1) Review the receivables ageing in this case. Discuss from the standpoint of acceptable collateral for a bank loan

2) Discuss the value of inventory as collateral

3) What is your recommendation on granting the loans? How would you structure the loan if granted?

CASE QUESTOR, INC. 16 Catherine Logan was president of Questor, Inc., a manufacturer of valves and pipe fittings. In April 1992, she visited Felix Fernandez, a loan officer for Golden West Bank, with a loan request. She gave Fernandez Questor's financial statements for the years 1990 and 1991 and for the most recent three-month period ending March 31, 1992. Logan indicated that she wanted Golden West Bank to provide Questor's banking requirements, including Questor's needs for loan funds. She complained that her present bank had be- come careless in serving Questor's banking re- quirements and that the loan officers assigned to Questor's account were being changed fre- quently, causing her great inconvenience. She was frustrated with having to explain Questor's needs and business every time there was a change in loan officers. Recently, Questor's line of credit agreement with its present bank had expired, and the bank seemed to be delaying action on the firm's request for a much needed moderate in- crease in the line. Logan informed Felix Fernandez that she would need as much as $1,000,000 during the next 12 months. She wanted part of the credit in 90-day notes and the rest on an intermediate- term basis. "Our sales volume continues to grow and our profits are good," she commented to Fernandez "We have been in business for 15 years and we have been profitable every year. Our equipment is in good condition, and we will not have to expand our plant for at least three more years. Logan offered as references her cur- rent mortgage lender, Fairview Savings and Loan Association, and several of her major suppliers. Later, Felix Fernandez made credit checks with these suppliers, who reported a pattern of generally prompt payment. They stated that Questor was usually prompt in meeting credit obligations. The highest credit reported by a sin- days actually could be collected. He was also wor- ried because Questor continued currently to sell to customers with receivables older than 60 days, and he wondered if he should assign any value at all to the receivables of such customers. Finally, he decided to appraise accounts receivable that were on time at only the cost of production (cost of goods), about 70 percent of their book value. gle supplier was $150,000. However, Questor was not always able to take trade discounts, which all suppliers offered on a 2/10et 30 basis. Fairview Savings and Loan reported a balance of $275,000 owed on an original $500,000 loan. Payments of $25,000 per quarter were being made promptly. The loan from Fairview Savings was secured by land and buildings owned by Questor. Felix Fernandez had not yet checked with Questor's present bank to discuss its experience with Questor. Golden West Bank was very anx- ious to establish a complete business relationship with Questor, but Fernandez was uncertain how to approach Questor's present bank and how to interpret what officers from that bank might tell him. After Fernandez conducted his initial investiga- tion, he called Catherine Logan to set up a meet- ing at the bank. At the meeting, Logan made a specific request for a $1,000,000 loan. In addition to the financial statements she provided earlier (Exhibits ! through 3), she provided a personal financial statement (Exhibit 4). Fernandez had also received a ratio analysis on Questor from Golden West Bank's credit analysis department (Exhibit 5). Logan indicated that Questor's inventory was composed of the following: Raw material 40% 20% Finished goods 40% Fernandez was advised by another loan officer that the fractions of values