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CASE 8 SPARTAN ROOFING LOAN EVALUATION "The Spartan Roofing Company makes excellent products!" So concluded a laudatory independent report commissioned by a bank in 1996, THE SPARTAN ROOFING COMPANY The Spartan Roofing Company was established in 1951 as a sole proprietorship in Ohio. The company is an innovative manufacturer of aluminum roofing products. Its standard products include the safeguard gravel stop system, the reglet and expansion joint system, and a wide variety of roofing panel systems. The safeguard system, which is patented, is designed to correct three major problems encountered by the roofing industry-water leakage of joints, tar drippage on the exterior of the finished building and shrinkage. The company's products are designed to favor both building owner and con tractor. The building owner benefits because of design technology that ensures Spartan's materials will last many years with little maintenance. The contractor benefits because the materials are simple to install. As a result the firm's prod ucts are extremely popular with the building industry, and many architects and engineers specify Spartan materials by brand name. Market studies support this claim and also indicate that Spartan could increase its market share substan- tially, given that the company has only a 5 percent share at present. Not sur prisingly the firm is very strong in technical expertise, the engineering depart- ment is an important component of the business, and the development of new products is very much encouraged. Consequently, the company has been granted over eight patents in the last 20 years. While Spartan's technical expertise is unquestioned, the firm is a bit suspect in financial matters. Periodically it has had difficulties with such matters as in ventory control and pricing. Historically, however, when the firm has expert enced serious problems in an area it has been able to show improvement by the PART II FINANCIAL ANALYSIS following year. All things considered, there is little doubt that Spartan has com- piled an impressive track record over the last 20 years. In fact, when one bank evaluated Spartan in 1991 it concluded that "this is one of the best-run compa- nies we have ever encountered in its size-sales category." In 1985, the firm relocated to Tennessee at the suggestion of Lawrence Wilson, the firm's CBO and son of the founder. The company's bank has been First City since the move South, but Tennessee National Bank (TNB) has aggressively sought Spartan's business. Since 1985 TNB has called on Wilson on more than 30 occasions and has made six different financing proposals. Wilson was always reluctant to switch, though he almost left First City for TNB in November 1999 because he was upset at First City for a reason never clear to TNB. JOHN PATTILLA In December 1994 John Pattilla of TNB had written a 12-page memorandum rec ommending that the bank make a specific financing proposal to Spartan. Pattilla's analysis was quite thorough and included projections of the firm's sit- uation using a "best guess" or "most likely" and "worst case set of assump tions. (See Exhibit 1 for excerpts from his 1994 report, Exhibit 2 for his net in come projections, Exhibit 3 for his balance sheet projections, and Exhibit 4 for his "worst case" cash flow estimates.) Pattilla had a few conversations with Wilson to get information for the pro jections. The final estimates, however, reflect Pattilla's Assessment of the situa- tion, and Wilson has never seen these numbers. Pattilla had recommended that TNB extend the company up to $700,000 in loans. The money would be used to finance Spartan's working capital and fixed-asset needs for anticipated strong sales growth from an expanding economy and the introduction of a number of new products. The company was especially excited about its new macrocarbide product line. Macrocarbide is known for its unusually long life and is therefore very useful in the roofing Industry. It is now early 1996 and Pattilla has to decide whether TNB should make an- other proposal to Lawrence Wilson As Pattilla leans back in his chair, he leafs through information on Spartan, and a number of items catch his eye. He smiles as he notices the nearly 40-percent increase in sales for 1995, an increase he pre- dicted almost to the penny, Pattilla realizes, however, that Spartan must have benefited enormously from the economic upturn, since the sales of its new prod- ucts have not gone as well as expected. Especially disappointing were the sales of Spartan's macrocarbide product line. It appears to Pattilla that the sales growth is due more to an external factor outside the company's control the