 7.54 7.33 5.04 6.03 6.98 6.78 4.86 1985 2,310 791 609 825 6.71 7.79 7.47 5.16 6.02 6.99 6.70 4.83 1986 2,351 818 642 808 6.40 7.41 7.13 4.87 5.59 6.48 6.23 4.28

* Includes other sectors not shown separately. ** Based on the GNP implicit price deflator.

Source: U.S. Energy Information Administration.

CRYSTAL CREEK POWER AUTHORITY EXHIBIT III COMPARATIVE INCOME ACCOUNTS

(in thousands of dollars)

1986 1985 1984 1983 1982 1981 1980

Total Operating Revenue $350,378 $341,012 $356,191 $329,517 $316,060 $307,752 $262,764

Operating Expenses 217,341 228,444 217,831 205,817 191,151 178,988 177,057 Maintenance 19,625 18,175 18,171 15,818 14,113 12,369 9,660 Depreciation 23,125 21,655 21,173 20,221 19,531 19,500 17,271 Income Taxes 27,931 16,538 14,955 16,678 11,285 (13,251) (2,149) Deferred Income Taxes 815 (465) 3,847 2,181 11,499 33,834 10,212 Investment Tax Credit Adjust., Net (1,085) 1,914 3,089 570 (771) (6,415) 4,588 General Taxes 11,067 11,930 16,016 14,965 14,286 14,247 12,389 Amortization of Property Losses 13,789 17,169 17,909 13,490 8,175 26,808 - Loss from Utility Plant Disposition 5 5 - 5 - - -_

Total Operating Revenue Deductions 312,613 315,364 312,989 289,743 269,268 266,080 229,027

Net Operating Revenue 37,765 25,648 43,202 39,774 46,792 41,672 33,737

Other Income, Net 618 1,365 (949) 1 1,926 3,039 4,980 Allowance for Other Funds

Used During Construction 3,584 5 ,900 5,048 2 ,615 1,139 5,645 7,152

Gross Income 41,967 32,912 47,302 42,390 49,857 50,355 45,869

Interest on Long-Term Debt 16,039 18,331 18,006 17,546 16,416 24,112 19,951 Amortization - Debt Discount 84 85 82 83 77 78 90 Other Interest Charges (791) 1,833 2,626 1,049 2,704 2,004 2,607 Allowance for Borrowed Funds

Used During Construction (2,596) (3,667) (3,348) (1,637) (2,224) (5,785) (5,670)

Total Income Deductions 12,737 16,581 17,366 17,041 16,972 20,408 16,978

Net Income $29,230 $16,331 $29,936 $25,349 $32,885 $29,947 $28,891

EXHIBIT IV CRYSTAL CREEK POWER AUTHORITY

OPERATING STATISTICS

1986 1985 1984 1983 1982 1981 1980 ELECTRIC Population served, retail 516,500 549,000 512,500 510,000 500,000 492,000 481,500 Customers (Average):

Residential 195,369 195,804 194,064 190,149 186,669 182,319 177,099 Commercial 19,088 18,905 18,514 17,922 17,379 16,765 16,285 Small Industrial 9,428 9,516 9,084 10,669 9,830 9,574 9,321 Large Industrial 4 4 3 3 3 3 2 Other 674 833 848 874 858 901 855 Total Customers 224,562 225,062 222,13 219,617 214,740 209,561 203,561

Sales, Kilowatt hours (in 000s): Residential 2,013,020 2,008,354 2,004,817 1,932,997 1,891,367 1,817,655 1,884,864 Commercial 1,647,017 1,619,640 1,575,214 1,449.748 1,471,063 1,363,241 1,475,111 Small Industrial 1,220,012 1,116,141 1,145,610 1,104,570 1,120,810 1,136,034 1,065,358 Large Industrial 732,007 777,427 716,006 690,356 630,456 605,885 491,704 Other 488,005 906,999 1,718,415 1,725,890 1,891,367 2,650,747 3,278,025

