Making the Case
Private Placement Memorandum Example 1 - Taylor Fastener Company, Inc.
CONFIDENTIAL MEMORANDUM
TAYLOR FASTENER COMPANY, INC
Toledo, Ohio
$ 1.75 million Senior Revolving Credit Loan
$ 1.75 million Senior Term Loan
$ 1.10 million Mortgage
$ 1.00 million Subordinated Loan
L. R. Nathan Associates, Ltd. is assisting TSC Acquisition Co., a new Ohio corporation that is being formed by certain key managers of Taylor Fastener Company, Inc. (the "Company") for the purpose of acquiring all of the business assets of the Company, in the private placement of the $3.7 million of Senior Secured Loans and the $1.0 million Subordinated Loan (together, the "Proposed Financing") described herein. The proceeds of the Proposed Financing will be used, in conjunction with $200,000 that is being provided by the management group, to effect the buyout, and for working capital. The information contained in this brochure and related materials with respect to the Company is being made available to you and to a limited number of institutional lenders on a confidential basis solely for the purpose of your considering participation in the private placement, and may not be reproduced or used for any other purpose. The information contained in the brochure has been obtained from sources believed to be reliable, but L. R. Nathan Associates, Ltd. does not warrant its accuracy or completeness. The Proposed Financing described herein has not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state. In addition, there is no present intention to register any securities pursuant to the Act. L. R. Nathan Associates, Ltd. is receiving compensation from the Company for its advice and assistance relative to the private placement of the Proposed Financing. A representative of the Company will be made available to you to discuss any of the materials or data included in this memorandum, or any documentation referred to herein, and will furnish any additional information as may reasonably be requested and will arrange for an inspection of the physical properties, if requested.
L. R. Nathan Associates, Ltd.
April, 2005
TAYLOR FASTENER COMPANY, INC.
The Company produces customized metal fasteners, wire formings and small precision metal stampings that are used as components of assemblies and sub-assemblies in a broad variety of industries. Major end-user markets include the automotive industry, as well as producers of medical devices, hand tools, appliances, electrical and electronic components, among many others. The market for Taylor Fastener's products is very large worldwide, but the biggest orders are filled by a few major manufacturers that have been forced in recent years to compete with low-cost producers in China, India and Mexico. Taylor's business niche is more customized, design-intensive products that are developed in close association with the customers' engineering staffs. These programs yield smaller unit volume orders that are far less subject to foreign competition. Once a part has been developed and the order has been secured, the re-order program usually remains active for a number of years.
Taylor Fastener Company was founded in 1955 in Toledo, Ohio by Charles Taylor, the father of the two current owners, Harold and Robert Taylor. These gentlemen are ready to retire and would like to sell the business to the experienced management team that they have built over the years. The Management Buyout Group consists of four individuals who, along with other key managers, cover all critical business functions: manufacturing operations, sales/marketing, finance and prototype & design engineering. The Group will form a new entity to purchase all assets of the Company's Toledo, Ohio operation, including real estate, for a price of $4.7 million free of all debt and encumbrances. A Letter of Intent was signed by all parties on February 25, 2005 and the transaction is expected to close within 120 days of that date.
The Company's Toledo, Ohio manufacturing operation has a long history of profitability. However, the business has been burdened by the expense of two ancillary operations in South Carolina and Texas that contributed $1,151,000 in Operating Losses over the past four years. The South Carolina facility was closed in 2002 and the Brownsville, Texas operation was terminated in March, 2005. The Management Buyout Group has identified other areas of unnecessary expense and unfulfilled opportunities that the current owners have resisted implementing, but which will be put in-place immediately following completion of the buyout. This includes more than $900,000 in immediate expense reductions that are related to departing ownership compensation, the carrying cost of discontinued subsidiaries and other expenses. In addition, certain operating efficiencies will be implemented within the first six months following the buyout that will have a clear and significant positive impact on Gross Profit margins.
In addition to the savings that will be realized by the above measures, the Management Buyout Group will take steps to boost sales, which have stagnated in recent years. Eighty percent of the Company's new orders currently are generated by a network of 13 small manufacturers' representative organization. These relationships have been closely controlled by the current owners, who have resisted any additions or changes in the rep. group for more than 10 years. Several of these sales organizations produce no new business for Taylor Fastener and the Company has no representation whatsoever in 24 U.S. States, including major industrial centers like Michigan, Wisconsin, Indiana and Southern California.
Moreover, the Toledo, Ohio plant is running at an estimated 50% of its capacity, so there is a real opportunity to produce significant additional volume with no further capital investment. The Management Buyout Group intends to terminate five unproductive rep. relationships immediately following the buyout, and to replace them with organizations that are believed to be more productive. In addition, six new sales organizations will be added to provide full national coverage for Taylor's services and products.
The $4.7 million buyout includes the repayment of all institutional debt, the repayment of certain existing obligations to the owners, and reserves against contingent liabilities. The assets to be acquired include all accounts receivable, inventory, equipment and real estate which will be purchased through a new corporate entity that is being formed by the Management Buyout Group. Sources of funding will consist of three senior secured loans - a $1,750,000 Revolving Credit Loan, of which just $850,000 will be funded at closing; a $1,750,000 Term Loan; and a $1.1 million Mortgage. This total $3.7 million of senior debt will be supplemented by a $1 million Subordinated Loan from a mezzanine fund, and $200,000 equity contribution by the Management Buyout Group. The total $4.9 million of proceeds will be sufficient to close the $4.7 million asset purchase and to cover all transaction costs. The new Company is expected to close with approximately $900,000 of excess working capital availability.