economy-than to internal factors under its control. He also notes that Wilson tapped the firm's line of credit with First City for over $500,000, a result not at all consistent with his 1994 projections. Pattilla knows that any proposal would involve a buy-out of First City, and TNB's offer should be at least the amount of Spartan's credit line with First City, or about $750,000. Pattilla had concluded his CASE 8 SPARTAN ROOFING 51 1994 report by noting that "this represents an excellent opportunity for TNB." But now, nearly 14 months after he made that recommendation, Pattilla won- ders if he will reach the same conclusions as he begins his evaluation of Spartan's financial records. QUESTIONS 1. (a) Complete the 1995 pro forma balance sheet listed in Exhibit 3. () Complete the "worst case" cash flow projection for 1997 listed in Exhibit 4. 2. Do you agree that TNB should have actively sought Spartan's business at the end of 1994? Fully support your answer. (Note: When this recommen dation was made, Pattilla only had financial information on the first three quarters of 1994. He did possess, however, a projection for the last quarter that was virtually identical to what actually occurred.) 3. Calculate the ratios listed in Exhibit 9 for the Spartan Roofing Company for 1995 4. Evaluate the Spartan Roofing Company's situation at the present time (early 1996). What difficulties, if any, does your evaluation indicate? 5. Note that in 1995 Spartan's cash flow from operations (net income plus de preciation) was its highest during the 1992-1995 period. Yet its need for ex- teral funds, reflected in the large increase in its short-term bank loans, was also the greatest over the same period. Resolve this apparent paradox. 6. Use the format of Exhibit 4. (a) Prepare what you think is a "best guess" ("most likely cash flow fore cast for 1996. State your assumptions clearly. Do assume, however, that capital expense will be $120(000) and depreciation remains at $80/000). Defend the assumptions of your forecast ) Prepare what you think is a "worst case" cash flow forecast for 19%. Clearly state your assumptions. Do assume, however, that there is no change in sales from the 1995 level, depreciation remains at $80(000). and that the firm will postpone all expansion projects and incur only re- placement capital expenses of $50(00). Defend the assumptions of your forecast. 7. Do a liquidation analysis on the firm for the end of 1995. That is estimate its liquidation value and compare it to the amount of its debt obligations. It is customary in a situation like this for Pattilla to make the following perhaps conservative, assumptions: (1) all cash on the balance sheet is used for liqui- dation expenses and (2) receivables can be converted into cash at 60 percent of book value, inventory at 30 percent, and net fixed assets at 25 percent. 52 PART I FINANCIAL ANALYSIS 8. Based on your previous answers and information in the case, do you rec ommend that TNB seek Spartan's business at the present time (early 1996) and offer a $750,000 buy-out of First City? Fully support your recommen- dation. (Note: Do not consider any smaller loan amount and assume the of- fer would involve a six-year term loan with the principal paid in equal amounts each year.) 9. What additional information would help you make a more informed deci- sion in question 8? SOFTWARE QUESTION 10. Attention instructors: Questions 6 and 8 should probably not be assigned if this question is used John Pattilla of Tennessee National Bank has to decide whether to seek Spartan's business. He is considering a $750,000 loan, which would enable Spartan to buy out First City, Spartan's present bank The principal would be payable in equal amounts each year for the next six years (1996-2001). After some thought, Pattilla decides to analyze Spartan's cash flow in the fol- lowing scenarios (1997 capital spending is $50(000) in all scenarios) $-1 SIA S-2A Annual sales growth 05 02 05 012 Net income/sales 004 018 022 Average collection period 60.00 65.00 55.00 Sales/Inventory 8.00 7.00 (AP & secula/ales .10 10 Capital spending (1996) 120.00 120.00 80.00 NOTE: AP refers to accounts payable. S1 and S-2 represent Pattilla's best-guess (most likely) and worst-case forecasts, respectively, assuming no additional concrete information about Spartan Roofing S-1A and S-2A are based on a recent conversation that Pattilla had with Lawrence Wilson, the owner. Wilson claimed that he is going to "implement sounder credit policies," and "eliminate some production inefficiencies." Pattilla has not had time to carefully examine these claims, and wonders if these changes would make any difference, anyway, assuming Wilson is right." Perform the appropriate analysis. What would you recommend to Pattilla? Defend your advice. 