Confidential Case Study
Nu-Tek Signs Inc. and T.C. Transitus Communications Inc.
Business Plan: Summary
Prepared for: Nu-Tek and Transitus
Prepared by: HC
February 1, 1997
Business Plan for Nu-Tek and Transitus
Executive Summary
Purpose of this Plan
Nu-Tek Signs Inc. (Nu-Tek) was started by Scott A. Brazeau and Francis Brazeau as Ar-Tek in 1989. It was officially renamed Nu-Tek Signs Inc. and incorporated as such in 1995. Nu-Tek is experiencing rapid growth based on providing superior quality signs and excellent customer service at competitive prices. T.C. Transitus Communications Inc. (Transitus) was incorporated in 1996 to develop and market a proprietary taxi-top mobile sign product and other innovative advertising products and media, as well as to handle more conventional stationary billboards. In 1996, the owners of Nu-Tek and Transitus formed an alliance and exchanged share ownership with the purpose of launching and building the mobile signage business for the benefit of both companies. Appendix B details the existing ownership and share structure of Nu-Tek and Transitus.
This Business Plan outlines the background, status and plans of both companies with a focus on the development of the mobile signage business. This business is projected to generate annual revenues in the order of US$100M within five years of funding for these two companies. To implement this Business Plan, US$2.4M (Cdn$3.2M) of capital will be required. The purpose of this Plan is to provide the information necessary to potential investors to assess the opportunity presented and to make a decision to invest.
Signage Services and Mobile Signage
Nu-Tek designs, manufactures and installs all types of signage, including illuminated signs, in brass, aluminum, plastic or other materials for commercial purposes. Nu-Tek is best known for its showcase signage at the new $200M Palladium (now the Corel Centre) in Ottawa and is currently negotiating the design of new signage for the National Arts Centre in Ottawa, Canada, and other prestige facilities.
Transitus has designed, developed, tested and protected an innovative taxi-top advertising display unit that will revolutionalize the mobile advertising market. The mobile billboard market currently focuses on transit buses. In contrast, the Transitus taxi-top unit provides greater advertising value per dollar and greater reach, on a high-quality, back-lit shell. Taxi drivers, owners and brokers enjoy steady revenues with this product.
The Transitus product was unveiled at the International Taxi & Livery Association Annual Meeting and Convention in Anaheim, California in October 1996 and it received overwhelming response. Service is scheduled for inauguration in Denver in February with service in New York and Toronto to follow soon after. Service has been enthusiastically received by both advertisers and the taxi industry.
The agreement between Transitus and Nu-Tek provides for Transitus to build, deliver and maintain the taxi-top units while Nu-Tek manufactures the images and installs the advertising copy on the units to client specifications.
The taxi-top sign business is, in many ways, reminiscent of the bus billboard business a generation ago. At that time, there were few bus or transit authorities who benefited from advertising revenues. The ‘industry', such as it was, was fragmented. Advertisers could not measure accurately the CPM (cents per thousand viewers) and could not place large-scale, North American-wide orders. Today, of course, bus ads are a part of main-stream media. Analysis shows that CPM for Transitus is in the range US 9 to 40¢. Given the design of the Transitus product (see Appendix A) and the nature of the taxi business as compared to buses, Transitus' cost-effectiveness is several orders of magnitude better. When compared to buses, the Transitus' product enjoys the advantages of non-fixed route exposure in metropolitan areas of higher average income population. Other media (national newspapers and magazines) are in a different cost regime of about $10 to $20 per thousand--about 100 times that of Transitus. Additionally, Transitus' taxi-top sign product is internally lit and, therefore, advertisers also benefit from after-dark hours of operation of taxis.
A few years from now, taxi-top signs will achieve wide acceptance and Transitus and Nu-Tek are poised to ride this wave.