The senior loans will be well secured by all tangible assets. The Revolving Credit Loan will be secured by accounts receivable in excess of $1.3 million, less than 1% of which is more than 90 days past invoice. All A/Rs that represent more than 2% of Company sales are credit insured up to $500,000 by CNB Insurance Company. Inventory of more than $1.8 million consists primarily of finished goods manufactured pursuant to customer orders. The proposed $1,750,000 Term Loan will be secured by machinery & equipment with an Orderly Liquidation Value of $2,356,600, according to a recent appraisal by National Appraisals Co. The $1.1 million mortgage is secured by a manufacturing facility that was recently appraised for $1,450,000 by a Bank-ordered appraiser.
Taylor Fastener Company has a well-established niche in the low volume, design-intensive industrial fastener business. The Company and it's management team are well-respected among its customers for producing quality products. However, historical operating results have been penalized by the carrying costs of discontinued subsidiaries, as well as by other expenses that will be eliminated immediately upon conclusion of the buyout. When these expenses are added back to the 2004 operating results, the cash flow coverage of pro forma debt service, including interest expense on the Subordinated Loan, is 1.44 times - after taking into account expenditures for "maintenance" capital expenditures. Assuming a mid-year closing, the coverage for 2005 improves to 2.26 times and further to 4.62 times in 2006, which will be the first full year of ownership by the Management Buyout Group
SUMMARY OF PROPOSED FINANCING
| Borrower: | TSC Acquisition Co., a new Ohio corporation that is being formed for the purpose of acquiring all business assets of Taylor Fastener Co., Inc. |
| Guarantors: | The four shareholders of TSC Acquisition Co |
| Amount: | $4.7 million, consisting of the following: |
SENIOR DEBT – all cross-collateralized
- $1,750,000 Revolving Credit Loan, of which $850,000 will be funded at closing.
Term & Amortization: Demand
Collateral: Accounts receivable & inventory
Advance Rates: 85% of eligible A/Rs, plus 50% of raw & finished goods inventory
- $1,750,000 Term Loan
Term & Amortization: 5 year term, 7 year principal amortization
Collateral: Machinery & equipment
Advance Rates: 74% of Orderly Liquidation Value of owned equipment
- $1,100,000 Mortgage
Term & Amortization: 10 year term, 20 year mortgage amortization schedule
Collateral: 29,500 sq. ft. building on 5.08 acres located on Kelley Road in Toledo, Ohio, which is occupied by Taylor Fastener Co., Inc.
Advance Rate: 76% of real estate Market Value
SUBORDINATED DEBT –
- $1,000,000 Subordinated Loan
Term & Amortization: 5 year term, interest-only for two years, then repaid at the rate of $200,000 in years three and four, with a $600,000 balloon at the end of the fifth year.
Interest Rate: 18% - payable 12% per year on a current basis, with 6% deferred until the end of the fifth year.
Priority Ranking: Subordinated to all Senior Debt of the Company, including the Revolving Credit Loan, Term Loan and Mortgage described above.
Use of Proceeds: The $4.7 million proceeds of the Senior Debt and Subordinated Loan will be used in conjunction with the $200,000 Equity contributed by the Management Buyout Group to purchase all business assets of Taylor Fastener Company, Inc.; for transaction costs & fees; and for working capital excess availability.
| Sources: | Uses: | ||
| Revolving Credit | 850,000 | Purchase Price | 3,000,000 |
| Term Loan | 1,750,000 | Debt Repayment | 1,400,000 |
| Mortgage | 1,100,000 | Other Seller Payments | 300,000 |
| Subord. Loan | 1,000,000 | Est. Closing Costs, Fees | 200,000 |
| Equity | 200,000 | ||
| Total Sources | 4,900,000 | Total Uses | 4,900,000 |
BUSINESS
Taylor Fastener Company was founded in 1955 by Charles Taylor as one of many small fastener manufacturers that emerged in the Toledo, Ohio area to serve the carriage industry. His son Harold (now 63 yrs. old) joined the business full-time in 1963, followed by Robert (now 55 yrs. old) in 1971. Charles continued to be active in the business until 1997. He died last year at age 91. The Company moved to its present location in 1962 when five acres were purchased and a 29,500 sq. ft. (exclusive of basement) light industrial building was constructed in several phases through 1988.
In 1981, the Company purchased a second 17,000 sq. ft. manufacturing facility Columbia, South Carolina in order to serve the needs of major appliance customers that had moved to the South. Robert was President of Taylor Fastener of South Carolina. This location was closed down in 2002 and the assets were sold off in response to the move of major appliance companies to offshore manufacturing sources. A third facility was opened in Brownsville, Texas in 1996 to serve the needs of U.S. corporate customers that opened production plants in Mexico. This leased facility conducted limited manufacturing, but mostly warehoused and distributed products that are produced in Toledo and transported to Brownsville. Harold Taylor is President of Taylor Fastener of Brownsville. The Management Buyout Group believes that customers in the Southwest and Mexico can be serviced just as effectively, and at lower cost, directly from Toledo, Ohio with the limited use of local public warehousing. Harold and Robert Taylor have agreed to close the manufacturing function in Brownsville by the end of March, 2005. The remaining warehouse facility will be discontinued upon the completion of the buyout.
