BAST JOOB LAWSONS "I think I have all the Information needed for your request Mr. Mackay. Give me a couple of days to come up with a decision and I'll contact you one way or another - good day!" So said Jackie Putrick, a newly appointed loans officer for the Commercial Bank of Ontario. She was addressing Paul Mackay, sole proprietor of Lawsons, a general merchandising retailer in Riverdale, Ontario. He had just requested a $194,000 bank loan to reduce his trade debt, as well as a $26,000 line of credit to service his right months of cash shortage. Jackie felt she was fully prepared to scrutinize all relevant information in order to make an appropriate decision. Her appointment as loans officer, effective today, February 18, 2013, was an exciting opportunity for her as she had been preparing for this position for some time. LAWSONS Lawsons had been operating in Riverdale for nearly five years. Mackay felt that his store stressed value if competitive prices, targeting low to middle income families. The store offered a wide range of products in various categories such as infants'. children's and youths' wear ladies' Wear men's wear abbenjones (footwear, pantyhose. jewellery, etc.) home needs (domestics, housewares, notions, yam, stationery) toys, health and beauty aids weiscal items (Christmas giftwrap and candy) To help finance the start up of the business in 2008, Mackay secured a long-term loan from the Commercial Bank of Ontario at the prime lending rate plus 1.5 per cent. As Mackay's personal avis were insufficient for security. the bank loan had been wcured by a pledge against all company assets and by a guarantee from Law som" major supplier, Forsyth Wholesale Lid (FWL). Mackay's More. with the exception of its first partial year, had always generated positive earnings. Houster, after Jawings, Mackay's equity in the finn decreased each year to its prowent level of 19 O W acer($18,914) Exhibits 1, 2, and 3 present Lawsons' datemoreis of earrings, balance sheets and selected financial ratios. Exhibit 4 presents sleeind techniry ratioe. PURCHASING PROCEDURES Mackay purchased most of his inventory from FWL, a wholesaler who dealt in the product categories and monthandian that Mackay stocked in his siege. Other sock, not supplied through FWL, was purchased directly from local supplier. Through an arrangement with FWL, Mackay made his merchandning decisions at two annual trade shows in May and Outober, At the May how, Mackay decided on back-to- school supplies, Christmas merchandise, and fall and winter clothing, Spring and summer merchandise was decided upon it the Cclober show. FWL's purchasing agents accumulated all of the order from the curious retailer it dealt with and, as a large buying group, executed the orders and negotiated prices with the manufacturers. The merchandise was best to FWL. from the individual manufacturers and then was distributed to respective retail cullen, wich as Lawsons. FWL required partial payment for this merchandise before the start of the particular selling season. The remainder was due in scheduled repayments throughout the selling season. Mackay was pleased with this arrangement that he had secured with FWL. He was convinced that his product costs were lower as a result. PAUL MACKAY Paul Mackay was 40 years old. He had immigrated to Canada in 200] from his native England, where he had been employed by an insurance company as an accountant, Flucationally, Mackay had completed a Business Economies degree at a military academy. When Mackay came to Canada, he admitted that he was toure about what recognition he would receive for his previous labours, both corporate and educational. Consequently, Mackay embarked upon an entrepreneurial career. Candidly, Mackay expressed, "I knew I wouldn't be satisfied in some corporate hierarchy - I knew I needed to be in baniseas for myself." In May 2008, a retail vacancy became available in Riverdale. Mackay seized this opportunity to bem his dream of independence into a reality, and opened Lawsons with the financial bucking of FWL Mackay was an active resident of Riverdale, often involving himself in community activities. He worked long hours at his store, performing bush managerial and clerical duties. Frequently. Mackay could by ween in his store pricing and stocking goods, of bagging merchandise at the cash register, THE PROBLEM Low cummings and necessary owner withdrawals had contributed to Mackay's increasing traike debt Past dos amounts on trade debt were charged a penalty of 13 3 per cent interest. Mackay indicated that of the present 5217 236 in trade debt, he win pay ip penalty malerest on $193.668. All of the overdue trade debt was bid to FWL. It was this overdue debt that had prompted his loan request. Mackay knew that. If he could wanster this trade debs to some other form of debt with bever interest charges such as the requested bank loan, profitability could be increased. Mackay indicated that the current portion of the trucks debt would be in acesplible amaint to carry for this time of year. which he curried to be 17 days of O W acerBART JOCB The total trade debt had increased to its present level in fiscal 2013 when Mackay decided that additional retail space would increase sales volume. Mackay felt that his store sim was too small to effectively display product lines and, therefore, decided that the expansion was a necessary step in the store's turnaround. Additional furniture, fixtures, sed leasehold improvements totalled $36,000, which was financed by FWL and added to Mackay's trade debt. Mackay explained that FWL financed the Improvements