Matrix Associates

Situation

A $50 million direct marketing firm was losing money, accounts, key sales reps, and an internal battle with an information system which seemed designed to prevent business, rather than facilitate it. The principle shareholder/CEO was acting irrationally. Key employees convinced the board of directors to hire Matrix to do a Rapid Situation Analysis. Based on our projection of an imminent cash crisis the board hired Matrix to effect a turnaround.

Matrix Action

Matrix took immediate executive control of the business. We added detailed research to the situational analysis and opened lines of communication with key lenders and vendors. We revamped the sales floor, putting new leadership and rules in place. We launched new market initiatives, settled dozens of outstanding lawsuits, all in the company’s favor, renegotiated lease terms and reduced fixed costs, bring operational costs within cash flow. We negotiated with a key strategic partner to free up cash to invest in a state-of-the-art computer system that was sales friendly.

Result

Within 9 months the firm was generating more than $100K/month in operating profit and on its way to a record year.

Situation

Faced with the alternative of becoming family pet doctors, a group of Minnesota veterinarians took it on themselves to save family farm livestock production in rural Minnesota. Bringing science, medicine, and organizational skills the veterinarians put together a collection of farmer-owned companies to breed top quality livestock. They created a leading national artificial breeding operation and structured companies to manage labor, transportation, feed, packaging and marketing. Carefully following Minnesota's strict family farm laws, the veterinarian organized to flow profits downstream to the farmers-owners.

The operations flourished, growing from nowhere to the 14th largest pig production operation in the country. Then disease and a disastrous market took its toll. Production dropped and costs rose. The principle lending bank changed hands and the new owners saw a debt package far in excess of liquidated value. While the operation was current in debt service, the bank, under pressure from regulators, began to make noises about not renewing the loans. The veterinarian, seeing their entire successful operation in jeopardy, called in Matrix Associates.

Matrix Action

Matrix conducted a thorough analysis of all financial operations, looked at the market and reviewed the steps the veterinarians had taken to curtail disease and bring production back to normal.

By building detailed cash flow projections for each of the many operating units, Matrix was able to show the bank exactly how much debt the system could support. Using these projections as a guideline, Matrix negotiated with the lead bank to reduce total indebtedness as an incentive to find a new lender. The bank agreed to a multi-million dollar write-down, representing 45% of the loans outstanding.

Matrix presented the recovery plan to alternative banks. While much improved, the loans were still substandard. Matrix then got a new lender to take the package based upon merger of the small operations into larger units, with the effect of mitigating disease and production risk throughout the system. Days of tough negotiations resulted in terms and conditions that were acceptable to all parties. Finally, Matrix undertook an intensive campaign to sell the new structure to the farmer-owners gaining a unanimous vote in favor of the restructured production units.

Result

Livestock operations are humming. Production is approaching record levels. Markets are beginning to recover and family farming survives in Minnesota. Matrix Associates and the veterinarian group worked to further strengthen the operation to assure that Minnesota family farmers can continue to compete with the megalithic agribusiness corporations that dominate livestock production.

Situation

The CEO/owner of a large, diversified manufacturing firm derived more than 30% of his revenues as a dedicated "out-source" for a Fortune 100 company. One product that his company assembled had a large molded plastic component. The owner determined that he could substantially increase profits if he produced the component. Production of the component, however, would require a capital investment in excess of a million dollars with no guarantee that his customer would buy the component from him, rather than the current supplier.

Matrix Action

The CEO hired Matrix Associates, Inc. to perform a "make-versus-buy" analysis. Matrix researched the market and determined that this segment of the plastics industry was a high- growth, very fragmented niche, comprising small entrepreneurial operations. There were several suitable businesses within the geographic area that could be purchased for a reasonable price. To start up an operation, however, involved a large capital investment plus the acquisition of knowledgeable management and technical staff. More critical was the need for a sales staff -- an area where the CEO's company was weak because so much of its business was captive.

Matrix recommended an acquisition and identified three potential candidates. Due diligence narrowed the field to one prime candidate and a back-up candidate.