The buyout transaction includes the purchase of all Taylor Fastener business assets that are located in Toledo, Ohio., along with minor equipment that will be moved in from Brownsville. Management estimates that the well-equipped Toledo manufacturing plant is capable of producing twice the current level of sales without additional capital investment.
Products & Competition
Taylor Fastener Company manufactures custom metal fasteners, wire formings and small stampings that are used as components or sub-assemblies in a broad array of industrial applications. The industry's dominant end-user market is the automotive industry, which accounts for an estimated 60% of fastener industry sales. Other end-markets include industrial & consumer electrical and electronic devices, home appliances, medical instrumentation, firearms, hand & power tools, and lawn & garden equipment, among many other applications.
Metal fasteners are made from carbon steel in wire form or rolled flat stock. In addition, stainless steel, brass and titanium are used for limited applications. Several kinds of fasteners are manufactured - staples, grommets, rivets, along with screws, bolts and nuts - which are produced on different kinds of equipment and are configured in varying sizes and designs,
depending upon the functional requirements of the component or subassembly involved. The Company's engineering and prototype personnel frequently play a key role in product design from the standpoint of manufacturability. Taylor also produces wire formings, which are made from various metals including carbon steel wire, stainless steel, phosphorous bronze, brass and copper, which are bent and formed to a specified functional design, in accordance with the customer's needs. Wire formings are used frequently by the automotive industry to hold cables in a fixed position. The Company also produces parts on high-speed precision 4-slide equipment. 4-slide machines produce parts that are both stamped and formed from a wide universe of metals that begin as round wire, shaped wire or strip form. These parts are used as components in assemblies for a broad variety of industries, including automotive, medical, consumer and construction.
The domestic fastener manufacturing industry is concentrated in the greater Toledo area, where over 30 fastener producers of various sizes are located, as well as in the Chicago, Illinois area. Taylor is regarded as a mid-size manufacturer. Approximately 30% of the company's product orders (+ re-orders) over the course of any year total 100,000 units or more, with the balance comprising lesser unit quantities. Competition in the fastener industry for very large orders of over 1 million units is limited to a few large domestic produces, such as The Barney Company, and to low-cost foreign producers in China, India and Mexico. Foreign competition has most profoundly affected the high volume production of fasteners for the small appliance and hand tool industries, both of which have moved offshore in recent years. By contrast, lower volume, customized fastener manufacturing has remained with domestic producers like Taylor Fastener Company.
Taylor and its direct competitors usually do not vie directly against foreign producers. This is true for two reasons. First, low-cost foreign producers do not find it economical to pursue small-to-midsize unit volume orders. Second, Taylor's customer requirements often are manufacturing design-intensive, which requires close coordination between the customer's engineering department and the Company's engineering staff and prototype personnel during the new product development phase. Moreover, once a job has been awarded, it tends to remain with the same manufacturer through the entire product re-order life cycle. This is because of the importance of the working relationship that is established during the design process, as well as the fact that tooling for the job is configured to fit a particular machine. Consequently, jobs that are started at a particular fastener manufacturer rarely are moved. The Company's job order life cycles are determined by the life cycles of the end-user's product. For example, the automotive industry tends to change car models every four years. Taylor Fastener's management estimates that the average duration of the projects that it wins is four years, and some items have continued to be produced for 10 years and more. The Company fully re-quotes its long-duration jobs every two years in order to adjust for inflation. Materials cost surcharges are passed through to customers with each re-order invoice.
Taylor's domestic competition comes from other mid-size spring companies, many of which are located in the Toledo area. These include: Rowland Fasteners, Economu Manufacturing, Toledo Fasteners, Ohio Screw & Stamping and Integrated Fasteners, among others.
Customers
Taylor Fastener Co. has about 250 customer accounts from an array industries, of which perhaps 35 are active at any point in time. Despite this diversity, the automotive industry is the dominant end-user of metal fasteners, wire formings and small stampings, accounting for at least 60% of the market. The automotive supply chain is broken down into tiers of suppliers to the major auto companies. Tier 1 suppliers sell their products directly to the auto producers, while Tier 2 and 3 vendors focus on supplying either completed parts or assemblies/sub-assemblies to the tiers directly above them. Taylor's customers include thirteen Tier 1, 2 & 3 level vendors to the automotive industry. The single largest and most significant customer is Diamond Automotive Services, a Tier 1 supplier to all American and Japanese OEMs of driver control systems, seating control systems, glass systems, engineered assemblies, structural door modules, exterior systems and mobile products. Diamond generates over $3.5 billion in annual sales from its 73 manufacturing and product development facilities world-wide. Diamond represented 28.6% of Taylor's sales in 2004, 31.2% in 2003 and 26.2% in 2002. The next most significant customer last year was Atriant & Becker at 9.6%, which was up from 5.6% in the prior year. No other single customer accounted for more than 4.2% of Company sales last year.