Total Sales (Kwhs) 6,100,062 6,478,562 7,160,062 6,903,562 7,005,062 7,573,562 8,195,062 Revenues:

Residential $139,985,431 $130,121,260 $125,742,136 $116,656,382 $107,978,119 $90,537,384 $80,031,332 Commercial 103,589,768 94,590,561 90,278,323 80,416,647 78,944,003 64,751,497 60,192,497 Small Industrial 52,649,631 47,218,218 45,376,460 43,452,673 44,566,999 36,960,874 29,397,489 Large Industrial 28,625,149 28,512,149 25,679,561 24,598,080 21,191,404 17,874,817 12,306,852 Other 25,527,537 40,570,048 69,114,642 64,392,970 63,379,695 97,626,995 80,836,087

Total Revenues $350,377,516 $341,012,236 $356,191,121 $329,516,752 $316,060,221 $307,751,566 $262,764,256

Kilowatt Hrs Generated (Net) 6,097,821,562 6,631,579,062 7,283,569,062 7,250,563,562 7,423,133,562 8,143,688,562 8,689,310,562 Kilowatt Hrs Purchased (Net) 439,559,562 341,966,562 370,158,062 154,734,562 23,333,062 14,340,062 46,731,062

Total Kilowatt Hours 6,537,381,123 6,973,545,623 7,653,727,123 7,405,298,123 7,446,466,623 8,158,028,623 8,736,041,623

EXHIBIT V

EMPIRE GLOBE NEGOTIATION PLAN BOOK - FELDPORT PLANT

1987 PRICING STRATEGIES

CURRENT SCENARIO NEGOTIATING TARGETS____________ PRESENT PRESENT PRESENT TARGET PROJECTED FIRST YEAR

RATE OF FELDPORT FELDPORT ECONOMIC RATE OF FELDPORT FELDPORT ECONOMIC MEASURE RATES COSTS VALUE MEASURE RATES COSTS VALUE

ISSUES:

REAL ESTATE TAXES: Mils per 0.23455 $295,436 $325,000 Mils per 0.24159 $304,299 $346,125 assessed assessed valuation valuation

COMMENTS: Rate held steady for last 4 years. Rate to hold for 4 years.___________________________

BANK FINANCING: % v. Prime -1 $2,350.000 $2,674,004 % v. Prime -1 $2,750,000 $3,118,880 based on based on credit line credit line usage usage

COMMENTS: Rate subject to utilization minimums. No utilization minimums.__________________________

TRUCKING RATES: Rate per Rate $4,200,000 $4,536,000 Rate per Rate $4,326,000 $4,929,498 tonnage Schedule tonnage Schedule shipped shipped

COMMENTS: Rate subject to ICC cost adjust index. Rate subject to 90% ICC cost adjustment index._______

UNION RATES: Hourly Cost $17.53 $5,469,360 $6,125,683 Hourly Cost $18.93 $6,299,904 $7,181,891 COMMENTS: Rate subject to CPI inflator index adjustment. Rate subject to 90% CPI inflator index adjustments._____

POWER RATE: Kwh's 3.53 $8,384,881 $10,516,111 Kwh's $4.25 $10,593,261 $11,428,384 Rate subject to automatic 2.5% annual adjustment. Rate subject to automatic 3.0% annual adjustment.______

SUBJECT COSTS TO NEGOTIATION: $20,699,677 $24,176,798 $24,273,464 $27,004,778

% NEGOTIATED COSTS/ECONOMIC COSTS: 85.62% 89.89%

EXHIBIT VI

EMPIRE GLOBE - FELDPORT PLANT CRYSTAL CREEK POWER AUTHORITY

Kilowatts Kilowatts Large General Rate Purchased By Sold To Industrial Power Revenue Concession to Empire Globe CCPA Charges Empire Globe General Rate Applicable to Empire Globe (in 000s) (cents per Kwh) Power Cost (in 000s) (cents per Kwh) Empire Globe Feldport Plant

