In early March 2019, Dan Johnson, President and major shareholder of BATHROOMS INC., emerged smiling from the meeting room. The board of directors of BATHROOMS INC. had just concluded its annual meeting and expressed confidence in its management team. Sales topped $2.8 million in 2018 and the forecast for 2019 is $3.0 million plus. However, the smile on Dans face faded as he read the memo, which his secretary handed to him as he reached the door of his office. Bill Marr, the loan officer at We The People Bank: Dan, I would like to draw your attention to the financial statement information, which shows selected financial information on BATHROOMS INC.. As you will note, there are signs of deteriorating financial performance, and several financial statement ratios have fallen below the minimums specified in the line of credit agreement with We The People Bank. Please call me to arrange a meeting. The memo surprised Dan. In fact, he had just been authorized by the board to request an increase in the line of credit from $400,000 to $500,000 to finance operations in 2019. BATHROOMS INC. had a long relationship with We The People Bank and prior to 2017, had always repaid funds borrowed under the line of credit. The authorized line of credit for 2005 was $200,000 but by the end of 2017, this was increased to $400,000. As part of its agreement, BATHROOMS INC. had to maintain a current ratio of 2.0, a quick ratio of 1.0 and a current debt to total asset ratio of 40%. All of these conditions were breached by the end of 2018 as shown in the financial results, and this prompted the bank to take some action. According to the loan agreement: The bank can legally call the loan for immediate payment If payment is not made in 10 days, the bank could force BATHROOMS INC. into bankruptcy. Bill does not intend to enforce the contract fully, but he intends to use the loan agreement to prompt BATHROOMS INC. to take some decisive actions to improve its financial condition. As a maker of bathroom hardware, BATHROOMS INC. was hit hard by the recession in 2008. An aggressive marketing program during this period resulted in increases in sales but price discounts and higher operating costs cut into profits. BATHROOMS INC. management speculated the recession would be short-lived and kept production levels relatively constant. The line of credit was increased to help to finance working capital and some capital assets. Dan feels that BATHROOMS INC. is poised to capitalize on an upturn in the economy in 2019. The new housing market is expected to pick up and the refurbishing of existing homes should experience increasing growth. BATHROOMS INC. is projecting revenues of at least $3 million for the fiscal year 2019. However, the present level of sales could not be continued without an increase in the line of credit to $500,000. Dan is concerned that the bank may not want to continue the present line of credit, let alone increase the loan outstanding. He understands clearly Bills concern: The bankruptcy rate for small business is currently at an all-time high

1. Conduct a financial review of BATHROOMS INC.. Your answer must identify the strengths and weaknesses of BATHROOMS INC. and possible reasons for the underlying trends. To facilitate an orderly discussion, organize your answers in the following order a. liquidity, b. activity, c. leverage, and d. profitability 2. In part (1) above, you have identified some weaknesses in the operations of BATHROOMS INC.. Suggest approaches, which may be taken to eliminate or reduce the impact of those weaknesses on BATHROOMS INC.. It is advisable to state clearly what results or standards you expect to achieve if your remedial actions are taken. This information will be useful to answer part (3) below 3. Assume that BKL will have sales of $3 million in 2019. Prepare pro forma financial statements for the fiscal year ended 2019 to illustrate what impact your remedial actions may have on the firm's financial condition. 4. What recommendations would you have for Bill? Why?