Newtech Instruments Limited

In March 1992, Don Nickerson, President of NewTech Instruments Limited, a six-year old electronics manufacturing company based in St John's, Newfoundland, was sitting at his desk watching as the snow flurry outside gradually turned to rain. He was considering the decision that the management group had to make by the end of the week.

NewTech had grown fairly steadily under Nickerson's leadership since its establishment in 1986. Sales figures had shown fairly consistent growth to this point, and sales projections for the future were assuming continuation of this growth. However, NewTech was running out of manufacturing space and currently was renting additional storage space in order to fulfill recent contracts. NewTech seemed to have finally outgrown its present facilities leaving two major options: expand in their present location through leasing more space, or move to another larger facility elsewhere.

However, Nickerson was reluctant to incur significant financial commitments and then see sales decline in the future. This was a possibility as there were general concerns that the industrial


This case was prepared by Dr Michael Skipton of the Faculty of Business Administration, Memorial University with the assistance of Craig Pollett, BComm ('91) for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is not meant to illustrate either effective or ineffective management.

Copyright © 1993, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproductions must acknowledge the copyright. This permission does not include publication.


recession would continue for some time and that any economic recovery would be slow. NewTech was operating in some of the world's most dynamic and competitive markets and the company had learned by experience not to count its contracts before they were signed, and sometimes not even if they were. There was no guarantee that sales projections for the future would actually materialise. As Don Nickerson considered the decision that must be made, he reviewed the events that had brought NewTech to this point.

The Hydroball System - A Technical Entrepreneurial Venture

Establishment of NewTech Instruments Limited

NewTech was established in October 1986 to manufacture and market the "Hydroball"-- an innovative current profiling system for ocean, like and river applications. The Hydroball technology was unique in the world. It was based on the concept that if an object, i.e., a Hydroball probe, was dropped into water it would move horizontally as it sinks. The horizontal movement depended on the speed and direction of any currents at the different depths in the water through which it was sinking. As the Hydroball probe transmitted a signal its movement could be followed using a ship-mounted signal receiver. The current profile of the water column through which the Hyroball was sinking could then be calculated. The Hydroball probes were single-use items, as after use a Hydroball would come to rest on the bottom of the ocean, river or Like and could not be recovered. Hydroball was the only current profiling system that worked in salt and fresh water, further technical details are given in Exhibit 1. In 1987, the Hydroball system received a Canada Award for Invention under the federal government’s Canada Awards for Business Excellence Program.

NewTech was initially capitalised at $3 million as a 50/50 joint venture between the inventor of the Hydroball technology, and NewTel Enterprises Ltd. The inventor had developed prototype technology for the Hydroball, as well as the ship-mounted signal receiver, and this technology was deemed to be worth $1.5 million. NewTel contributed $1.5 million in long-term and working capital and management personnel to enable marketing and manufacturing. NewTel Enterprises Ltd was a financial holding company owning, as its major asset, Newfoundland Telephone Company Ltd. An important objective of NewTel was to invest in developing businesses in Newfoundland. For this reason, NewTech was established as a company that had a primary objective to become a Newfoundland-based electronics manufacturer. At the time of its establishment there was no electronics company in St John's having significant manufacturing capability.

Don Nickerson was formerly employed by Newfoundland Telephone and started as President of NewTech in December 1986 with two other managers also from Newfoundland Telephone, and a secretary. One of these managers came to establish and manage production, and the other to establish and manage quality assurance. Three production employees and two electronics technicians were recruited in early 1987, and a Vice-President Marketing was hued in March 1987.

NewTech was established in space leased in the St John's regional office and manufacturing/distribution facility of Northern Telecom Ltd. NewTech's manufacturing space was approximately 4000 square feet and office space was 2680 square feet. Approximately $300,000 was spent on equipment in the production facility From the start, NewTech made a strategic decision to deliver a high level of product quality, and accordingly invested in the necessary quality assurance system and procedures.