The Management Buyout Group is eager to grow the business with a more diversified customer base, but this effort has been resisted to date by the current owners who are more comfortable with the status quo. Diversified growth following the buyout is expected to come from both within and outside of the automotive industry. To date, Taylor has done no business with other Tier 1 automotive vendors, such as Ficosa North America and Simpson FVD Automotive, or with Tier 2 suppliers such as Automotive Luminescent and Buckwalter Corp. There also are numerous aftermarket suppliers of braking systems and other assemblies which represent growth potential that is a natural fit for the Company. Outside of the auto industry, the Buyout Management Group intends to build on existing customer relationships to expand its participation in several industries, which include:
- Atriant & Becker, a producer of power tools;
- Loomis Manufacturing, which makes medical devices;
- Envirosinc for home health care and mobility products;
- The James Tools Corp.;
- Briggs & Stratton, Little Wonder and Toro in the lawn and garden industry;
- Keytronics and Thomson CE, electronics manufacturers;
- Locloop, Ltd in the safety pool cover business;
- Connical Tackle, which makes fishing bobbers;
- Marlin, Savage Arms & Mossberg in the firearms industry.
Sales & Marketing
Taylor has no direct sales force other than personal working relationships between certain management personnel with individual customers. About 80% of Taylor's initial orders are generated by a network of 13 small manufactures' representatives who earn a 5% commission on orders and re-orders. Some of these exclusive arrangements are account-specific and others are territory-specific. The rep. relationships are managed personally by Harold and Robert Taylor, who have been resistant to any changes in, or additions to, the existing group. Consequently, the rep. network has been static for more than 10 years, despite the fact that the Company has no representation at all in 24 U.S. States. The no-coverage areas include major industrial regions such as Michigan, Indiana, Wisconsin and Southern California.
An experienced marketing and sales executive was added to the staff about one year ago. Douglas Smith brought to the Company over 25 years of applications engineering sales and industrial marketing experience. He and other key management personnel have identified new market opportunities that the Buyout Management Group is eager to pursue. They have determined that, immediately upon completion of the buyout, five of the existing reps. will be replaced by organizations that are believed to be more effective. In addition, six new manufacturers' rep. organizations will be added to cover important markets where Taylor currently has no representation. Management ultimately expects to fully-cover U.S. and foreign markets with about 18 well-supervised rep. organizations.
The Management Buyout Group believes that there is excellent potential to increase Company sales volume far beyond the levels that have stagnated over the past several years. The Toledo, Ohio facility currently is operating at about 50% of its capacity, so there is considerable upside in production capability with no additional capital investment.
Facilities
Taylor Fastener Company is an ISO 9002 certified quality manufacturer, which is an important international credential to qualify as a producer of highly-designed products requiring documented manufacturing procedures and measures. The business operates from of a well-equipped, 29,500 sq. ft. (plus 1,120 sq. ft. basement-level) single-story light industrial property located in an industrial park in the southeast quadrant of Toledo, Ohio. Seventy-one non-union employees are located in this plant. The building was constructed in 1963 and was expanded in several phases, most recently in 1988. The structure is on a 5.08 acre parcel with frontage on Kelley Road, where there is room for permitted expansion up to a 110,000 sq. ft. building size. The property is owned by Taylor Realty, LLC, a partnership of Harold and Robert Taylor, and is leased to Taylor Spring Company. The real estate was appraised as of March 8, 2005 at the request of Bank One by Robert Goyer Associates, MAI, of Cleveland, Ohio, which determined a Market Value of $1,450,000.
The Company's manufacturing equipment is standard for the production of various types of fasteners, wire formings and small metal stampings. All equipment was appraised as of March 22, 2005 by National Appraisals Company of Cincinnati, Ohio, which determined an Orderly Liquidation Value "as is, where is" of $2,356,600 and a Forced Sale Liquidation Value (one-day public auction, "as is, where is") of $1,831,875.
The Company's computer hardware consists of a Dell Power Edge 4600 server and 55 IBM compatible PCs. The operating system is Global Shop software and Windows XP. Global Shop is a COBOL based Enterprise Resource Planning program that can connect an entire organization's processes and provide output to support management decision-making. The system was installed at Taylor Fastener Company in 1998, but has never been utilized fully due to the existing owners' preferences.
Taylor has received a matching grant of $175,000 from the U.S. Department of Commerce and a Ohio Department of Labor grant of $26,000. Both grants have been used for the implementation of Lean Manufacturing training, which began in December, 2004.
Management & Ownership
The Management Buyout Group consists of four individuals who currently are employed in responsible management positions at Taylor Fastener Company. The Group is contributing $200,000 of equity personally and will share equally in their ownership.
Donald J. Rummy (52 years old), Plant Manager, will serve as Chief Operating Officer of the post-acquisition business. He has been with the Company in his current position for ten years and came to Taylor from Integrated Co. where, for eight years, he supervised 45 people in the manufacturing plant. He previously worked for two years at Integrated as a Production Scheduler. Don's experiences have included training in Total Quality Management; ISO installation and management (100 hours); Statistical Process Control; Behavioral Interviewing and other human relation courses; Labor Laws; First Line Supervision; OHSA Regulations; Lean Manufacturing. He is a veteran of the U.S. Army and graduated Magna Cum Laude from the University of Akron in 1983 with a Bachelor of Science degree in Communications and Business.
