Case Questions: Be Our Guest, Inc.

1. A. Reformat the income statement to clearly indicate EBITDA and EBIT. B. See footnote A Exhibit 3. Remove from "Other General and Administrative Expenses the depreciation expenses noted in the footnote. Put those expenses into the depreciation expense line item.

2. Analyze the income statement line items. What do the trends imply about the operations of the business?

3. Calculate and analyze the following margins from the income statement: gross margin, COGS margin, operating expense margin, EBITDA margin, EBIT margin and net profit margin. What do the margin trends imply regarding the operations of the firm?

4. Calculate the percentage of earnings retained in the firm and the percentage of earnings paid out? What does the trend imply about earnings distributed to the firm's management?

5. Analyze the balance sheet line items. What do the trends imply about the operations of the business? B. What is the Loan to Shareholder/Total Assets? What does this imply? Is this a value maximizing trend for the business?

6. Calculate and analyze the trend in the following ratios: current ratio, cash ratio, accounts receivable turnover, day's in A/R, accounts payable turnover, days in A/P, adjusted Cash Conversion Cycle - since there is no inventory - use AR and AP, fixed asset turnover, and total asset turnover - exclude loan to shareholder from total asset. - For leverage calculate the following ratios: total debt/total equity ratio, short-term debt (STD)/Equity ratio- short term debt defined as: bank line of credit and current installment of term note, long-term debt (LTDequity ratio- long term debt defined as: term note payable less current installment, Debu'EBITDA, Debt Total Assets Coverage ratios: EBIT/Interest, EBITDA Interest, Cash/Interest, Debu/EBITDA, Net Debt EBITDA

7. Calculate the Sustainable Growth Rate (SGR) and Internal Growth Rate (IGR)? What is the IGR and SGR telling you? What is the compounded annual growth rate (CAGR) in sales annually? What is it telling you?

8. Calculate and analyze the firm's Free Cash Flow to the Firm (FCFS) and operating cash flow from 1995 to 1997. What is the trend in FCFF? Which of the components of FCF is impacting its value? What does this suggest?

9. Forecast the firm's financial statements for 1998, 1999 and 2000 using historical account relationships to sales to find out if additional financing is need and how much. Income Statement: Two Proforma Income statements Proforma Income Statement 1: Sales forecast is based on the outlook given in the case. For the remaining Income Statement items: Assumptions - Admin & Selling Expenses: Use percentage of sales -Depreciation Expense: Use % of Gross Fixed Assets Interest expense: Use as a percentage of Line of Credit and Term Loan - Taxes: None -Sub Chapter S-So only distributions - Dividends: None Proforma Balance Sheet Assumptions to Use: - Capital Expenditures (CAPEX): % of Sales - Cash: Percentage of Sales - Accounts Receivable: % of Sales Inventories: % of Sales - Payables: % of Sales Proforma Income Statement 2: Using linear trend extrapolation (See Excel book), what would the historical trend in sales forecast predict the projected sales for 1998, 1999 and 2000 to be. Use the number projected based on the historical trend as the sales forecast. Assumptions For the remaining Income Statement items: Admin & Selling Expenses: Use percentage of sales Depreciation Expense: Use % of Gross Fixed Assets - Interest expense: Use as a percentage of Line of Credit and Term Loan - Taxes: None - Sub Chapter S - So only distributions - Dividends: None Proforma Balance Sheet Assumptions to Use: - Capital Expenditures (CAPEX): % of Sales - Cash: Percentage of Sales Accounts Receivable: % of Sales - Inventories: % of Sales - Payables: % of Sales In Summary: There will be two sets of financial statements: Two income statements and two balance sheets.

10. A. Given the historical trend in sales compared to the outlook stated in the case, which forecast scenario makes the most sense? Why? Which should be presented to the bank? B. Is the firm's customer mix diversified? See Exhibit 2. What is the risk if any

11. Given the selected forecast scenario above in number 9, does the firm need external financing? If so, how much is needed on an annual basis? What is the average amount across the forecast period? Will the firm be able to repay the loan within a reasonable time period? Why or Why not?

12. What should management do in terms of the form of financing needed: term loan or credit line? Which option (term loan vs. credit line) that carries the least amount of risk?

13. What should the bank do? Should the bank lend the money? Explain why or why not? If so, what type of financing should the bank use: term loan or line of credit? Is the bank or firm at more risk with one type or another?