The Hydroball probes and the signal receiver contained a circuit board and electrical components. While sophisticated systems and test equipment were a large part of quality assurance, good housekeeping was also important. It was necessary to be free from static electricity and to minimise the amount of dust that could cause bad connections and short circuits. The NewTech manufacturing facility was deliberately planned to be bright, shiny, and an attractive place to work. Employees were encouraged to keep it clean and looking good.

The Hydroball Experience

Hydroball development was aimed to be completed by the inventor in early 1987, at which time it would be turned over to NewTech to manufacture and market the system, including Hydroball probes and the ship-mounted signal receiver The first three manufactured units were produced by NewTech in the Spring of 1987, and sea trials were carried out in early June. Although the manufacturing specifications were achieved, it was found that the overall performance of the system in use required improvement, involving development and redesign work in a number of significant areas. Further development work involving sea hub was then undertaken from June 1987 to February 1988.

This development work was funded by the joint venture partners, and used up financial resources that had originally been earmarked for manufacturing and marketing purposes. However, in the last set of trials, potential customers were taken out to sea off Cape Spear lighthouse near St John's and the working system demonstrated to them. This resulted in NewTech's first sale of the system. By June 1988, a marketing strategy had been formulated and marketing efforts were under way worldwide. Advertising in the marine survey instruments and systems trade press was being carried out, and twelve distributors covering most of the world, except for the then communist bloc, had been found. However, by late Summer, NewTech had become very concerned about the lack of sales of systems and disposable Hydroball probes. A consultant was retained to study the problem.

By October 1988, the consultant reported that NewTech's marketing efforts were as good as anything he could think of, but that their expectations of market size and rate of penetration must be radically scaled down. It seemed that the market was not as big as indicated in a previous market study commissioned by the inventor, prior to NewTech being established. Most of the potential customers listed in that original study were not considering the product. New Tech was finding that purchasers of marine hydrographic survey equipment were very cautious and conservative and did not make purchases in response to advertisements or trade shows. A lot of time, money or even one's reputation could be lost if a ship got to a survey site but the measuring equipment did not work. Most potential purchasers preferred to wait until someone else had used new equipment in the field and then asked them about their experience with it. In any case, in the northern hemisphere the summer was not the time to be trying to contact buyers of marine hydrographic survey instruments as most of them were out surveying. Between 1988 and 1990, NewTech continued to refine the system. In particular, the ship-mounted hydrophone signal receiver was further developed to make it easier to attach to the outside of a vessel hull. Originally this hydrophone was 14" in diameter and 18" high, but new developments in electronics design and assembly enabled the size to be reduced to 3.5" in diameter and 20" high.

Sales of Hydroball systems and probes continued to be slow and erratic. During 1988, two systems and sixty probes, worth in total $129,000 were sold. In 1989, four systems and 324 probes, worth $380,000 were sold. Since then, there had been no further sales of systems and few sales of probes. As things turned out, the amount of current profiling work carried out in the world during 1988 and 1989 was at a historic low. By early 1992, NewTech had received over 1000 enquiries concerning the Hydroball system, but had only sold six systems and approximately 750 probes.

The Decision To Carry On

By Summer 1988, NewTech managers and the Board of Directors were aware that the real potential market size for the Hydroball system was considerably smaller than originally estimated, and that the likely rate of market penetration would be much slower Newly estimated sales and profitability projections, based on Hydroball systems and probes alone, were insufficient to sustain the company.

The key strategic decision was made by the shareholders in NewTech that even though sales of the Hydroball systems could not be expected to sustain the company, they would carry on. The shareholders believed that NewTech would be able to develop other businesses. Although one of the shareholders, NewTel Enterprises Ltd, had the financial resources to be able to take a longer term view, the inventor was unable to put in additional funds to assist NewTech to find these other products/services and markets. (As things turned out, the inventor had other projects and businesses that he owned which required funding. He sold his 50% shareholding in NewTech to NewTel Enterprises Ltd in March 1989.)

NewTech was now given by its shareholders the objective of becoming a Newfoundland based electronics manufacturing company, with the aims of being profitable within 3 to 5 years, creating employment in Newfoundland, and utilising the technical institutional infrastructure in St John's This infrastructure included the Memorial University Faculties of Science, Engineering and Applied Science, and Business Administration, the Centre for Cold Ocean Resources Engineering, and the Ocean Sciences Centre, the Marine Institute, and the National Research Council of Canada's Institute for Marine Dynamics - $60 million research facility established on the University campus.

