Calderon Textiles – Business Memorandum

Calderon Textiles

Business Memorandum

Summer 2005

Prepared by

LS Associates, LLC

INDEX

______

  1. Executive Summary
  1. Business Overview

Industry Overview

1.)Healthcare and Hospitality Division

2.)Textile Rental Division

3.)Retail (Concordia) Division

Facilities

Equipment

Management

Recent Operational Events

Risk Discussion

III. Financials Discussion and Statements

IV. Fixed Asset Values and Analysis

I. Executive Summary

Calderon Textiles (“CTI” or the “Company”) with headquarters in Indianapolis, Indiana, is an Indiana corporation founded in 1983.

The company year-end is December.

Sales / Gross Margin / Gross Margin % /

S G&A %

/ % Sales
Increase
6 months ended June 2005 / $38,763,743 / 5,693,365 / 14.7% / 11% / 9%
2004 / $66,672,913 / 9,425,960 / 14.1% / 15% / 16%
2003 / $56,004,601 / 8,737,693 / 15.6% / 14% / 11%
2002 / $49,600,257 / 8,294,103 / 16.7% / 14% / 1%
2001 / $49,375,631 / 7,333,730 / 14.9% / 12% / 5%

Calderon mainly imports its products. Some of what is imported requires additional “value added” processes when it arrives in the U.S. The value added process is mainly packaging related for selling bulk imports in smaller packages to specific retailers. In addition, there is some cutting and sewing of fabrics for the Healthcare and Hospitality markets.

Currently , the Company has two primary divisions:

Institutional Division – imports and distributes textile products, such as towels, bed sheets, table linens, aprons, blankets and bedding

Retail Division(“Concordia” Division) – imports and distributes automotive body care products

These divisions have a broad range of customers and subsets of business within their line of business and share accounting, G&A, purchasing, and warehousing resources of the Company.

The Company’s products and services are provided to a worldwide customer base and its customers are primarily from the following industries:

Institutional:

% of Sales
2004 / 2003 / 2002
Healthcare / Hospital Laundries / 11% / 14% / 14%
Hospitality / Travel
Franchises
Resorts/Water Parks
Spas
Convention Centers / 12% / 10% / 11%
Textile Rental / 40% / 42% / 42%
Direct Import
Cruise Lines
(Carnival, HollandAmerica) / 10% / 10% / 9%

Retail:

% of Sales
2004 / 2003 / 2002
Retail Centers
Wal-Mart
Target / 25% / 23% / 23%
Automotive
Canadian Tire / 2% / 1% / 1%

COMPANY HISTORY

  • 1983 – Company founded in the president’s garage – initial product line

focused on bath towels, washcloths and linens

  • 1991 – Full-fledged textile rental division established
  • 1995 – Company moved to 75,000 sq ft facility on 8 acres
  • 1995 – Purchase of Concordia – a distributor for retail body care products
  • 1998 – Purchase of Milin industries in Detroit adding multiple distribution

center locations

  • 2001 – Garment manufacturing division established
  • 2001 – Company leased 105,000 square foot facility to house inventory

for the retail segment of the business

  • 2003 – Purchase of Swobbit™ Products – a producer of utility poles to

wash large recreational vehicles

Calderon has been in business for twenty- two years. Its longevity in this industry and past successes can be attributed to its ability to be an innovative importer and provide solutions to the customers’ verses being viewed as solely a commodity supplier. In the past, the Company has mostly relied on imports and its overseas relationships to provide solutions at a competitive price. Over the last eight months, Calderon has been making changes to its business model.

During 2003, 2004, and 2005, Calderon encountered several business challenges. As the Company grew, Calderon lost some of its agility. Recent changes in the industry, specifically the lifting of all textile import quotas in January of 2005, have forced Calderon to re-evaluate how it does business and what changes are needed to succeed in its new environment in the future.

In addition to industry changes, Calderon has faced internal operational challenges related to:

  1. Significant growth in the retail portion of the business and education in dealing with Wal-Mart and Target
  1. Installation of a new software package
  1. The inability to finance its growth within the existing credit facility, which has resulted in aninability to properly maintain inventory levels and receivable terms that the company demands.