Actual 1980 177,782 2.50 (1) $4,444,539 177,782 2.68 $4,761,364 $316,825 1981 182,340 2.50 (1) 4,558,502 182,340 3.16 5,755,565 1,197,063 1982 186,061 2.50 (1) 4,651,533 186,061 3.77 7,007,813 2,356,280 1983 197,938 3.20 (1) 6,334,002 197,938 3.81 7,546,191 1,212,189 1984 206,185 3.28 (1) 6,762,867 206,185 3.84 7,913,564 1,150,698 1985 217,037 3.36 (1) 7,2%.777 217,037 3.92 8,518,174 1,221,396 1986 226,080 3.45 (1) 7,790,830 226,080 4.18 9,460,928 1,670,098

Estimate 1987 237,384 3.53 (1) $8,384,881 237,384 4.43 $10,516,111 $2,131,231

Projections (3) 1988 249,253 4.25 (1) $10,593,261 249,253 4.59 $11,428,384 $835,123 1989 261,716 4.38 (1) 11,456,612 261,716 4.75 12,419,7% 963,184 1990 274,802 4.51 (1) 12,390,326 274,802 4;91 13,497,213 1,106,888 1991 288,542 4.64 (1) 13,400,137 288,542 5.08 14,668,097 1,267,960 1992 302,%9 4.78 (1) 14,492,248 302,969 5.26 15,940,554 1,448,306

(1) Negotiated fixed rate (2) Negotiated rate - first-year of 3.2 cents per Kwh with 2.596 annual adjustment after first year. (3) Assumes annual 5% growth in accordance with normal business planned growth. (4) Under negotiation - first-year rate of 4.25 rents per Kwh with 396 annual adjustment after first

year, as per strategies in Empire-Globe Negotiation Plan Book.

EXHIBIT VII

EMPIRE GLOBE - FELDPORT PLANT INCOME STATEMENTS (in thousands of dollars)

ACTUAL____________________________ FORECAST ESTIMATE

1988 1987 1986 1985 1984 1983 1982

SALES REVENUES $72,900 $67,000 $62,328 $57,646 $53,008 $49,279 $42,798 COSTS:

MATERIALS AND SUPPLIES $25,880 $24,300 $22,999 $21,387 $19,719 $18,430 $16,007

POWER 10,600 8,400 7,791 7,297 6,763 6,334 4,652

CONTRACT LABOR 6,300 5,500 5,111 4,669 4,241 3,992 3,509

TRUCKING 4,330 4,200 3,927 3,689 3,446 3,252 2,867

SALES SERVICE 1,281 1,220 1,122 1,095 1,007 1,035 856

REPAIR AND MAINTENANCE 2,646 2,450 2,244 2,075 1,908 1,774 1,541

RESEARCH & DEVELOPMENT 925 1,200 1,500 1,525 1,475 1,440 895

GENERAL ADMINISTRATION 1,025 920 800 780 820 775 770

INTEREST EXPENSE 2,750 2,350 1,780 1,450 1,280 1,260 1,160 OTHER 830 755 645 725 660 710 680

56,567 51,295 47,918 44,693 41,319 39,002 32,937

ADD: DEPRECIATION 15,600 15,500 14,000 12,500 11,250 9,875 9,450

TOTAL COSTS 72,167 66,795 61,918 57,193 52,569 48,877 42,387

INCOME BEFORE INCOME TAXES $734 $705 $410 $453 $440 $402 $411

EXHIBIT VIII

EMPIRE GLOBE - FELDPORT PLANT BALANCE SHEETS (in thousands of dollars)

ACTUAL__________________________ FORECAST ESTIMATE

1988 1987 1986 1985 1984 1983 1982 ASSETS

CURRENT ASSETS $22,107 $20,520 $19,032 $17,620 $16,210 $15,084 $13,101

PROPERTY, PLANT, & EQUIPMENT 145,800 144,800 131,300 116,700 104,400 91,325 87,500

LESS: DEPRECIATION 106,225 90,625 75,125 61,125 48,625 37,375 27,500

NET 39,575 54,175 56,175 55,575 55,775 53,950 60,000

TOTAL ASSETS $61,682 $74,695 $75,207 $73,195 $71,985 $69,034 $73,101 = = = = = = = = = = = = = = = = = = = = = = = = = = = = LIABILITIES