NewTech management began to search for other products or services opportunities where they had the internal resources to be competitive. Since then, NewTech has followed a path largely defined by an increasing variety of contract and build-to-print work A key decision at this time was to invest in a formal quality assurance system.

Business Development and Growth

Repair of Printed Circuit Boards

Each Hydroball probe had a circuit board which was brought in and assembled by NewTech. In addition, every signal receiver had a number of complicated circuit boards that went inside it. NewTech managers identified their investment and expertise in building and testing printed circuit boards as a possible foundation for business development.

By early fall 1988, NewTech had decided that they could offer a repair service for printed circuit boards and, as they had an urgent requirement for positive cash flow, they decided to try to find customers as quickly as possible. Fortunately, NewTech already had contacts with Newfoundland Telephone Company Ltd and became aware of its for repair of printed circuit boards.

The potential customer department had a number of circuit boards in various pieces of communications equipment, that were expected to fail for one reason or another after a certain length of service. Replacement boards were inserted into the equipment and the faulty boards were then repaired. There was enough equipment, and therefore failing boards, to generate a constant need for replacement and repair. Up until this time, boards needing repair had been sent out of Newfoundland. The repair price was relatively high, shipping charges were being incurred, and the turnaround time was at least one month.

NewTech was able to offer to repair the boards with a one-week turnaround, with no shipping charges, and a somewhat lower price. One individual from NewTech was therefore assigned to "go down to the telephone company and convince them that we have the capabilities to repair their boards". While this may seem an "easy-sell" it definitely was not. There was considerable customer concern over the ability of NewTech to carry out high quality repairs and to reliably assure this high level of quality. However, NewTech obtained an initial contract and, based on its quality work, was able to obtain continuation of this business after the initial batches had been repaired.

While this new business provided some steady income for NewTech, it was by itself insufficient to sustain the firm. Nor were there large growth prospects for the supply of failing or otherwise defective printed circuit boards in Newfoundland.

Quality Assurance System

In the fall of 1988, NewTech decided to invest in the highest quality specifications and assurance systems as the basis for seeking electronics manufacturing opportunities. Further funding assistance was obtained from ACOA through another of its assistance program. ACOA funded approximately 70% of the consultants' fees, and about 50% of the total $100,000 cost of the additional measuring and testing equipment that was needed. NewTech had, since early 1989, been working to the NATO AQAP-4 quality standard, and has met the quality requirements of such companies as Northern Radar and General Motors.

Northern Telecom Inc

In the spring of 1989, Northern Telecoms Belleville, Ontario plant approached NewTech with a request to produce a ribbon cable for use in some of their products. (A ribbon cable was made up of a number of individual strands of wire running side-by-side and embedded in a plastic coating, and looked like a ribbon, with connectors at each end.) NewTech began the initial production run of cables in mid-1989 and had sold 24,000 of them to Northern Telecom by the end of 1990 for sales of $549,913. During 1991, NewTech produced another 23,000 of the ribbon cables for sales of $527,000. During the first quarter of 1992, sales of ribbon cables were $175,000.

Also, in mid-1991, NewTech began production of five other types of cables for Northern Telecom. Sala of these cables totalled 5,000 units or about $100,000 by the end of 1991. During the first quarter of 1992 sales of these cables were $87,500.

Build-to-Print Contracts

Build-to-print was where a customer required a certain product built to its design and specifications, by a certain time, and usually according to a specified delivery schedule and price. Budd to-print could involve some original design work Much of the build-to-print business in Canada originated with Canadian government defence spending, aerospace contracts, or related research and development projects.

Beginning late in the fall of 1988, NewTech began to bid on build-to-print contracts. They were unsuccessful until, in mid1989, they were made aware by ACOA that General Motors of Canada Ltd had been awarded a Canadian government contract to supply 200 Light Armoured Vehicles (LAV's). It was a condition of the contract that GM seek out qualified suppliers in the regions, and they had approached ACOA, in its supplier development/advocacy role, for a list of possible Newfoundland subcontractors.