Stephen W. Cohn (39 years old), Controller, will become Chief Financial Officer of the new company. He has initiated, implemented and supervised the installation of numerous accounting, finance and human resources systems at Taylor since joining the Company in June, 2002. From 2001-2002, he worked for the Company's public accounting firm Donald, Diserio & Company as an Auditor/Management Consultant. Steve's other positions included Manager, Financial Planning at ANDO, Manager of Financial Analysis at Arnot Pharmacies and Nutrition Centers, and Sales and Business Center Manager for QRI Environmental. He holds an MBA from Worcester Polytechnic Institute and a BA from The University of Florida. Steve currently is pursuing his CPA license and is a former U.S. Navy Officer.
Darryl B. Dane (41 years old), Toolroom/4-slide Supervisor, will be Vice President-Manufacturing after the buyout. Before joining the Company in 1994, Darryl oversaw tooling operations for ABC Company and eventually became responsible for all tooling and production, including the high-speed line of surgical staples and clips. His first responsibility at Taylor was to integrate CAD software into the tooling operations, including software selection and training toolroom personnel. He now supervises both the toolroom and 4-slide stamping operations for the Company. Darryl attended E. C. Goodwin Technical School, followed by an apprenticeship in toolmaking, and has spent his entire career in the fastener industry.
Aaron C. Taylor (32 years old), is the son of Robert Taylor, one of the selling owners. Aaron is a product engineer and Prototype Department Manager at Taylor Fastener Co. He is responsible for product design, estimating and scheduling for prototypes and production. He also spearheads the Lean Manufacturing effort for the Company, which has resulted in reduced set-up times, improved throughput and reduced inventory requirements. Aaron has worked at Taylor Fastener Company for over 16 years, including four years as an apprentice toolmaker, and has gained practical experience in nearly all departments of the Company. Once the buyout is completed, he will become Vice President in charge of the Design Engineering, Prototype and Quality Assurance departments, and also will be directly responsible for management of the Diamond account. He holds an Associates Degree in Manufacturing Engineering from Watertown State Technical College.
Douglas Smith (52 years old), Sales & Marketing Manager, joined Taylor Fastener in early 2004. He is not part of the Management Buyout Group and will not be a shareholder following the buyout. He will be responsible for all new marketing initiatives, as well as for the selection and coordination of manufacturers representative organizations. Doug brings over 25 years of direct sales and sales management experience to his position. Most recently, he was Mid States Regional Sales Manager for Guest Co., a manufacturer of plastic fittings used in the water industry. He spent more than 20 years as a sales engineer with Worcester Controls, a fluid power controls manufacturer. Douglas's technical sales background orients him well for the "applications solution" requirements of Taylor's customers. He attended Quincy College.
FINANCIAL
The consolidated financial statements of Taylor Fastener Co., Inc. for the fiscal years ended December 31, 2000-2004 are attached for reference. All statements were reviewed without qualification by Donald, Diserio & Company, CPAs of Toledo, Ohio. The consolidation includes Taylor Fastener Company, Inc. and its wholly-owned subsidiaries, Taylor Fastener Co., Inc. of Brownsville, Texas and Taylor Fastener Co., Inc. of Columbia, South Carolina. The South Carolina operation was closed and the subsidiary was dissolved as of December 4, 2002. The Brownsville manufacturing activity was closed by the end of March, 2005 and the remaining warehousing operation will be closed immediately following the buyout. These discontinued, and shortly-to-be-discontinued, subsidiaries contributed $1,151,000 in Operating Losses to the Company's consolidated financial performance over the past four years, as summarized below.
| ($000s) | Restated | ||||
| Preliminary | Actual | Actual | Actual | Actual | |
| 2004 | 2003 | 2002 | 2001 | 2000 | |
| Net Sales - Brownsville & Columbia | 747 | 1,547 | 2,801 | 4,725 | 5,670 |
| Income (Loss) from Operations: | |||||
| Taylor of Brownsville, Texas | -279 | -21 | -181 | -421 | 34 |
| Taylor of Columbia, S.C. | n.a. | n.a. | -298 | 49 | 60 |
| Total Subsidiary EBIT | -279 | -21 | -479 | -372 | 94 |
Operating Results
Taylor Fastener Company's accountant-prepared consolidated operating statements include consolidating balance sheets and income statements in each year, so that it is possible to examine the operating performance of Taylor of Toledo on a stand alone basis. This is the entity whose assets are being acquired in the proposed management buyout, and the operating history of that business is summarized below. It should be noted that the Toledo results include the costs of supporting the Texas and South Carolina operations, since these expenses were never segregated and allocated among the three operations on any consistent basis. Management's estimate of these unallocated carrying costs in each year is added back to the summary income statements shown below in order to more accurately depict the historical profitability of Taylor of Toledo. The subsidiary support costs included accounting services, which declined when the South Carolina subsidiary was closed at the end of 2002, as well as quality assurance, tooling and engineering support for the Texas manufacturing operation.