60.00 8.00 7.00 .10 80.00 CASES SPARTAN ROOFING 53 EXHIBITI Excerpts from John Pattilla) 1994 Report on the Spartan Roofing Company "The company expects, and I agree that sales growth will be 37 percent, 20 percent, and 20 percent over the next three years. This will result partly from the economic growth of the overall economy but mainly from the sales gen- erated by its new macrocarbide products." "Lawrence Wilson is exceptionally strong in the technical aspects of the busi- ness and is very much involved in new product development. He has a B.S. and an M.S. in chemical engineering from MIT. On the other hand, being a technical sort, his financial expertise is somewhat limited. Nonetheless, Wilson's track record over the last 10 years speaks for itself, and we have had no reason to question his integrity." "One area of concern is the quality of the accounts receivable, given that the majority of the customers are contractors. It should be noted, however, that the majority of the contractors have been doing business with Spartan for a number of years and the company is familiar with their financial condition In fact, its bad debt expense has never exceeded 0.6 percent in any of the last 10 years, a solid statistic considering the customer base." . "The main reason for the company's poor earnings in 1994 was the large ex- penses incurred by a former salesman of the company. Lawrence hired a salesman who was very expensive but did not produce. As a result, selling exe penses increased sharply in 1991." "From 1992 to 1996, the period analyzed most intensively, Spartan generated sufficient cash flow from operations to meet its capital expenditure needs and its debt service. Adjusted working capital was a net source of funds for the company which partly reflects the attention given to the management of working capital. The result of all this was a large positive cash flow (see Exhibit 8) which Spartan used to repay a number of relatively expensive term loans. Whether this was a wise financial move is debatable." "Due to the working capital requirements of the large expected sales growth and the fixed-asset needs of the company, the company will not be in a posi- tion to begin repaying any of the principal on the debt until 1997." "Even my 'worst case' cash flow forecast indicates that Spartan will have suf- ficient funds to repay sizeable chunks of any new debt beginning in 1997." (See Exhibit 4.) (continued) 54 EXHIBIT 1 (Continued) "1 recommend we finance Spartan's working capital and fixed asset needs. This will require up to $700,000. I also recommend that we do not amortize any of the loans for two years. The loans would be secured by the accounts re- ceivable, inventory, and equipment of the company, and would be personally guaranteed by Lawrence. . "I believe this to be an attractive opportunity for us, but it does involve sev- eral elements of risk. The company's sales and earnings are quite sensitive to overall economic conditions and the construction industry in particular. In addition, the nature of the customer base (contractors) is suspect. On the other hand, given the company's track record, it appears that they have effectively managed these risks EXHIBIT 2 Net Income Projections for the Spartan Roofing Company: 1995-1997 (0004) (Developed by John Pattilla for TNB in 1994) 1995 19% 1997 B.G. WC. B.G. WC Sales 55.400 5.000 $6,500 5.300 $7.800 1900 Net Income $135 $ 162 80 $195 74 "G. Is the best worthly forecast and assumes sales will increase by 37 percent in 1995,20 percent in 1994 and 20 percent in 1997. Net Income sumed to be 2.5 percento 'W.C.Isa word case forecast that meet income will be 1.5 percent of sales EXHIBIT 3 Pro Forma Balance Sheets for the Spartan Roofing Company 1995-1997 (000u) (Developed by John Pattilla for TNB in 1994) 1995 1996 1997 B.O. B.O. B.O C Assets Cash $0 $40 $50 $50 $60 $40 Receivables 883 999 83 1,193 816 Inventory 91 Current Assets $1,510 $1,567 $1.819 $1,669 52,184 $1.536 Gross fixed assets 929 1,309 1.309 1,399 1,309 (continued) CASES SPARTAN ROOPING 55 EXHIBIT 3 (Continued 1995 1997 B.G. WC. 3.0 W.C. BG W.C. (Depreciation) (537) 187 Netflixed assets 7 292 -392 Total assets 51.902 $1999 52321 Les and Equity $2.999 Short-term debt due $ 169 $326 $196 $300 $166 566 Accounts payable 194 252 Accruals 385 Current liabilities 294 $820 $40 5832 Term loans 5550 158 590 155 125 400 Common stock 50 50 50 Retained earning 994 1014 Total abilities and equity $1.902 1.352 2088 SLOS 2.088 3.Gelgot helyforecast that we will be 55 days of wale) inventory tumeer will be $4603de ple wereld ale round your estimated core will be percent of indlegende in 30 in 1976, and 530 in 1 