Module 1, Topic 3 Case Study: The Anderson Bat Company (ABC) You have just been hired as the Chief Risk Office (CRO) for The Anderson Bat Company (ABC). Although you have been responsible for risk management programs at other companies, this is your first CRO role and you are anxious to show the company's CEO that he made the right decision in selecting you. Prior to joining ABC, you were the risk management director for a mid-sized services company in Utah. You reported to the CRO and had a small staff that reported to you. You were responsible for the ongoing maintenance of the company's RMIS and two members of your staff assisted you with this effort. Two additional staff members served as risk analysts, conducting analysis and completing loss forecasts. Your fifth direct report was responsible for maintaining the company's risk management website on the company's intranet. This individual was also responsible for maintaining a risk map on the website, ensuring the data included was no more than six months old at any time. You had worked your way up to the director role from an analyst position over your previous five years with the organization. At this point, you are the only member of the ABC risk management team. In fact, you are the company's first on-staff CRO. Prior to your arrival, ABC leadership utilized consultants to perform any required risk management duties. You accepted the position with the understanding that you would be designing and building your own risk management team, and selecting and installing any technology you felt was needed, over the next few years. You and the CEO met upon your arrival and established the following schedule for your first important deliverable to him and the ABC Board of Directors: Week One Get to know ABC, meet the leadership team, read the company's financials, etc. Week Two Watch the provided operations video; research one or two key dealers to understand ABC's distribution channel Week Three Begin preparations for an initial report to the CEO and the Board of Directors Week Six Present initial report The CEO promises to share an outline of the requested report within a few days. You agree to begin your to-do list now (and hints about what to use for some of these items are in parentheses): 1. 2. 3. 4. 5. 6. 7. 8. Read the background information provided by the CEO (this document) Visit the company's website to learn as much as possible about the company Watch the video about the company and its manufacturing process Review the provided company financial information (ABC Financial Statements.pdf) Research the company's distribution model and 1-2 dealers Receive the CEO's report outline (at the end of this document) Conduct any additional research required to prepare the report Prepare the requested report (ABC_Report; ABC_Company_Profile_Template) Company Information from the CEO on The Anderson Bat Company, LLC Our story began when three individuals from very different professional backgrounds were brought together by their shared passion for diamond sports and desire to produce a better bat. This passion goes back many years, but it was in 1996 that we manufactured our first model in a private labeling venture for another bat company. In 1999, we designed and produced our first multi-wall bat featuring our patented Power-Arch Technology. After development was completed, the company it was designed for underwent a major upheaval and delayed the bat's release. Rather than allowing this groundbreaking performance technology to sit on the back burner, we took the bats to a local tournament and shared our design with members of our extended diamond sports family. The response was overwhelming, and we were instantly bombarded with inquiries on "How do I get my hands on one of those Anderson bats?" Thus, Anderson Bat Company was born... The Anderson Bat Company vision is Game Improvement by Design. It is our desire to be interwoven into the fabric of our national pastime and to have Anderson Bat Company become synonymous with better baseball and better softball. Our commitment to this vision involves every facet of the game that we can reach, and it is an uninterrupted cycle of renewal. Improved products improve the players, improved players improve the game, and the improved game is the inspiration to improve the product . . . and the cycle renews itself. Our dedication to the cycle includes a constant, careful assessment of how today's game is played and a vigilant examination of the player that plays it. This investigative progression toward perfection provides the