CURRENT LIABILITIES $9,924 $8,844 $8,557 $7,627 $7,313 $6,394 $5,583

HEADQUARTERS EQUITY ACCOUNT 51,758 65,851 66,650 65,568 64,672 62,640 67,518

TOTAL LIABILITIES $61,682 $74,695 $75,207 $73,195 $71,985 $69,034 $73,101 = = = = = = = = = = = = = = = = = = = = = = = = = = = =

EXHIBIT IX

EMPIRE GLOBE - FELDPORT PLANT FUND-FLOW STATEMENTS

(in thousands of dollars)

ACTUAL_____________________ FORECAST ESTIMATE 1988 1987 1986 1985 1984 1983 1982 SOURCES OF FUNDS

NET INCOME $734 $705 $410 $453 $440 $402 $411

ADD BACK: DEPRECIATION 15,600 15,500 14,000 12,500 11,250 9,875 9,450

PROVIDED FROM OPERATIONS $16,334 $16,205 $14,410 $12,953 $11,690 $10,277 $9,861

CHANGES IN HEADQUARTERS EQUITY - - 672 443 1591 - -

TOTAL SOURCES OF FUNDS $16,334 $16,205 $15,082 $13,396 $13,281 $10,277 $9,861 = = = = = = = = = = = = = = = = = = = = = = = = = = = = USES OF FUNDS

CAPITAL ADDITIONS $1,000 $13,500 $14,600 $12,300 $13,075 $3,825 $3,350

INCREASE IN WORKING CAPITAL 507 1,201 482 1,096 206 1,172 980

CHANGES IN HEADQUARTERS EQUITY 14,827 1,504 - - - 5,280 5,531

TOTAL USES OF FUNDS $16,334 $16,205 $15,082 $13,396 $13,281 $10,277 $9,861 = = = = = = = = = = = = = = = = = = = = = = = = = = = =

EMPIRE GLOBE CORPORATION

SITUATION II

Something strange was going on back at World Headquarters. Susan sensed it, but she didn’t have enough information to know what it was. Trusting her intuition, she canceled the afternoon meeting with the CCPA and called Ted Bates, a senior colleague in finance.

SUSAN: I’m doing a little research, Ted, and I was hoping you might be able to help. You have a few minutes?

TED: Sure. What's up?

SUSAN: You know the deal we’re trying to cut with the Power Authority here in Feldport...?

TED: Yeah

SUSAN: Well, yesterday I got a telex from Treadstone informing me that our new rate ceiling was 3.8 cents per kwh--down from 4.25.

TED: Right

SUSAN: You’re not surprised? Ted, you know utilities inside and out…

TED: Well, I know, but Jim Doran had me running some production efficiencies with that number earlier this week.

SUSAN: Really. That's interesting. I did my homework, and I can’t see how our current level of production could possibly justify such a low rate. Can you?

TED: I'm not sure, but from what Doran was telling me, production at Feldport will be increasing significantly... 25 percent or so.

SUSAN: Twenty-five percent?! How does he figure that?

TED: I guess that big contract with the Department of Defense is almost finalized. He and Treadstone are supposed to be signing the dotted line today.

SUSAN: So that’s why they couldn’t make it for our negotiating session--which I canceled.

TED: You did?

SUSAN: Uh-huh. I didn’t feel I could argue for such a lower rate without more data to justify our position. Now I see what’s going on.

TED: Well, good luck.

SUSAN: Thanks, Ted. You’ve been a big help.

TED: No problem. But Susan.... off the record, eh?

SUSAN: Don’t worry. Talk to you later.

TED: Okay. Bye.

When Susan hung up the phone, she was shaking. How long had her superiors been working on this new contract? Why hadn’t they told her? And why had they threatened to close the Feldport plant if they knew production was going to rise so sharply? Her instincts had been right. Something out of the ordinary was going on.