14. Should the bank be concerned about the issue of scale as it relates to the expansion of the business?

15. What can management do to improve the operations of the firm

anything helps , need this assignment to graduate! please help

Page of 14 Be Our Guest, Inc. Steve Lazio, Al Lovata and Simone Williamson met in the spring of 1998 to review the financial plans for their company in preparation for a meeting with Anne Granger, Vice President at State Street Bank. She was the loan officer in charge of the bank's relationship with Be Our Guest, Inc., a successful company in the business of renting party equipment. The management team was scheduled to meet with Granger to review the borrowing relationship and discuss renewal of the company's credit line that would expire in June. Be Our Guest had moved its banking relationship to State Street in October 1996. As of the end of 1997, the company had a fully used line of credit totaling $140,000 and a term loan with an outstanding balance of $$18,000, due over the next four years. Looking ahead to the meeting, the management group needed to decide how large a line of credit to request for 1998. In addition, they were considering whether some of their borrowing should be shifted from short-term borrowing under the line of credit to the more permanent financing provided by a term loan. Tinally, given the company's successful track record of the past few years, they were also considering whether to request any adjustments in the covenants imposed by the bank. History of Be Our Guest Stephen Lazio, who had substantial experience in the wine and food business, founded Be Our Guest in 1983. The firm initially provided temporary wait staff and other services to catering companies, but the business concept evolved in the mid-1980s as the firm began to rent tables, chairs and other equipment to the caterers. Lovata, who was formerly a banker with one of the large Boston-based banks, began providing part-time financial consulting for the business in 1987. Lizio brought him on full-time as Chief Executive Officer in September of 1988 as Livio assumed the role of Chairman The new business strategy received a big boost in 1988 when the food industry in Boston sponsored a major fund raising event on the floor of the Boston Garden, bone of the Boston Celtics basketball and Boston Bruins hockey teams. The event, called Aid & Confort, attracted 1,000 supporters and brought together a large percentage of the wine and food service industry from the Boston area. Major caterers provided the food service for the event and Be Our Guest contributed the equipment for several of the catering firms. Simone Williamson was added to the management team the next year. She had several years of experience in the food service business and was well known to caterers in the Boston area. Her job Research Associate Penny Joseph prepared this case under the supervision of Professer Dwight Crane as tive basis for class discussion rather than to illustrate either effective or indfective handling of an administrative situation. Copyright 1999 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise without the permission of Harvard Business School was to manage the day to day operations and improve the efficiency of the firm. In 1996, Williamson was appointed President of the firm, Be Our Guest grew rapidly from its small beginnings, reaching revenue of $1 million in 1991 and $2.7 million in 1997. The company's primary customers were catering firms and event planning firms that had been hired to provide food and beverages for partien, weddings or other events. Major hotels also rented equipment from Be Ow Guest when they had an unusually large party or were catering an outside affair. Lavata described how they built the busine In the early days, we were a secondary firm Our pitch to caterers was "Let us help you out when you have a big job or a special need that your regular supplier cannot meet." We provided excellent service and over time they began to think of us as a primary provider. The emphasis on service continued as a key part of the firm's strategy helping the business develop into a leading provider of party rental equipment in the Boston metropolitan area Williamson reported that they had strong relationships with 14 of the top 20 firms in the area and provided some service to another 4. It was also very active in its community and in 1997 The Boston Chamber of Commerce selected Be Our Guest as the Small Business Firm of the Year. Description of the Business Be Our Guest maintained a large inventory of tables, chairs, dishes, linens and other equipment organized by type of item. After a caterer was lured to provide food service for a reception or other event, the caterer would then contract with Be Our Gues to rent equipment for that event. He Our Guest pulled together the equipment, delivered it to the event and picked it up immediately afterward. In order to maintain this delivery efficiency, the operating facility was organized with speed and accuracy in mind. After each order came into the warehouse, computer generated list of the items required was given to cach department. The head of each area would then gather the items needed for that job and prepare them for transport. It was the driver's responsibility to pick up all the equipment from each department and make sure it was placed on the truck for delivery. The drivers played a key role in the preparation, delivery and retum of all equipment for a job. Most of Be Our Cuest's drivers had a number of years of experience with the firm giving them exposure to the numerous possible complications. As Dan Young, the Director of Operations. commented, The drivers definitely have the toughest job in this whole establishment. If something breaks on its way to a site is forgotten in putting the order together or in picking the equipment up from a job, it's all on the driver's shoulders And those responsibilities don't even take into account the driving hassles they face every day around this city One competitive advantage Be Our Guest had was its inner-city location in the Roxbury Section of Boston The convenient outlet to downtown Boston and to the intersection of the Massachusetts Tumpike and Interstate 93 made it easier to cover multiple events with a single trip. As Your stated, "If we don't turn over live or six jobs in the moming and five or six jobs in the afternoon, I'm not doing my job. Projects Vaded greatly in size. At one extreme, He Our Guest would rent one table to a customer in a bind or they could provide will the equipment for a 1,300-person reception. A more typical event might be a wedding reception for approximately 200 people. Pricing for such an event would depend on the amount and quality of equipment provided, but could easily cost about $4.000 2 As shown in Exhibit 1, the chairs, linen. Alatware and other materials for a table of 10 might price out at $167 per table for a total of $3.340. Adding the cost of ovens, serving tables and other items would bring the total to $4,000 The firm positioned itself at the high end of the market in terms of quality of inventory and quality of service. It invested in more elegant inventory that would be appropriate to Me At a large function in one of the more prestigious hotels in Boston. The high quality china, glassware, chairs and linens available enticed affluent prospects to seek the company's services. Providing a high level of service to many firms was an essential piece of Be Our Guest's business strategy as it sought to develop long-term relationships with clients. Simone Williamson described the kind of service they provide. If a customer needs an extra table with no notice, we deliver it even if we are not the primary provider for the event. We also make it a point to wash, press and deliver our linens to dients on hangers. If a client requests a different type of linen from another rental company that boxes