Term Project

Term Project
INCOME STATEMENTS
Historical Projected
2013 2014 2015 2016 2017 2018 2019 2020
TOTAL SALES $32,886,109 $33,497,044 $49,732,345 $54,705,579 $60,176,137 $66,193,751 $72,813,126 $77,181,913

OTHER REVENUES:
INTEREST INCOME $34,202 $57,467 $76,780 $0
MISCELLANEOUS $171,553 $280,239 $200,000 $237,724
TOTAL OTHER REVENUES $205,755 $337,706 $276,780 $237,724

TOTAL REVENUES $33,091,864 $33,834,750 $50,009,125 $54,943,304
LESS: COST OF GOODS SOLD $16,447,863 $18,024,814 $24,335,337 $26,768,871
GROSS PROFIT $16,644,001 $15,809,936 $25,673,788 $28,174,433
GROSS PROFIT MARGIN (%) 50.3% 46.7% 51.3% 51.3%

GEN. & ADM. EXPENSE
BAD DEBT $181,597 $95,577 $189,668 $0
SALARIES $3,476,930 $3,675,427 $4,136,820 $4,136,820
ADVERTISING & PROMOTION $21,884 $50,465 $194,467 $197,752
COMMISSIONS & ROYALTIES/FEES $57,591 $48,377 $24,600 $0
OFFICE SUPPLIES $120,040 $128,194 $148,729 $148,729
RESEARCH & DEVELOPMENT $314,028 $267,134 $90,821 $90,821
RENTALS $277,346 $731,583 $896,638 $896,638
UTILITIES $337,996 $288,720 $322,194 $322,194
INSURANCE $201,873 $356,195 $695,952 $695,952
PROFESSIONAL FEES $355,078 $715,343 $283,704 $306,480
TAXES $153,814 $106,208 $117,288 $117,288
TRAVEL & VEHICLE $365,000 $342,989 $489,585 $489,585
PENSION & PROFIT SHARING $198,183 $127,601 $45,960 $45,960
DEPRECIATION $1,083,409 $933,128 $1,505,209 $1,693,055
AMORTIZATION $3,573 $164,356 $38,676 $717,119
MANUFACTURING EXPENSE $6,487,781 $7,059,185 $9,166,897 $9,166,897
MISCELLANEOUS $1,309,202 $728,991 $942,941 $1,071,698
TOTAL GEN. & ADM. EXPENSE $14,945,325 $15,819,474 $19,290,149 $20,096,988

OPERATING INCOME $1,698,676 ($9,538) $6,383,638 $8,077,445
OPERATING MARGIN (%) 5.1% 0.0% 12.8% 14.7%

EXTRAORDINARY INCOME (EXPENSE) $0 ($457,975) $200,000 $0

INCOME AFTER EXTRAORDINARY ITEMS $1,698,676 ($467,513) $6,583,638 $8,077,445

INTEREST EXPENSE $992,783 $886,447 $684,345 $436,731
PRE-TAX INCOME $705,893 ($1,353,960) $5,899,294 $7,640,713
PRE-TAX MARGIN (%) 2.1% -4.0% 11.8% 13.9%

TAXES $193,889 $477,938 $2,309,703 $2,433,085

NET INCOME AFTER TAXES $512,004 ($1,831,898) $3,589,590 $5,207,629
AFTER-TAX MARGIN (%) 1.5% -5.4% 7.2% 9.5%

DEPRECIATION & AMORTIZATION $1,086,982 $1,097,483 $1,543,885 $2,410,174

EBITDA $2,785,658 $1,087,945 $7,927,523 $10,487,619
MARGIN (%) 8.4% 3.2% 15.9% 19.2%

BALANCE SHEETS

DESCRIPTION 2012 2013 2014 2015 2016 2017 2018 2019 2020
CURRENT ASSETS:
CASH $737,747 $274,996 $0 $1,424,527 $2,721,329
ACCOUNTS RECEIVABLE $5,289,701 $3,370,451 $4,567,295 $5,750,259 $6,421,451
INVENTORY $5,083,700 $5,293,306 $2,215,248 $2,614,444 $3,986,147
PREPAID EXPENSES $186,037 $117,506 $253,161 $253,161 $253,161
DEFERRED TAXES $346,735 $375,000 $0 $0 $0
OTHER CURRENT ASSETS $828,208 $781,647 $262,876 $273,111 $273,111
TOTAL CURRENT ASSETS $12,472,128 $10,212,906 $7,298,580 $10,315,502 $13,655,199