at Lawsons because it was interested in Mackay improving to the point where he could start paying off the trade debt ownd to it At the time of the expansion, FWL's financial director stated, "If this expansion is a means towards debt repayment, and I believe it is, FW'L is committed to financing the expansion. " To go along with this capital expenditure, a greater investment in inventory was needed Sales results in 2013 indicated to Mackay that the expandon was helping to improve sales volume. Mackay beloved that with his purchasing arrangements with FWL, a seasonal line of credit was necessary, so that he could manage the months with tight cash positions. February through June were months of cash outflows with the total cumulative cash outflows peaking at about four per cent of sales. Lawsons would therefore require the equivalent of four per cent of sales in extra cash during cash outflow PROJECTIONS Mackay did not anticipate any additional capital expenditures for some time, given the just-completed expansion. Sales growth of 10 per cent in each of the next two years was projected With respect to interest charges, Mackay calculated that if less expensive debt could be found, Lawson's intereid capenic for all debt. including the proposed line of credit, would be $27 500 and 526,920 for 2014 and 2015, INspectively. Store salaries were to remain constant as a dollar amount because of improved employee productivity. Mackay realized he had a great deal of money tied up inventory, but he hoped that, as he gained greater caperience in handling the added sales volume, inventory could be reduced to pre-2013 levels. With respect to drawings, Mackay caplained that doc to his depleted savings, future withdrawals from the firm would be at the 2013 level JACKIE PATRICK Putnick had hoped that her first loan request in her now ponition would be straightforward. Howway. a Flower look indicated that this request would certainly require careful allenlie and scrutiny. She suspected her superiors would be reviewing her first series of recommendations carefully. given her W acerBART JODO STATEMENTS OF EARNINGS for the Your Ending January 1 20-14 $ 650.210 $ 56.322 507 778 Cent of gooda sold 407 510 Gross profit $102,700 1 13422 $ 118 030 Doparwing Bapaneca: Store salaries $ 41334 # 38.154 20 818 8.124 7.032 7:324 Building maintenance and repair 508 408 Plan and property Lik M4.710 24564 28.304 Insurance and Mom 4 70 5.834 Dopredation: Furniture and fixtures 2.952 3.570 6374 Lemeholds 3.176 160 Other operating expenses 27 603 26,112 23,840 14 016 Long-Mom debt 1418 1332 11.418 Trade debt TATE 4.724 Tolil capenies 1 21.274 5 13.650 $ 15012 acerwe3 to some features. View permissions BALANCE SHEETS 20-13 2013 2010 A99579 Current maint : 3,060 2:590 12 038 2514 3275 100,300 163 623 140.702 21 218 3.183 2.764 Toll current saint 12312 $ 165,414 $140.096 $ 128,878 Furniture and fixtures, coat 1 32,104 Lots: nocumulated depreciation 14.314 1304 17850 Lenscholds, out Letit accumulated depreciation Net Leaseholly 20,110 15 320 17.050 LIABILITIES AND PROPRIETOR'S CAPITAL Current labilies: Accounts payable $ 217 234 $ 100.404 $ 71.25 $ 43 392 Offer current liabilities Total current linblities $ 106.764 Long-term bank loan Total Satelites # 123,228 Propavior's Capital Butance, beginning of year 13854 21.152 Add net earnings Sebiout 37/402 Least drawergo Butangel end of your Toll Lizoides and Proprietor's Capital aceread aloud e access to some features. View permissions BART MOO RATIO ANALYSIS 2041 PROFITABILITY Vertical anyone 100 0PM 100 04 100 ON 719% 28.15 1.4% 1.72 0.1% 0. 15 Hand find property law Insurance and bum Unpredation Furniture and flajuran 154 Leuwholds O. T Intermit 1.3% 3.3% 324 NA 241.1% Cument Falo 2:06:1 207 1 Aced out ratio 0. 10:1 0.071 10. 11:1 Working capital 485.486 EFFICIENCY (Based on 305-day your) Age of recalvibes Age of Inventory 140 days 145 dips $5 days STABILITY Anbereit coverage LTX 2012-13 3011-12 2010-14 GROWTH Nitpolt Toul assets Met Mort acerd aloud 7 access to some features. View pormissions DUN & BRADSTREET CANADIAN NORMS A KEY BUSINESS RATION Industry: Retail - Wincollongoun Products PROFITABILITY LIQUIDITY 1.1.1 EFFICIENCY 126 7 durga STABILITY MY worth Total assets CABASOON acere books to some features. View permissions STATEMENT OF CASH FLOWS for the your ending January 20-13 3013 OPERATIONS: $ 15012 LIST0 DepartMotion - Lensehold Improvement 5,170 17:304) 10.5741 1376 Accounts payable 1 10 742 35.200 27.54 137.120 $ 27.520 FINANCING ACTIVITIES Offer current Lablides Long low bank kan Driving (20 714) Net cash Bow from Inancing activities HZACH $ (20 202) INVESTING ACTIVITIES Furniture Ind thou purchase $ 126.410) Leduchold Improvements 19.376) (5,5051 (1.200) Not cash flow from Inviting Activity Net cash flow S TO 1.182 202 2.594 Ending with CHOASDOW acerPicture Styles Mid-Term-Lawson's Case Study Here are the questions you should answer: 1. After reviewing the financial statements and ratio analysis, what are the major factors impacting Lawsons' profitability? 2. Why has Mackay's owner's equity declined every year despite Lawsons having earned a profit every year? Prepare projected statements for Lawsons. Will Lawsons' situation improve? 4. What impact will new bank financing have on Lawsons' expected results? 5. Using the four Cs of credit analysis. what is your appraisal of the request? 6. What role do you expect Forsyth Wholesaler Limited to play in any financial restructuring of Lawsons* debt to it? 7. What would be your recommendation(s) on the loan request? Would you make any recommendations to Mackay? acer