Recently, the Company has placed a concerted focus on :

-controlling costs

-improving working capital

-realigning its core business opportunities

-exiting businesses or business strategies that are no longer profitable and will not fit with the future business model

The results of these efforts can be seen in the Quarterly Financial summary and working capital analysis below:

CALDERON TEXTILES
QUARTERLY FINANCIAL SUMMARY
2nd Qtr / 1st Qtr / 4th Qtr / 3rd Qtr / 2nd Qtr / 1st Qtr
2005 / 2005 / 2004 / 2004 / 2004 / 2004
Sales / $ / 22,228,976 / 16,534,767 / 15,124,883 / 16,047,727 / 20,266,823 / 15,233,478
Gross Profit / $ / 3,487,557 / 2,205,808 / 2,141,200 / 2,123,665 / 2,954,356 / 2,119,951
% / 15.7% / 13.3% / 14.2% / 13.2% / 14.6% / 13.9%
Sales, General & Administrative / $ / 2,341,599 / 2,023,230 / 2,142,421 / 2,515,122 / 2,702,319 / 2,341,700
% / 10.5% / 12.2% / 14.2% / 15.7% / 13.3% / 15.4%
Operating Income / 1,145,958 / 182,578 / (1,221) / (391,457) / 252,037 / (221,749)
Interest Expense / 235,238 / 230,528 / 209,184 / 252,904 / 203,821 / 181,261
Other Inc / (Exp) / (18,193) / 25,948 / (162,418) / (139,207) / (236,767) / (178,945)
Extraordinary Expense / 1 / (1,283,242)
Net Income (Loss) / (390,715) / (22,002) / (372,823) / (783,568) / (188,551) / (581,955)
EBITDA( excludes extraordinary) / 1,229,978 / 302,517 / (92,337) / (439,279) / 106,605 / (309,522)
1) Notes on 2005 Extraordinary Expenses
The charges consist of write-downs for discontinuing operations and related expenses for restructuring. See detail in Financial analysis.

The quarterly working capital trends and momentum can be seen in the quarterly overviews below:

CALDERON TEXTILES
WORKING CAPITAL TRENDS
Quarter / Accounts / Quarterly / Days
Ending / Receivable / Revenue / Outstanding
Mar 04 / 10,116,768 / 15,233,478 / 61
June 04 / 11,601,872 / 20,266,823 / 52
Sept 04 / 10,478,069 / 16,047,727 / 60
Dec 04 / 8,756,044 / 15,124,883 / 53
Mar 05 / 10,517,216 / 16,534,767 / 58
June 05 / 12,195,429 / 22,228,976 / 50
Quarterly / Days
Inventory / Cost of Sales / Outstanding
Mar 04 / 16,325,377 / 13,113,527 / 114
June 04 / 19,164,914 / 17,312,467 / 101
Sept 04 / 20,632,383 / 13,924,062 / 135
Dec 04 / 17,031,813 / 12,983,683 / 120
Mar 05 / 16,171,725 / 14,328,959 / 103
June 05 / 16,880,331 / 18,741,419 / 82
Accounts / Quarter / Days
Payable / Cost of Sales / Outstanding
Mar 04 / 8,338,636 / 13,113,527 / 58
June 04 / 11,596,665 / 17,312,467 / 61
Sept 04 / 11,149,063 / 13,924,062 / 73
Dec 04 / 7,713,204 / 12,983,683 / 54
Mar 05 / 8,626,654 / 14,328,959 / 55
June 05 / 9,807,686 / 18,741,419 / 48
Line of
Credit
Mar 04 / 14,178,302
June 04 / 13,664,608
Sept 04 / 15,994,185
Dec 04 / 14,666,148
Mar 05 / 14,915,062
June 05 / 15,518,831

Additionally, over the last three months, the Company has reduced the advance rates on its revolving Line of Credit with its lender from 85% on receivables and 65% on inventory to 80% on receivables and 60% on inventory.

Management is in the process of implementing additional initiatives to further improve its business model. Most of these have been announced and implementation begun:

1.)Management has decided to eliminate the West Coast operations. Over the past three years the West Coast warehouse and sales have not been profitable and have required warehousing and inventory on the West Coast that has historically been very slow moving.

2.)Management is eliminating its relationship and sourcing from WIP-X, a captive supplier based in Atlanta. The products made at WIP-X can now be sourced at a lower price from overseas. Maintaining this investment, inventory, and working relationship is not expected to be beneficial or profitable in future years as the industry moves beyond this type of sourcing.

3.)Management is contemplating the elimination of Mexico manufacturing, sourcing, and inventory. This resource has helped address timely needs of quality, shorter-run production requirements in the past, however, it has required maintaining inventory in Mexico and the expense of managing the production schedules, inventory, and shipping. In future years it is anticipated that this need may be met by overseas sourcing from Pakistan at a lower cost.

4.)The Company is in the process of changing its inventory mix, purchasing, and supply chain management. Calderon still experiences shortages of product in its high volume items too often, which results in missed sales or substituting products at lower margins. The Company has recently eliminated many slow moving items from its inventory and is changing how it forecasts future needs and minimuminventory levels. In addition, it is addressing vendor reliability and performance to eliminate or reduce the late shipments, and has made changes in its purchasing department and supply chain management. The Company is also initiating a search for a high level purchasing associate to lead purchasing and inventory management. This person will be recruited from outside the current organization. It is anticipated that some of these benefits will not be seen until late 2005 and early 2006.