DEPOSITS $245,405 $336,894 $444,384 $444,384 $444,384

NOTES RECEIVABLE $0 $16,294 $888,007 $658,651 $658,651

GROSS FIXED ASSETS $7,233,474 $11,088,479 $9,680,382 $11,851,382 $11,851,382
(ACCUM. DEPRECIATION) ($3,541,017) ($5,549,385) ($5,175,286) ($6,680,495) ($8,373,550)
NET FIXED ASSETS $3,692,457 $5,539,094 $4,505,096 $5,170,887 $3,477,832

GOODWILL & ORGANIZAT’L $164,889 $240,353 $10,756,790 $10,756,790 $10,756,790
(ACCUM. AMORTIZATION) $0 ($3,573) ($141,643) ($180,318) ($897,438)
NET GOODWILL & ORGAN’L $164,889 $236,780 $10,615,147 $10,576,472 $9,859,352

TOTAL ASSETS $16,574,879 $16,341,968 $23,751,214 $27,165,895 $28,095,419

CURRENT LIABILITIES:
ACCOUNTS PAYABLE $2,650,422 $2,108,658 $2,339,772 $2,553,598 $1,839,991
ACCRUED INCOME/OTHER TAX $89,411 $119,818 $310,099 $1,066,125 $1,077,556
ACCRUED EXPENSES $1,216,823 $416,915 $612,396 $612,396 $612,396
REVOLVING DEBT $0 $0 $1,538,628 $0 $0
ACCRUED EMPLOYEE EXPENSE $300,000 $41,783 $322,407 $322,407 $322,407
OTHER CURRENT LIABILITIES $246,732 $17,894 $67,894 $67,894 $67,894
CURRENT PORTION L-T DEBT $1,736,294 $3,714,344 $937,134 $1,321,976 $1,124,860
TOTAL CURRENT LIABILITIES $6,239,682 $6,419,412 $6,128,330 $5,944,397 $5,045,104

LONG TERM LIABILITIES:
LONG TERM DEBT $4,723,702 $4,426,519 $3,485,019 $3,882,377 $3,353,564
DEFERRED TAXES $66,405 ($656,368) ($120,289) ($120,289) ($120,289)
TOTAL L-T LIABILITIES $4,790,107 $3,770,151 $3,364,730 $3,762,088 $3,233,275

PREFERRED STOCK $0 $0 $14,250,000 $14,250,000 $11,400,000
DIVIDENDS IN ARREARS $0 $0 $0 $157,884 $157,884

STOCKHOLDERS’ EQUITY $81,164 $176,475 $41,000 $41,000 $41,000
RETAINED EARNINGS $5,463,926 $5,975,930 ($32,845) $3,010,528 $8,218,157
TOTAL EQUITY $5,545,090 $6,152,405 $8,155 $3,051,528 $8,259,157

TOTAL LIABILITIES & EQUITY $16,574,879 $16,341,968 $23,751,214 $27,165,896 $28,095,420

ASSETS – LIAB. & EQ. $0 $0 ($0) ($1) ($1)

STATEMENTS OF CASH FLOW
2013 2014 2015 2016 2017 2018 2019 2020
FROM OPERATIONS:
NET INCOME $512,004 ($1,831,898) $3,589,590 $5,207,629
DEPRECIATION & AMORTIZATION $1,086,982 $1,097,483 $1,543,885 $2,410,174
NON-CASH CURRENT ASSETS $1,796,471 $2,639,330 ($1,592,395) ($2,042,896)
CURRENT LIABILITIES ($1,311,265) $616,876 $969,853 ($702,177)
TOTAL FROM OPERATIONS $2,084,192 $2,521,791 $4,510,934 $4,872,730