their linens, we iron their linens ourselves and deliver them on hangers. As a result of those efforts, Be Our Guest generated a substantial amount of business from several clients as shown in Exhibit 2. Consistent quality service was key since the equipment rental business was dependent upon word of mouth and reputation. The company worked to keep the referrals coming by remaining active in the small business community and by networking regularly with clients. It also maintained visibility in the market through activities such as serving as a corporate sponsor of events at leading museums and theatres. Equipment rental in Boston was made up of three categories of companies: full service table, chairs and tents and specialty items. Be Our Guest was a full service company but did not provide tents. The tent market generated much larger revenues, often in the neighborhood of $20,000 per order. However, Be Our Guest chose not to offer tents because of low margins in this commodity business and high labor costs per order. For a typical tent order, workers had to arrive at a job on the day prior to an event in order to set up the platform and tent before any other equipment could be brought in. The tent provider also had the added responsibility of taking down the tent on the day after the event. The management at Be Our Guest saw the three to four day tumover of the tent business as inconsistent with their existing rapid turnover strategy. Be Our Guest's main competitors in the full service arena consisted of one company with about the same equipment rental revenue, three medium-sized lins capable of handling larger jobs. and about eleven smaller companies that took up significantly less of the market share. Some caterers were also considered competition because they could purchase their own dishes and other equipment, reducing their need for the services of a rental company Some of the other firms in the area negotiated with their customers on price, putting pressure on Be Our Guest to bring down their prices as well. However, Be Oar Guest did not reduce the cost per item on jobs except for the standard 10% wholesale discount. The strategy of BeOur Guest was to compete in the market on pality of service and Inventory, not on bottom line price per order. Financial Situation After reaching revenues of $990,000 in 1991, the business continued to grow rapidly reaching revenues of $2.7 million in 1997. Groes profits kept pace but net caring delined over the past four years because of the rapid rise in general and administrative salaries. (See Exhibits 3 and 4 Hur be Our Cuest incuine statements and balance sheets). Some of these in general and administrative Shanes results from increases in compensation paid to the executives who were he shareholders of the company. Taking some of the proas as salary maher than dividends did not affect taxes pald by them or the company because Be Our Guest was a Subchapters Corporation. A Subchapter S Corporation is a mul business corporation with a limited number of shareholders. Shareholders in this type of corporation have limited liability yet, like a partnership, avoid double taxation. The corporation itself is not tured, but the net income or loss, is passed on to the shareholders of the corporation and reported on the owners' individual tax returns The nature of this business was extremely seasonal Business was usually brisk during the fall and winter holiday seasons and during the early summer months when wedding receptions and company parties thrived. Based on the past few years, only 10% of annual revenues were realized in the first quarter while the second and fourth quarter on average generated about 33% each. Because revenues were low in the first quarter of each year, the company operated at a loss in this period, as Exhibit 52 and 5b demonstrate. This seasonality appears in the quarterly Income statements and balance sheets shown in Exhibits 6 and 7 Be Our Guest adjusted their staff to the seasonality of their business by hiring approximately 15 to 20 temporary employees during the peak season to supplement the 30 to 35 full time employees. During the slack winter months the company made no layoffs. However, some employees, particularly those from Brazil and other South American countries, took advantage of the slack period to go on long vacations back home. Most employees returned to Be Our Guest from year to year. Compounding the sensonality of the business was the fact that sales were highly uncertain. For example, total revenues for June 1997 jumped 35% above June 1996 but there had been only marginal year to year growth through May. This made it very difficult to develop annual projections Al Lovata stated, It's hard to really judge the year's financial situation until June when our revenues actually start showing what the year will be like. Up until then, it's all guesswork. Because of this uncertainty, we like to keep the balance sheets conservative on the whole. Be Our Guest succeeded in keeping the ratio of total liabilities to equity at approximately 1 to 1. They did this in part by minimizing assets on the books. The delivery trucks were leased on three-year operating leases and the buildings were rented from a separate affiliate owned by the shareholders. Therefore these items were not shown on the balance sheet. Also, accounts reneivable were tightly controlled with a thirty day pay policy. In spite of these controls, accounts receivable ballooned at year-end because business was booming during the month of December. De Our Guest attempted to collect these receivables quickly because caterers who did not pay right away were typically unable to pay until late spring- Relationship with State Street Bank Anne Granger met Steve Lazio at a networking event for smaller companies in the full of 1995 and became interested in learning more about Be Our Guest. Over the next everal months she maintained contact, Visiting the company a few times and becoming acquainted with the management team. Recalling her impressions during this period, she reported: I was favorably impressed by the quality of management and the profitable growth of the firm. The seasonality of the business presented a challenge to a bank lender and to the corngany, but Al Levata was aware of the risks involved and writers estimated CRA salaries for a company at Be Our Guest's size would more typically average about $225,000 Bess than the numbes ported in 1992 4 Tendr arter's Note Bs Our Guest, Inc. 299-001 openly discussed the issue with me. The fact that he was on top of the issue and understood the bank's perspective provided some comfort Granger's efforts at building a relationship paid off in October 1996 when Be Our Guest moved its account from one of the other Boston banks. This bank was going through a merger, so Lovata and his colleagues decided to take advantage of State Street's interest The initial borrowing arrangement consisted of two parts, a $100,000 line of credit and a $390,000, five-year term loan. Borrowings could take place at any time under the line of credit at an interest rate equal to the bank's prime rate plus 1.5%. Interest on the term loan was fixed at 9.25% and monthly payments of principal and interest totaling $8,143 were required. The bank imposed several covenants as part of the loan agreement, including requirements that the shareholders guarantee the low and that virtually all the firen's assets be pledged as collateral against the loans. Other restrictions included limits on debt ratios, advances and distributions to principals, and net earnings losses. See Exhibit 8 for a list of the covenants, In late 1997 the company requested a $40,000 increase in its credit line to help finance the receivables resulting from a large increase in December sales. Thus, Be Our Guest ended the year with a fully and $140,000 line and an outstanding balance of about $318,000 on its term loan Estimating its needs for