Tauber-Arons, Inc. / Quarterly Report

13848 Ventura Boulevard
Sherman Oaks, CA 91423
323-851-2008
800-648-2249
FAX: 818-933-0782
tauberarons@aol.com

Quarterly Report
July 10, 2006

GENERAL
Even though economists are predicting a slowdown; most industries in general are doing well, but what does seem to be missing is the lack of auction sales. I don't feel that is attributable to a growing economy, but instead the emergence of the venture capital groups replacing the Turnaround Management Groups. It seems that nowadays if a company is struggling the venture capital groups bring in an influx of capital to keep the company alive in exchange for a large, if not a controlling interest, in the company. They then negotiate a turnaround strategy with the creditors and if the turnaround is successful they either keep it in the portfolio or spin it off for a quick gain. The strategy is to continue to merge in weaker companies, consolidate operations (thus providing better profit margins) and redistribute assets to their other divisions. In other words, the sick ones don't go to auctions, instead they get merged in with venture capital groups.

This will continue to work until one day the management team that has put together this consortium realizes there is not further growth potential. If investors find an investment (higher interest rates), that will return 10-15% with less risk, then the influx of new capital will dry up and consequently the reason that these companies have stayed alive. The companies will be required to actually make money and that is when the manager will say 'adios' and the investors will be left with a huge bankruptcy case.

FOOD
The food industry giants are duplicating the Wal Mart model, which Boeing followed. Sub out all your production needs and then squeeze the subcontractor's profit margins by competition from other contractors trying to score the Wal Mart contract. You as bankers have seen it time and again that you look at a balance sheet and see that the company's sales are concentrated in the 80% range with one company. The subcontractor knows that to stay alive he must go after the big fish. But once he gets the big fish he finds out that he is the one on the hook. He must expand operations from the growth of obtaining that contract, but the only way he is competing is on the basis of price, and that is when the main has him.

They go out and get quotes from overseas and local subcontractors forcing him to drive down his pricing or lose the main and go out of business. He may know that the new subcontractor can never perform at those bid price levels but he also knows if he calls their bluff he will be out of business, the new subcontractor will get his foot in the door and then re-negotiate the contract when the main has lost his other source. And so begins the new cycle for this new subcontractor. This seems to be the future for a while as long as the purchasing agents of these mains base their decisions solely on pricing.

Every once in a while you will read of a company who refuses to do business with Wal Mart when he has built an excellent product, because he knows the short lived future.

We bought a deal from Con Agra in Canada and had a sale that brought 40% more than we expected. Con Agra was moving one product line over to China and subbing out the balance of what that plant produced. We are doing a salad processing plant in New Orleans in June. It is a little unique that there is a lot of auction sales taking place in this industry but the prices are extremely high. I attribute this to the mains subbing out their production and the subcontractors are scurrying to increase their manufacturing capabalities due to the new supply of orders. I think you as lenders will be seeing a lot of activity and growth in this industry for a while until the work is finally placed: pricing will become the only criteria and profits start shrinking; until then enjoy the expansion demand ride.

MACHINE SHOPS
Not a lot of auction sales taking place since this industry is doing so well due to aerospace. When a sale takes place the prices are fantastic. But don't think that because you have a CNC Machine Turning Center in a wheel company, that the Turning Center will do well. The wheel industry is just about done in the U.S. and those machines will not be used by the aerospace industry. Because of the automotive downturn, the machines in an automotive auction sale will not do well, except for Swiss CNC Screw Machines making small parts for other industries.

So when you are looking at an industry (machine shops) don't look at it in general, but look at whom they are providing work for and how that particular industry is doing.

SHEET METAL
Doing better because of the demand for computer and telecommunication panels has increased from where it was 4 years ago. Amada CNC Press Brakes are back up again, but an older Amada CNC Brake may outsell and newer Amada due do design changes. CNC Turret Fabricators & Plasma Units are back up. Structural steel companies have been fantastic for the last 3 years due to the expansion of city building planning. What airport have you gone to that is not expanding for increased air travel? What city do you go to where you don't see new buildings going up or old ones being torn down with new ones going up in their place? We are starting to run out space in the large cities. July 10, 2006 Page three

WOODWORKING
Still a segmented industry with the cabinet industry doing well and the furniture doing terrible.

PLASTICS
Now more than ever a 'commodities game.' Companies continue to devour others so that they can get the volume discounts on resins. Hasn't been a lot of injection molding sales and when they do occur the prices are about average. One change is the pricing of Electric Injection Molders (EIM). Prices on EIM's used to be quite a bit higher than a Hyd. Injection Molder due to the high cost of energy that spurred the development and demand for the EIM. Well now more manufacturers have gotten into building EIM's and the new price has dropped down to about the same level as the Hyd. Injection Molder. Blow Molding is off a little bit. If you are manufacturing small bottles, they are a product that is easily shipped to the U.S. from overseas in large quantities, and therefore that portion of blow molding is not doing well.

Sincerely,

TAUBER ARONS, INC.

STEVE W. QUALE

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