The five-year period depicted below shows stagnant sales which are due, in part, to the general economic slowdown that began in early 2001 and also to the Company's weak manufacturers' rep. network. Taylor is under-represented in certain major industrial centers
Taylor Fastener Company - Toledo, Ohio alone
| ($000s) | |||||
| Actual | Actual | Actual | Actual | Actual | |
| FYE - 12/31 | 2004 | 2003 | 2002 | 2001 | 2000 |
| Net Sales | 10,457 | 9,685 | 10,368 | 8,350 | 10,141 |
| Cost of Goods Sold | 8,314 | 7,137 | 7,409 | 6,152 | 7,383 |
| Gross Profit | 2,143 | 2,548 | 2,959 | 2,198 | 2,758 |
| - % Margin | 20.5% | 26.3% | 28.5% | 26.3% | 27.2 |
| Selling, General & Admin. Expenses | 2,132 | 2,266 | 2,025 | 1,939 | 2,600 |
| Income from Operations | 11 | 282 | 934 | 259 | 158 |
| plus: Depreciation & Amortization | 285 | 265 | 252 | 260 | 242 |
| EBITDA | 296 | 547 | 1,186 | 519 | 400 |
| add back: Carrying costs of discontinued subsidiaries | 169 | 175 | 190 | 248 | 248 |
| ADJUSTED EBITDA | 465 | 722 | 1,376 | 767 | 648 |
of the U.S. and several of the existing rep. organizations are inactive on Taylor's behalf. The correction of this situation is a key element of Buyout Management Group's Business Plan, as described below.
The 2004 Gross Profit margin was negatively impacted by a 19% year-to-year increase in the price of steel. This was due primarily to a world-wide steel shortage - including a shortage of nickel, which is a component of stainless steel - and surging prices throughout 2004. A number of factors contributed to the price increases, including higher energy prices for the energy-intensive steel manufacturing process, a weakening dollar and surging demand by steel-using manufacturers in China. The owners of Taylor Fastener Company were hesitant to pass along materials surcharges to customers until October, 2004, when an average 10% materials price increase finally was enacted. Much of the industry had taken this step earlier in the year. The net impact on operating results in fiscal 2004 was $815,000, as the $937,000 cost of materials increase was partially offset by the $122,000 surcharges passed on late in the year. In addition, a thorough examination of inventory values in Toledo and Brownsville was conducted during 2004 in order to correct valuation errors and to recognize obsolete inventory that had accumulated over the years, primarily as the result of production overruns. This resulted in a net $50,000 charge-off. Management believes that an additional $30,000 to $50,000 of obsolete inventory likely remains.
Management's Business Plan
The Buyout Management Group is determined to operate Taylor going forward with the primary goal of maximizing profitability. Progress toward this goal will come quickly with a three-pronged approach. First, certain expenses will be eliminated immediately following the buyout, none of which are speculative and all of which are within management's control.
Second, there currently are production inefficiencies related to excessive overtime, offloading of product, and production overruns that will be corrected within the first six months following completion of the buyout. Third, the restructuring of the manufacturers rep. network and other sales initiatives are expected to grow revenues over the next several years from a more diversified customer base. These Plan elements are described in more detail below and are incorporated into the forecasted 2005 and 2006 operating results that are summarized on page 5.
Immediate Expense Reductions vs. 2004:
- The buyout will eliminate the departing owners' compensation and related expenses, which amounted to $360,448 in 2004, not including a $140,000 "dividend" distribution that did not impact the income statement.
- Elimination of subsidiary support costs for accounting, quality assurance, tooling & engineering resulting from closing the Brownsville manufacturing facility in March, 2005. This cost amounted to $168,750 in 2004. The Brownsville warehouse remains operational, but will be closed immediately following the buyout.
- Termination of two people in the over-staffed Quality Assurance Department, one of whom was devoted entirely to support of the Brownsville, Texas manufacturing plant. The two compensation packages totaled $172,500 in 2004.
- Elimination of $184,598 in commissions paid in 2004 on non-current sales from past years to manufacturers' rep. organizations that will be terminated immediately following the buyout.
- Reduction in 2004 excess travel expense related to Brownsville: $5,650.
- Toledo rent expense of $22,000 paid in 2004, net of property taxes, will be eliminated since the property is included in the buyout. The previously paid rent will be available for debt service of the Proposed Financing.
- Discretionary items that will be discontinued, such as donations, subscriptions, entertainment and other miscellaneous items totaled $63,616 in 2004.
Production Efficiencies:
The Management Buyout Group will immediately make certain changes to improve the efficiency of the Toledo manufacturing plant. Even though the plant currently operates at an estimated capacity of only 50%, Taylor now spends about $10,000/week, or over $500,000 annually, on overtime pay. Moreover, $75,000 of product was "off-loaded" to competitors last year, which actually was down from the more typical $150,000 of annual business that is outsourced. These inefficiencies will be remedied within the first six months following the buyout with the hiring of three machine setup personnel and one operator to begin a second shift. This will eliminate the existing bottleneck that has been partially responsible for the excessive overtime, inventory overruns and, ultimately, obsolete inventory. The second shift of additional setup capacity will increase production flexibility and enable an 80% reduction in overtime cost by year-end 2005. The cost of the additional personnel is built in to the July-December, 2005 forecast below. For the full year, 2006, the incremental personnel cost of $275,500 will save $400,000 in overtime, plus $305,000 in inventory cost. The inventory turnover rate is expected to improve from below 5 times in 2004 to 6.6 times in 2006. Other production efficiency measures also are being considered to reduce outsourcing. For example, Taylor currently outsources it electronic welding at a cost of $8,500 per month. An electronic welding machine can be leased at a cost of just $3,500, for a savings of $5,000/month, or $60,000 annually.
