Sunny Day Stores operates convenience stores throughout much of the United States. The industry is highly competitive, with low profit margins. The company's competition includes national, regional, and local supermarkets; oil companies; and convenience store operators.

A footnote to the 2005 financial statements described the company’s long-term debt:
Note payable to the Prudential Insurance Company of America (“Prudential”) with annual principal payments of \($900,000\), interest at 8.93%. Amount outstanding: \($5,700,000\) in 2005 and \($6,600,000\) in 2004.
Term note payable to First Florida Bank (“First Florida”) maturing in September 2010, with quarterly principal payments of \($125,000\) through June 30, 2006 and \($250,000\) thereafter, with interest at 1% in excess of prime (5.5% at December 26, 2005). Amount outstanding \($3,563,956\) in 2005 and \($3,000,000\) in 2004.
Revolving note payable to First Florida Bank with interest at 1% in excess of prime (5.5% at December 26, 2005). Amount outstanding: \($7,400,000\) in 2005 and 2094.
Certain of the Company’s loan agreements pertaining to the borrowings from the Prudential Insurance Company of America (“Prudential”) and First Florida Bank (“First Florida”) require the Company to maintain minimum interest coverage ratio, working capital, and net worth levels, impose restrictions on additional borrowings, and prohibit the payment of dividends. Specifically, at the end of fiscal 2005 Sunny Day must have a net worth of \($22,850,000\), working capital (on a FIFO inventory basis) must be at least \($1,300,000\), and the interest coverage ratio must be at least 1.6.
The company’s 2005 financial statements that follow show that Sunny Day Stores was not in compliance with these loan covenants at year end.

Required:
It’s late January 2006, and Prudential and First Florida have hired you to act on their behalf in negotiations with Sunny Day Stores. Both lenders want to restructure their loans to address the company’s current financial problems, and the restructured loans may require covenant changes.
Prudential and First Florida seek your advice on the type and amount of collateral to be required, revised interest rates, and possible changes to the payment schedules. In addition, the lenders have asked you to suggest new minimum net worth, working capital, and interest coverage ratios for 2006 and 2007. Specifically:
1. What type and amount of collateral do you suggest be required?
2. Should a higher interest rate be charged? Why or why not?

3. What changes would you suggest be made to the payment schedule?
4. What new minimum net worth, working capital, and interest coverage limits would you suggest the lenders set?
5. Suppose the company asked permission to resume payment of its \($0.12\) per share dividend, which was suspended in 2004. What advice would you give Prudential and First Florida?

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Sunny Day Stores, Inc. Comparative Balance Sheets Cash and cash equivalents Accounts receivable less allowances for doubtful accounts of $82,000 and $63,000 in 2005 and 2004, respectively Refundable income taxes Inventories-FIFO basis Less: LIFO reserve Total inventories Prepaid expenses and other assets. Refundable deposits Total current assets 2005 Fuel taxes 2004 2005 2004 $ 1,451,688 $2,971,457 Accounts payable Trade $9,237,416 $6,208,733 Money orders 1,637,255 1,442,811 1,106,713 635,556 Accrued liabilities 985,987 705,923 Salaries and wages 774,519 846,131 400,000 135,831 Self-insurance reserves 1,186,613 966,770 10,640,125 (3,057,715) 8,690,734 (2,845,703) State and local taxes 1.136,241 569.160 Current portion of long- 7,582,410 5,845,031 term debt 1,956,369 Total current liabilities $17,035,126 1,082,429 $11,751,590 764,627 700,000 $11,884,712 547,705 380,522 $10,586.469) Property and equipment Land 11,016,168 13,603,304 Deferred income taxes Unearned revenue 400,000 111,426 1.477.323 179,224 Buildings 19,673.636 19,801,221 Fixtures and equipment 32.232.643 32,749,133 Long-term debt, less Leaseholds and current portion 13,969,745 16,693,772 improvements 5,084,679 $68,007,126 4,929,748 $71,083,406 Less: Allowances for depreciation and amortization (31,008,778) $36,998,348 (28,988,173) $42,095,233 Stockholders' equity Common stock 170,165 Other assets Additional paid-in capital 5,124,245 170,165 5,124,245 Land held for sale 2,641,735 Retained earnings 15,171.001 17,735,240 Other 456.913 449,857 $20,465,411 $23,029,650 Total liabilities and Total assets $51,981,708 $53,131,559 stockholders' equity $51,981,708 $53,131,559