Owner and Management Team
Mr. Scott A. Brazeau and M.H. Milford Holdings Inc., controlled by Dr. Bruce M. Firestone, are the majority owners of Transitus and Nu-Tek. Mr. Brazeau is President of both Nu-Tek and Transitus, while Dr. Firestone is Chairman and Founder of Transitus. Mr. Brazeau is an experienced entrepreneur, having started and developed Nu-Tek to its current successful and rapidly growing operation. The Ottawa-Carleton Board of Trade recently named Mr. Brazeau the Bronze Young Entrepreneur of the Year as part of the 1996 Business Achievement Awards. Dr. Firestone is well-known for his entrepreneurship and innovative business sense, and as the Founder of the Ottawa Senators Hockey Team and inspiration behind the Palladium (now the Corel Centre). His involvement with NHL hockey has given him insights with respect to the top metropolitan centres in North America--the target market for Transitus. His experience in real estate development provides an understanding of municipal government and regulation which are key to securing necessary approvals for taxi advertising.
Nu-Tek, under Mr. Brazeau's leadership, has a young but knowledgeable management team of three senior managers who, together with Mr. Brazeau, capably operate the manufacturing businesses. To date, this team has run Transitus as well as Nu-Tek. The team will be augmented by two experienced managers specifically for the Transitus operation shortly after funding is in place.
Financial History and Projections
Nu-Tek achieved net income (before taxes) of Cdn$126K on revenues of Cdn$1.16M in fiscal year ending April 30, 1996, a factor of three higher in revenue over the previous year. Projections for FY97 are for income of over Cdn$150K on revenues of Cdn$1.6M. These years of success follow five years of development of the business by Mr. Brazeau under the Ar-Tek name. Excluding the growth in business for Nu-Tek projected to come from the alliance with Transitus, Nu-Tek will increase its revenues by approximately 40% annually for the next three years while enhancing profitability.
Transitus began operation as a company in October 1996 after two years of owner development and contributions. Transitus' first full year of operation, after funding is in place, is projected to show a loss of US$945K on revenues of US$1,415K. Net income is projected to turn positive between the fifth and sixth quarters making the second year of operation show a profit of US$450K. Third and subsequent years will be considerably profitable such that cumulative net income becomes positive in the tenth quarter (from funding). The fifth year projections show net income before tax of some US$22M on revenues of US$76M with an annualized 20th quarter revenue of US$105M.
The Transitus operation is projected to bring additional revenues to Nu-Tek of about 30% of the Transitus advertising revenue. This additional revenue will increase Nu-Tek's second fiscal year revenue after funding by Cdn$1.5M. In later years, the impact on Nu-Tek is substantial--projected to be Cdn$4.5M, $13M and $25M.
Financing Requirements
Financial projections detailed in the Business Plan show that Transitus will need working capital of US$1.8M (Cdn$2.4M) to meet cash flow requirements through its development period. Nu-Tek's growth, based on its own fast-growing market plus Transitus' business, will require an additional Cdn$800K.
It is proposed that 75% (Cdn$2.4M) of this total cash requirement (Cdn$3.2M) will be financed as equity and 25% as debt as a combination of a bankline secured by receivables, mortgage of real property and a three-year term loan.
The equity financing will be paid out in the fourth or fifth year at market value through company redemption of shares, a buy-out of shares by a third party, or through proceeds from a public offering.
Assessment of Risk
The principals in this venture have identified the risks involved and have plans to minimize the negative impacts where possible. These risks have been identified as:
• Rapid growth can lead to financial risk;
• The interests of and relationships among taxi companies, unions, drivers, licensing and regulatory authorities can become barriers;
• Competitors will try to emulate the success and innovation of Transitus' product and service;
• Other advertising media may react strongly if they perceive their market to be jeopardized; and
• Once the concept is proven, an innovator could attempt to develop a high-tech electronic mobile sign.
These risks will be managed and mitigated in the following ways.
Dealing with rapid growth means having systems and processes in place to take advantage of opportunity. Transitus and Nu-Tek have together taken the next step by purchasing an expanded plant, engaging financial consultants and putting in place revenue contracts before committing product. As well, the detailed market penetration plan is based on an intentional consolidation period (a pause in growth) of approximately nine months after the first full year of operation (see the projected Market Penetration by City graph in Appendix C). If necessary, this consolidation period will be utilized to refine the manufacturing and production processes, and the marketing and implementation plan, to ensure delivery of high-quality service to advertising clients and the taxi industry.
