Jack Cavanaugh, President and General Manager of the Swarthmore Co$-$op has a vision: a brand new facility for the Co$-$op that will serve as the anchor for the business community in the quaint little borough of Swarthmore, Pennsylvania. He has researched the costs of such an expansion and is about to sit down and project the amount of bank funding necessary to get the project underway. He solicits Andy Lewis, the Finance Committee chair on the Co$-$ops Board of Directors, to help in preparing the pro forma financial statements for the coming three years and thus determine the external funding needs in advance of a meeting with the Co$-$ops banker at National Cooperative Bank. The Co$-$ops HistoryIn $1932,$ two years into what would soon to be known as the Great Depression, a few women in the Swarthmore community were determined to find a solution to the lack of quality, fresh produce. Gathered in houses of local Swarthmoreans, wives of Swarthmore College professors planted the beginnings of a produce$-$buying club. The buying club gave Swarthmore families access to fresh produce at an affordable price, while supporting the local farmers and boosting the Swarthmore economy. News of the buying club grew rapidly and by $1937,$ the roots of the third oldest food cooperative in the nation were planted. Consumers Cooperative Association of Swarthmore, Inc. $($doing business as the Swarthmore Co$-$op$)$ was incorporated under the laws of the District of Columbia as a cooperative association in $1937.$ The Co$-$op moved out of the homes of its members and into its own space in a renovated car repair garage on Dartmouth Avenue in $1945$ and has been in business at this site ever since.The Co$-$op is owned and democratically governed by its members and is operated in accordance with cooperative principles. Member shares historically cost $$5.$ The Co$-$ops capital needs are provided by its member$-$owners and any realized net earnings arising from business with the owners are to be allocated and distributed back to the owners in proportion to their patronage with the Co$-$op$.$ Both members and non$-$members are always welcome to shop at the Co$-$op$.$ The Co$-$op is committed to: providing the community with the best possible selection of high$-$quality food and grocery products and services in a clean and convenient environment; to delivering outstanding customer service through knowledgeable and friendly staff; to practicing good corporate citizenship and participation in community affairs; and to promoting cooperative principles. The Expansion ProjectThe late $1990$s brought some significant challenges and opportunities to the Co$-$op$.$ Less than one mile outside the boroughs limits$,$ a brand new Genuardis Supermarket opened. The convenience, the vastly larger array of products, and the lower prices from Genuardis volume buying power lured many shoppers outside the borough and away from the Co$-$op$,$ resulting in a serious decline in sales. It took six years of dedicated work to get the business back and still is a daily challenge. The Co$-$ops old physical structure is also far less appealing than Genuardis; for example, carts were known to roll down aisles all by themselves due to uneven floors. In addition, the Board of Directors discovered that the building had some serious long$-$term structural issues with its roof and foundation. A structural engineer estimated that the cost to fix those problems is at least $$750,000.$ Such an expenditure would have no impact on improving or expanding the store.However, at the same time, the Borough of Swarthmore fortuitously did a Business District Revitalization Plan that identified the Co$-$op as the anchor store in the business district and recognized an expanded Co$-$op store as critical to the success of the revitalization project. As part of that project, the borough planned to purchase and tear down the building next to the Co$-$op and build a through street from Dartmouth Avenue to Meyers Avenue to improve traffic flow and access to parking in the business district. Jack Cavanaughs vision was born. He and the Co$-$ops Board saw a golden opportunity to build a new and expanded Co$-$op store. They would purchase the property next door, tear it down, build the new Co$-$op on that site, let the Borough purchase the old Co$-$op building, raze it$,$ and put the new street there.The Board commissioned a market study to see if the area had sufficient potential to support an expanded store. The conclusion drawn from the study was that the Co$-$op should try to double its retail space to fully capitalize on the market potential. The Borough has been approached with the plan and they are very supportive of both the Co$-$ops expansion and of moving the street to run through the old