that could be recor- ered on short notice for inventories such as Questor's were about 50, 0, and 50 percent, re- spectively, for raw, in-process, and finished inven- tories. On Questor's accounts receivable, Fernandez wondered if those outstanding for more than 60 ASSIGNMENTS I. Amount of loan: As a check against the $1,000,000 loan amount requested by Logan, deter- mine how much Questor actually needs to borrow. (Estimate Questor's balance sheet for December 31, 1992, based on continued growth and industry average ratios for an average collection period and inventory turnover. Estimate December 1992 ac- counts payable based on taking a substantially higher amount of trade discounts than are presently taken.) 2. Purpose: Determine the purpose for the loan. 3. Term for each type of borrowing: Determine how much of the total amount loaned will be loaned short term and how much long term (or revolving). 4. Collateral value and borrowing base: Assuming that the bank secures the loan with Questor's ac- counts receivable and inventories, determine how much value can be recovered if Questor fails to pay. (Alternatively, determine how much Golden West Bank can safely lend against Questor's accounts re- ceivable and inventories.) 5. Repayment terms: Establish a repayment sched- ule for each type of borrowing. 6. Repayment source: Identify the cash flow sources of repayment for each type of borrowing. 7. Rate: Establish the interest rate on each type of borrowing. (Specify in terms of points above the prime rate.) 8. Guarantees, covenants, and other restrictions: Specify the covenants to be placed on Questor. De- scribe the guarantees or other restrictions. Work in process 1991 1990 EXHIBIT | Income and Expenses-Questor, Inc. Three Months 1992 Sales revenue $1,878,000 Cost of goods sold 1,333,380 Gross profit 544,620 Operating expense 423,845 Net income before taxes and interest 120,775 Other expenses includes interest) 41,899 Income taxes 27,606 Profit after taxes $ 51,270 $6,400,000 4,480,000 1,920,000 1,362,000 558,000 174,000 134,400 $ 249,600 $6,101,000 4,209,000 1,892,000 1,359,000 533,000 159,900 130,584 $ 242,516 1989 $5,400,000 3,780,000 1,620,000 1,127,000 493,000 169,000 113,400 $ 210,600 Dec. 31 1991 Dec. 31 1990 Dec. 31 1989 EXHIBIT 2 Balance Sheet-Questor, Inc. March 31 1992 Cash $ 67,800 Account receivable 1,009,960 Inventory 1,780,000 Current assets 2,857,760 Land 100,000 Plant and equipment 614,000 Depreciation ($280,000) Net plant and equipment 334,000 Total assets $3,291,760 Notes payable (bank) $ 800,000 Accounts payable 640,834 Accrued expenses 70,000 Current liabilities 1,510,834 Long-term debt 275,000 Total liabilities 1,785,834 Capital 100,000 Retained earnings 1,405,926 Total stockholders' equity 1,505,926 Total liabilities and equity $3,291,760 $ 113,000 914,284 1,357,600 2,384,884 100,000 610,000 ($270,000) 340,000 $2,824,884 $ 139,320 859,320 1,315,200 2,313,840 100,000 602,700 ($230,000) 372,700 $2,786,540 $ 130,600 782,600 1,111,800 2,025,000 100,000 598,000 ($190,000) 408,000 $2,533,000 $ 800,000 190,228 80,000 1,070,228 300,000 1,370,228 100,000 1,354,656 1,454,656 $2,824,884 $ 650,000 467,364 64,000 1,181,364 400,000 1,581,364 100,000 1,105,176 1,205,176 $2,786,540 $ 650,000 370,460 50,000 1,070,460 500,000 1,570,460 100,000 862,540 962,540 $2,533,000 EXHIBIT 3 Accounts Receivable Aging (March 31, 1992)-Questor, Inc. Credit Extended During: Before Dec. 1991 Feb. 1992 Jan. 1992 Dec. 1991 Credit Extended Since Feb, 29, 1992 $ 33,000 44,000 $ 66,000 $ 20,000 15,000 15,000 $ 6,000 45,000 $25,000 5,000 10,000 6,000 104,000 52,000 54,000 10,000 35,600 3,600 30,000 60,000 6,000 Customer Bunson, J. C. Carpenter Co. Dalton Co. Davidson Co. Fredrick Co. Gaston, Inc. Hardy Sons Ivor Logan, Inc. Jefferson, Inc. Kessel Sons Lamont Co. Lawrence Sons Massey, Inc. Nestor Olympia Pinocle, Co. Trenton, Inc. Trilogy Watson Other Total Total of all receivables 2,000 15,000 30,000 34,000 12,000 84,000 10,000 10,000 10,000 4,000 8,000 30,000 5,000 745,000 26,000 (240) phone 40,000 $ 605,360 $1,009,960 $161,600 $135,000 $37,000 $71,000 EXHIBIT 4 Personal Financial Statement for Catherine and Cyril Logan (April 1, 1992) Assets Liabilities and Equity Cash $ 24,000 Notes payable-banks $ 150,000 Marketable securities . 