The barriers to entry are both a positive and negative factor for Transitus. The political experience of the principals and staff in dealing with regulatory matters will allow Transitus to meet the requirements for taxi licensing commissions and authorities. Once established, Transitus will have a built-in advantage over most competitors.
Competition in any industry today is inevitable. Transitus will meet its competition by not only providing a superior product but also superior service and price. Transitus is the lowest cost provider of mobile signage in North America which helps secure Transitus' position. In addition, Transitus will vigorously enforce its design patents in Canada and the USA, as it has already begun to do.
Transitus is not only the lowest cost signage supplier in the taxi industry, but it has the lowest CPM of any major media including bus billboards, stationary billboards, junk mail, major magazines and newspapers as well as television and radio advertising.
To date, no manufacturer has produced an electronic board that could meet the requirements of the taxi industry. If such developments occur, Transitus may incorporate same into its program at that time.
In summary, Transitus and Nu-Tek, with its leading edge technology, are well positioned to take advantage of this opportunity and to prevail against the competition.
Appendix- Existing Ownership and Share Structure of Nu-Tek Signs Inc. and T.C. Transitus Communications Inc.
Nu-Tek Signs Inc.
Shares:
Class A one vote each Authorized: 10,000,000 Issued: None
Class B ten votes each Authorized: unlimited Issued: 12,000,000
Ownership:
Scott Brazeau 6,600,000 Class B
Transitus 4,200,000 Class B
M.H. Milford Holdings Inc. 1,200,000 Class B
T.C. Transitus Communications Inc.
Shares:
Class A ten votes each Authorized: 29,000,000 Issued: 6,500,000
Class B one vote each Authorized: 5,000,000 Issued: 50,000
Class C 100 votes each Authorized: unlimited Issued: 30,000,000
Ownership:
Scott Brazeau 2,800,000 Class A
M.H. Milford Holdings Inc. 1,125,000 Class A
Hickling Capital Corporation 1,125,000 Class A
Other individuals 1,450,000 Class A
Transitus' professionals 50,000 Class B
Scott Brazeau 15,000,000 Class C
M.H. Milford Holdings Inc. 15,000,000 Class C
Appendix C
Market Development, Revenue and Cost Projections for T.C. Transitus Communications Inc.
Chart 1: Market Penetration into North American Cities by Quarter over Five Years
Chart 2: Net Income Before Taxes: Cash Basis and Accrual Basis
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
Chart 3: Net Advertising Revenue and Gross Margin (Cash Basis)
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
Chart 4: Gross Margin and Net Income (Cash and Accrual Basis)
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
Chart 5: Gross Margin, (Taxi-Top) Unit Costs and Fees
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
Chart 6: Gross Margin and Sales Costs
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
Table 1: Pro Forma Financial Statements for First Five Years (US Dollars)
Table 2: Summary of Revenues and Expenses by Year for First Five Years (US dollars)
Table 3: Summary of Revenues and Expenses by Quarter for First Five Years (US dollars)
Chart 1: Market Penetration into North American Cities by Quarter over Five Years
The planned market penetration by city in North America follows a typical "S-shaped" curve except for the planned postponement of expansion in Quarters 5, 6 and 7. This postponement of expansion is included in the plan but may modified at the time. The purpose is to consolidate experience during the initial market penetration time period to modify product design, if appropriate, to review and revise standard agreements, procedures, processes, pricing, etc. Such "postponements" often occur in practice but are not planned for. If experience to date after the first four quarters indicates that a postponement is not needed, or if a shorter postponement would be sufficient, such a change would be decided at the time. Chart 2: Net Income Before Taxes: Cash Basis and Accrual Basis
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
These two charts show net income in US dollars by quarter over the five year market development period. Net Income on a cash basis treats all revenues and expenses within a quarter as recorded in that quarter. Net Income on an accrual basis considers the investment in taxi roof-top units as a capital expenditure and a depreciation charge is recorded each quarter (over a three year life) as the unit is in use. In the early quarters, therefore, Net Income on a cash basis is lower than on an accrual basis since the full cost of the taxi roof-top unit is recognized when that unit is made.
