Exhibit le Sea & Snow Sports, Inc.- Income Statements Years Ended December 31, 1995-19974 and Three Months Ended March 31, 1998 (Dollar figures in thousands) Sales Cost of goods sold Gross profit 1995 S 926 (685) S 241 1996 $1069 812 $ 257 1997 $1464 1127 $ 337 3 Mo. 1998 $ 454 3(54) $ 100 Operating, selling, and administrative expense Rent expense Less: Sales discounts given Plus: Purchase discounts taken Operating profit (98) (41) (23) 7 S 86 (129) (42) (25) 8 $ 69 (187) (46) (24) 10 $ 90 (62) (13) (7) 2 $ 20 Interest expense Earnings before taxes Taxes Earnings after taxes S 69805 tagasi (1) $ 68 27 41 86 34 52 (1) $ 89 (36) 53 $ 20 (8) 12 Dividends Retained earnings (27) 25 30 23 (6) 6 25 *Cost of goods sold can be computed as follows: Beginning inventory 122 153 181 Plus : Purchases 716 840 1209 838 993 1390 Less : Ending inventory (153) (181) Equals : Cost of goods sold $ 685 $ 812 $1127 "Includes rental payments on lease which calls for a base payment of $30,000 plus 5% of gross profit each year. 2632 388 651 297 $ 354 263 Depreciation expense is negligible. The interest rate on the bank loan is 7% per year. Interest expense has been about $700 per year. As the size of the loan increases, interest expense will become a more consequential item on the income statement. The tax rate for S&SS is 40% of earnings before tax.. Tibility: Unavailable Exhibit 2 Sea & Snow Sports, Inc. Balance Sheets December 31, 1995-1997 and on March 31, 19984 March 31, 1995 1996 1997 1998- ASSETS- Cash Accounts receivable Inventories, at cost Total current assets Net equipment Deferred charges Total assets $ 15,620 134,660 153,150 $ 303,430 9,820 5,190 $ 318,440 $ 10,850 184,240 180,760 $ 375,850 9,270 7,350 $ 392,470 $ 5,030 239,890 263,400 $ 508,320 11,030 8,610 $ 527,960 $ 1,660 302,510 297,340 $ 602,970 10,850 9,930- $ 622,290 LIABILITIES & OWNER'S EQUITY Accounts payable Accrued expenses Bank loan Total current liabilities Common stock Retained earnings Total liabilities and owner's equity $ 62,820 4,140 5,000 $ 71,960 50,000 196,480 $ 104,570 6.210 10,000 $ 120,780 50,000 221,690 $ 213,750 9.680 10,000 S 233,430 50,000 244,530 $ 301,290 10,720 10,000 $ 322,010 50,000 250,280 $ 318,440 $ 392,470 $ 527,960 $ 622,290 Questions 1. Analyze S&SS's profitability. (Eg: analyze S&SS's profit margin on sales through time using gross sales. Analyze other profit measures through time.) 2. Are operating expenses in control? (Hint: Analyze operating expenses through time.) 3. Is Mr. Wu managing receivables and payables prudently? (Hint: Analyze DSO and DPO over time.) 4. Is S&SS's inventory "in control? 4 5. Should S&SS take a loan to "get current in its trade credit?" 6. How large of a loan would be needed by 4/30/1998 from the bank to allow S&SS to become current on its accounts payables so as to take advantage of early payment discounts during April? Analyzing this question is the key to financial planning for Mr. Wu. Every financial plan involves a host of assumptions. To get started consider the following: Indunilable a. We must determine the size of accounts payable on 4/30/98. We must recognize that accounts payable cannot exceed 10 days of purchases. b. To address (a) we must project sales and purchases The case says sales are steady throughout the year, so let's use the January-March period as a basis for sales, cost of goods sold, purchases, and operating expenses. c. For simplicity, let accrued expenses, equipment, and deferred expenses be unchanged from March. d. The starting point for the analysis is the April pro forma income statement. To construct the April pro forma income statement, we need also to estimate sales discounts given. Let's assume that the fraction of sales discounts given is about the same as January-March. e. We can use the relationship in footnote (a) under the income statement in Exhibit 1 to come up with purchases. To do so, let's assume inventory has the same relationship to cost of goods sold in the future as in the recent past and calculate the number of days of inventory. (That is, Ending inventory + Cost of goods - Beginning inventory = Purchases. From our ratio analysis, we can project ending inventory). f. Assume dividends are paid on a monthly basis. g. With these assumptions, we can construct a pro forma balance sheet for the end of April. That pro forma balance sheet will tell us the size of loan needed to clean up S&SS's balance sheet". 7. Construct a long-term financial plan. Specifically, produce pro forma income statements for the full year 1998, 1999, and 2000 and year-end balance sheets for 1998, 1999 and 2000. (We will need to make additional assumptions to construct these pro formas. The assumptions from #6 above will serve as the starting point and let's accept Mr. Wu's sales projections. We also must recognize that most items will grow with sales including cost of goods sold and operating expenses. To calculate receivables and inventory, let's use historical DSO (or ACP) and historical Days of Inventory. But, for simplicity, let equipment, deferred charges and accrued expenses remain constant 8. Given this set of pro forma financial statements, what type of loan should be structured by the bank? What should the collateral be? What should the maturity be?" essibility: Unavailable