the next 12 months was difficult as usual Sales early in 1998 had been a little stronger than in prior years and Lovata wanted to make sure that the firm would be able to finance at least a 10-15% growth in its business. The management team also wondered whether it was time to rethink the amount of the term loan versus the credit line. It had not been able to pay the credit line down to were during the past year as the bank preferred. Compounding the uncertainty, the company was evaluating an upgrade in their computer and telephone syster, but the amount and timing of this investment was still uncertain Lovata and Williamson wanted to keep their financial structure on a sound footing to be prepared for future growth. They had sufficient space in their present location for another three to four years at went growth rates, but then they would need to move to larger quarters. They also wanted to be able to expand perhaps through an cuisition in a nearby community or by expawling their product ling 299- Be Our Guest, Inc. Exhibit1 Sample Price List for a Ten-Person Dimer Table Item Cost per Itam Quantity Total Table And Chais: 6 Round Table with cloth and overlay Wooden Garden Chairs with Cushion 21.50 4.95 1 $ 21.50 10 49.50 Flatware: Salad/Dessert Fork (2) Dinner Fork Tea Spoon Dessert Spoon Salad knife Dinner Knife Butter knife 0.55 0.55 0.55 0.55 0.55 0.55 0.55 10 10 10 10 10 10 10 5,50 5.50 5.50 5.50 5.50 5.50 6.50 China: Woodmere "Wusion White with White Rim 12 Oversized Dinner 10 3/4" Dinner 8 1/4" Salad 6 1/2" Bread Cup/Saucer 12 oz. Rim Soup Plate 0.65 0.48 0.48 0.48 0.48 0.48 10 10 10 10 10 10 6.50 4.80 4.80 4.80 4.80 4.80 Glassware: Premium Wine 12 oz Flule Champagne Beverage Goblet, 16 OZ. 0.50 0.65 0,50 10 10 10 5.00 6.50 5.00 Other Items: Champagno Wine Bucket Salt & Pepper Broad Basket Table Number & Stand 7.00 1.00 0.75 1.00 1 1 2 1 7.00 1.00 1.50 1.00 Grand Total $167.00 De Our Guest Inc. 299-001 Exhibit 2 Top Clients (Based on recent 12-month period) Sales Revenue Sales % Customer Customer A Customer B Customer C Customer D Customer E Customer F Customer G Customer Customer Customer Top 10 Clients Second 10 Clients Third 10 Clients Fourth 10 Clients Other Clients Total 300,010 291,023 176,971 155,405 140,190 119,128 99,445 78,554 47,985 43,214 1,451,925 339,988 214.816 115,918 636 288 2.758,964 10.87% 10.55% 6.41% 5.63% 5.08% 4.32% 3.60% 2.85% 1.74% 1.57% 52.63% 12.32% 7.79% 4.20% 23.06% 100.00% Be Our Guestino 239001 Exhibit 3 Be Our Guest, Inc. Income Statements Years Ended December 31 1994 1995 1998 19977 Revenue: Rental Income Delivery Income Total Revenue $1,620,313 $1,794,807 $1,990,853 $2,469,474 156,035 179173 168,959 180 567 1,776,348 1,973,980 2,159,812 2,650,041 Cost of Revenue: Salarias Other Cost of Revenue Depreciation 490,968 211,468 116 119 818,555 575,253 302.877 127 906 1,006,036 547,611 347,094 128,299 1,023,004 810,602 419,050 148 707 1.178,350 Gross Profit 9577793 3G7,944 1.336.808 1,471.682 Operating Expenses: General and Administrative Salaries Other General and Admin. Expenses (a) Bed Debt Expense 381,501 402,423 5./02 789,626 434,434 384,863 9TZI 820,274 539,168 420,683 22 186 982,037 840,718 500,384 5,188 1,346,290 Earnings from Operations 168, 167 147,670 154,771 125.392 Interest, Net (27,820) (3,912) (44,545) (37,580) Net Earnings 140,347 113,758 110,226 87,812 Distributions To Shareholders 160.000 (16.700) 195.000) (27 6602 Earnings Retained $ 0,347 $ 67,058S 15,226 $ 0.152 (a) Other General and Administrative Expenses include depreciation of $3,692, $8,322: $14,025; and $22,612 for the years 1004 though 1997 respectively, Exhibit 4 Be Our Guest, Inc. Balance Sheets December 31, 1995 1998 1994 1997 ASSETS Current Assets: Cash (Overdraft) Accounts Receivablo (a) Loans to Shareholders & Affilate (b) Other Current Assets Total Current Assets (2,695) $ 229,333 12,500 882 238,920 565 $ 303.430 21.117 13,332 338.444 645 $ 303.478 30.052 700 334,873 (3.498) 348,109 24,263 2,678 369,552 Property and Equipment: Rental Equipment Leasehold Improvements & Other Equipment 768,481 102,272 870,753 414,988 455,765 928,391 193,850 1,082,241 561,214 511,027 1,077,484 208,827 1,286,311 679,734 606.577 1,251,080 278,500 1,529,588 851,053 678.535 Less Accumulated Depreciation Net Property and Equipment Other Assets: Loans to Shareholders & Affiliate (b) 140,000 130,000 168,000 75,950 Total Assets $ 834,685 $ 979,471 S 1,109,450 $ 1,124,037 LIABILITIES AND STOCKHOLDERS' EQUITY $ Current Liabilities: Borrowings under Bank Line of Credit Current Installments of Term Note Borrowings from Shareholder Accounts Payable and Accounts Total Current Liabilities 140,000 75,268 75,000 $ 32,539 17,000 63,465 188,004 53,388 32,816 69,733 165,437 98,270 $ 70,651 32,816 88,296 290.033 103,155 318,423 Term Notes Payable, Less Current Install 226,814 837109 317,266 243,311 Total Liabilities 414.818 492,546 607,299 561734 Shareholders' Equity: Common Stock, $1 Par Value Additional Pald-in Capital Retained Eemings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 2,000 74,000 343.867 419,867 S 634.685 2,000 74.000 410,925 455,925 2.000 74.000 426,151 502.151 2.000 174,000 486,303 562,308 979,471 $ 1.109.450 1.124,037 Nole (a) Accounts Recevable are shown net of allowance for doubtful accounts of $5,00D L) As of 12/31/97 loans to shareholders & alle were scheduled to be paid down at an annual rate of $24.263. Exhibit 52 Average Monthly Revenue and Earnings as a Percentage of Armua Totals 100% B0% 80% 40% Net Earnings Revenue 20% 0% -20% 40% Jan Feb Mar Apr May June July Aug Sept Oct Dec Exhibit Sb Average Quarterly Revenue and Earnings as a Percentage of Annual Totals Second First Quarter Fourth Third Quarter Quarter Quarter Year 10.1% 33.04 Revenues Net Eaming 23.9% 33.0% 100.0% (96.2%) 155.0% 1.7% 39.694 100.0% Note: The average revenue and net earrings are based on data for 1994 through 1997 290-001 Be Our Guest, Inc. Exhibit 6 Be Our Guest, Inc. 1997 Quarterly Income Statenents First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenue $ 237,638 $ 894,434 $ 699,000 $818,888 Cast of Revenue Salaries Other Cost of Revenue Depreciation 68,348 38,860 32,599 139,807 197 406 126,716 32,590 356.720 167,697 114,124 32,599 314,419 177.151 139,350 50,911 367,412 Gross Profit 97,831 537,714 384,661 451,477 Operating Expenses General and Administrative Salaries Other General and Administrative Expenses Bad Debt Expense 125,473 81,241 149,092 119.99G 5,188 274,276 223,178 140,313 342,974 158,835 206,714 363,491 501,809 Earnings from Operations (108,883) 263,438 21170 (50,332) Interest, Net (9,234) (9,891) (8,950) (9,505) Net Earnings (118,117) 253,547 12,220 (59,837) Distributions to Shareholders 11.000) (16,660) Earnings Retained $(129,117 $253.57 $ 12,220 S (76,497) Exhibit 7 Be Our Guest, Inc. 1997 Quarterly Balance Sheets March 31 June 30 Sept. 20 Dec. 31 ASSETS Current Assets: Cash (Overdraft) Accounts Receivable Loans to Shareholders & Affiliate Other Current Assets Total Current Assels $ 5,338 $ 144,926 38,528 700 189.492 12,882 S 401,432 50,686 1,630 466,630 39,239 $ 318,698 47,572 2,828 408,337 (8,498) 346,109 24,263 2,678 369,552 Net Property and Equipment 626,847 685,616 751,304 678,535 Other Assets: Loans to Shareholders & Affiliate 71,527 71,527 71,527 75.950 Total Assets S 887,867 $1,223,774 $11.231,168 $11.124.037 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Borrowings under Bank Line of Credit Current Installments of Term Note Accounts Payable and Accruals Total Current Liabilities $ 68,270 $ 71.201 74,649 214, 120 97,270 $ 71,826 145,097 314 194 87,270 $ 140,000 72.455 75.268 167, 769 103,155 327,494 318,423 Term Notes Payable, Less Current Install Other Term Notes 296.281 4,432 278,567 4,132 250.440 4,432 243,311 Total Liabilities 514,833 597 193 592,367 561,734 Shareholders' Equity Common Stock, S1 Par Value Additional Paid In Capital Retained Earnings Total Shareholders' Equity 2,000 74.000 297,034 373.034 2,000 74.000 550,581 620,581 2,000 74,000 562,801 638.801 2,000 74.000 486303 562,303 Total Liabilities and Shareholders' Equity S BU/867S 1223774$ 1,231,168 1.124,037 HH . GR 299-001 Be Our Guest, inc. Exhibits Representative Covenants on State Street Bank Loan The Borrower Will Not 1. Permit its Cash Flow/Debt Service Ratio for the year to be less than 1.251 (Cash Flow defined as net income plus interest expense and depreciation less distribution to shareholders. Debt Service defined as interest and principal payments due on debt.) 2. Permit its Debt/Tangible Net Worth Ratio to be greater than 2.00:1. (Tangible Net Worth defined as net worth less loans to principals and related entities.) 