Instructions

Your assignment for this case study is questions 1-7

1.Input a 12-month Cash Budget reflecting anticipated cash inflows, outflows and short-term borrowing needs. (Short-term loan rate is 6.00% - Prime + .50 % with a floor of 6%)

2. When do you expect the credit need to be the greatest?

3. Would you expect to have a "clean-up" period in the credit? If so, when and why?

4. What are the strengths and weaknesses of TRC? Should you have a clean- up period and why? Based on these strengths and weaknesses- how would you structure and price this relationship?

5. Would your bank book these requests today? Does your Loan Policy cover seasonal lending, please give detail?

6. How could different Accounts Payable and Accounts Receivable terms change this credit for better or worse? Provide detail

7. What are general risks behind seasonal lending? How can they be mitigated by structure, monitoring, pricing, controls?

Additional questions for consideration and discussion:

? What are the strengths and weaknesses of this credit? Prior to 2019 and during 2019

? Analyze the information to determine structure, term, amount and other conditions to satisfy TRC financing needs for the coming year.

? What kind of information will you ask TRC to provide you to ensure your ability to properly service the loan during 2019? Why are you requesting such items?

? How can seasonal loan needs be adequately determined without the use of a cash budget?

? Visualize your first plant visit. Describe what you expect to find. What do site visits allow you as the banker to see?

? If the loan is made, what rate and fees would seem appropriate? If you are pricing for current risks? What other products or services could you possibly cross-sell to TRC, Mr. Woods, or Mr. Hall?

TRC's executive management knows the toy business well but has looked to Athens Bank & Trust for general financial advice. New to the account, you have an opportunity to take a "fresh look" at their operation. Are there any matters you have noted during your review of the company that you will want to discuss with Mr. Woods and Mr. Hall?

Use the information below to assist:

In Jan 2019, Mr. Woods, President of ToysRCash, Inc (TRC) was considering his company's financing needs for the coming fiscal year (year ended Dec 31st). The company's production schedules have been highly seasonal, reflecting a seasonal pattern of sales.

TRC is a regional manufacturer of plastic toys. Products produced through FYE 2018: are: Gobots, DOlls, Glowworms, Little People, Wheel Whoppers, Cook Sets, Plastic riding toys, and a variety of other misc. items. Exhibit 1 shows the company's product mix for the years 2014-2018.

The manufacture of plastic toys is highly competitive business with many producers, most of which are not strongly financed. Capital requirements are not large and technology is relatively simple, so that a number of new firms enter the business each year. On the other hand, competition is severe with respect to both price and design, resulting in a relatively high failure rate. There is a significant, temporary advantage in designing a popular new toy. Margins tend to be high on such an item, until competitors are able to offer a similar product. For example, the successful introduction by TRC of the Glowworm contributed significantly to profits in 2017. In 2018, 7 competitors offered a similar item, and its wholesale price was nearly halved.

Although TRC still plans to manufacture their existing lines, a new product line known as "Radar Gun" is being introduced. This toy is a version of "Paint Ball" where, when hit, the transmitted beam causes a safe paint-like product to explode from plastic vests worn by participants. "Radar Gun" is more of a high technology toy that transmits light beams for approximately 100 feet, one activated by a trigger mechanism. In the research and development phase and subsequent test marketing of the product, buyers became very excited about the marketability of this product. Due to this high success rate, TRC has purchase orders from major retail stores representing $1,000,000 in sales for the 2019 season. The company expects that sales in 2019 will double over 2018 levels, with 60% of sales coming from the new product and the remaining 40% to come from existing lines. Exhibit 2 shows the company's projected product mix for the year 2019, with appropriate related sales.

Mr. Lee Woods founded TRC in 1999. Prior to founding TRC Mr. Woods had been employed for 15 years as a production manager by a large national manufacturer of plastic toys. With his savings and those of his former assistant, Mr. Andy Hall, Mr. Woods established the company. Originally a partnership, the firm incorporated in 2001, with Mr. Woods taking 75% of the capital stock and Mr. Hall 25%. The latter serves as production manager and Mr. Woods, as President, is responsible for overall direction of the company's affairs. The company has experienced relatively rapid growth since its founding and has enjoyed profitable operations each year since 2002. Sales in 2018 were $1,000,000 and by virtue of the new "Radar Gun" are projected to double in 2019.

