Can someone please help me respond to questions 1 through 5 on page 1? All questions are based on the information provided in the case. Any assistance will be greatly appreciated.

BME 5003 Finance for Entrepreneurs

Seaway Lumber Company

Assignment

The time is spring, 1997. Your group is Ms. Kelly Dodge from Scotia Bank. Prepare a recommendation in memo format to your immediate superior, Warren Thompson, on whether or not to make the requested loan and, if so, under what terms and conditions.

Format

Use the bank's standard recommendation memo format, shown below. Use complete sentences (not point form), present tense and active voice. Please ensure that your grammar and spelling are correct and that your writing is clear and concise.

Recommendations

State what actions need to be taken. Each statement should be numbered, in logical sequence.

Rationale

State why the recommended actions are necessary and what will be accomplished. Each statement should be numbered and in an order corresponding to the recommendation(s) that it ls associated with.

Situation, Analysis & Discussion

Fully explain the situation and present the analysis and logic that supports the recommendations. Include subsections if required for clarity. All exhibits included must be referenced here.

Exhibits

Each exhibit must be on a separate page and must be sequentially numbered in order of reference in the previous section. All assumptions must be stated and explained in notes at the bottom of each exhibit. Each exhibit that is included must be referenced in section 3.

For this assignment, all pages must be typed, single-space,in 10 to 12-point font,with 1- inch margins on all sides. Sections 1,2 and 3 combined must not exceed four typewr itten pages. Sections 1 and 2 combined must not exceed one typewritten page. You may include as many exhibits as required to support your arguments; however, every exhibit must be referenced in section 3. Exhibits that are included but not referenced in section 3 will be ignored.

Content

In your recommendation address the following questions (note: bracketed items are analyses that you should complete to support your answers).

1. What are Seaway's financial characteristics? (Sources & Uses of Funds; Common Size,Trend and Ratio analyses).

2. If Seaway's sales continue to grow as rapidly as they have been lately (+38% p.a.) and there are no changes in the way the business is operated, what willbe the size of the line of credit at the end of 1997 and the end of 1998? Is a $200,000 line of credit sufficient? Are the funds needed short term in nature? (Pro Forma statements based on historical performance and case data. Note: Please state your assumptions for each line of the Pro Forma statements. You may assume that COGS will be 72.5% in 1997 and 1998).

3. What will happen in 1997 and 1998 to Seaway's line of credit, liquidity,profitability and efficiency if Cook takes the 2% trade discount? (Revised Pro Forma statements based on revised assumptions).

4. Should the bank grant the loan, and if so, under what conditions?

5. What other actions do you recommend that Cook takes?

SEAWAY LUMBER COMPANY After a rapid growth in its business during recent years, the Seaway Lumber Company, in the spring of 1997, anticipated a further substantial increase in sales. Despite good profits, which were largely retained in the business, the Company had experienced a shortage of cash and had found it necessary to increase its borrowing from the National Trust to $99,000 in the spring of 1997. The maximum loan that National Trust would make to any one borrower was $100,000 and Seaway had been able to stay within this limit"in the spring of 1997 only by relying very heavily on trade credit. Mr. Roger Cook, proprietor of the Seaway Lumber Company, was therefore actively looking elsewhere for a new banking relationship where he would be able to negotiate a larger loan.

Mr. Cook had recently been introduced by a personal friend to Ms. Kelly Dodge, an officer of a much larger bank, the Scotia Bank. Mr. Cook and Ms. Dodge had tentatively discussed the possibility that the Scotia Bank might extend a line of credit to Seaway up to a maximum amount of $200,000. Mr. Cook thought that a loan of this size would more than meet his foreseeable needs, but he was eager for the flexibility that a line of credit of this size would provide. Subsequent to this discussion, Ms. Dodge arranged for the credit department of the Scotia Bank to investigate Mr. Cook and his Company.

The Seaway Lumber Company had been founded in 1987 as a partnership by Mr. Cook and his brother-in-law, Mr. Macintosh. In 1994 Mr. Cook bought out Mr. Macintosh's interest for $50,000 and continued the business as a sole proprietorship. Mr. Macintosh had taken a note for $50,000,to be paid off in 1995, in order to give Mr. Cook time to arrange for the financing necessary to make the payment of $50,000 to him. The major portion of the funds needed for this payment was raised by a mortgage, negotiated in late 1994, carried an interest rate of 8%, and was repayable in quarterly instalments at the rate of $3,000 a year over the next 10 years.

The business was located in a growing suburb of a large city in southern Ontario. The Company owned land with access to a railroad siding, and two large storage buildings had been erected on this land. The Company's operations were limited to the wholesale distribution of lumber products in the local area. Typical products included plywood, mouldings and sash and door products. Quantity discounts and credit terms of net 30 days on open account were usually offered to customers.

Seaway had built up its sales volume largely on the basis of successful price competition made possible by careful control of operating expenses and by quantity purchases of materials at substantial discounts. Much of the mouldings and sash and door products which constituted significant items of sales were used for repair work. About 55% of total sales were made in the six months from March through August. No sales representatives were employed, orders being taken exclusively over the telephone. Annual sales of $314,000 in 1992 and $476,000 in 1993 gave profits of $40,000 and $49,000, respectively.1 Comparative operating statements for the years 1994 through 1996 and for three months ending March 31,1997 are given in Exhibit 1.

Mr. Cook was an energetic man, 39 years of age, who worked long hours on the job, not only handling management matters but also performing part of the clerical work. He was helped by an assistant who, in the words of the investigator of the Scotia Bank,"has been doing and can do about everything that Mr. Cook does in the organization". Other employees numbered 12 in early 1997, 10 who worked in the yard and drove trucks and 2 who assisted in the office.

As a part of its customary investigation of prospective borrowers, the Scotia Bank sent inquiries concerning Mr. Cook to a number of firms that had business dealings with him. The manager of one of his large suppliers, the B.C. Timber Company, wrote in answer: The conservative operation of his business appeals to us. He has not wasted his money in disproportionate plant investment. His operating expenses are as low as they could possibly be. He has personal control over every feature of his business, and he possesses sound judgement and a willingness to work harder than anyone I have ever known. This, with a good personality, gives him an excellent turnover; and from my personal experience in watching him work, I know that he keeps close check on his own credits. All of the other trade letters received by the bank bore out the statements quoted above.

1The profit figures for 1992 and 1993 are not comparable with those shown in Exhibit 1for 1994-96. The 1992 and 1993 figures do not reflect the payment of salaries to either Mr. Cook or Mr. Macintosh. Their remuneration would constitute a "drawing by proprietors" rather than an operating expense. When Mr. Macintosh withdrew from the business in 1993,the employee who took his place was paid a salary, which is shown in Exhibit 1as a component of the operating expense account, not as a drawing by a proprietor.