FROM INVESTING ACTIVITIES:
DEPOSITS ($91,489) ($107,490) $0 $0
NOTES RECEIVABLE ($16,294) ($871,713) $229,356 $0
GOODWILL & ORGANIZAT’L ($2,930,046) $100,870 ($2,171,000) $0
GROSS FIXED ASSETS ($75,464) ($10,516,437) $0 $0
TOTAL FROM INVESTING ACTIVITIES ($3,113,293) ($11,394,769) ($1,941,644) $0

FROM FINANCING ACTIVITIES:
REVOLVING DEBT $0 $1,538,628 ($1,538,628) $0
ACCRUED EMPLOYEE EXPENSE ($258,217) $280,624 $0 $0
OTHER CURRENT LIABILITIES ($228,838) $50,000 $0 $0
CURRENT PORTION L-T DEBT $1,978,050 ($2,777,210) $384,842 ($197,116)
LONG TERM DEBT ($297,183) ($941,500) $397,358 ($528,813)
DEFERRED TAXES ($722,773) $536,079 $0 $0
OPTIONAL CATEGORY 10 $0 $0 $0 $0
PREFERRED STOCK $0 $14,250,000 $0 ($2,850,000)
DIVIDENDS IN ARREARS $0 $0 $157,884 $0
STOCKHOLDERS’ EQUITY $95,311 ($135,475) $0 $0
DIVIDENDS ($0) ($4,203,163) ($546,217) $0
TOTAL FROM FINANCING ACTIVITIES $566,350 $8,597,983 ($1,144,762) ($3,575,928)

TOTAL CHANGE IN CASH ($462,751) ($274,996) $1,424,527 $1,296,801

PLUS: BEGINNING CASH $737,747 $274,996 $0 $1,424,527
ENDING CASH BALANCE $274,996 $0 $1,424,527 $2,721,329

CASH FROM BALANCE SHEET $274,996 $0 $1,424,527 $2,721,329

FINANCING PAYMENT SCHEDULES

LOAN NO.: #1
Description: Seller Note
Interest Rate 8.00%
Original Principal Amount $3,850,000
Current Principal Balance $3,144,033
Date of Current Balance 12/31/2016
Final Payment Due Date 11/30/2020
2017 2018 2019 2020
Beg. Balance $3,144,033 $2,433,094 $1,663,147 $829,295
Payment $936,769 $936,769 $936,769 $862,974
Interest $225,830 $166,823 $102,917 $33,680
Principal Pymt. $710,939 $769,947 $833,852 $829,295
Ending Balance $2,433,094 $1,663,147 $829,295 ($0)

LOAN NO.: #2
Description: Capital Expenditure
Interest Rate 10.16%
Original Principal Amount $1,738,000
Current Principal Balance $1,334,391
Date of Current Balance 12/31/2016
Final Payment Due Date 11/30/2019
2017 2018 2019 2020
Beg. Balance $1,334,391 $920,470 $462,499 ($0)
Payment $530,524 $530,524 $486,314 $0
Interest $116,603 $72,553 $23,815 $0
Principal Pymt. $413,921 $457,971 $462,499 $0
Ending Balance $920,470 $462,499 ($0) ($0)

PREFERRED STOCK #1
Description: Series/Type
Interest Rate 0.00%
Original Principal Amount (Input) $14,250,000
Current Principal Balance $11,400,000
Date of Current Balance 12/31/2016
Final Payment Due Date 11/30/2020
2017 2018 2019 2020
Beg. Balance $11,400,000 $8,550,000 $5,700,000 $2,850,000
Payment $2,850,000 $2,850,000 $2,850,000 $2,850,000
Dividend $0 $0 $0 $0
Principal $2,850,000 $2,850,000 $2,850,000 $2,850,000
End. Balance $8,550,000 $5,700,000 $2,850,000 $0

COMMENTS ON WRITING A BUSINESS REPORT

A good report is crucial to communicating what you have done and instilling confidence in the reader that you have done a thorough analysis. A report should be well-organized with a definite path that leads the reader from an introduction to a conclusion. Outlining your report in advance could aid you in this endeavor. A typical outline might look something like this:
I. Introduction
The purpose of the analysis and report

II. Background
A brief summary of the company does and how the business is changing. (Outlook for increased sales due to more focused marketing efforts, larger customer accounts, etc.)