WC etwas case force that incorporates the locals we day of les and Inventory tumover will be 7280 days of sales options in the main charged EXHIBIT 4 Worst Case Cash Flow Projections for the Spartan Roofing Company 1995-1997 (000s) (Developed by John Pattilla in 1994) 1997 Net Income $75 $80 574 Depreciation Cash flow operations $155 -Adjusted working capital media 5200 -Capital expense -Dividende Cash flow 57 CASE 8 SPARTAN ROOFING EXHIBIT 7 Balance Sheets for the Spartan Roofing Companys 1992-1995 (000) 1992 1999 1904 1995 5120 785 $21 $ 1.124 TA $1,940 914 $1.21 $1,350 $1.000 (3122 $1,738 467 $1419 Receivable Inventory Currentes Grossfied assets (Accumulated depreciation) Net fixed asset Liabilities and Equity Notes payable banks Accounts payable Accruals Current liabilities Term loans Common stock Retained earning Total liabilities and equity $1,666 $180 34 218 $220 $162 150 $700 306 310 $400 374 219 SO 716 $1,000 $1419 1994 55 $100 (95) EXHIBITS Spartan's Cash Flow 1992-1994 (0001) 1992 1993 Net Income $96 595 Depreciation 61 Cash flow operations $159 -Adjusted working capital nende -Capital expenditure -Dividends Cash flow $189 $150 Adressed Working Capital 1991 1992 1993 Accounts receivable 5700 Inventory 476 466 -Accounts payable 157 -Accruals 218 Adjusted working capital $997 $817 5297 Change adjusted working capital (BO) $1.37 1994 150 157 $701 196 58 PART I FINANCIAL ANALYSIS EXHIBIT 9 Financial Ratios for the Spartan Roofing Company: 1992-1995 1992 1993 1994 1995 Am 1993-1995 Liquidity Ratio Current 24 16 12 15 1.45 1.38 1.25 Quick Leverage Ratio Debt (1) 35 50 36 3.42 LAS Times interesteamed Activity Ratio Inventory tumover (sales) 84 13.6 G 92 164 Fixed asset tumover 252 101 * C***** CCC ECCE EGEER 55 Total asset turnover 2.36 228 278 72 53 Average collection period 6 Profitability Ratios Grow margin 2 26 >> Net profit margin (0 24 25 11 16 Retum on net worth (5) 12.5 113 49 Retum on total assets (%) 57 5.6 104 5.8 "The three for each rate are computed in the following way. Ratio form in the day arranged in what is considered a strong towards the middle number represents the that is, half the firm in the industry had to better than the median and half had wewe The top number represents the upper quartile figure mening 3 percent of the firms had set beste The lower number represents the lowest quarties that percent of the fiems had ratios were the CASE 8 SPARTAN ROOFING LOAN EVALUATION "The Spartan Roofing Company makes excellent products!" So concluded a laudatory independent report commissioned by a bank in 1996, THE SPARTAN ROOFING COMPANY The Spartan Roofing Company was established in 1951 as a sole proprietorship in Ohio. The company is an innovative manufacturer of aluminum roofing products. Its standard products include the safeguard gravel stop system, the reglet and expansion joint system, and a wide variety of roofing panel systems. The safeguard system, which is patented, is designed to correct three major problems encountered by the roofing industry-water leakage of joints, tar drippage on the exterior of the finished building and shrinkage. The company's products are designed to favor both building owner and con tractor. The building owner benefits because of design technology that ensures Spartan's materials will last many years with little maintenance. The contractor benefits because the materials are simple to install. As a result the firm's prod ucts are extremely popular with the building industry, and many architects and engineers specify Spartan materials by brand name. Market studies support this claim and also indicate that Spartan could increase its market share substan- tially, given that the company has only a 5 percent share at present. Not sur prisingly the firm is very strong in technical expertise, the engineering depart- ment is an important component of the business, and the development of new products is very much encouraged. Consequently, the company has been granted over eight patents in the last 20 years. While Spartan's technical expertise is unquestioned, the firm is a bit suspect in financial matters. Periodically it has had difficulties with such matters as in ventory control and pricing. Historically, however, when the firm has expert enced serious problems in an area it has been able to show improvement by the PART II FINANCIAL ANALYSIS following year. All things considered, there is little doubt that Spartan has com- piled an impressive track record over the last 20 years. In fact, when one bank evaluated Spartan in 1991 it concluded that "this is one of the best-run compa- nies we have ever encountered in its size-sales category." In 1985, the firm relocated to Tennessee at the suggestion of Lawrence Wilson, the