The requirement for cash for the business is based on Net Income on a basis but also takes into account the delay in the collection of accounts receivable, etc. Chart 3: Net Advertising Revenue and Gross Margin (Cash Basis)
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
Net Ad Revenue is essentially total advertising revenue to Transitus but net of a sales charge (usually 15%) made by advertising agencies. These charts show Ad Revenue and Gross Margin where Gross Margin (on a cash basis) is the difference between Ad Revenue and "costs of sales" which includes the taxi roof-top unit, cost of handling and placement of ads, and payments to taxi operators. In the long term, Gross Margin is about 47% of Net Ad Revenue. Chart 4: Gross Margin and Net Income (Cash and Accrual Basis)
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
In these and following charts, several costs are related and compared to the Gross Margin on a cash basis. In these charts opposite, Net Income is compared to Gross Margin, both on a cash basis and on an accrual basis. Chart 5: Gross Margin, (Taxi-Top) Unit Costs and Fees
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
The charts opposite show the cost of taxi roof-top units made and the payments to taxi operators in comparison to the Gross Margin. As shown, the cost of units is a small cost compared to the payments made to taxi operators. Such payments are the largest cost factor of the Transitus operation. A key advantage of the Transitus product is the simplicity of the roof-top design and therefore its cost. Chart 6: Gross Margin and Sales Costs
Top: by Quarter first Two Years
Bottom: by Quarter first Five Years
These final charts show the other costs (which must be covered by the Gross Margin in order to make a profit) compared to the Gross Margin. Other costs are divided into marketing and sales for taxis, marketing and sales for advertising, and general administrative overhead. The largest of these other costs (marketing and sales of ads) in the long term is about 25% of the Gross Margin. Together, these costs are about 40% of the Gross Margin.
Letter of Interest
CONFIDENTIAL
November 16, 1998
@@insert specific name
company and address
MediaDome Assets for Sale
Dear Mr/Ms @@:
As you well know, outdoor advertising is a growth market--growing at a rate greater than the overall advertising market. Innovation in the out-of-home market has increased the supply-side of the outdoor advertising market even while restrictions are tightening on the traditional medium--stationary billboards. Such innovations include bus billboards, transit stations and shelters, public convention and stadium facilities, truck boxes, etc.
Advertising on taxis in major metropolitan centres has been around for many years in a few select cities. The MediaDome is an innovative, multi-sided, backlit billboard for taxis that has gained quick initial acceptance and approval by the industry and by municipal authorities. This good response stems from its pleasant streamlined appearance, nine-sides for backlit display of advertising, high quality materials and construction, ease of installation, excellent safety record and its aerodynamic, fuel-efficient shape.
The company that developed the MediaDome has decided that, to take the products and services to the next level, it will sell the designs and patent together with the rights to manufacture and distribute the product, and the rights to sell advertising and to produce the artwork and vinyl image. It is the sale of this asset that is subject of this Request for Proposal and Bid.
The MediaDomes are molded in a single piece from a super strong polycarbonate sheet. They are inexpensive to produce and provide high margins on sale. Because they are nine-sided, MediaDome designs maximize advertising space and advertising revenues. The design for the MediaDomes include the Classic (for all maks and models of North American taxis) and the Super (for smaller European and Asian vehicles). There is also the MediaDome LX which is more reminiscent of the existing two-sided industry standard. All designs are covered by US Patent No. D386,209. including the MediaDome LX.
Hickling Capital Corporation is acting as agent for the owner, T.C. Transitus Communications Inc., for this sale. Please review the attached RFP and contact HCC directly with any questions.
Yours sincerely,
HC
Dr. VC, CMC
President and CEO