Light Armoured Vehicle Driver's Instrument Panel

NewTech managers met with GM representatives and persuaded them to inspect their manufacturing and design facilities. GM representatives were naturally skeptical that an unknown electronics :manufacturing company situated in Newfoundland would be able to meet their production and quality requirements and do so reliably. It was crucial that NewTech was able to show that best practices were in place and were being used in design, production and quality assurance processes. Following the GM inspection, NewTech was asked to quote on the contract for the driver's instrument panel for the LAV.

On January 10, 1990, NewTech and GM held a news conference to announce the awarding of a contract, worth approximately $870,000, to NewTech- This contract called for NewTech to provide 200 panels at a proposed rate of 10 per month for 20 months. Production got underway in March 1990, and by November 1991 NewTech had filled the entire order, four months earlier than the March 1992 deadline. GM was very impressed with the quality and service provided by NewTech. None of the panels had to be returned or even altered on-site as NewTech had gone to great lengths to ensure that they were thoroughly inspected and tested before they left the plant.

Since NewTech had demonstrated that it could provide a high level of quality on a consistent basis, it was successful in bidding for a further instrument panel contract with GM in early 1991, as GM had won a further contract to supply more LAV's. Unfortunately, political changes led to the cancellation of the entire order and consequently NewTech's subcontract. However, GM Canada was marketing the LAV internationally and was hopeful of obtaining orders for at least 1100 units worldwide by 1995.

Light Armoured Vehicle Fuel Tank Sensor

Late in 1989, GM suggested that NewTech might be able to design a circuit to solve a problem which GM had with the sensor in the LAV fuel tank and its indicator light on the driver's instrument panel. NewTech developed a prototype circuit design and sent it to GM. NewTech managers were pleasantly surprised when, in the spring of 1990, GM gave it a NATO Part Number and placed an order for 200 sets of wired circuits for the initial batch of LAV's. Again, this fuel tank sensor could be installed on all LAV's sold internationally.

Light Armoured Vehicle Alarm Annunciator Panel

In the summer of 1991, as a result of involvement with GM Canada's LAV contract, NewTech found out that GM was not happy with the LAV Alarm Annunicator Panel, another of the driver's instruments. It was based on outdated technology, was not as reliable as ideally required, was not repairable in the field, and cost $2,200 per unit. As a result of their associations with Newfoundland Telephone, NewTech personnel had experience in alarm technology and they decided to speculatively design a more modem unit and offer this design to GM. They were able to design a panel that incorporated vehicle alarm indicator lights, for example, low oil pressure, handbrake on; and battlefield alarm indicator lights, for example, fire, or gas attack A prototype was demonstrated to GM in September 1991, and a manufacturing contact was obtained in the early fall of 1991. The NewTech unit was more functional, more robust, repairable in the field and had a lower price. At least 1100 units, at a price of $1,500 per unit, were expected to be sold by NewTech over 5 years.

Light Armoured Vehicle Driver's Head-up Display

Also in the summer of 1991, as a result of involvement with GM Canada's LAV contract, NewTech found out that GM had a requirement for a digital, electronic, externally-mounted head-up up display (HUD) for the LAV driver This HUD would be used by the driver when the vehicle was moving unsealed and the armoured hatch cover over the driver's head was open. NewTech was successful in being able to design a 6"x1"x1" HUD, readable in bright sunshine and incorporating on its long side facing the driver, a digital speedometer and simplified vehicle and battlefield alarm indicator lights. In the fall of 1991, CM placed orders for this unit. At least 1100 units at a price of $410 each were expected to be sold by NewTech over 5 years.

Copper Telecommunications Cable Splice Closure Product

The Copper Telecommunications Cable Splice Closure Product was a patented method of transporting molten polyethylene to a job site and using it in a low-pressure moulding process to mould a closure around a prepared cable splice bundle. The application was for non-pressurised cables in the buried and underground outside plant environments. It enjoyed a significant cost advantage over conventional closure systems. The rights to this technology were purchased from Northern Telecom in late 1988. Sales were expected to be approximately $140,000 over the three years 1992-95. Potential customers included Newfoundland Telephone and other companies that were laying communications and control cabling.