Revenue Growth:
The Buyout Management Group already has identified the five rep. organizations that will be terminated for lack of performance, and is working with several new replacements that will provide more effective national sales coverage. Net Sales for the post-buyout second half of 2005 are forecasted to increase by 9.5%, or $546,780, vs. the first half of 2005. This increase is derived from identified new orders only, which represents a net increase for the full year of $900,000, plus the addition of $750,000 of existing Brownsville sales that previously were carried in a separate subsidiary. The 2006 forecast shows Net Sales increase of 12.4%, consisting of $500,000 already-identified new orders, plus $1 million that is conservatively estimated from new rep. organizations. The 6-7 new rep. organizations also will aid the Company to diversify its customer base from the current 30% sales concentration of Diamond Automotive, as previously mentioned, to a greater percentage of growth from other Tier 2 & 3 automotive suppliers and other industries. Product testing processes already are under way with prospective new rep. organizations.
Forecasted Operating Results
The following table contrasts the January-June, 2005 pre-buyout period with the July-December, 2005 post-buyout period (assuming a mid-year closing) and the implementation of the Business Plan that is described above. The 2006 forecast also is summarized in the table. Details of the 2005 and 2006 forecasts, along with their assumptions, are provided in the attached schedules, Exhibit I & II. A full five-year forecast through 2009 is being prepared by the Management Buyout Group and will be available shortly.
| Pre-Buyout | Post-Buyout | Forcasted | ||
| ($000s) | 6 mos. end. | 6 mos. end. | 12 mos. end. | Forcasted |
| 6/30/2005 | 12/31/2005 | 12/31/2005 | 2006 | |
| Net Sales | 5,777 | 6,323 | 12,100 | 13,600 |
| Cost of Goods Sold | 4,530 | 4,359 | 8,889 | 9,424 |
| Gross Profit | 1,247 | 1,964 | 3,211 | 4,176 |
| - % Margin | 21.6% | 31.1% | 26.5% | 30.7% |
| S. G. & A. Expenses | 1,153 | 613 | 1,766 | 1,659 |
| Income from Operations | 94 | 1,351 | 1,445 | 2,517 |
| less: Brownsville Whse. Cost | 71 | 71 | ||
| plus: Depreciation & Amort. | 144 | 140 | 284 | 284 |
| EBITDA | 238 | 1,420 | 1,658 | 2,801 |
The immediate improvement in profitability is the result of an increase in already-identified new orders, plus the immediate reduction of more than $900,000 in 2004 expenses, and the decline in overtime and inventory costs through implementation of a second shift. All of these improvements are non-speculative and are within management's immediate control.
Financial Position
The Management Buyout Group will acquire all business assets of Taylor Fastener Company, Inc., including, but not limited to, accounts receivable, inventory and machinery & equipment. In addition, the Toledo, Ohio real estate will be purchased from the owners' partnership, Taylor Realty, LLC. No liabilities will be assumed, except for accounts payable and other specified items in the ordinary course of the Company's business. The final Purchase & Sale Agreement will specify the relationship between the level of accounts receivable purchased and the assumed liabilities, such that positive working capital resources will be established. All assets will be acquired fee and clear of all encumbrances, as the owners will use a portion of the proceeds to pay off all secured debt.
The Company's normal selling terms are 30 days. Accounts receivable at April 4, 2005 totaled $1,334,416, of which 60% was current, 34% was 31-60 days from the invoice date, 6% was 61-90 days and less than 1% was beyond 90 days. The largest customer was Diamond Automotive Services, which accounted for 26% of the total A/Rs, followed by Atriant & Becker at 13%, James Tools at 7% and Loomis Manufacturing at 5%. All customer accounts that amount to more than 2% of Company sales are insured up to a maximum of $500,000 by CNB Insurance Company. This policy has been in place for two years.
Accounts payable at April 4, 2005 totaled $909,322, of which 39% was current, 46% was 30-59 days past invoice date and 15% was 60-90 days.
Inventory at March 31, 2005 totaled $1.8 million, which consisted of 81% finished goods, 8% raw materials and 11% work-in-process. Finished goods are produced pursuant to customer orders and are important to their on-going programs. However, the Company traditionally has produced overruns at levels that the Buyout Management Group feels is imprudent going forward, since the practice has led to a buildup of obsolete finished goods inventory. The obsolete inventory that remains following the 2004 write-off is estimated to be in the range of $30,000 to $50,000.
Management estimates that the level of capital expenditures going forward to maintain the existing plant capacity is approximately $250,000 per year. No major capital equipment additions are contemplated over the next several years.
Pro Forma Financing Structure
TSC Acquisition Company will be capitalized by a combination of Senior Debt, Subordinated Debt and Equity, as shown in the table below. The proceeds will be used to purchase all of the business assets of Taylor Fastener Company, Inc., as well as the real estate owned by Taylor Realty LLC, for $3 million, plus $300,000 of other payments to the sellers. Approximately $1.4 million of the proceeds will be used to repay all existing debt and to pay the estimated $200,000 is transaction costs and fees. It is estimated that the Revolving Credit portion of the capital structure will have excess unfunded availability at closing of approximately $900,000.