Negotiations were initiated. The current owner wanted an unreasonable price. Matrix got both seller and buyer to agree to a valuation-based purchase, driven by an agreed upon set of assumptions. Matrix performed the valuation and both sides accepted the general parameters of the price. Matrix led the team to resolve other outstanding issues and the acquisition was made.

Result

The plastic molded part that had initiated the decision to go into plastics was discontinued as the technology of the assembled piece advanced. Despite the fact that it never got this expected new business, the plastics business grew rapidly and both revenues and profits far exceeded the new owner's projections.

Had the CEO followed his instincts and built his own plastics capability, he would have had huge investments and idle equipment. By following the Matrix "buy" recommendation he added a new, high-grow/high-profit business to his diversified enterprise.

Situation

A retired local businessman was in the midst of estate planning with his accounting firm, looking to preserve as much capital as possible when he passed his wealth on to his children and grandchildren. Included in the large, diverse estate were two substantial businesses that had both been managed by one of his children for more than two decades. The obvious estate planning strategy was to have this child buy the businesses under favorable terms, allowing a fair distribution of the value among the siblings. An offer was made, but the sibling business manager balked at the terms. The other children responded with anger. Legal counselors were unable to settle the dispute and the family members chose sides. Communication among the siblings became infrequent, defensive, and hurtful. The situation persisted for nearly three years and was destroying family relationships. The businessman turned to Matrix for help.

Matrix Action

The family’s first proposal was for Matrix to evict the sibling who was managing the businesses and intervene until they could be sold on the open market. After carefully reviewing the situation, Matrix determined that this strategy would prevent the family from receiving fair value since the current manager was an integral part of the business. Instead, Matrix supported the original goal of encouraging the sibling to acquire the businesses in a MBO. Matrix had a legal document drafted that empowered the consulting team to seize managerial control of the businesses. Matrix then met with the recalcitrant buyer and presented two options – either negotiate a mutually beneficial purchase or retire. Faced with imminent dismissal, the buyer agreed to negotiate in good faith. Matrix helped to guide the discussions and clear up the many misunderstandings that had formed. Once both buyer and seller fully understood the other’s concerns, compromises were achieved and the deal was closed. The entire process took just eight weeks.

Result

Both businesses are thriving under their new structure. The family is satisfied that the value of the businesses has been fairly distributed. The wounds have healed and the businessman and wife are comforted to have peace in the family once more.

Situation

The R&D investment to gain FDA approval of implantable medical devices is huge. A company that had invested more than $60 million in the process and achieved approval on one device was forced into receivership by a major US bank when it defaulted on more than $40 million in debt. A management team, made up of former and current employees of the company wanted to save the name and technology, but their resources were limited.

Matrix Action

The group hired Matrix to help them negotiate a deal with the bank. Matrix negotiated around the clock with the bank’s legal firm and secured an agreement to buy the assets of the firm for 15% of the realizable value of its real-estate, inventory, accounts receivable, and plant & equipment. Matrix then built a business plan that the principals used to raise the necessary capital.

Matrix worked directly with top management to renegotiate supplier and distributor agreements, restructure the organization, and develop an international sales strategy.

Result

The company was back in business in less than 30 days. Costs were brought under control. Unprofitable relationships were severed. Sales efforts paid off with increased sales in Europe and Asia.

In the twenty years prior to its foreclosure the firm was never profitable. After the Matrix negotiated buy-out and Matrix developed strategic plan, it was profitable its first year of operation.

Situation

A company built around an environmental-related technology went public and raised $5 million to penetrate world markets and grow its product line. Eighteen months later, sales had fallen to an all-time low, while SG&A skyrocketed. The company was in litigation with both suppliers and distributors. It was in default to the university from which it licensed its technology. Cash on hand would cover less than two months of operation and 80% of accounts receivable were doubtful.

Most sales were to a handful of entrepreneurial “distributors” in the Pacific Rim, with a large percentage of inventories sent on consignment. The company had never passed EPA testing on any of its current products to permit aggressive marketing in the US. The products, which were being distributed in major US retail operations were not in compliance with EPA requirements.