Carefully, Susan ran through several calculations. The new projections based on a 25 percent increase in output from the defense contract were staggering. Profits generated by the Feldport plant would exceed all of the company’s earlier expectations. Susan felt she had been used. The negotiation process now seemed like a ploy to take advantage of an unsuspecting party. At best it was manipulative; at worst, it was dishonest. Perhaps this “partnership” philosophy was merely a clever way to rationalize greed. Susan felt compelled to do something.

EXHIBIT VI-A

EMPIRE GLOBE - FELDPORT PLANT CRYSTAL CREEK POWER AUTHORITY

Kilowatts Kilowatts General Rate Purchased By Sold To Large Industrial Power Revenue Concession to Empire Globe CCPA Charges Empire Globe General Rate Applicable to Empire Globe (in OOOs) (cents per Kwh) Power Cost (in OOOs) (cents per Kwh) Empire Globe Feldport Plant

Actual 1980 177,782 250 (1) $4,444,539 177,782 2.68 $4,761,364 016,825 1981 182,340 2.50 (1) 4,558,502 182,390 3.16 5,755,565 1,197,063 1982 186,061 2.50 (1) 4,651,533 186,061 3.77 7,007,813 2,356,280 1983 197,938 3.20 (2) 6,334,002 197,938 3.81 7,546,191 1;212,189 1984 206,185 3.28 (2) 6,762,867 206,185 3.84 7,913,564 1,150,698 1985 217,037 3.36 (2) 7,296,777 217,037 3.92 8,518,174 1,221,396 1986 226,080 3.45 (2) 7,790,830 226,080 4.18 9,460,928 1,670,098

Estimate 1987 237,384 3.53 (2) $8,384,881 237,384 4.43 $10,516,111 $2,131,231

Projections (3) 1988 249,253 3.80 (4) $9,471,622 249,253 4.59 $11,428,384 $1,956,762 1989 261,716 3.91 (4) 10,243,559 261,716 4.75 12,419,796 2,176,237 1990 274,802 4.03 (4) 11,078,409 274,802 4.91 13,497,213 2,418,805 1991 288,542 4.15 (4) 11,981,299 288,542 5.08 14,668,097 2,686,798 1992 302,969 4.28 (4) 12,957,775 302,969 5.26 15,940,554 2,982,779

Revised Projections (5) 1988 308,599 3.80 (4) $11,726,770 308,599 4.59 $14,164,703 $2,437,934 1989 321,062 3.91 (4) 12,566,361 321,062 4.75 15,252,525 2,686,164 1990 334,148 4.03 (4) 13,470,895 334,148 4.92 16,429,782 2,958,887 1991 347,888 4.15 (4) 14,445,560 347,888 5.09 17,704,059 3,258,499 1992 362,315 4.28 (4) 15,495,964 362,315 5.27 19,083,595 3,587,631

(1) Negotiated fixed rate. (2) Negotiated rate-first-year rate of 3.2 cents per Kwh with 2.5% annual adjustment after first year. (3) Assumes annual 5% growth in accordance with normal business planned growth. (4) Under negotiation-first-year rate of 3.8 cents per Kwh with 3% annual adjustment after first year. (5) Assumes annual 5% growth in accordance with normal business planned growth plus 2596 additional power needs for Defense Contract.

EXHIBIT VII-A EMPIRE GLOBE - FELDPORT PLANT

BALANCE SHEETS (in thousands of dollars)

REVISED FORECAST REVISED

WITH ORIGINAL ACTUAL___________________ DOD CONTRACT FORECAST ESTIMATE 1988 1988 1987 1986 1985 1984 1983 1982

SALES REVENUES $91,125 $72,900 $67,500 $62,328 $57,646 $53,008 $49,279 $42,798

COSTS:

MATERIALS & SUPPLIES $31,894 $25,880 $24,300 $22,999 $21,387 $19,719 $18,430 $16,007

POWER 11,727 9,470 8,400 7,791 7,297 6,763 6,334 4,652

CONTRACT LABOR 6,930 6,300 5,500 5,111 4,669 4,241 3,992 3,509

TRUCKING 4,980 4,330 4,200 3,927 3,689 3,446 3,252 2,867

SALES SERVICE 1,307 1,281 1,220 1,122 1,095 1,007 1,035 856

REPAIR AND

MAINTENANCE 2,964 2,646 2,450 2,244 2,075 1,908 1,774 1,541

RESEARCH & DEVELOPMENT 925 925 1,200 1,500 1,525 1,475 1,440 895

GENERAL ADMINISTRATION 1,075 1,025 920 800 780 820 775 770

INTEREST EXPENSE 3,450 2,750 2,350 1,780 1,450 1,280 1,260 1,160

OTHER 895 830 755 645 725 660 710 680

66,145 55,437 51,295 47,918 44,693 41,319 39,002 32,937

ADD: DEPRECIATION 15,800 15,600 15,500 14,000 12,500 11,250 9,875 9,450

TOTAL COSTS 81,945 71,037 66,795 61,918 57,193 52,569 48,877 42,387

INCOME BEFORE INCOME

TAXES $9,180 $1,864 $705 $410 $453 $440 $402 $411

EXHIBIT VIII-A

EMPIRE GLOBE - FELDPORT PLANT BALANCE SHEETS (in thousands of dollars)

REVISED FORECAST

WITH REVISED DOD ORIGINAL ACTUAL

CONTRACT FORECAST ESTIMATE 1988 1988 1987 1986 1985 1984 1983 1982 ASSETS

CURRENT ASSETS $27,565 $22,107 $20,520 $19,032 $17,620 $16,210 $15,084 $13,101

PROPERTY, PLANT, 147,200 145,800 144,800 131,300 116,700 104,400 91,325 87,500 EQUIPMENT

LESS: DEPRECIATION 106,425 106,225 90,625 75,125 61,125 48,625 37,375 27,500

NET 40,775 39,575 54,175 56,175 55,575 55,775 53,950 60,000

TOTAL ASSETS $68,340 $61,682 $74,695 $75,207 $73,195 $71,985 $69,034 $73,101

LIABILITIES

CURRENT LIABILITIES $11,024 $9,726 $8,844 $8,557 $7,627 $7,313 $6,394 $5,583

HEADQUARTERS 57,316 51,956 65,851 66,650 65,568 64,672 62,640 67,518 EQUITY ACCOUNT

TOTAL LIABILITIES $68,340 $61,682 $74,695 $75,207 $73,195 $71,985 $69,034 $73,101

EXHIBIT IX-A

EMPIRE GLOBE - FELDPORT PLANT ' FUND FLOW STATEMENTS tin thousands of dollars)

REVISED FORECAST WITH REVISED ACTUAL

DOD ORIGINAL CONTRACT FORECAST ESTIMATE

1988 1988 1987 1986 1985 1984 1983 1982 SOURCES OF FUNDS

NET INCOME $9,180 $1,864 $705 $410 $453 $440 $402 $411

ADD BACK: DEPRECIATION 15,800 15,600 15,500 14,000 12,500 11,250 9,875 9,450

PROVIDED FROM $24,980 $17,464 $16,205 $14,410 $12,953 $11,690 $10,277 $9,861 OPERATIONS

CHANGES IN HEADQUARTERS EQUITY - - - 672 443 1591 - -

TOTAL SOURCES $24,980 $17,464 $16,205 $15,082 $13,396 $13,281 $10,277 $9,861 OF FUNDS

CAPITAL ADDITIONS $2,400 $1,000 $13,500 $14,600 $12,300 $13,075 $3,825 $3,350

INCREASE IN WORKING 4,865 705 1,201 482 1,096 206 1,172 980 CAPITAL

CHANGES IN 17,715 15,759 1,504 - - - 5,280 5,531 HEADQUARTERS EQUITY

TOTAL USE OF FUNDS $24,980 $17,464 $16,205 $15,082 $13,396 $13,281 $10,277 $9,861

EMPIRE GLOBE CORPORATION

SITUATION III

Struggling to keep an open mind, Susan Bond decided to first raise her concerns with the head of Empire’s Feldport negotiating team, Jim Doran. After all, he had been involved with drafting the negotiation plan book in the first place. When she finally got through to him, Jim Doran sounded less than pleased to hear from Susan:

JIM: Susan. Hi. What can I do for you?