108,000 Notes payable--Questor, Inc. 65,000 Loan receivables from Logan, Inc. 80,000 Mortgage on home 335,000 Residence 550,000 Total liabilities 550,000 Automobiles 44,000 Equity 1,821,926 Personal property 60,000 Stock of Questor, Inc. (book value) 1,505,926 Total assets $2,371,926 Total liabilities and equity $2,371,926 Salary (1991) Bonus (estimated) Other $150,000 30,000 2,000 $182,000 Total Income EXHIBIT 5 Financial Ratios-Questor, Inc. Industry 1992 1991 1990 1989 Avg., 1991 1.892 2.228 1.959 1.892 2.100 me 0.713 0.960 0.845 0.853 1.000 49.07 52.14 51.41 52.90 49.00 3.400 3.352 3.468 3.600 1.186 0.942 1.312 1.632 1.500 Liquidity Ratios current assets Current ratio = current liabilities current assets - inventory Quick ratios = current liabilities Activity Ratios accounts receivable Average collection period = annual sales rev./365 days (days) Inventory turnover = costs of goods sold (times) avg. inventory Financial Leverage Ratios total liabilities Debt to equity = tot, stockholders' equity Coverage of net income before taxes and interest interest expenses interest expenses Profitability Ratios Gross profit margin = sales revenue - cost of goods sold sales revenue Net profit margin profit after taxes sales revenue Return on total assets = profit after taxes total assets Return on equity = profit after taxes tot. stockholders' equity *1992 quarterly figures are annualized. bIntereat expenses interest-bearing liabilities X assumed 10% interest rate. 8.99 10.15 10.15 8.57 3.50 29.00% 30.00% 31.01% 30.00% 30.70% 2.73% 3.90% 3.98% 3.90% 3.60% 6.23% 8.84% 8.70% 8.31% 5.07% 13.62% 17.16% 20.12% 21.88% 17.00% CASE QUESTOR, INC. 16 Catherine Logan was president of Questor, Inc., a manufacturer of valves and pipe fittings. In April 1992, she visited Felix Fernandez, a loan officer for Golden West Bank, with a loan request. She gave Fernandez Questor's financial statements for the years 1990 and 1991 and for the most recent three-month period ending March 31, 1992. Logan indicated that she wanted Golden West Bank to provide Questor's banking requirements, including Questor's needs for loan funds. She complained that her present bank had be- come careless in serving Questor's banking re- quirements and that the loan officers assigned to Questor's account were being changed fre- quently, causing her great inconvenience. She was frustrated with having to explain Questor's needs and business every time there was a change in loan officers. Recently, Questor's line of credit agreement with its present bank had expired, and the bank seemed to be delaying action on the firm's request for a much needed moderate in- crease in the line. Logan informed Felix Fernandez that she would need as much as $1,000,000 during the next 12 months. She wanted part of the credit in 90-day notes and the rest on an intermediate- term basis. "Our sales volume continues to grow and our profits are good," she commented to Fernandez "We have been in business for 15 years and we have been profitable every year. Our equipment is in good condition, and we will not have to expand our plant for at least three more years. Logan offered as references her cur- rent mortgage lender, Fairview Savings and Loan Association, and several of her major suppliers. Later, Felix Fernandez made credit checks with these suppliers, who reported a pattern of generally prompt payment. They stated that Questor was usually prompt in