| Funded at Closing | |
| Revolving Credit Loan, $1,750,000 line | 850,000 |
| Term Loan | 1,750,000 |
| Mortgage | 1,100,000 |
| Total Senior Debt | 3,700,000 |
| Subordinated Debt | 1,000,000 |
| Equity | 200,000 |
| Total Funding at Closing | 4,900,000 |
The table below demonstrates that this capital structure will require an estimated $638,963 of total debt service in the first year following the buyout. This assumes that both the Term Loan and Mortgage are repaid on the basis of level principal payments plus interest on the declining balance, rather than using a mortgage table. It also assumes that the Subordinated Loan is repaid beginning in yr 3. The interest rates shown below are estimates for calculation purposes and the principal amortization schedules are taken directly from the Summary of Proposed Financing described on pg. 1 of this Presentation.
| Interest | Principal | Total Debt | |
| Expense | Amortization | Service | |
| Revolving Credit Loan, Interest @ 5.5% | 46,750 | 46,750 | |
| Term Loan - principal + interest @ 6% | 97,500 | 250,000 | 347,500 |
| Mortgage - principal + interest @ 6.5% | 69,713 | 55,000 | 124,713 |
| Total Senior Debt Service | 213,963 | 305,000 | 518,963 |
| Subordinated Debt, interest-only @ 12% | 120,000 | 120,000 | |
| Total Debt Service, Year 1 | 333,963 | 305,000 | 638,963 |
Pro Forma Debt Service Coverage
The Company's historical operating results in 2004 were inadequate to cover pro forma debt service & capital expenditures without first adding back the expenses of that period that will be eliminated immediately upon completion of the buyout. This rationale is presented in the table below, along with a demonstration of coverages for 2005 and 2006. The operating cash flow generated in the first six months following the buyout will be significantly higher than the results for the comparable pre-buyout period. This was demonstrated and discussed earlier in the context of Management's Business Plan (page 4) and Forecasted Operating Results (above, this page). The results for the first full year thereafter improve further, since the benefits of the immediate expense reductions, improvements in production efficiency and identified sales increases are realized for the full year.
| ($000s) | Actual | Forecast | Forecast |
| 2004 | 2005 | 2006 | |
| Actual EBITDA | 285 | ||
| add back: 2004 expenses eliminated upon buyout | 978 | ||
| Adjusted & Forecasted EBITDA | 1,263 | 1,608 | 2,801 |
| less: Depreciation Expense | 285 | 284 | 284 |
| Earnings Before Interest & Taxes | 978 | 1,374 | 2,517 |
| less: Pro Forma Expense | 334 | 334 | 334 |
| Pro Forma Pretax Income | 644 | 1,040 | 2,183 |
| estimated State & Fed. income taxes @ 37% | 238 | 385 | 808 |
| Pro Forma Net Income | 406 | 605 | 1,360 |
| add back: Depreciation | 285 | 284 | 284 |
| Pro Forma Cash Flow | 691 | 939 | 1,609 |
| less: Future Capital Expenditures | 250 | 250 | 250 |
| Cash Flow available for Principal Amortization | 441 | 689 | 1,409 |
| Principal Amortization, yr. 1 | 305 | 305 | 305 |
| "Free" Cash Flow | 136 | 384 | 1,104 |
| Coverage of Pro Forma Principal Amortization | 1.44 | 2.26 | 4.62 |
The above analysis demonstrates that 2004 operating results, when adjusted for expenses to be eliminated immediately upon the buyout, produced adequate cash flow to cover all pro forma debt service generated by the Proposed Financing. Once the Buyout Management Group's Business Plan is implemented, the coverages improve dramatically.
CONCLUSION
Taylor Fastener Company is well-established in its market niche as a producer of highly-engineered, low order volume metal fasteners, wire formings and stampings. The Management Buyout Group is well-qualified to run the business going forward and to significantly improve profitability immediately through the elimination of certain easily-identified, unnecessary expenses. In addition, Gross Profit margins will be returned to historical levels and beyond, through the rapid implementation of certain simple operational improvements that will significantly reduce overtime cost, product outsourcing and habitual production overruns. Finally, a major restructuring of the manufacturers' representative sales network, which already is under way, will stimulate revenue growth, beginning immediately following the closing of the buyout transaction.
The proposed buyout transaction is an asset purchase. Because the assets to be purchased include all accounts receivable and real estate - assets which often are excluded in such transactions - the Management Buyout Group is afforded the opportunity to raise a significant portion of the purchase price as senior secured debt. However, in order to insure a healthy level of working capital going forward and a "bankable" balance sheet, $1.2 million of the total $4.9 million funding will be in the form of "capital" through a combination of $1 million Subordinated Loan and $200,000 Equity. It is estimated that $900,000 of excess working capital availability will be on hand at the time of closing.
Each senior debt element of the Proposed Financing will be well-secured by tangible assets that have been valued by recognized equipment and real estate appraisers. The accounts receivable are of high quality and are credit insured. The predominance of inventory consists of finished goods that are produced pursuant to long-term customer order programs. Overall leverage is relatively low, as the relationship between total debt and 2004 EBITDA (adjusted to add-back $946,000 of immediately eliminated expenses) is just 3.82 times and is 3.42 times in 2005. Cash flow coverage of total debt service is 1.44 times in 2004 (adjusted), 2.26 times in forecasted 2005 and 4.62 times in forecasted 2006. The Subordinated Loan is well-compensated in today's market for its junior position at a guaranteed 18% IRR. However, the deferral of 6% of interest, plus the two year interest-only period, will afford the Company some cash flow relief during the period immediately following the buyout while certain improvements are being implemented.