Salinity Meter

In February 1988, NewTech was contacted by a St John's scientist who had independently originated a design for an underwater salinity meter. Since that time NewTech and the scientist collaborated in developing a working prototype device. Marketing efforts were underway towards other manufacturers of hydrographic measuring equipment with the aim of persuading them to incorporate the salinity meter into their products or product ranges. When a manufacturer decided to include the salinity meter in its offerings, the form of the prototype would be redesigned to meet that manufacturer's -particular specifications and NewTech would aim to build it.

Crab Tester

As part of its strategy to develop additional business opportunities, NewTech also sought contract research and development projects from government departments. In mid-1989, NewTech became involved with the crustacean tester concept through taking part in a design competition sponsored by the provincial Department of Fisheries.

When crabs were processed, only live crabs could be used. In order to inspect crabs coming into the processing plant to find out whether they were alive or dead the standard method had been to take a crab, Pull its shell off as fast as possible, and pull open its flesh to see if its heart was beating. Needless to say, this was somewhat injurious to the crab and this shock treatment could itself cause a crab's heart to stop beating, so leading to rejection of what was in fact a live crab. In any case, this treatment caused a consequent reduction in product quality

The Department of Fisheries had the idea that a better method would be to stimulate the crab's nervous system with a small electric shock, and if the crab was alive its legs would move. The Department had carried out trials of this testing method and was convinced that it did work to select only live crabs. (Perhaps, if the crab was more intelligent, it would try not to move in the hope that it would be perceived as dead and would hopefully be thrown back into the sea. However, even more intelligent crabs are presumably unable to keep their legs from moving when given an electric shock.)

NewTech won the Department's design competition for an easy-to-use portable unit and six were built in 1989. Fisherpersons now picked up a crab and held it by its back, put the two prongs of NewTech's test instrument on the crab, pressed a button and a light flashed to confirm that a current had gone through the crab - and if the crab twitched it was alive.

This product would never be a large money maker, but it was bringing in an income and it had begun to build NewTech's reputation with provincial government departments.

Adnatech Manufacturing Corporation

In September 1989, NewTech was approached by Adnatech, a St John's company, to manufacture the "Rodent Guard". This device could be screwed into a light socket and generated a pulsating high frequency ultrasonic sound barrier that specifically irritated the auditory nerves of rodents, forcing them to leave the area covered by the Rodent Guard. Areas that contained materials upon which rodents could potentially feed, or areas from which rodents had to be especially excluded could be protected. An initial batch of NM units at $75 each were produced by NewTech- Further units would be produced in the future depending on orders from Adnatech.

EJE Trans-Lite Inc

In early 1990, NewTech was approached by representatives of EJE, which had developed a small but powerful light that was activated by contact with water. Its main market was as an attachment for lifevests used on cruise ships. Pending legislation would make such lights mandatory for the cruise industry worldwide. Production began in late 1990, and during 1991 NewTech produced 155,000 lights for EJE, worth about $1,250,000. The lights had a projected life of eight to ten years, although the legislation required replacement every five years

The initial production run was taken up by ship operators in fulfilling the legislative requirements. The market had then dropped to a level determined by replacements and by sales to operators of ships where the light was not mandatory However, EJE expected that regulations similar to those in the cruise industry would be introduced in the airline industry, a much larger potential market.

Telephone Refurbishment

In April 1991, NewTech won a six-week contract to refurbish used telephone sets as Newfoundland Telephone Company's contribution to helping the environment through recycling. Even though at the time NewTech did not have sufficient manufacturing facilities to carry out this contract on top of ongoing work, Don Nickerson believed that it could lead to similar more substantial contracts in the future. With this in mind, he rearranged the manufacturing area and hired two trailers to provide temporary storage space so that NewTech could carry out the contract. Once again, NewTech and its employees delivered on time and with superior quality. By the end of 1991, NewTech had won several more short-term refurbishing contracts and had added seven new workbenches to handle the extra production.

