Silver Fox Advisors - Case Studies

COMPANY

The Company was a $10 to $13 million per year revenue steel processor that converts flat rolled coils into slit strip and sheets to specific customer requirements. The product line is low added value with raw material a high percentage of revenue. The Company came out of bankruptcy two years ago and was financed by GE Capital as an asset-based lender. The facility is a 100,000 sq ft plant for raw material storage and processing equipment. All facilities and equipment are leased.

PROBLEM ENCOUNTERED

Operating losses were continuing with negative cash flow from the time it was taken out of bankruptcy. However, assets were adequate for loan coverage at the time of the SFA's involvement. Inventory was excessive with little control. Gross margin on sales and the operating expenses indicated that losses would continue unless changes were made. Later in the SFA's involvement, GE Capital advised that the account was too small and would no longer provide funding. GE gave the Company a six month notice to pay off the debt.

SILVER FOX ADVISOR INVOLVEMENT

The first and primary issue was to initiate lower operating expenses; second, to raise the gross margin on sales; and third, to generate a positive cash flow. During the first few meetings, management believed that they could work out the situation by increasing sales. Inventory planning was arbitrary and speculative. The Controller was inadequate for the job. Monthly closings took four weeks with little management information. Fixed asset ledgers were incorrect with understated depreciation.

In the first two months, a layoff was made. The Owner took a pay cut. These actions resulted in a 30% reduction in salaries and wages. Other selected expenses were cut. Inventory was worked down. A new Controller was hired and backed up by a CPA Firm, which also performed a year-end review and tax filings. Inventory constraints were imposed using input/output controls. As time progressed, selected prices and gross margins were improved, partly as the result of the economic environment in the steel business.

Following the GE Capital announcement, the Company retained another SFA who specializes on securing asset-based lenders. The task was difficult but successful; however, at a continuing high borrowing rate. After five months of profits borrowing, costs will be reduced.

After one year of SFA involvement, the results on a comparative first five months basis are as follows:

	2001	2002		Difference

	---------------$1,000's------------------			%
Sales	4,359	3,966	(393)	(9)
Profit	(141)	44	185	100
Compensation	488	340	(148)	(30)
Inventory	2,255	1,353	(897)	(40)
GE Loan	2,040	1,215	(825)	(40)

CONCLUSIONS

While the company is not completely out of the "woods" and still has high borrowing costs remaining, it can make a profit. With continuing results, the Company will be bankable and/or saleable within a year.