5.)The Company has restructured its credit policies and management. Many of these benefits can be seen in the most recent two months and are expected to continue to show improvements. These restructurings have included implementing timely and efficient credit applications and research, establishing limits and terms for all customers, aggressively reconciling all customer accounts, pursuing collections for past problem accounts, and ensuring timely and accurate cash application. Although much progress has been made over the summer, it is expected that it may take until November or December to put in place all procedures and have all open issues within the credit department addressed. The goal is to become more proactive vs. reactive in managing customer credit.

6.)Calderon is moving toward improving on time delivery and shipping performance. In addition, the Company desires to become more flexible and agile in revising warehousing and shipping needs as customer needs and product mix change. Over the last year, Calderon has expanded its Direct Import program in which products can be imported and delivered directly to the customer without involving internal warehousing and shipping. As far as internal management of a warehouse, Calderon is looking to outsource its warehousing and logistics to a third party warehouse management firm that specializes in warehouse management for distribution companies. This benefit should be seen in 2006.

7.)Calderon is improving its communication, knowledge sharing, and training with sales associates and customer service personnel to enhance its ability to ensure that each sale is profitable and to increase margins.This in turn should allow the Company to become more responsive, easier to work with and better communicators with the customers. Internally the goals are to reduce the significant amount of small orders, implement handling charges, reduce backorders, and move toward a business model more focused on selling items with higher margins and service vs. a business model focused on just growing sales. This will require changes with-in customer service, sales, communication systems and improved web based tools.

II. Business Overview

Industry Overviews

1.) Healthcare and Hospitality Division

Pursuant to the agreement drafted by the World Trade Organization (WTO) on January 1, 2005, virtually all import quotas on textiles were lifted. Many companies have been scrambling to establish a presence in the manufacturing and sourcing of textile products off shore. Given the realities of the post-2005 textile marketplace, Calderon Textiles will build its business by excelling in providing quality products that are better than domestic goods manufactured in the U.S. at prices that will be attractive to both the healthcare and hospitality markets. Calderon has a unique advantage over competitors in that the Company has over 20 years of experience manufacturing and sourcing products overseas. Currently Calderon imports from Pakistan, Bangladesh, China, Turkey, India, and Nepal, among others. In 2004 the Healthcare and Hospitality division accounted for $11.5 million in total sales. Of this total $5.2 million was sold to healthcare customers, $5 million to hospitality customers and the remaining $1.3 million to distributors, colleges, universities and other industries that do not fit into the healthcare or hospitality industries.

Objective

Calderon will continue to place an emphasis on growing the overall sales and maintaining the profitability of the Healthcare/Hospitality division. Sales and margins over the last 3 years have been as follows:

Sales / Gross Margin %
2002 / $10,046,106 / 24.82%
2003 / $11,097,134 / 24.43%
2004 / $11,562,235 / 22.37%
2005 (6 months) / $6,045,184 / 21.70%

Market Share Analysis

Management has estimated market share based on the number of customers who ordered within a 16-month period compared to the number of facilities in the Info/USA database. Recent data indicates that there are currently approximately 60,000 hospitality entities in the U.S. This data also suggests that there are approximately 40,000 healthcare facilities throughout the U.S. Therefore, the Company’s current market share is estimated by management to be 2% for Hospitality, while the Healthcare market share is approximately 3%. The Company’s strength is mainly in the Midwest. Both markets are experiencing rapid change and Calderon’s “agility” and response to the markets’ changing needs and demands will be a strength.

Competitive Analysis

Calderon’s management believes it has nine primary competitors in the Healthcare/Hospitality arena (discussed below) and at least ten secondary competitors. The following is an overview of the nine primary competitors:

Guest Supply

  • All inclusive supplier – linens, amenities (shampoo, soap), vacuums, coffee pots, etc.
  • Competitive pricing
  • Good sales force
  • Free delivery on orders over a certain dollar amount

American Hotel Register

  • All inclusive supplier – linens, amenities (shampoo, soap), vacuums, coffee pots, etc.
  • Competitive pricing
  • Service is their weakness
  • Poor customer service
Medline (Healthcare Only)
  • Good quality products
  • Competitive pricing
  • All inclusive supplier – linens, amenities (shampoo, soap), gloves, medical supplies, etc.
Kahn and Company
  • All inclusive supplier – linens, amenities (shampoo, soap), vacuums, coffee pots, etc.
  • Good import products
  • "Room Ready" program – linens ready for use upon delivery, no need to launder
  • Poor customer service