3. Incur any additional outside debt, other than normal trade debt. 1 Advance any additional funds to the principals or related entities, 5. Distribute more than 50% of annual earnings to the principals. 6 Incur two consecutive quarters of net losses; nee incur a net loss for any fiscal year. In addition to the negative convenants above, virtually all of the company's assets were pledged and company shareholders guaranteed the loan. Exhibit 1 Sample Price List for a Ten-Person Dinner Table Item Cost per Item Quantity Total Table and Chairs: 6' Round Table with cloth and overlay 21.50 1 $ 21.50 Wooden Garden Chairs with Cushion 4.95 10 49.50 Flatware: Salad/Dessert Fork (2) 0.55 10 5.50 Dinner Fork 0.55 10 5.50 Tea Spoon 0.55 10 5.50 Dessert Spoon 0.65 10 5.50 Salad knife 0.55 10 5.50 Dinner Knife 0.55 10 5.50 Butter Knife 0.55 10 5.50 China: Woodmere "Husion"White with White Rim 12 Oversized Dinner 0.65 10 6.50 10 3/4" Dinner 0.48 10 4.80 8 1/4" Salad 0.48 10 4.80 6 1/2" Bread 0.48 10 4.80 Cup/Saucer 0.48 10 4.80 12 oz. Rim Soup Plate 0.48 10 4.80 Glassware: Premium Wine 12 oz 0.50 10 5.00 Flute Champagne 0.65 10 6.50 Beverage Goblet, 16 oz. 0.50 10 5.00 Other Items: Champagne/Wine Bucket 7.00 1 7.00 Salt & Pepper 1.00 1 1.00 Bread Basket 0.75 2 1.50 Table Number & Stand 1.00 1 1.00 Grand Total $ 167.00 Exhibit 2 Top Be Our Guest Clients Sales Customer Revenue Customer A 300,010 Customer B 291,023 Customer C 176,971 Customer D 155,405 Customer E 140,190 Customer F 119,128 Customer G 99,445 Customer H 78,554 Customer 47,985 Customer 43,214 Top 10 Clients 1,451,925 Second 10 Clients 339,988 Third 10 Clients 214,816 Fourth 10 Clients 115,948 Other Clients 636,288 Total 2.758,964 Sales % 10.87% 10.55% 6.41% 5.63% 5.08% 4.32% 3.60% 2.85% 1.74% 1.57% 52.63% 12.32% 7.79% 4.20% 23.06% 100.00% Exhibit 3 Be Our Guest Inc. Income Statements Years Ended December 31 1994 1995 1996 1997 $ 1,620,313 $ 1,794,807 $ 1,990,853 $ 2,469,474 156,035 179,173 168,959 180,567 1,776,348 1,973,980 2,159,812 2,650,041 490,968 211,468 116,119 818,555 957.793 575,253 302,877 127,906 1,006,036 967,944 547,611 347,094 128,299 1,023,004 1,136,808 610,602 419,050 148,707 1,178,359 1,471,682 Revenue: Rental Income Delivery Income Total Revenue Cost of Revenue: Salaries Other Cost of Revenue Depreciation Gross Profit Operating Expenses: General and Administrative Salaries Other General and Admin. Expenses (a) Bad Debt Expense Earnings from Operations Interest, Net Net Earnings Distributions To Shareholders Earnings Retained 381,501 402,423 5,702 789,626 168,167 (27.820) 140,347 (60.000) 80.3475 434,434 384,863 977 820,274 147,670 (33,912) 113,758 (46.700) 67,058 $ 539,168 420,683 22,186 982,037 154.771 (44,545) 110.226 (95.000) 15,226 $ 840,718 500,384 5.188 1,346,290 125,392 (37,580) 87,812 (27,660) 60,152 S (a) Other General and Administrative Expenses include depreciation of $3,692: $8,322: $14,025; and $22,612 for the years 1994 through 1997 respectively. Exhibit 4 Be Our Guest, Inc. Balance Sheets December 31, 1994 1995 1996 1997 ASSETS Current Assets: Cash (Overdraft) $ (2.595) $ 565 $ 845 $ (3,498) Accounts Receivable (a) 228,333 303.430 303.476 346,109 Due from Officers & Employees 5,000 13,817 22,652 16,763 Loan Receivable from Shareholder (b) 7.500 7,500 7,500 7,500 Other Current Assets 682 13,332 700 2,678 Total Current Assets 238,920 338,444 334,873 389,552 Property and Equipment: Rental Equipment 768,481 928,391 1,077,484 1,251,080 Leasehold Improvements & Other Equipment 102.272 133,850 208,827 278,508 870,753 1,062 241 1,286,311 1,529,588 Less Accumulated Depreciation 414,988 551,214 679,734 851,053 Net Property and Equipment 455,765 511,027606,577 1678,535 Other Assets: Loan Receivable from Shareholder (b) 30,000 20,000 10,000 10,000 Due from Affiliate (c) 110,000 110,000 158,000 65,950 140.000 130,000 168,000 75,950 Total Assets $ 834,685 $ 979,471 S 1.109.450 $ 1,124,037 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Borrowings under Bank Line of Credit $ 75,000 $ $ 98.270 $ 140,000 Current Installments of Term Note (d) 32.539 53,388 70,651 75.268 Due to Officer 17.000 32.816 32,816 Accounts Payable and Accounts 63,465 69,233 88.296 103,155 Total Current Liabilities 188,004 155,437 290,033 318,423 Term Notes Payable, Less Current Install, (d) 226,814 337,109 317.266 243.311 Total Liabilities 414,818 492,546 607.299 561,734 Shareholders' Equity Common Stock, S1 Par Value 2.000 2.000 2.000 2.000 Additional Paid-in Capital 74,000 74.000 74.000 74,000 Retained Earnings 343,867 410.925 426,151 486,303 Total Shareholders' Equity 419.867 486.925 502.151 562,303 Total Liabilities and Shareholders' Equity $ 834,685 $ 979.471 S 1,109,450 $ 1.124.037 (a) Accounts Receivable are shown net of allowance for doubtful accounts of $5,000. (b) A loan was made to a shareholder to purchase shares. $17.500 was outstanding as of 12/31/97 (c) At Dec. 31, 1996, the outstanding balance of the bank term loan was $383.484 of which $69,893 was due in one year Exhibit ba Average Monthly Revenue and Earnings as a Percentage of Annual Totals 100% 80% 60% 40% Net Earnings Revenue 20% 0% -20% -40% Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Exhibit 5b Average Quarterly Revenue and Earnings as a Percentage of Annual Totals First Second Third Fourth Quarter Quarter Quarter Quarter Year Revenues 10.1% 33.0% 23.9% 33.0% 100.0% Net Earnings -96.2% 155.0% 1.7% 39.6% 100.0% Note: The average revenue and net earnings are based on data for 1994 through 1997 Exhibit 6 1997 Quarterly Income Statements First Second Third Fourth Quarter Quarter Quarter Quarter $ 237,638 $ 894,434 $ 699,080 $ 878,888 Total Revenue Cost of Revenue Salaries Other Cost of Revenue Depreciation 68,348 38,860 32,599 139,807 197,406 126,716 32,599 356,720 167,697 114,124 32,599 314,419 177,151 139,350 50,911 367,412 97,831 537,714 384,661 Gross Profit 451,477 Operating Expenses General and Administrative Salaries Other General and Administrative Expenses Bad Debt Expense 125,473 81.241 223,178 140,313 342,974 158,835 149,092 119.996 5,188 274,276 206,714 363,491 501,809 Earnings from Operations (108,883) 263,438 21,170 (50,332) Interest, Net Net Earnings (9,234) (9,891) (118,117) 253,547 (8,950) 12,220 (9,505) (59,837) Distributions to Shareholders (11.000) (16,660) Earnings Retained $ (129,117) $ 253,547 $ 12,220 $ (76,497) Exhibit 7 Be Our Guest, Inc. 1997 Quarterly Balance Sheets March 31 June 30 Sept. 30 Dec. 31 ASSETS Current Assets: Cash (Overdraft) $ 5,338 $ 12,882 $ 39,239 $ (3,498) Accounts Receivable 144.926 401,432 318,698 346,109 Due from Officers & Employees 31,028 43,186 40,072 16,763 Loan Receivable from Shareholder 7,500 7,500 7,500 7,500 Other Current Assets 700 1,630 2,828 2,678 Total Current Assets 189,492 466,630 408,337 369,552 Net Property and Equipment 626,847 685,616 751,304 678,535 Other Assets: Loan Receivable from Shareholder 10,000 10,000 10,000 10,000 Due from Affiliate 61,527 61,527 61,527 65,950 71,527 71,527 171,527 75,950 Total Assets $ 887.867 $ 1.223,774 $ 1.231,168 S 1,124,037 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Borrowings under Bank Line of Credit $ 68,270 $ 97.270 $ 87,270 $ 140,000 Current Installments of Term Note 71,201 71,826 72.455 75,268 Accounts Payable and Accruals 74.649 145,097 167,769 