In February 1992, NewTech was advised that it would likely be awarded a contract to do all the telephone refurbishing for a year The contract would be worth approximately $1,000,000 and production would be approximately .550 sets per week, based on the demand estimates from Newfoundland Telephone.

Whale Alerter

In recent years there had been increasing concern over the sad fate of whales that became trapped in fishing nets around Newfoundland and Labrador. The Memorial University Whale Research Centre and Centre for Cold Ocean Resources Engineering (C-CORE) had for some time been Jointly working on developing an "alerter" in the form of a buoy that could be attached to the fishing nets. This device gave out an intermittent and loud ultrasonic signal that would alert whales and hopefully cause them to avoid the nets.

In February 1991, NewTech was approached by the Whale Research Centre and C-CORE with a prototype and was asked to carry out further development work and produce a batch of alerters; for more extensive sea trials. NewTech carried out design-for-manufacture and in doing this it was also able to enhance the performance of the alerter units, so that battery life was extended from 3 to 40 days. Two hundred alerters were sold to C-CORE in 1991. Further development work and sales were dependent on the field trials now under way. If successful, these alerters might have worldwide sales potential.

Radio Signal Receptor

In mid-1991, NewTech commenced negotiations with a firm *in the United Kingdom for the worldwide manufacturing and marketing rights to a radio signal receptor which that firm had developed. The receptor was a small, pen-sized unit that could replace any traditional radio antenna and actually amplify the signal for better reception. One major potential market was the automobile industry which could use it to replace radio antennas on vehicles. Nickerson himself had one of the units installed in his own vehicle and experienced its effectiveness (not only in producing a dear signal, but also in reducing the annoying noise caused by wind drag on a traditional antenna).

In the fall of 1991, the negotiations were successfully completed. NewTech had secured the services of a North American distributor and it was expected that the receptor would go into full production in the spring of 1992. Market forecasts suggested an initial sales level of 5000 units per month.

Norcontrol Ltd Contract

During 1990, NewTech was involved with Norcontrol Ltd in its efforts to obtain a contract to supply and install a ship simulator at the Marine Institute in St John's. As things turned out NewTech did not obtain work from this contract, but received instead a manufacturing contract from Norcontrol for other products. This arrangement was preferable to both companies. Fifty "signal acquisition units" were to be produced for Norcontrol during 1992, and, if these were satisfactory, orders for up to 500 further units were likely over the following four years. NewTech's selling price would be $725 per unit.

Present Organization and Operations

In March 1992, NewTech employed 39 people, organized according to the chart shown in Exhibit 2. Sales had grown from $129,000 in 1988 to $33 million in 1991 (Exhibit 3). However, it was only in 1991 that the company began to make a profit.

NewTech's offices and manufacturing facilities were located in space leased in the - Northern Telecom provincial head office/manufacturing and distribution building in St John's. The front section of NewTech's space, 2,680 square feet, was taken up by the office area, and the rear section, 4,200 square feet, by the manufacturing area. This manufacturing area included the actual work area, a storage area, a hazardous materials storage area, and the mechanical workshop. For most of 1991 and into 1992, NewTech had been fully utilising its manufacturing space. During 1991, the company had to rent two trailers as storage space in order to be able to complete the telephone refurbishing contracts.*

All production work was done at workbenches. Each bench was an independant production area in itself, providing all the tools necessary to manufacture intricate electronic component assemblies. In March 1992, NewTech was operating with 24 workbenches, seven of which had been added to cope with the PI rho production requirements since mid-1991.

Don Nickerson was also aware of other considerations related to the pressures on manufacturing space. The provincial Department of Health was applying pressure concerning the small size of the female washroom relative to the number of female employees. It was also becoming apparent that with the increasing number of employees, the staff lunch room, which often served as a storage area, could no longer be used to store materials. More recently it had become dear that there was an increasing requirement for additional hazardous material storage space, which must be constructed according to all fire and safety regulations.

Concerns for the Future

Business Development and Facilities

Projections of sales revenues, operating expenses and overheads for the future are given in Exhibit 4. As the manufacturing facilities were already insufficient, it looked as if more space was needed, and soon. Fortunately, there was no similar pressure on the office space and obtaining further office space was not envisaged.