Direct Supply

  • Décor for healthcare – furniture, wallpaper, carpeting, etc.
  • Large variety of inventory
  • Poor industry reputation

Standard Textile

  • Proprietary fabric line for décor – furniture, etc.
  • Good installation team
  • Professional sales force
  • Healthcare focus
Phoenix Textile Company
  • Small décor presence
  • No customer loyalty – often a reflection on poor sales relationships
  • Marginal prices
  • Poor service

Encompass (Healthcare Only)

  • Healthcare focus
  • No customer loyalty
  • Poor service
  • Low quality
A-1 Textiles
  • Bait - n - Switch
  • Competitive prices – only when using bait–n–switch tactics, otherwise pricing is marginal
  • Inferior quality

Calderon attempts to differentiate itself from the above listed competitors through a variety of different means. Since its inception in 1983, Calderon has developed a professional and personalized sales force and the Company has been able to maintain a loyal customer base. Many of the inside sales representatives have been with the company for 10 or more years. Combined, the sales representatives have over 70 years of experience selling linens to the healthcare and hospitality markets. Additionally, Calderon has spent the last 22 years developing a vast network of overseas suppliers. These suppliers represent the best manufacturers in several different countries. Because the Company’s President, Azher Khan, is a native of Karachi, Pakistan, the Company has unparalleled contacts within Pakistan. By maintaining this diverse mix of vendors, Calderon’s goal is to obtain a continual supply of the best quality products at the fairest market prices. In turn, the Company is able to supply its customer base with good quality products at fair market prices while maintaining good profit margins.

Market Opportunities

Management believes the Company has the ability to increase its customer base and as a direct result the gross sales. The majority of all hospitality entities are franchised by Choice Hotels International, Best Western International, Cendant Corporation and Intercontinental Hotels. Calderon is already an approved vendor for Choice Hotels and has seen its sales to franchised hotels increase from $300,000 in 2003 to $1 million in 2004. Calderon senior management continues to work with Best Western, Cendant Corporation and Intercontinental Hotels to develop specifications for bedding and bath linens. It is anticipated that as hotels move toward increasingly luxurious goods throughout their properties, Calderon will have the opportunity to enhance profit margins. Apart from franchised hotels, management has also identified a target market of 4 and 5 star independent hotels to sell its higher end products.

The Healthcare and Hospitality Division has also realized initial success in working with design firms that are starting to specify linens in the Hotel Industry. Presently Calderon is working with a design firm on a project that will utilize all of the luxury items, Luxuria towels, sheets and robes. The first phase of this project will open in July and will be approximately $250,000 in volume with a 25% gross profit. This will hopefully be a market that may lead to many other opportunities within the changing hotel design community.

Opportunities for new markets include:

  • Government
  • University/College
  • Conference/Event/Hotel/Residential Services
  • Athletic Departments
  • Food Service

To penetrate each of these markets, unique approaches would need to be formulated. Calderon does have an approval for a Federal CAGE number; therefore, the Company has the ability to bid on Federal procurement contracts. As an example, Calderon can bid on terry and bedding for military bases and officers housing as well as military institutions.

2.) Textile Rental Division

Although Calderon sells nationwide, Calderon management believes its’ strength is in the Midwesttextile rental market place. The Company will maintain this strength through continued efforts to provide superior import products at prices that are attractive to the market place. In addition, Calderon will continue to work with its customers and vendors to provide new and innovative products at the best prices possible.

Objective

The objective of the Textile Rental Division continues to be growing sales and margins as it has for the last 3 years:

Sales / Gross Margin %
2002 / $20,138,353 / 14.89%
2003 / $22,857,063 / 14.86%
2004 / $25,247,956 / 15.14%
2005 (6 months) / $12,263,631 / 12.16%

However, management believes future growth and margin opportunities will not come from institutional linens as in past years. Rather, the Company expects to shift its focus on growth through increased sales of table linen and garments that are all higher margin goods.

Market Share Analysis

Calderon currently engages in business with a wide variety of Textile Rental customers throughout the U.S. Management estimates that annualized industry sales for the segments of the market that Calderon presently serves are roughly $10 billion. In 2004 the Textile Rental Division’s sales reached $25.2 million, or 2.5% of the projected market. The company is contracted to provide various items to ARAMARK, Cintas Corporation, and Van Dyne Crotty, all of whom are corporations with industrial laundry plants dispersed throughout the country. Calderon also continues to service and grow its business relationships with CSCNetwork and UniLink, the country’s two largest industrial laundry consortiums. For example, since contracting to supply table linen to ARAMARK in January of 2005, Calderon has taken over 25% of the total business, $2.5 million, which equates to nearly $700,000 in annual table linen sales for the division.