Net income reached $152,000 in 2018 after state and federal taxes of 50%. A new Tax Reform Act will result in a blended effective tax rate of 40% for the fiscal year 2019. Exhibits 3 and 4 present the latest financial statements of the company. For the year 2017 and 2018 the cost of goods sold averaged 60% of sales and is expected to maintain approximately that proportion in 2019. With the introduction of the new product, the company will need to acquire fixed assets costing $250,000. Plans are to acquire the assets in February, and it will take until May to get the new systems up and operating. Operating expenses will more than double for 2019. Projections indicate that due to raises to key officers and new operating expenses associated with the new product, operating expense will amount to $240,000, spread evenly throughout each month of the 2019 fiscal year.

Expanding operations has resulted in a somewhat strained working capital position for TRC. The year-end cash position of $147,000 is only $47,000 greater than what is regarded as the minimum necessary for the operation of the business. The company currently has a $100,000 unsecured line of credit with your bank, 3 Athens Bank & Trust. The high usage in 2018 was $62,000 and there was no outstanding debt at fiscal yearend 2018.

The company's sales are highly seasonal. Over 95% of annual dollar volume usually is sold during MaySeptember. Exhibit 5 shows sales by month for 2018 and Exhibit 5-A shows expected sales percentage based on the introduction of the "Radar Gun". Sales are made principally to regional variety store chains and toy brokers on net 30-day terms. Large variety store chains are becoming increasingly important customers of TRC, accounting for over 65% of sales for 2018. These customers are requesting longer payments terms (net 90 days) and because of competitive pressures, TRC expects to grant such terms to these customers starting May 1, 2019. TRC expects these large customers to continue to account for about 65% of 2019 sales.

The company's production processes are not extremely complex. Plastic molding powder is processed by injecting molding presses formed into the shape desired. Automatic painting machines next paint the plastic shapes. The final step in the process is assembly and packaging in cartons or plastic bags. The production of the "Radar Gun" is somewhat more complex, but the basic molding process is the same. Inserted in the interior of the toy is a tiny light transmitter and trigger device that when engaged, sends out a tiny light beam. Wiring of these mechanisms to a battery pack in the handle of the gun completes the interior of the toy. To avoid excess equipment costs, storage and high inventory levels, typically all production processing is completed in the same day so there is virtually no work in process at the end of each day. Material Purchases on net 30- day terms are made monthly for the estimated production in the current month. Total purchases in 2019 are forecast at $600,000; labor and production cost are expected to be $600,000 in 2019, which Excludes $24,000 in depreciation.

TRC's practice is to produce in response to orders and, although there are large orders for the new product, it will be May before the company will have its capacity expanded from its purchase of additional fixed assets and renovations to handle the new production.

With the exception of existing purchase orders, the first sizeable orders for holiday sales by retailers are usually received in early May. Shipments are made whenever possible on the day that an order is produced. Hence, production and sales amounts in each month tend to be equivalent. A small inventory of representative finished goods, averaging $31,000 in 2018, is maintained in a nearby public warehouse, owing to lack of space in the plant. Inventory is expected to remain at these levels during the coming year.

The company has requested that Athens Bank & Trust loan TRC $220,000 for the purchase of additional fixed assets (renovations and specialized equipment). This loan should provide monthly principal payments including interest of $10,000. The equipment needs to be purchased and paid for next month (Feb. 2019) to ensure installation is completed prior to the season's orders. Term loan interest expense has been projected through operating expenses and is included in the loan terms above. Mr. Woods does not have a close handle on what his short- term borrowing needs will be; that's where you come in. You have just been assigned this account relationship at Athens Bank & Trust by the EVP of commercial lending.