III. Analysis
A. Projected Income Statements
a. Sales
b. Cost of goods sold
c. Administrative expenses
d. Depreciation expense
e. Interest expense
f. Taxes
B. Projected Balance Sheets
a. Projected asset requirements to support projected sales
i. Cash
ii. Accounts Receivable
iii. Inventories
iv. Fixed Assets
b. Financing of asset requirements
i. Accounts Payable
ii. Accruals
iii. Long-term Debt
iv. Retained Earnings (Dividend policy)
v. Additional Financing Required
C. Statement of Cash Flows (This would show the annual needs versus the cumulative needs indicated on the balance sheets)
D. Financing Alternatives
a. Debt
i. Bank restrictions
ii. Total debt availability
iii. Short-term debt availability
b. Required equity financing

III. Conclusions/Recommendations
Advantages and Disadvantages of financing alternatives. What you would recommend and why.

In writing up the report, be as concise as possible. Remember, the person who is reading the report is a busy person and all “fluff” does is waste their time. Also, the report should be written so that a non-technical person can get a basic understanding of what you have done. For example, in describing the projection of accounts receivable, one might write

“Accounts receivables are projected to increase from their current level of $110,800 to $351,435 by 2018 (See Exhibit II). The tripling of receivable balances over this period, when sales are anticipated to only double in volume, is due to more of our customers demanding more advantageous credit terms. The result is an expected increase in the average collection period from approximately 32 days to just over 40 days (See Exhibit IV for calculations).”

You have communicated to the reader what your numerical analysis reveals and why it does so without burdening them with the detail of how it was calculated. Thus, a non-numbers person can understand what is anticipated to occur in terms of increased asset (receivables) requirements and the cause of the increase. A more technically-oriented person (such as myself) has been directed to Exhibit II to see the actual balance sheets and to Exhibit IV in order to see how you have derived the average collection periods using ratios, probabilities, or whatever.

The report itself should only quote key figures from the exhibits such as the beginning and ending accounts receivable balances used in the above example. (Obviously, in some cases, such as the amount of financing needed, you will want to quote the amount required for each year.) The bulk of the numbers should otherwise be restricted to exhibits. Exhibits should be numbered. In general, an exhibit that is not referred to in the report is not needed for the report and should not be included. (There can be exceptions to this, but they are relatively rare.)

The result of a good report is that the reader can understand what you have done without having to look at the exhibits specifically, feel confident in your abilities to analyze the circumstances, and be persuaded into accepting your conclusions.

I strongly encourage you to proofread your report very carefully. While some errors will inevitably be missed, you want to minimize them. The spell-checker and grammar-checker in Word are notoriously bad and cannot tell that the word “in” should have been “is”. Mistakes in your spelling and grammar cast serious doubt upon the quality of the analysis itself.

COLLECTIBLES, INC.
Collectibles, Inc., produces a variety of consumer products, including dolls and jewelry. It’s primary products are manufactured in China and sold through gift shops throughout the United States as well as via the Television Shopping Network (TSN). The television marketing also involves the use of a well-known celebrity whose name has become associated with the various dolls that she “pitches” on six different days during the year.

Prior to 2015, Collectibles (formerly, Knicknacks, Inc.) had concentrated solely on the gift items categories. In late 2014, Knicknacks completed the acquisition of the Bock Company. Bock was a designer and manufacturer of custom jewelry that was sold in a variety of Asian and Middle Eastern countries but had encountered financial difficulties necessitating that it seek protection in bankruptcy court. Knicknacks was able to structure a merger with Bock that resulted in the formation of Collectibles. The merger resulted from a combination of new equity infusion and the restructuring of supplier debt, both in the form of preferred stock that carried a zero percent dividend rate but was payable over a five-year period (an equity “kicker” was included as part of the preferred stock). The proposal was viewed as superior to a competing bid and won approval from the bankruptcy court.