The management group had been uncertain about how much manufacturing space to accommodate additional workbenches, etc, was required. They did know, however, that with their present square footage of Manufacturing space, including storage area and washrooms and excluding the temporary trailer storage, they could handle the work needed to support an estimated maximum sides revenue of $3 million.

If they decided to go ahead, NewTech could expand its manufacturing facilities in several ways. The first option was to expand the existing facility; the second was to lease another existing building; the third was to buy another existing building; and the fourth option was to construct a new building of their own. If the company was to move, the one-time cost to move furnishings, fittings, and all manufacturing equipment and supplies, etc, including set-up costs in the new location, would be $120,000.

Option 1: Expand Existing Facility

Through negotiations with the Northern Telecom manager and landlord, Don Nickerson had secured an agreement to allow NewTech to lease an additional 3,000 square feet in the rear of the building However, he was concerned whether this amount of space would be sufficient to accommodate the required increased workspace and the other additions to storage areas and washrooms that were becoming needed. The rental cost of existing space in the Northern Telecom building was $9.60 per square foot per year and Don Nickerson believed that this rate would be charged for any new space.

Option 2: Lease Another Existing Building

The second option was to lease a building in Donovan's Industrial Park in the adjoining city of Mount Pearl. As it happened, there was only one available building that could possibly house NewTech's type of operation. This warehouse-type facility had more than adequate total square footage, but the relatively large office area would have to be reduced in order to be able to establish the manufacturing area at the required size. As well, changes in the ventilation and waste disposal systems would be required to meet NewTech's stringent quality assurance standards. The lease itself would cost $22 per square foot per year for the square footage that NewTech required, and building modifications would be at NewTech's expense.

Option 3: Purchase Another Existing Building

Very dose to NewTech's present facility was a building in reasonable condition which had been recently vacated by a St John's printing and publishing company. This building which had contained their printing plant and offices was for sale. It included front offices and a large rear production area (now empty) with large loading doors and loading dock. The cost to buy the land and building was estimated to be around $75 per square foot, for approximately 12,000 square feet.

However, the building required significant capital expenditure in the form of improvements such as repairs to a sagging roof.

It would also require the same types of improvements and modifications as the other buildings under consideration in order to meet quality assurance standards. A further concern was that the floor in the plant area had been reinforced in places to enable the installation of very large printing presses. The reinforcement had been made by pouring extra concrete so that the floor was now on two levels. This concrete would be costly to remove and if left in place would complicate the of the manufacturing space and the work flows. The total cost of the required improvements and modifications to this building were estimated at $250,000.

Option 4: Construct a New Building

NewTech had used the services of a contractor to estimate the cost of constructing a new building. The contractor had provided a quote of $60 per square foot to construct the kind of facility that NewTech needed. However, NewTech managers knew that they had more than construction costs to consider For example, there were the problems of where the building would be located, where land must be bought, and the building and activity permissions required. Also, utilities and services would need to be paid for, employees would have to travel, etc.

A Final Look Around

The ram was slackening and the sun was going down. The impending decision of whether to expand the facilities, and if so, to what extent and by what means, was on Don Nickerson's mind as he left his office to take a final look around before going home.


Exhibit 1

The HYDROBALL Current Profiling System

Exhibit 2

NewTech Instruments Ltd
Organization Chart, March 1992

Exhibit 3

NewTech Instruments Ltd
NewTech Income Statements for Year Ending December 31st, 1991
with Comparative Figures