firm's CBO and son of the founder. The company's bank has been First City since the move South, but Tennessee National Bank (TNB) has aggressively sought Spartan's business. Since 1985 TNB has called on Wilson on more than 30 occasions and has made six different financing proposals. Wilson was always reluctant to switch, though he almost left First City for TNB in November 1999 because he was upset at First City for a reason never clear to TNB. JOHN PATTILLA In December 1994 John Pattilla of TNB had written a 12-page memorandum rec ommending that the bank make a specific financing proposal to Spartan. Pattilla's analysis was quite thorough and included projections of the firm's sit- uation using a "best guess" or "most likely" and "worst case set of assump tions. (See Exhibit 1 for excerpts from his 1994 report, Exhibit 2 for his net in come projections, Exhibit 3 for his balance sheet projections, and Exhibit 4 for his "worst case" cash flow estimates.) Pattilla had a few conversations with Wilson to get information for the pro jections. The final estimates, however, reflect Pattilla's Assessment of the situa- tion, and Wilson has never seen these numbers. Pattilla had recommended that TNB extend the company up to $700,000 in loans. The money would be used to finance Spartan's working capital and fixed-asset needs for anticipated strong sales growth from an expanding economy and the introduction of a number of new products. The company was especially excited about its new macrocarbide product line. Macrocarbide is known for its unusually long life and is therefore very useful in the roofing Industry. It is now early 1996 and Pattilla has to decide whether TNB should make an- other proposal to Lawrence Wilson As Pattilla leans back in his chair, he leafs through information on Spartan, and a number of items catch his eye. He smiles as he notices the nearly 40-percent increase in sales for 1995, an increase he pre- dicted almost to the penny, Pattilla realizes, however, that Spartan must have benefited enormously from the economic upturn, since the sales of its new prod- ucts have not gone as well as expected. Especially disappointing were the sales of Spartan's macrocarbide product line. It appears to Pattilla that the sales growth is due more to an external factor outside the company's control the economy-than to internal factors under its control. He also notes that Wilson tapped the firm's line of credit with First City for over $500,000, a result not at all consistent with his 1994 projections. Pattilla knows that any proposal would involve a buy-out of First City, and TNB's offer should be at least the amount of Spartan's credit line with First City, or about $750,000. Pattilla had concluded his CASE 8 SPARTAN ROOFING 51 1994 report by noting that "this represents an excellent opportunity for TNB." But now, nearly 14 months after he made that recommendation, Pattilla won- ders if he will reach the same conclusions as he begins his evaluation of Spartan's financial records. QUESTIONS 1. (a) Complete the 1995 pro forma balance sheet listed in Exhibit 3. () Complete the "worst case" cash flow projection for 1997 listed in Exhibit 4. 2. Do you agree that TNB should have actively sought Spartan's business at the end of 1994? Fully support your answer. (Note: When this recommen dation was made, Pattilla only had financial information on the first three quarters of 1994. He did possess, however, a projection for the last quarter that was virtually identical to what actually occurred.) 3. Calculate the ratios listed in Exhibit 9 for the Spartan Roofing Company for 1995 4. Evaluate the Spartan Roofing Company's situation at the present time (early 1996). What difficulties, if any, does your evaluation indicate? 5. Note that in 1995 Spartan's cash flow from operations (net income plus de preciation) was its highest during the 1992-1995 period. Yet its need for ex- teral funds, reflected in the large increase in its short-term bank loans, was also the greatest over the same period. Resolve this apparent paradox. 6. Use the format of Exhibit 4. (a) Prepare what you think is a "best guess" ("most likely cash flow fore cast for 1996. State your assumptions clearly. Do assume, however, that capital expense will be $120(000) and depreciation remains at $80/000). Defend the assumptions of your forecast ) Prepare what you think is a "worst case" cash flow forecast for 19%. Clearly state your assumptions. Do assume, however, that there is no change in sales from the 1995 level, depreciation remains at $80(000). and that the firm will postpone all expansion projects and incur only re- placement capital expenses of $50(00). Defend the assumptions of your forecast. 