In early January, 2004, Lloyd Singer, Managing Director and co-founder of Westport, CT based Business Renewal Solutions (BRS), was selected by Ray Neihengen, chairman of TMA’s Midwest Chapter’s Pro Bono Committee, to undertake a turnaround assignment on behalf of Lake Villa, IL based Interplex Co. Interplex is a seventeen year old company and one of more than 200 distributors of Class C inventory components (fasteners – nuts, bolts, screws, rivets, etc.) sold predominately to manufacturing businesses in the northern Illinois region.

Singer was assisted in the engagement by Charles Winternitz of Internitz Inc. and Westport, CT based Joe Tesoriere, Singer’s partner and co-founder of BRS.

The Situation

At Singer’s first meeting with Interplex CEO and founder David Hartwig on January 14, it was obvious that Interplex was far down the “slippery slope” and that a successful outcome was a long shot at best. Interplex was virtually in a revenue free fall with sales down 75% per month over the past three years. The company was clearly in a double whammy situation - a victim of the rapid migration of assembly and manufacturing jobs to Asia as well as the difficulty of competing with bigger players in the Asian sourcing of parts for U.S. manufacturing. Its Balance Sheet as of year-end ’03 had a six figure negative equity.

The company was two quarters behind in Federal and State payroll taxes as well as delinquent two years on its Lake County real estate taxes on its 13,000 square foot warehouse/office building in Lake Villa, its principal asset. Liens had been filed by both taxing agencies.The company was seriously delinquent on both principal and interest payments on its secured debt with a suburban Illinois bank. The debt to revenue ratio was a dangerous 1:1. The loans were in workout under the supervision of a creative Vice-President who had suggested a TMA Pro Bono solution as a last resort. Financials were in disarray with a new bookkeeper, new financial consultant, and a new software system that was difficult to work with – especially for such a small business. There was no Cash Flow statement. AR and AP were upside down with 80% of payables in the over 90 column. Interplex was maxxed out on fourteen company credit cards used to finance customer orders with key vendors with accumulated obligations of over $117,000. Without an ability to prepay vendors, the company was in danger of losing its key customers.Morale of employees and the owner was understandably low. In a word – the circumstances were dire.

The Plan

After the analysis, our alternatives appeared to be few and far between. An “11” or an Illinois ABC would certainly help in reducing the liabilities but there were no leases to reject, and the shortfall on the secured debt would probably force personal bankruptcy for the owner. Foreclosure by the bank would doubtless result in fire-selling the building, inventory, AR. Again, a significant shortfall for the secured lender and bankruptcy for the owner. On the strengths side of the ledger, there were several to consider. The founder and 17 year CEO was (and still is) a strong salesperson with a loyal following of about 20 customers who paid their bills promptly, mostly blue chips. The remaining ten employees were highly experienced and loyal – a base that could run the business. The bank had demonstrated extreme patience and appeared to want to workout the loan rather than foreclosing. Creditors were reasonably understanding and aware that pushing the business into “involuntary” would result in close to zero recovery of their AR. And the building appeared to be a strong asset that we might be able to work with. The owner had already cost-reduced the business dramatically. Headcount had been halved. They moved the business into half the space with a plan to lease out the other half to further reduce costs. After extensive review with David Hartwig we decided that despite the Myth of Sisyphus situation, a try at a turnaround was the best bet.

Here are the major elements of the Plan we developed:

I. Secured Lender. Make the bank a key member of the turnaround team. We met several times with the workout VP, one of the most creative workout VP’s I have had the pleasure of working with. It was clear from the outset that he did not want to take a haircut, despite a 75% SBA guarantee on the loan. It was also clear that he viewed the foreclosure alternative as a last resort, and one that would result in a substantial shortfall on the loan. He gave us time to put our plan on paper, and start to execute.

II. Building. Get 50% of the building leased out and on the market as soon as possible. We got an $810,000 fair market value appraisal and put it in the hands of a commercial broker with a price tag of $790,000.

III. Lease Income. Get the remaining 6500 feet of the building including an attractive loft apartment leased out to generate some monthly Cash Flow.

IV. Taxing Authorities. Met with IRS and other taxing authorities to work out settlements and buy time.

V. Operations. Stabilize the business on the downside. Make it break-even or profitable at the EBITDA line at current sales levels.

VI. Strategic – M&A. Find either a small acquisition or larger divestiture candidate in the same business to achieve either critical mass, profitable revenues, or a chance for David to bring his account list, AR and inventory to a buyer that was looking for a growth opportunity.

VII. Strategic - Sourcing. Find an Asian sourcing and credit opportunity that would make Interplex more competitive, and broaden the range of products the company could offer.

VIII. Cash. Find a way to fund short term purchases to avoid loss of revenue and customers.

The Results

IX. Secured Lender. Bank agreed to, and executed a 90 day, interest-only Forbearance Agreement which we’ve been able to handle. This helped with our sagging internal PR at the bank and, with the rest of our moves and demonstrated our ability to turn the situation around. We are currently making both principal and interest payments in a timely manner.

X. Building. We have prospects for the purchase of the building but no closure at this writing.

XI. Lease Income. Interplex has leased out both the first floor storefront space as well as the loft apartment with a total monthly income of $4100.

XII. Taxing Authorities. We are current with our quarterly IRS obligations and have submitted an OIC (Offer in Compromise) offering a Cash settlement of 50%. The bank has paid the two years of delinquent real estate taxes. We arranged a payment plan for the State of Illinois for the arrears.

XIII. Operations. The business is now running at an average of approximately $100,000 in revenues, up approximately 50% over Q1 run rate and generating break-even at the Net Income line and approximately $10,000 at the EBITDA line. Reporting is timely and the team is able to work with the financials.

XIV. Strategic – M&A. We are currently negotiating the purchase of an $800,000 revenue, profitable parts distribution business based in the Rockford area. The sole shareholder would become a salesperson for the merged entity. The combined entity would generate better than $50,000 per month in cash, expand our customer base and give us a foundation for further strategic growth.

XV. Strategic - Sourcing. The company is now in a sourcing partnership worked out with an Elk Grove Village $100 million public electronic assembly outsourcing company. The partner has a 13 person sourcing office on Taiwan. While most of their work supports their new mainland China assembly plant, they have granted Interplex a $100,000 open credit line which has helped Interplex expand their vendor purchases dramatically.

XVI. Working Capital Loan. With the approval of the bank, Singer and another investor have formed a small partnership to make revolving Cost of Goods Sold loans to AMCORE on select orders.

Bottom Line

While the turnaround is far from complete, and there are still potential roadblocks, we’ve come a long way from those bleak January, 2004 days. Hartwig’s morale is high. And his enthusiasm is infectious. The team approach has produced excellent results and we believe Interplex will survive and prosper once again.

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