1988 1989 1990 1991
$(,000) $(,000) $(,000) $(,000)
Sales 129.6 589.0 1,052.2 3,345.4
Cost of Sales 89.1 321.7 694.7 2,527.5
Gross Profit 40.5 267.3 357.5 817.9
Other Income 13.3 1.8 26.1 51.5
Expenses
Salaries (admin.) 260.1 268.4 282.4 338.2
Rent 22.2 22.2 14.6 14.6
Professional Fees 49.1 13.7 4.2 9.5
Travel 24.6 13.7 12.4 24.5
Office Expenses 9.2 9.5 12.9 12.7
Pension & Benefits 29.4 29.8 34.5 46.7
Telephone 21.7 22.2 24.9 21.9
Miscellaneous 31.2 28.5 121.7 36.3
Marketing 148.0 151.2 167.1 130.9
Depreciation 6.7 9.2 10.1 11.3
Accounting 13.8 17.4 9.9 6.2
R&D amortization 201.2 345.2 1,254.4 0.0
Insurance 2.4 0.3 0.6 1.0
Municipal Taxes 3.4 4.6 2.4 4.3
Research & Dev, 62.8 26.7 9.9 34.3
Bank Charges 1.6 1.3 2.0 3.2
Interest Expense 29.3 97.5 183.4 150.7
916.7 1,061.4 2,147.4 846.3
Income (loss)
before income taxes (862.9) (792.3) (1,763.8) 23.1
Income tax 27.5 288.9 (394.6) 10.5
Net Income (890.4) (1,081.2) (1,369.2) 12.6
Source: Company records

Exhibit 4

NewTech Instruments Limited
Future Financial Projections, 1992-19%

Sales Revenues 1992 1993 1994 1995 1996
$(,000) $(,000) $(,000) $(,000) $(,000)
Refurbishing Services $977.2 $1,050.0 $1,310.0 $1,512.0 $1,814.0
Northern 998.9 1,600.7 1,728.8 1,867.0 2,016.4
Translite 606.9 828.0 900.0 1,112.0 1,200.0
General Motors 219.0 1,490.8 1,907.0 2,323.0 2,323.0
Norcontrol 231.3 783.0 797.5 797.5 203.0
Contract Work 1,509.1 296.5 352.0 407.0 462.0
Receptor 476.8 1,104.0 1,242.0 1,380.0 1,380.0
New Projects 0 674.0 552.7 1,391.5 3,391.6
Misc Projects 197.4 173.0 210.0 210.0 210.0
Total Sales
Revenues $5,216.6 $8,000.0 $9,000.0 $11,000.0 $13,000.0
Plant Overheads 1992 1993 1994 1995 1996
$(,000) $(,000) $(,000) $(,000) $(,000)
Plant Depreciation 63,575 97,044 106,204 113,204 120,204
Municipal Taxes 3,499 3,900 4,100 4,300 4,400
Cleaning & Garbage 9,884 13,200 14,000 14,500 15,000
Other Costs 3,841 4,200 4,600 5,000 5,400
Labour 19,340 19,200 20,000 21,000 22,000
Equipment Maint 12,094 12,656 13,096 12,996 12,996
Total Overheads 112,233 150,200 162,000 171,000 180,000
Note: Rent or mortgage costs for manufacturing space must be added to these projections.

 

Operating
Expenses 1992 1993 1994 1995 1996
$(,000) $(,000) $(,000) $(,000) $(,000)
Salaries (Admin) 266.9 411.6 466.1 484.7 504.1
Professional Fees 0 6.0 6.0 6.0 6.0
Travel 19.7 25.0 25.0 25.0 25.0
Office Expenses 12.9 13.0 13.7 14.3 15.0
Pension & Benefits 82.6 97.0 90.5 94.1 97.9
Health & Ed Tax 0 0 0 0 0
Telephone 21.8 22.0 22.0 22.0 22.0
Miscellaneous 17.5 19.0 20.0 20.9 22.0
Marketing 152.5 249.2 254.8 306.5 327.1
Depreciation 14.5 23.8 26.9 29.7 32.5
Accounting 8.5 11.5 11.5 11.5 11.5
R&D Amortization 0 0 0 0 0
Insurance 1.2 1.4 1.4 1.4 1.4
Municipal Taxes 4.3 4.7 4.8 4.9 5.0
Research & Dev 4.1 30.0 30.0 30.0 30.0
Bank Charges 3.2 4.0 4.0 4.0 4.0
Total Expenses 609.7 908.2 976.7 1,055.0 1,103.5
Note: Rent or mortgage costs for the office area must be added to the expenses projections.
Source: Company records