7. Do a liquidation analysis on the firm for the end of 1995. That is estimate its liquidation value and compare it to the amount of its debt obligations. It is customary in a situation like this for Pattilla to make the following perhaps conservative, assumptions: (1) all cash on the balance sheet is used for liqui- dation expenses and (2) receivables can be converted into cash at 60 percent of book value, inventory at 30 percent, and net fixed assets at 25 percent. 52 PART I FINANCIAL ANALYSIS 8. Based on your previous answers and information in the case, do you rec ommend that TNB seek Spartan's business at the present time (early 1996) and offer a $750,000 buy-out of First City? Fully support your recommen- dation. (Note: Do not consider any smaller loan amount and assume the of- fer would involve a six-year term loan with the principal paid in equal amounts each year.) 9. What additional information would help you make a more informed deci- sion in question 8? SOFTWARE QUESTION 10. Attention instructors: Questions 6 and 8 should probably not be assigned if this question is used John Pattilla of Tennessee National Bank has to decide whether to seek Spartan's business. He is considering a $750,000 loan, which would enable Spartan to buy out First City, Spartan's present bank The principal would be payable in equal amounts each year for the next six years (1996-2001). After some thought, Pattilla decides to analyze Spartan's cash flow in the fol- lowing scenarios (1997 capital spending is $50(000) in all scenarios) $-1 SIA S-2A Annual sales growth 05 02 05 012 Net income/sales 004 018 022 Average collection period 60.00 65.00 55.00 Sales/Inventory 8.00 7.00 (AP & secula/ales .10 10 Capital spending (1996) 120.00 120.00 80.00 NOTE: AP refers to accounts payable. S1 and S-2 represent Pattilla's best-guess (most likely) and worst-case forecasts, respectively, assuming no additional concrete information about Spartan Roofing S-1A and S-2A are based on a recent conversation that Pattilla had with Lawrence Wilson, the owner. Wilson claimed that he is going to "implement sounder credit policies," and "eliminate some production inefficiencies." Pattilla has not had time to carefully examine these claims, and wonders if these changes would make any difference, anyway, assuming Wilson is right." Perform the appropriate analysis. What would you recommend to Pattilla? Defend your advice. 60.00 8.00 7.00 .10 80.00 CASES SPARTAN ROOFING 53 EXHIBITI Excerpts from John Pattilla) 1994 Report on the Spartan Roofing Company "The company expects, and I agree that sales growth will be 37 percent, 20 percent, and 20 percent over the next three years. This will result partly from the economic growth of the overall economy but mainly from the sales gen- erated by its new macrocarbide products." "Lawrence Wilson is exceptionally strong in the technical aspects of the busi- ness and is very much involved in new product development. He has a B.S. and an M.S. in chemical engineering from MIT. On the other hand, being a technical sort, his financial expertise is somewhat limited. Nonetheless, Wilson's track record over the last 10 years speaks for itself, and we have had no reason to question his integrity." "One area of concern is the quality of the accounts receivable, given that the majority of the customers are contractors. It should be noted, however, that the majority of the contractors have been doing business with Spartan for a number of years and the company is familiar with their financial condition In fact, its bad debt expense has never exceeded 0.6 percent in any of the last 10 years, a solid statistic considering the customer base." . "The main reason for the company's poor earnings in 1994 was the large ex- penses incurred by a former salesman of the company. Lawrence hired a salesman who was very expensive but did not produce. As a result, selling exe penses increased sharply in 1991." "From 1992 to 1996, the period analyzed most intensively, Spartan generated sufficient cash flow from operations to meet its capital expenditure needs and its debt service. Adjusted working capital was a net source of funds for the company which partly reflects the attention given to the management of working capital. The result of all this was a large positive cash flow (see Exhibit 8) which Spartan used to repay a number of relatively expensive term loans. Whether this was a wise financial move is debatable." "Due to the working capital requirements of the large expected sales growth and the fixed-asset needs of the company, the company will not be in a posi- tion to begin repaying any of the principal on the debt until 1997." "Even my 'worst case' cash flow forecast indicates that Spartan will have