The board of directors conducted a search for outside help. They selected Matrix under an agreement whereby Matrix would take over day-to-day management as well as address the outstanding strategic and fund-raising issues.

Matrix Action

Matrix immediately restructured management to reduce the SG&A burn rate. The former CEO, COO and VP of Manufacturing/Engineering were terminated with minimal severance costs. Outstanding litigation was settled. Supplier relationships were renegotiated. A new distributorship agreement was written and the relationship with existing distributors was restructured with minimal terms. The burn rate was decreased, and sales and cash-flow increased to the level where the company was able to operate for 9 months without additional outside financing despite the fact that 80% of existing accounts receivable were written off as bad debt.

Matrix uncovered EPA problems with the product line and critical product quality problems. Matrix brought in technical expertise to fix the current product line and to begin designing products for the future. Matrix withdrew products that were in violation of the EPA from the US market and invited the EPA in for a review of procedures and practices to establish a new, working relationship with the regulatory body. Matrix also restructured the licensing agreement with the university to reduce royalties and capture follow-on technology.

Matrix developed a detailed long range strategic plan showing how the company could apply new capital to overcome its current problems and enter new, high growth markets.

Result

Matrix identified and secured a new group of outside investors to come into the firm and assume management. The company then successfully merged with another firm in its business segment.

Situation

Three partners launched an enterprise on a shoestring in the mid 1990's. One partner contributed less than $100,000 in capital; another contributed some livestock and the third, the managing partner, contributed expertise, enthusiasm, and hard work. Over the next ten years, the company was built into a $90 million dollar a year business production and a top-20 producer in its category. Meanwhile the passive investors watched the value of their investment grow.

The two passive partners pooled their voting strength and unseated the managing partner, engaging professional, non-agriculture management to run the enterprise. Performance declined. The managing partner invested substantial sums to prevent loan covenant violations; nonetheless, the bank informed the company its line of credit would be restructured and unless the disputes were settled, the lender would withdraw from the loan.

With his own and his family's personal wealth at risk, the managing partner engaged Matrix Associates to help him execute a buyout of the dissident partners.

Matrix Action

Matrix engaged legal counsel both to structure offers and to demonstrate a willingness to take the matter to court. We reviewed the financial and operational structure, existing partnership and buy-sell agreements and structured a preliminary offer within the buy-sell valuation formula and consistent with current industry values at that time. We underscored the dire consequences to all parties (all notes included personal guarantees), if a successful resolution were not reached. As expected, the first offer was rejected, but valuable insights were gained and the message of consequences delivered. A revised offer was accepted.

As soon as the offer was accepted and letters of intent signed, Matrix launched the second stage - attracting new equity investors to underwrite the buyout. Keeping the lending institution in the loop, we were able to go past their deadline for agreement and restructuring, finally bringing in knowledgeable partners who had faith in the managing partner's ability to deliver. From engagement to refinancing took approximately five months.

Result

The managing partner now holds a majority. Freed from the distraction of dissention the operation is booming, with production at record levels. The company is expanding and will likely be a top ten producer within the next five years.

Situation

A medium-sized law firm found themselves facing a liquidity crisis and defections by key shareholders. Hourly billings dropped significantly below those of the prior year and over 90-day accounts receivable skyrocketed. An outdated compensation system cost the firm two practice areas and created a major imbalance between legal revenue and administrative costs. The reduced practice size and a strategic move of a labor-intensive operation out of expensive, downtown space left the firm with half of its high-cost space vacant and an onerous long-term lease. Operating losses required salary hold-backs from partners whose earnings had already dropped well below national averages. The firm’s bank began making noises about increased personal guarantees on the mounting debt. Some lawyers were frustrated because their efforts to build the firm’s business went unrewarded. Others, feeling the handwriting was on the wall, began looking for opportunities to switch firms. There was a high probability that the fragile thread that holds any law firm together would come unraveled and the firm would dissolve.