SUSAN: I need to talk to you about our new position on the utility rate. I'm having trouble.

JIM: Look, Sue, this isn’t a good time. I’m about to leave for the airport.

SUSAN: Oh, I see. Well, can you call me when you get to wherever you're going?

JIM: I’ll try. But I’m going to be awfully busy. And frankly, I don’t know what to tell you about the rate thing, except that’s what we need. Period.

SUSAN: Yes, but how did you…

JIM: I’m sorry, Sue, the limo is here. Why don’t you try to reach one of the other team members? I’ve got to go. SUSAN: Sure, bye.

Susan fumed. She hated being put off. But that was part of Doran’s style. Susan now knew she would have to go to the top. None of the other negotiation team members were in a position to do anything about the rate, anyway. Besides, from what Ted had said, they probably weren’t even aware of the situation. Susan wasn’t looking forward to talking to Treadstone. She knew how headstrong he was on this Feldport issue.

Finally she picked up the phone.

SUSAN: Hello, John. This is Susan.

JOHN: Ah good. How did it go with the Power Authority?

SUSAN: It didn’t.

JOHN: What do you mean, “It didn’t?”

SUSAN: I mean there wasn’t any meeting. I canceled it.

JOHN: You canceled? Whatever for?

SUSAN: I didn’t feel comfortable with our new rate request. I thought we were pushing it a little with 4.25.... But 3.8 isn’t fair at all. I’ve run some projections at both rates, and I just don’t see where we're coming from. I was hoping you could explain it to me.

JOHN: There’s nothing to explain. We need that lower rate to keep the plant operating at a reasonable return. You’re an economist; you can understand that, can’t you?

SUSAN: I guess it depends upon how you define “reasonable.”

JOHN: And you think this is being unreasonable, or something?

SUSAN: Yes, I do. Especially when that defense contract kicks in and our profits go through the roof!

JOHN: So you know about that. Well, Susan, we have obligations to our stockholders, remember? And besides, we’re in business--what’s wrong with profits?

SUSAN: Nothing. But with the defense contract, returns would increase sharply anyway. Are these concessions really necessary? What about our “partnership,” as you choose to phrase it, with Feldport? Don’t forget John, government contracts become public record.

JOHN: Look, Susan. We needed lower energy costs to justify our bid on that defense contract. Besides, do you realize what the production increases mean to our “partners”? We’re talking about adding a third full shift, for starters. Do you think our “partners” are going to mind that?

SUSAN: But you lied about pulling operations out of Feldport if they didn’t acquiesce.

JOHN: Well, you’re entitled to your opinions. But you can’t let it keep you from doing your job. Have you rescheduled with the Power Authority?

SUSAN: Uh...no. I wanted to talk with you first.

JOHN: I see. And now that we’ve talked?

SUSAN: Okay ...I get the message. But what if they don’t agree to the lower rate?

JOHN: Susan, negotiating means getting agreements. Anything else on your mind?

SUSAN: No.

JOHN: Fine. I’m counting on you, Susan ...Let me know how it turns out.

SUSAN: I will.

When Susan Bond got off the phone with Treadstone, she knew she was facing the most significant decision of her career. She didn’t like what was happening at Empire Globe, but she wasn’t sure what to do about it. Not yet, anyway.

Susan began to review her options. Several appeared realistic to her—realism being defined in her mind as revealing the truth without becoming a sacrificial lamb. Recalling her father’s business maxim “Slaughtered animals are meant to be eaten,” Susan determined she would not be devoured.