103,155 Total Current Liabilities 214.120 314,194 327.494 318,423 Term Notes Payable, Less Current Install 296,281 278,567 260.440 243,311 Other Term Notes 4.432 4,432 4,432 Total Liabilities 514.833 597,193 592,367 561,734 Shareholders' Equity: Common Stock, $1 Par Value 2,000 2.000 2.000 2,000 Additional Paid-In Capital 74,000 74,000 74,000 74.000 Retained Earnings 297.034 550.581 562.801 486,303 Total Shareholders' Equity 373,034 626,581 638,801 562.303 Total Liabilities and Shareholders' Equity $ 887,867 $ 1,223,774 $ 1.231,168 $ 1,124,037 Average Debt (298,220 (319,409) (289.035) (306,954) Page of 14 Be Our Guest, Inc. Steve Lazio, Al Lovata and Simone Williamson met in the spring of 1998 to review the financial plans for their company in preparation for a meeting with Anne Granger, Vice President at State Street Bank. She was the loan officer in charge of the bank's relationship with Be Our Guest, Inc., a successful company in the business of renting party equipment. The management team was scheduled to meet with Granger to review the borrowing relationship and discuss renewal of the company's credit line that would expire in June. Be Our Guest had moved its banking relationship to State Street in October 1996. As of the end of 1997, the company had a fully used line of credit totaling $140,000 and a term loan with an outstanding balance of $$18,000, due over the next four years. Looking ahead to the meeting, the management group needed to decide how large a line of credit to request for 1998. In addition, they were considering whether some of their borrowing should be shifted from short-term borrowing under the line of credit to the more permanent financing provided by a term loan. Tinally, given the company's successful track record of the past few years, they were also considering whether to request any adjustments in the covenants imposed by the bank. History of Be Our Guest Stephen Lazio, who had substantial experience in the wine and food business, founded Be Our Guest in 1983. The firm initially provided temporary wait staff and other services to catering companies, but the business concept evolved in the mid-1980s as the firm began to rent tables, chairs and other equipment to the caterers. Lovata, who was formerly a banker with one of the large Boston-based banks, began providing part-time financial consulting for the business in 1987. Lizio brought him on full-time as Chief Executive Officer in September of 1988 as Livio assumed the role of Chairman The new business strategy received a big boost in 1988 when the food industry in Boston sponsored a major fund raising event on the floor of the Boston Garden, bone of the Boston Celtics basketball and Boston Bruins hockey teams. The event, called Aid & Confort, attracted 1,000 supporters and brought together a large percentage of the wine and food service industry from the Boston area. Major caterers provided the food service for the event and Be Our Guest contributed the equipment for several of the catering firms. Simone Williamson was added to the management team the next year. She had several years of experience in the food service business and was well known to caterers in the Boston area. Her job Research Associate Penny Joseph prepared this case under the supervision of Professer Dwight Crane as tive basis for class discussion rather than to illustrate either effective or indfective handling of an administrative situation. Copyright 1999 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means-electronic, mechanical, photocopying, recording, or otherwise without the permission of Harvard Business School was to manage the day to day operations and improve the efficiency of the firm. In 1996, Williamson was appointed President of the firm, Be Our Guest grew rapidly from its small beginnings, reaching revenue of $1 million in 1991 and $2.7 million in 1997. The company's primary customers were catering firms and event planning firms that had been hired to provide food and beverages for partien, weddings or other events. Major hotels also rented equipment from Be Ow Guest when they had an unusually large party or were catering an outside affair. Lavata described how they built the busine In the early days, we were a secondary firm Our pitch to caterers was "Let us help you out when you have a big job or a special need that your regular supplier cannot meet." We provided excellent service and over time they began to think of us as a primary provider. The emphasis on service continued as a key part of the firm's strategy helping the business develop into a leading provider of party rental equipment in the Boston metropolitan area Williamson reported that they had strong relationships with 14 of the top 20 firms in the area and provided some service to another 4. It was also very active in its community and in 1997 The Boston Chamber of Commerce selected Be Our Guest as the Small Business Firm of the Year. Description of the Business Be Our Guest maintained a large inventory of tables, chairs, dishes, linens and other equipment organized by type of item. After a caterer was lured to provide food service for a reception or other event, the caterer would then contract with Be Our Gues to rent equipment for that event. He Our Guest pulled together the equipment, delivered it to the event and picked it up immediately afterward. In order to maintain this delivery efficiency, the operating facility was organized with speed and accuracy in mind. After each order came into the warehouse, computer generated list of the items required was given to cach department. The head of each area would then gather the items needed for that job and prepare them for transport. It was the driver's responsibility to pick up all the equipment from each department and make sure it was placed on the truck for delivery. The drivers played a key role in the preparation, delivery and retum of all equipment for a job. Most of Be Our Cuest's drivers had a number of years of experience with the firm giving them exposure to the numerous possible complications. As Dan Young, the Director of Operations. commented, The drivers definitely have the toughest job in this whole establishment. If something breaks on its way to a site is forgotten in putting the order together or in picking the equipment up from a job, it's all on the driver's shoulders And those responsibilities don't even take into account the driving hassles they face every day around this city One competitive advantage Be Our Guest had was its inner-city location in the Roxbury Section of Boston The convenient outlet to downtown Boston and to the intersection of the Massachusetts Tumpike and Interstate 93 made it easier to cover multiple events with a single trip. As Your stated, "If we don't turn over live or six jobs in the moming and five or six jobs in the afternoon, I'm not doing my job. Projects Vaded greatly in size. At one extreme, He Our Guest would rent one table to a customer in a bind or they could provide will the equipment for a 1,300-person reception. A more typical event might be a wedding reception for approximately 200 people. Pricing for such an event would depend on the amount and quality of equipment provided, but could easily cost about $4.000 2 As shown in Exhibit 1, the chairs, linen. Alatware and other materials for a table of 10 might price out at $167 per table for a total of $3.340. Adding the cost of ovens, serving tables and other items would bring the total to $4,000 The firm positioned itself at the high end of the market in terms of quality of inventory and quality of service. It invested in more elegant inventory that would be appropriate to Me At a large function in one of the more prestigious hotels in Boston. The high quality china, glassware, chairs and linens available enticed affluent prospects to seek the company's services. Providing a high level of service to many firms was an essential piece of Be Our Guest's