Co$-$op site.The new store envisioned by Jack and the Board of Directors will have almost double the amount of retail space with full professional kitchen capabilities. The strategy for the larger store has two primary goals: retention of the Co$-$ops strong customer base and attracting new customers. By maintaining and growing the customer base, the new store can attain long$-$term financial viability. These goals will be achieved by the following specific changes: Major expansion in produce, meat, seafood, and prepared foods Adding gourmet products Expanding offerings of organic and natural products Improved customer service with a customer service counter in the front of the store Employee efficiency gains with a larger, safer back$-$stock storage area Open space with tables in front of the store for dining and gathering Patio area outside for eating, grilling, music, outdoor eventsThe overall positive impact to the Co$-$op$,$ the business district, and the community as a whole is expected to be dramatic.Cost and Funding of the Expansion ProjectJack and Andy have spent much of their time recently estimating the costs of the expansion project and brainstorming ways to raise the necessary funding for it$.$ They have met with engineers, architects, builders and equipment vendors to develop the following costs:Land Purchase$ $375,000$Building$$1,350,000$Equipment$ $450,000$ In addition, they will need to increase their inventory levels by at least $$60,000$ over what they would normally be to fill the additional space in the new store with higher$-$end products. They also want to spend an additional $$25,000$ on promotion and advertising in the first year of operations in the new store to attract old and new customers in sufficient amounts. Lastly, they figure they should beef up their cash account by $$190,000$ to cover any contingencies and miscellaneous expenses that are sure to arise with the expansion.The Co$-$op uses the straight line method of depreciation and expects the useful life of the building and the equipment to be $39\mathrm{.}5$ years and $8$ years, respectively.Funding of the new store is a huge undertaking for a retail co$-$op of this size. The project as described will cost $$2\mathrm{.}45$ M$.$ Preliminary discussions with National Cooperative Bank indicate that they require the Co$-$op to fund at least $$650,000$ on their own in order to be considered for a $20-$year, $6\mathrm{.}5\%$ loan. Because the Co$-$op does not have a spare $$650,000,$ it will need to rely upon its members for the capital. Jack and Andy have pitched an idea to the Board $($who has approved it$)$ whereby the Co$-$op will $1)$ engage in a new membership campaign and $2)$ solicit loans from members. The new member campaign aims to raise $$300,000$ by selling shares at the new price of $$300$ to $1000$ new members. In addition, Swarthmore College has already agreed to purchase a share at the price of $$25,000.$ The member loan program will solicit members to lend a minimum of $$1500$ over a term of $6$ to $8$ years at a rate of $0\%$ to $3\%,$ as negotiated with each individual lender. Preliminary discussions with many dedicated members indicate their willingness to participate, often at amounts well in excess of the $$1500$ minimum; member loans in total are expected to generate $$300,000.$ This plan should raise close to the $$650,000$ required by the bank but the Co$-$op has an additional cushion. Selling the current property that the Co$-$op occupies $($whose $$50,000$ original book value has been depreciated down to zero$)$ to the Borough of Swarthmore will raise another $$375,000.$ If all goes according to plan, funds raised will total $$1,000,000.$Jack and Andy meet to look over the Co$-$ops historical income statements and balance sheets $[$Exhibits $1$ and $2]$ and begin working on projecting their position over the next three years. With the additional square footage and product offerings of the new store along with the new member campaign and advertising budget, they expect sales in $2005$ will be somewhere between $$3,300,000$ and $$3,600,000,$ roughly a $30\%-40\%$ increase over $2004.$ After that initial bump, a more conservative sales growth of $10\%$ per year will be the target though it could be more if all goes well. They would like to keep the short$-$term line of credit at no more than $$35,000,$ less if possible. While the member loans can be paid off over a six$-$ to eight$-$year period, both Jack and Andy would like to pay them back as soon as possible at which point the Co$-$op hopefully will be in a position to begin paying member dividends. Now the task is to prepare pro forma statements for $2005-2007$ to determine the remaining external funding needs before their meeting with National Cooperative Bank.