meeting credit obligations. The highest credit reported by a sin- days actually could be collected. He was also wor- ried because Questor continued currently to sell to customers with receivables older than 60 days, and he wondered if he should assign any value at all to the receivables of such customers. Finally, he decided to appraise accounts receivable that were on time at only the cost of production (cost of goods), about 70 percent of their book value. gle supplier was $150,000. However, Questor was not always able to take trade discounts, which all suppliers offered on a 2/10et 30 basis. Fairview Savings and Loan reported a balance of $275,000 owed on an original $500,000 loan. Payments of $25,000 per quarter were being made promptly. The loan from Fairview Savings was secured by land and buildings owned by Questor. Felix Fernandez had not yet checked with Questor's present bank to discuss its experience with Questor. Golden West Bank was very anx- ious to establish a complete business relationship with Questor, but Fernandez was uncertain how to approach Questor's present bank and how to interpret what officers from that bank might tell him. After Fernandez conducted his initial investiga- tion, he called Catherine Logan to set up a meet- ing at the bank. At the meeting, Logan made a specific request for a $1,000,000 loan. In addition to the financial statements she provided earlier (Exhibits ! through 3), she provided a personal financial statement (Exhibit 4). Fernandez had also received a ratio analysis on Questor from Golden West Bank's credit analysis department (Exhibit 5). Logan indicated that Questor's inventory was composed of the following: Raw material 40% 20% Finished goods 40% Fernandez was advised by another loan officer that the fractions of values that could be recor- ered on short notice for inventories such as Questor's were about 50, 0, and 50 percent, re- spectively, for raw, in-process, and finished inven- tories. On Questor's accounts receivable, Fernandez wondered if those outstanding for more than 60 ASSIGNMENTS I. Amount of loan: As a check against the $1,000,000 loan amount requested by Logan, deter- mine how much Questor actually needs to borrow. (Estimate Questor's balance sheet for December 31, 1992, based on continued growth and industry average ratios for an average collection period and inventory turnover. Estimate December 1992 ac- counts payable based on taking a substantially higher amount of trade discounts than are presently taken.) 2. Purpose: Determine the purpose for the loan. 3. Term for each type of borrowing: Determine how much of the total amount loaned will be loaned short term and how much long term (or revolving). 4. Collateral value and borrowing base: Assuming that the bank secures the loan with Questor's ac- counts receivable and inventories, determine how much value can be recovered if Questor fails to pay. (Alternatively, determine how much Golden West Bank can safely lend against Questor's accounts re- ceivable and inventories.) 5. Repayment terms: Establish a repayment sched- ule for each type of borrowing. 6. Repayment source: Identify the cash flow sources of repayment for each type of borrowing. 7. Rate: Establish the interest rate on each type of borrowing. (Specify in terms of points above the prime rate.) 8. Guarantees, covenants, and other restrictions: Specify the covenants to be placed on Questor. De- scribe the guarantees or other restrictions. Work in process 1991 1990 EXHIBIT | Income and Expenses-Questor, Inc. Three Months 1992 Sales revenue $1,878,000 Cost of goods sold 1,333,380 Gross profit 544,620 Operating expense 423,845 Net income before taxes and interest 120,775 Other expenses includes interest) 41,899 Income taxes 27,606 Profit after taxes $ 51,270 $6,400,000 4,480,000 1,920,000 1,362,000 558,000 174,000 134,400 $ 249,600 $6,101,000 4,209,000 1,892,000 1,359,000 533,000 159,900 130,584 $ 242,516 1989 $5,400,000 3,780,000 1,620,000 1,127,000 493,000 169,000 113,400 $ 210,600 Dec. 31 1991 Dec. 31 1990 Dec. 31 1989 EXHIBIT 2 Balance Sheet-Questor, Inc. March 31 1992 Cash $ 67,800 Account receivable 1,009,960 Inventory 1,780,000 Current assets 2,857,760 Land 100,000 Plant and equipment 614,000 Depreciation ($280,000) Net plant and equipment 334,000 Total assets $3,291,760 Notes payable (bank) $ 800,000 Accounts payable 640,834 Accrued expenses 70,000 Current liabilities 1,510,834 Long-term debt 275,000 Total liabilities 1,785,834 Capital 100,000 Retained earnings 1,405,926 Total stockholders' equity 1,505,926 Total liabilities and equity $3,291,760 $ 113,000 914,284 1,357,600 2,384,884 100,000 610,000 ($270,000) 340,000 $2,824,884 $ 139,320 859,320 1,315,200 2,313,840 100,000 602,700 ($230,000) 372,700 $2,786,540 $ 130,600 782,600 1,111,800 2,025,000 100,000 598,000 ($190,000) 408,000 $2,533,000 $ 800,000 190,228 80,000 1,070,228 300,000 1,370,228 100,000 1,354,656 1,454,656 $2,824,884 $ 650,000 467,364 64,000 1,181,364 400,000 1,581,364 100,000 1,105,176 1,205,176 $2,786,540 $ 650,000 370,460 50,000 1,070,460 500,000 1,570,460 100,000 862,540 962,540 $2,533,000 EXHIBIT 3 Accounts Receivable Aging (March 31, 1992)-Questor, Inc. Credit Extended During: Before Dec. 1991 Feb. 1992 Jan. 1992 Dec. 1991 Credit Extended Since Feb, 29, 1992 $ 33,000 44,000 $ 66,000 $ 20,000 15,000 15,000 $ 6,000 45,000 $25,000 5,000 10,000 6,000 104,000 52,000 54,000 10,000 35,600 3,600 30,000 60,000 6,000 Customer Bunson, J. C. Carpenter Co. Dalton Co. Davidson Co. Fredrick Co. Gaston, Inc. Hardy Sons Ivor Logan, Inc. Jefferson, Inc. Kessel Sons Lamont Co. Lawrence Sons Massey, Inc. Nestor Olympia Pinocle, Co. Trenton, Inc. Trilogy Watson Other Total Total of all receivables 2,000 15,000 30,000 34,000 12,000 84,000 10,000 10,000 10,000 4,000 8,000 30,000 5,000 745,000 26,000 (240) phone 40,000 $ 605,360 $1,009,960 $161,600 $135,000 $37,000 $71,000 EXHIBIT 4 Personal Financial Statement for Catherine and Cyril Logan (April 1, 1992) Assets Liabilities and Equity Cash $ 24,000 Notes payable-banks $ 150,000 Marketable securities . 108,000 Notes payable--Questor, Inc. 65,000 Loan receivables from Logan, Inc. 80,000 Mortgage on home 335,000 Residence 550,000 Total liabilities 550,000 Automobiles 44,000 Equity 1,821,926 Personal property 60,000 Stock of Questor, Inc. (book value) 1,505,926 Total assets $2,371,926 Total liabilities and equity $2,371,926 Salary (1991) Bonus (estimated) Other $150,000 30,000 2,000 $182,000 Total Income EXHIBIT 5 Financial Ratios-Questor, Inc. Industry 1992 1991 1990 1989 Avg., 1991 1.892 2.228 1.959 1.892 2.100 me 0.713 0.960 0.845 0.853 1.000 49.07 52.14 51.41 52.90 49.00 3.400 3.352 3.468 3.600 1.186 0.942 1.312 1.632 1.500 Liquidity Ratios current assets Current ratio = current liabilities current assets - inventory Quick ratios = current liabilities Activity Ratios accounts receivable Average collection period = annual sales rev./365 days (days) Inventory turnover = costs of goods sold (times) avg. inventory Financial Leverage Ratios total liabilities Debt to equity = tot, stockholders' equity Coverage of net income before taxes and interest interest expenses interest expenses Profitability Ratios Gross profit margin = sales revenue - cost of goods sold sales revenue Net profit margin profit after taxes sales revenue Return on total assets = profit after taxes total assets Return on equity = profit after taxes tot. stockholders' equity *1992 quarterly figures are annualized. bIntereat expenses interest-bearing liabilities X assumed 10% interest rate. 8.99 10.15 10.15 8.57 3.50 29.00% 30.00% 31.01% 30.00% 30.70% 2.73% 3.90% 3.98% 3.90% 3.60% 6.23% 8.84% 8.70% 8.31% 5.07% 13.62% 17.16% 20.12% 21.88% 17.00%