business strategy as it sought to develop long-term relationships with clients. Simone Williamson described the kind of service they provide. If a customer needs an extra table with no notice, we deliver it even if we are not the primary provider for the event. We also make it a point to wash, press and deliver our linens to dients on hangers. If a client requests a different type of linen from another rental company that boxes their linens, we iron their linens ourselves and deliver them on hangers. As a result of those efforts, Be Our Guest generated a substantial amount of business from several clients as shown in Exhibit 2. Consistent quality service was key since the equipment rental business was dependent upon word of mouth and reputation. The company worked to keep the referrals coming by remaining active in the small business community and by networking regularly with clients. It also maintained visibility in the market through activities such as serving as a corporate sponsor of events at leading museums and theatres. Equipment rental in Boston was made up of three categories of companies: full service table, chairs and tents and specialty items. Be Our Guest was a full service company but did not provide tents. The tent market generated much larger revenues, often in the neighborhood of $20,000 per order. However, Be Our Guest chose not to offer tents because of low margins in this commodity business and high labor costs per order. For a typical tent order, workers had to arrive at a job on the day prior to an event in order to set up the platform and tent before any other equipment could be brought in. The tent provider also had the added responsibility of taking down the tent on the day after the event. The management at Be Our Guest saw the three to four day tumover of the tent business as inconsistent with their existing rapid turnover strategy. Be Our Guest's main competitors in the full service arena consisted of one company with about the same equipment rental revenue, three medium-sized lins capable of handling larger jobs. and about eleven smaller companies that took up significantly less of the market share. Some caterers were also considered competition because they could purchase their own dishes and other equipment, reducing their need for the services of a rental company Some of the other firms in the area negotiated with their customers on price, putting pressure on Be Our Guest to bring down their prices as well. However, Be Oar Guest did not reduce the cost per item on jobs except for the standard 10% wholesale discount. The strategy of BeOur Guest was to compete in the market on pality of service and Inventory, not on bottom line price per order. Financial Situation After reaching revenues of $990,000 in 1991, the business continued to grow rapidly reaching revenues of $2.7 million in 1997. Groes profits kept pace but net caring delined over the past four years because of the rapid rise in general and administrative salaries. (See Exhibits 3 and 4 Hur be Our Cuest incuine statements and balance sheets). Some of these in general and administrative Shanes results from increases in compensation paid to the executives who were he shareholders of the company. Taking some of the proas as salary maher than dividends did not affect taxes pald by them or the company because Be Our Guest was a Subchapters Corporation. A Subchapter S Corporation is a mul business corporation with a limited number of shareholders. Shareholders in this type of corporation have limited liability yet, like a partnership, avoid double taxation. The corporation itself is not tured, but the net income or loss, is passed on to the shareholders of the corporation and reported on the owners' individual tax returns The nature of this business was extremely seasonal Business was usually brisk during the fall and winter holiday seasons and during the early summer months when wedding receptions and company parties thrived. Based on the past few years, only 10% of annual revenues were realized in the first quarter while the second and fourth quarter on average generated about 33% each. Because revenues were low in the first quarter of each year, the company operated at a loss in this period, as Exhibit 52 and 5b demonstrate. This seasonality appears in the quarterly Income statements and balance sheets shown in Exhibits 6 and 7 Be Our Guest adjusted their staff to the seasonality of their business by hiring approximately 15 to 20 temporary employees during the peak season to supplement the 30 to 35 full time employees. During the slack winter months the company made no layoffs. However, some employees, particularly those from Brazil and other South American countries, took advantage of the slack period to go on long vacations back home. Most employees returned to Be Our Guest from year to year. Compounding the sensonality of the business was the fact that sales were highly uncertain. For example, total revenues for June 1997 jumped 35% above June 1996 but there had been only marginal year to year growth through May. This made it very difficult to develop annual projections Al Lovata stated, It's hard to really judge the year's financial situation until June when our revenues actually start showing what the year will be like. Up until then, it's all guesswork. Because of this uncertainty, we like to keep the balance sheets conservative on the whole. Be Our Guest succeeded in keeping the ratio of total liabilities to equity at approximately 1 to 1. They did this in part by minimizing assets on the books. The delivery trucks were leased on three-year operating leases and the buildings were rented from a separate affiliate owned by the shareholders. Therefore these items were not shown on the balance sheet. Also, accounts reneivable were tightly controlled with a thirty day pay policy. In spite of these controls, accounts receivable ballooned at year-end because business was booming during the month of December. De Our Guest attempted to collect these receivables quickly because caterers who did not pay right away were typically unable to pay until late spring- Relationship with State Street Bank Anne Granger met Steve Lazio at a networking event for smaller companies in the full of 1995 and became interested in learning more about Be Our Guest. Over the next everal months she maintained contact, Visiting the company a few times and becoming acquainted with the management team. Recalling her impressions during this period, she reported: I was favorably impressed by the quality of management and the profitable growth of the firm. The seasonality of the business presented a challenge to a bank lender and to the corngany, but Al Levata was aware of the risks involved and writers estimated CRA salaries for a company at Be Our Guest's size would more typically average about $225,000 Bess than the numbes ported in 1992 4 Tendr arter's Note Bs Our Guest, Inc. 299-001 openly discussed the issue with me. The fact that he was on top of the issue and understood the bank's perspective provided some comfort Granger's efforts at building a relationship paid off in October 1996 when Be Our Guest moved its account from one of the other Boston banks. This bank was going through a merger, so Lovata and his colleagues decided to take advantage of State Street's interest The initial borrowing arrangement consisted of two parts, a $100,000 line of credit and a $390,000, five-year term loan. Borrowings could take place at any time under the line of credit at an interest rate equal to the bank's prime rate plus 1.5%. Interest on the term loan was fixed at 9.25% and monthly payments of principal and interest totaling $8,143 were required. The bank imposed several covenants as part of the loan agreement, including requirements that the shareholders guarantee the low and that virtually all the firen's assets be pledged as collateral against the loans. Other restrictions included limits on