The result of the business combination proved to be quite successful as a result of the synergies realized by relocation of the jewelry manufacturing to the Asian continent and the ability to introduce one line of jewelry to the U.S. market through the Television Shopping Network. Collectibles was also beginning to make in-roads into the European market as a result of the distribution channels of the Bock jewelry line. The European market proved to be receptive to the dolls and other collectible product lines of the company and was expected to provide a significant source of sales growth over the next three years.

Collectibles currently is in negotiations with Starlight Jewelry Manufacturing, Inc., a company that manufactures and sells low-end jewelry throughout the United States. The appeal of Starlight to Collectibles is two-fold: first, it provides a complement to the higher-priced custom jewelry lines that it currently sells and is expected to allow certain synergies to be realized through consolidation of facilities. The CFO anticipates the consolidations to produce savings of approximately $600,000 per year. Moreover, the resulting surplus productive capacity would be such that no capital expenditures were considered necessary in the foreseeable future. Even then, the use of subcontracted Asian manufacturing facilities was expected to result in the shifting of the burden of equipment purchases to the subcontractors. In addition to the annual consolidation savings, the CFO felt that the Cost of Goods Sold of the combined entity could be reduced by one percent by pressuring suppliers to pass along some of the economies of scale that the larger volume of purchasing would provide.

The second incentive for acquiring Starlight was the fact that TSN had been pressuring Collectibles to develop a low-end jewelry line that was more in line with the buying habits of its customers. Although the sales of Collectibles’ Bock jewelry line had been favorable, the relatively high price of the custom jewelry line was seen as being quite limiting in the ability of the network to fully develop a customer base for the jewelry. Starlight Jewelry appeared to be a means by which Collectibles could produce a low-cost, low profit margin line that would bolster the Bock brand name on TSN while being affordable to the viewers. The added distribution channel of TSN was, therefore, viewed as a means of significantly expanding the sales of Starlight over the next two-to-three years.

The acquisition of Starlight would be through an asset purchase and would necessitate that Collectibles restructure its own financing as well as finance the acquisition. The long-term debt of Collectibles contained a clause that dictated no additional debt (other than a revolving line of credit secured by inventories and receivables) was allowed. The revolving line of credit utilized by Collectibles was from Econova Bank and carried an interest rate of prime plus 4½% (the prime rate is currently 3.25%). The revolver was limited to 70% of accounts receivable plus 18% of inventories based upon the historical breakdown of an aging of accounts receivable and the work-in-process versus finished goods inventories. Econova Bank was also the provider of the current $4½ million of long-term debt of Collectibles and indicated a willingness to refund the current debt as well as providing some of the funding for the acquisition of Starlight Jewelry. The new long-term debt would be at the same rate as the revolving line of credit (currently 7.75%) and payable over a five-year period on a fully amortized basis. The refunding of the long-term debt at a lower interest rate than the current long-term debt was agreed upon in order to reflect the new equity as well as the threat to move the company’s financing to the Eastern Seaboard Bank which had made a competitive offer of financing. The restrictions would be similar to the restrictions on the current debt: 1) no new debt would be allowed except for revolving debt secured by receivables and inventories; 2) the firm must maintain a Quick Ratio of at least 1.25; and 3) the company must maintain a Debt Service Coverage Ratio [EBITDA/(Interest + Principal)] of at least 1.75.
Your task:

Determine the value that Collectibles should be willing to pay for Starlight Jewelry. Note that Collectibles will not assume any of Starlight’s debt (i.e., it is buying the assets of Starlight debt-free). Once a value has been determined, assume that the acquisition will be at the price that you determined and will be paid for through a loan and additional equity from venture capitalists. The venture capitalists like to see 50-60% of the purchase be financed through debt and want a rate of return of 25-30% on their equity investment. Since Collectibles will be acquiring the financing, assume that the terms of the line of credit for Starlight’s receivables and inventories will be those of Collectibles. Also, assume that a completely new loan package will have to be structured that will refinance all of Collectible’s existing debt in addition to the 50-60% acquisition price. The new loan will be payable over five years and have similar restrictions to Collectible’s current debt.

Finally, write up your analysis as a concise, coherent report. I should be able to read through the report and have a good understanding of what you have done in your analysis. Your projections should be attached as exhibits and referred to in the report as needed. Your ability to clearly communicate what you have done is at least as important as your analysis.

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