Matrix Action

Matrix launched an intensive 30-day Rapid Situational Analysis of the law firm’s financial status and operations. Each attorney and staff member was interviewed. A “state-of-the- practice” report was issued identifying the critical steps necessary to staunch the losses and put the firm back on a growth track. Negotiations were initiated immediately with the landlord, resulting in an agreement to allow the firm to consolidate from two floors to one. Accounts receivable and work-in-process billings were thoroughly reviewed for collectability and collection actions initiated. Matrix developed a new compensation plan for the firm that tied pay to measurable productivity benchmarks and, for the first time, rewarded rainmaking and client-sharing. Matrix restructured the firm’s operating departments into profit centers and created a zero-based budget that illustrated resource distribution inefficiencies. A specific administrative overhead reduction plan was provided, with Matrix endorsing the re- involvement of shareholders in the management of the firm.

Result

Rent reductions and zero-based budgeting cut expenses dramatically. The new compensation plan revitalized rainmaking and hourly billings rebounded, putting the firm in the black. Attorney attrition ended and client services improved. Conservative accounting with reserves for doubtful accounts and pro-active collections took the surprises out of financial performance. The firm is liquid and shareholder compensation is equal or above the national averages.

Situation

Union leaders found themselves trapped by company demands as the corporation filed for Chapter 11 protection and then proceeded to file a Section 1113 to abrogate the union’s collective bargaining agreement. To make matters worse, the corporation had filed in the Southern District of New York, a court with a reputation of siding with management. The union felt it was being singled out and made the bad guy even though potential savings from the union were a tiny fraction of what the company needed to survive. The company made a wealth of data available, as required; but the union had no one able to analyze the data and determine the true state of affairs. They turned to Matrix Associates, Inc.

Matrix Action

The Matrix forensic team dug deep into the available data. Within two days they had a list of additional information needed to fully assess the situation and the company slowly began complying. Meanwhile the Company filed its 1113 petition, claiming the union wasn’t negotiating in good faith. Matrix worked with the union’s legal team to draft a response that accurately pointed out flaws in the company’s arguments and identified the huge debt, resulting from a leveraged buy-out, as the real cause of the company’s distress.

True to form, the District Court put direct pressure on the union, telling them in court that they better reach a negotiated settlement or they “wouldn’t like” the court’s ruling. Matrix led an all-night negotiating session that allowed the union to keep its health benefits and sweetened the pot on the company’s union buy-out offer. Most important, the changes to the CBA were an amendment to the existing agreement, giving the union a position to negotiate some recovery when the contract expired the following year. Then Matrix helped union leadership explain the settlement to the rank and file winning ratification of the agreement.

Result

The union ratified the agreement and a large number of union members accepted the buy- out. The company continued negotiating with other unions eventually winning concessions from all. Ultimately, however, Matrix proved correct and the senior lender had to write down the debt by 75% in order for the company to produce an exit plan acceptable to the Court.

Situation

A major regional building supplies and services company got caught expanding even as the real estate market imploded. Management took immediate action to restructure operations and the balance sheet, making every effort to avoid a court-ordered restructuring. Among the debt holders were a group of small investors who had purchased short-term company notes. The note offering had been a mechanism by which the company could share its success with local small investors. Unfortunately the program was some-what informal, without a mechanism properly qualifying investors. Thus among the note holders were many that were technically in violation of the Securities and Exchange Act. The company needed to get nearly unanimous agreement to its settlement proposal which had to include resolution of non-accredited investors. Matrix was engaged to act as advocate for the short- term note holders and make sure they were treated fairly.

Matrix Action

The challenge in this assignment was communications. Many of the note holders were retired seniors, some in declining health. There were few among them who were sufficiently sophisticated to understand the company’s proposal and its financial statements. Matrix thoroughly analyzed the data and then created presentations that were both comprehensive and comprehensible for this audience. To complicate matters the economy was continuing to decline and the company had to revise its offer several times. Each time Matrix took the investor group through the numbers in group meetings, answered all their questions, and made sure each investor thoroughly understand the situation, the proposal, and his or her options.

Result

In the end the investors voted overwhelmingly for the company’s settlement offer. The company then engaged Matrix in a continuing role to make sure the small investors who were qualified and opted in to the new, revised, fully accredited offering understood the company’s quarterly performance data and had a channel for bringing questions and concerns to management. All unaccredited investors were cashed out in the settlement.