debt ratios, advances and distributions to principals, and net earnings losses. See Exhibit 8 for a list of the covenants, In late 1997 the company requested a $40,000 increase in its credit line to help finance the receivables resulting from a large increase in December sales. Thus, Be Our Guest ended the year with a fully and $140,000 line and an outstanding balance of about $318,000 on its term loan Estimating its needs for the next 12 months was difficult as usual Sales early in 1998 had been a little stronger than in prior years and Lovata wanted to make sure that the firm would be able to finance at least a 10-15% growth in its business. The management team also wondered whether it was time to rethink the amount of the term loan versus the credit line. It had not been able to pay the credit line down to were during the past year as the bank preferred. Compounding the uncertainty, the company was evaluating an upgrade in their computer and telephone syster, but the amount and timing of this investment was still uncertain Lovata and Williamson wanted to keep their financial structure on a sound footing to be prepared for future growth. They had sufficient space in their present location for another three to four years at went growth rates, but then they would need to move to larger quarters. They also wanted to be able to expand perhaps through an cuisition in a nearby community or by expawling their product ling 299- Be Our Guest, Inc. Exhibit1 Sample Price List for a Ten-Person Dimer Table Item Cost per Itam Quantity Total Table And Chais: 6 Round Table with cloth and overlay Wooden Garden Chairs with Cushion 21.50 4.95 1 $ 21.50 10 49.50 Flatware: Salad/Dessert Fork (2) Dinner Fork Tea Spoon Dessert Spoon Salad knife Dinner Knife Butter knife 0.55 0.55 0.55 0.55 0.55 0.55 0.55 10 10 10 10 10 10 10 5,50 5.50 5.50 5.50 5.50 5.50 6.50 China: Woodmere "Wusion White with White Rim 12 Oversized Dinner 10 3/4" Dinner 8 1/4" Salad 6 1/2" Bread Cup/Saucer 12 oz. Rim Soup Plate 0.65 0.48 0.48 0.48 0.48 0.48 10 10 10 10 10 10 6.50 4.80 4.80 4.80 4.80 4.80 Glassware: Premium Wine 12 oz Flule Champagne Beverage Goblet, 16 OZ. 0.50 0.65 0,50 10 10 10 5.00 6.50 5.00 Other Items: Champagno Wine Bucket Salt & Pepper Broad Basket Table Number & Stand 7.00 1.00 0.75 1.00 1 1 2 1 7.00 1.00 1.50 1.00 Grand Total $167.00 De Our Guest Inc. 299-001 Exhibit 2 Top Clients (Based on recent 12-month period) Sales Revenue Sales % Customer Customer A Customer B Customer C Customer D Customer E Customer F Customer G Customer Customer Customer Top 10 Clients Second 10 Clients Third 10 Clients Fourth 10 Clients Other Clients Total 300,010 291,023 176,971 155,405 140,190 119,128 99,445 78,554 47,985 43,214 1,451,925 339,988 214.816 115,918 636 288 2.758,964 10.87% 10.55% 6.41% 5.63% 5.08% 4.32% 3.60% 2.85% 1.74% 1.57% 52.63% 12.32% 7.79% 4.20% 23.06% 100.00% Be Our Guestino 239001 Exhibit 3 Be Our Guest, Inc. Income Statements Years Ended December 31 1994 1995 1998 19977 Revenue: Rental Income Delivery Income Total Revenue $1,620,313 $1,794,807 $1,990,853 $2,469,474 156,035 179173 168,959 180 567 1,776,348 1,973,980 2,159,812 2,650,041 Cost of Revenue: Salarias Other Cost of Revenue Depreciation 490,968 211,468 116 119 818,555 575,253 302.877 127 906 1,006,036 547,611 347,094 128,299 1,023,004 810,602 419,050 148 707 1.178,350 Gross Profit 9577793 3G7,944 1.336.808 1,471.682 Operating Expenses: General and Administrative Salaries Other General and Admin. Expenses (a) Bed Debt Expense 381,501 402,423 5./02 789,626 434,434 384,863 9TZI 820,274 539,168 420,683 22 186 982,037 840,718 500,384 5,188 1,346,290 Earnings from Operations 168, 167 147,670 154,771 125.392 Interest, Net (27,820) (3,912) (44,545) (37,580) Net Earnings 140,347 113,758 110,226 87,812 Distributions To Shareholders 160.000 (16.700) 195.000) (27 6602 Earnings Retained $ 0,347 $ 67,058S 15,226 $ 0.152 (a) Other General and Administrative Expenses include depreciation of $3,692, $8,322: $14,025; and $22,612 for the years 1004 though 1997 respectively, Exhibit 4 Be Our Guest, Inc. Balance Sheets December 31, 1995 1998 1994 1997 ASSETS Current Assets: Cash (Overdraft) Accounts Receivablo (a) Loans to Shareholders & Affilate (b) Other Current Assets Total Current Assets (2,695) $ 229,333 12,500 882 238,920 565 $ 303.430 21.117 13,332 338.444 645 $ 303.478 30.052 700 334,873 (3.498) 348,109 24,263 2,678 369,552 Property and Equipment: Rental Equipment Leasehold Improvements & Other Equipment 768,481 102,272 870,753 414,988 455,765 928,391 193,850 1,082,241 561,214 511,027 1,077,484 208,827 1,286,311 679,734 606.577 1,251,080 278,500 1,529,588 851,053 678.535 Less Accumulated Depreciation Net Property and Equipment Other Assets: Loans to Shareholders & Affiliate (b) 140,000 130,000 168,000 75,950 Total Assets $ 834,685 $ 979,471 S 1,109,450 $ 1,124,037 LIABILITIES AND STOCKHOLDERS' EQUITY $ Current Liabilities: Borrowings under Bank Line of Credit Current Installments of Term Note Borrowings from Shareholder Accounts Payable and Accounts Total Current Liabilities 140,000 75,268 75,000 $ 32,539 17,000 63,465 188,004 53,388 32,816 69,733 165,437 98,270 $ 70,651 32,816 88,296 290.033 103,155 318,423 Term Notes Payable, Less Current Install 226,814 837109 317,266 243,311 Total Liabilities 414.818 492,546 607,299 561734 Shareholders' Equity: Common Stock, $1 Par Value Additional Pald-in Capital Retained Eemings Total Shareholders' Equity Total Liabilities and Shareholders' Equity 2,000 74,000 343.867 419,867 S 634.685 2,000 74.000 410,925 455,925 2.000 74.000 426,151 502.151 2.000 174,000 486,303 562,308 979,471 $ 1.109.450 1.124,037 Nole (a) Accounts Recevable are shown net of allowance for doubtful accounts of $5,00D L) As of 12/31/97 loans to shareholders & alle were scheduled to be paid down at an annual rate of $24.263. Exhibit 52 Average Monthly Revenue and Earnings as a Percentage of Armua Totals 100% B0% 80% 40% Net Earnings Revenue 20% 0% -20% 40% Jan Feb Mar Apr May June July Aug Sept Oct Dec Exhibit Sb Average Quarterly Revenue and Earnings as a Percentage of Annual Totals Second First Quarter Fourth Third Quarter Quarter Quarter Year 10.1% 33.04 Revenues Net Eaming 23.9% 33.0% 100.0% (96.2%) 155.0% 1.7% 39.694 100.0% Note: The average revenue and net earrings are based on data for 1994 through 1997 290-001 Be Our Guest, Inc. Exhibit 6 Be Our Guest, Inc. 1997 Quarterly Income Statenents First Quarter Second Quarter Third Quarter Fourth Quarter Total Revenue $ 237,638 $ 894,434 $ 699,000 $818,888 Cast of Revenue Salaries Other Cost of Revenue Depreciation 68,348 38,860 32,599 139,807 197 406 126,716 32,590 356.720 167,697 114,124 32,599 314,419 177.151 139,350 50,911 367,412 Gross Profit 97,831 537,714 384,661 451,477 Operating Expenses General and Administrative Salaries Other General and Administrative Expenses Bad Debt Expense 125,473 81,241 149,092 119.99G 5,188 274,276 223,178 140,313 342,974 158,835 206,714 363,491 501,809 Earnings from Operations (108,883) 263,438 21170 (50,332) Interest, Net (9,234) (9,891) (8,950) (9,505) Net Earnings (118,117) 253,547 12,220 (59,837) Distributions to Shareholders 11.000) (16,660) Earnings Retained $(129,117 $253.57 $ 12,220 S (76,497) Exhibit 7 Be Our Guest, Inc. 1997 Quarterly Balance Sheets March 31 June 30 Sept. 20 Dec. 31 ASSETS Current Assets: Cash (Overdraft) Accounts Receivable Loans to Shareholders & Affiliate Other Current Assets Total Current Assels $ 5,338 $ 144,926 38,528 700 189.492 12,882 S 401,432 50,686 1,630 466,630 39,239 $ 318,698 47,572 2,828 408,337 (8,498) 346,109 24,263 2,678 369,552 Net Property and Equipment 626,847 685,616 751,304 678,535 Other Assets: Loans to Shareholders & Affiliate 71,527 71,527 71,527 75.950 Total Assets S 887,867 $1,223,774 $11.231,168 $11.124.037 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Borrowings under Bank Line of Credit Current Installments of Term Note Accounts Payable and Accruals Total Current Liabil