suf- ficient funds to repay sizeable chunks of any new debt beginning in 1997." (See Exhibit 4.) (continued) 54 EXHIBIT 1 (Continued) "1 recommend we finance Spartan's working capital and fixed asset needs. This will require up to $700,000. I also recommend that we do not amortize any of the loans for two years. The loans would be secured by the accounts re- ceivable, inventory, and equipment of the company, and would be personally guaranteed by Lawrence. . "I believe this to be an attractive opportunity for us, but it does involve sev- eral elements of risk. The company's sales and earnings are quite sensitive to overall economic conditions and the construction industry in particular. In addition, the nature of the customer base (contractors) is suspect. On the other hand, given the company's track record, it appears that they have effectively managed these risks EXHIBIT 2 Net Income Projections for the Spartan Roofing Company: 1995-1997 (0004) (Developed by John Pattilla for TNB in 1994) 1995 19% 1997 B.G. WC. B.G. WC Sales 55.400 5.000 $6,500 5.300 $7.800 1900 Net Income $135 $ 162 80 $195 74 "G. Is the best worthly forecast and assumes sales will increase by 37 percent in 1995,20 percent in 1994 and 20 percent in 1997. Net Income sumed to be 2.5 percento 'W.C.Isa word case forecast that meet income will be 1.5 percent of sales EXHIBIT 3 Pro Forma Balance Sheets for the Spartan Roofing Company 1995-1997 (000u) (Developed by John Pattilla for TNB in 1994) 1995 1996 1997 B.O. B.O. B.O C Assets Cash $0 $40 $50 $50 $60 $40 Receivables 883 999 83 1,193 816 Inventory 91 Current Assets $1,510 $1,567 $1.819 $1,669 52,184 $1.536 Gross fixed assets 929 1,309 1.309 1,399 1,309 (continued) CASES SPARTAN ROOPING 55 EXHIBIT 3 (Continued 1995 1997 B.G. WC. 3.0 W.C. BG W.C. (Depreciation) (537) 187 Netflixed assets 7 292 -392 Total assets 51.902 $1999 52321 Les and Equity $2.999 Short-term debt due $ 169 $326 $196 $300 $166 566 Accounts payable 194 252 Accruals 385 Current liabilities 294 $820 $40 5832 Term loans 5550 158 590 155 125 400 Common stock 50 50 50 Retained earning 994 1014 Total abilities and equity $1.902 1.352 2088 SLOS 2.088 3.Gelgot helyforecast that we will be 55 days of wale) inventory tumeer will be $4603de ple wereld ale round your estimated core will be percent of indlegende in 30 in 1976, and 530 in 1 WC etwas case force that incorporates the locals we day of les and Inventory tumover will be 7280 days of sales options in the main charged EXHIBIT 4 Worst Case Cash Flow Projections for the Spartan Roofing Company 1995-1997 (000s) (Developed by John Pattilla in 1994) 1997 Net Income $75 $80 574 Depreciation Cash flow operations $155 -Adjusted working capital media 5200 -Capital expense -Dividende Cash flow 57 CASE 8 SPARTAN ROOFING EXHIBIT 7 Balance Sheets for the Spartan Roofing Companys 1992-1995 (000) 1992 1999 1904 1995 5120 785 $21 $ 1.124 TA $1,940 914 $1.21 $1,350 $1.000 (3122 $1,738 467 $1419 Receivable Inventory Currentes Grossfied assets (Accumulated depreciation) Net fixed asset Liabilities and Equity Notes payable banks Accounts payable Accruals Current liabilities Term loans Common stock Retained earning Total liabilities and equity $1,666 $180 34 218 $220 $162 150 $700 306 310 $400 374 219 SO 716 $1,000 $1419 1994 55 $100 (95) EXHIBITS Spartan's Cash Flow 1992-1994 (0001) 1992 1993 Net Income $96 595 Depreciation 61 Cash flow operations $159 -Adjusted working capital nende -Capital expenditure -Dividends Cash flow $189 $150 Adressed Working Capital 1991 1992 1993 Accounts receivable 5700 Inventory 476 466 -Accounts payable 157 -Accruals 218 Adjusted working capital $997 $817 5297 Change adjusted working capital (BO) $1.37 1994 150 157 $701 196 58 PART I FINANCIAL ANALYSIS EXHIBIT 9 Financial Ratios for the Spartan Roofing Company: 1992-1995 1992 1993 1994 1995 Am 1993-1995 Liquidity Ratio Current 24 16 12 15 1.45 1.38 1.25 Quick Leverage Ratio Debt (1) 35 50 36 3.42 LAS Times interesteamed Activity Ratio Inventory tumover (sales) 84 13.6 G 92 164 Fixed asset tumover 252 101 * C***** CCC ECCE EGEER 55 Total asset turnover 2.36 228 278 72 53 Average collection period 6 Profitability Ratios Grow margin 2 26 >> Net profit margin (0 24 25 11 16 Retum on net worth (5) 12.5 113 49 Retum on total assets (%) 57 5.6 104 5.8 "The three for each rate are computed in the following way. Ratio form in the day arranged in what is considered a strong towards the middle number represents the that is, half the firm in the industry had to better than the median and half had wewe The top number represents the upper quartile figure mening 3 percent of the firms had set beste The lower number represents the lowest quarties that percent of the fiems had ratios were the