Situation

A feedlot operator in the Midwest was in receivership, owing more than $350 million to several major banks and financial organizations as well as hundreds of individual investors. Attorneys General from three states and federal prosecutors were intent on proving criminal intent and fraud on the part of the operator and an accomplice who had allegedly represented roughly 16,000 cattle as a herd of more than 350,000. Bank auditors had allegedly been shown the same small group of cattle in surveys from small aircraft, while being told that each herd was unique. Proving the case required a careful documentation of the flow of funds in and out of the organization's accounts.

Matrix Role

Matrix was initially engaged by trustees of the bankruptcy court to document the state of the organization’s finances. Soon, however, the FBI requested that Matrix compile a detailed transaction database that would include every financial transaction engaged by the principles, and that would be capable of being searched to provide every step of certain complex transactions. Matrix forensic accounting professionals researched every financial transaction and created a database with more than 50,000 individual transaction records.

Result

Federal prosecutors were successful in convicting the principles of the feedlot organization of fraud and unlawful conversion of assets and the two principles were each sentenced to significant time in the federal penitentiary. The database Matrix produced was instrumental in the successful prosecution.

Situation

A regional fleet and farm wholesale supply organization was in violation of its covenants. The senior lender required the principal to engage a consulting firm to help him deal with the issues that were causing successive losses. The principal selected Matrix.

Matrix Role

Matrix helped the principal get a significant forbearance agreement from the senior lender and immediately launched a restructuring plan, replacing the principal with a senior Matrix executive, examining sales compensation and territories, shipping, inventory management, purchasing, and financial reporting and control. Under Matrix guidance the business began a slow journey back towards profitability. The senior lender, however, was anxious for the business to find new financing and to exit the bank. The principal found the entire process stressful and asked Matrix to find a buyer.

Matrix continued the revitalization and launched a regional search for an appropriate buyer. With no track record to attract a financial buyer, the major hope was a strategic buyer – i.e. a competitor looking to expand reach.

Result

Matrix did locate an appropriate buyer, headquartered in an adjacent state and arranged a sale that allowed the principal to exit whole. The senior lender got a problem loan off his books and customers through the upper Midwest continued to be served.

Situation

A major vacation resort saw an opportunity to stand out from competing venues for both vacation and conference clientele by adding a huge water park and integrated shopping mall at a cost in excess of $40 million. A local investment banking firm was engaged to raise the funds. Matrix was engaged to make the case for investment, showing how the expanded facilities would deliver on the promise.

Matrix Role

Matrix was engaged by the investment banking firm to validate the market study; analyze pro forma financial projections and determine if, in fact, the new facilities would yield a return to investors. Matrix conducted an in-depth study of the vacation area and trends in resorts and conference centers nation-wide. Industry data substantiated certain relationships between facilities, amenities, price, and occupancy. These factors were applied to pro forma projections and the results modeled The data demonstrated that the project had a high probability of achieving or surpassing its forecasted occupancy at target rates.

Result

The investment banking firm was successful raising capital to fund the expansion. The resort completed its building plan on schedule and enjoyed immediate success as one of the prime vacation and conference spots in its market.

Situation

A local small cap high tech firm sold off its hardware business and the board of directors authorized the CEO to invest the proceeds in building an Internet based business. After several months of promises, the board became concerned and hired Matrix Associates to investigate the state of the business and determine whether or not the plan being followed was in the best interest of shareholders.

Matrix Role

Matrix launched a Rapid Situation Analysis, with its team of business researchers and forensic accountants immediately digging into every facet of the new business. Within 76 hours Matrix had determined that, in fact, there was little or no business and that reports the CEO had been providing to his board of directors were pure fabrications. The company had no revenue and very poor prospects of attaining any revenue in the foreseeable future.

However executives’ salaries were high, the facilities were lavish, and enormous sums of money were being spent almost whimsically on things that pleased the CEO. Matrix recommended the CEO be terminated and business closed, salvaging whatever funds remained.

Result

The board of directors followed Matrix recommendations, terminating the CEO, closing the business and forming a committee to study how to best use the salvaged funds.