inspiration for a focused approach to developing the highest performing bats on the field. Every Anderson bat is proudly made in the U.S.A. for players, by players. We set the standard, and we will continue to push the envelope Over the last decade, our labor of love has evolved from a private labeling operation into the industry's leading manufacturer of aluminum baseball and softball equipment, and the best is yet to come! Source: www.andersonbat.com Video About the Company and Its Manufacturing Process URL https://ksutube.kent.edu/playback.php?playthis=5rggdvd64 Company Information Shown on Manta.com: http://www.manta.com/c/mmytlz9/anderson-bat-company-llc Interesting information about an ABC Competitor: http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=7867098 Outline of CRO's Report to the Board of Directors/CEO I. Company Profile II. Inventory of Risk Exposures III. Risk Management Recommendations IV. Next Steps V. Conclusion ABC Financial Statements Consolidated Balance Sheets (USD $) ASSETS Cash and cash equivalents Accounts receivable, (less allowance for doubtful accounts of $70,000 and $59,000 respectively) Inventories, net Net deferred income tax asset Prepaid expenses Other current assets Total current assets Property, plant and equipment: Machinery and equipment Building Office furniture and equipment Intellectual property Land Leasehold improvements Fixtures and equipment at customer locations Projects under construction Property Plant Equipment and Intellectual Property Gross Less : accumulated depreciation and amortization Total property, plant and equipment, net Other assets: Deferred financing costs, net Goodwill Net deferred income tax asset Other assets Total other assets TOTAL ASSETS LIABILITIES AND EQUITY Checks written in excess of bank balance Trade payables (VIE $0 and $58,000, respectively) Line of credit (VIE $0 and $700,000, respectively) Notes payable - current portion Notes payable - officers, current portion Capital lease - current portion Notes Payable Affiliates - current portion Accrued liabilities Total current liabilities Long-term liabilities: Notes Payable - Affiliates Notes payable, net of current portion Capital Lease Notes payable - officers, subordinated Total long-term liabilities Equity: Preferred Stock -- no par value 2,000,000 shares authorized 0 shares issued and outstanding Common stock - no par value, 5,000,000 shares authorized, 3,276,633 and 3,209,475 shares issued and 3,137,348 and 2,808,720 outstanding, respectively Paid-in-capital Accumulated deficit Accumulated other comprehensive loss Less: Treasury stock, 72,127 shares Total ABC Industries Corporation stockholders' equity Noncontrolling interest Total Equity TOTAL LIABILITIES AND EQUITY Dec. 31, 2011 Dec. 31, 2010 $338,523 $761,874 7,091,194 13,338,317 760,241 1,345,223 427,471 23,300,969 8,533,626 10,368,037 750,485 582,025 430,042 21,426,089 24,333,989 3,329,174 3,022,719 432,070 250,000 415,663 2,629,902 502,021 34,915,538 -26,071,629 8,843,909 22,900,460 3,260,201 2,718,425 345,092 250,000 443,630 2,629,902 1,601,682 34,149,392 -24,489,624 9,659,768 42,986 1,033,077 197,243 197,338 1,470,644 33,615,522 63,634 1,033,077 360,830 317,990 1,775,531 32,861,388 154,501 6,359,757 7,298,363 362,927 1,424,923 2,559 6,718 2,079,246 17,688,994 692,141 4,307,358 8,225,900 276,667 1,410,807 5,117 6,754 3,027,298 17,952,042 134,919 3,932,032 426 103,656 4,171,033 155,648 2,611,127 2,559 360,351 3,129,685 0 0 13,704,890 950,968 -368,122 -2,285,679 -141,289 11,860,768 -105,273 11,755,495 $33,615,522 13,394,940 817,138 -693,651 -1,592,798 -141,289 11,784,340 -4,679 11,779,661 $32,861,388 All data is imaginary and in no way represents true financial information for the Anderson Bat Company 1 of 6 ABC Financial Statements Consolidated Statements of Operations (USD $) Net Sales Cost of Sales Gross profit Operating expenses: General and administrative Selling Advertising and marketing Total operating expenses Income from operations Other (expense) income: Interest expense Interest income Foreign currency gain (loss) Total other expense, net Income before taxes Income tax expense Net Income Other Comprehensive Income Basic income per common share (in dollars per share) Diluted income per common share (in dollars per share) Weighted average number of shares and equivalent shares of common stock outstanding: Basic (in shares) Diluted (in shares) 12 Months Ended Dec. 31, 2011 Dec. 31, 2010 $47,171,498 $47,747,611 37,965,245 37,145,439 $9,206,253 $10,602,172 5,278,507 910,882 1,579,162 7,768,551 1,437,702 4,921,457 914,698 1,719,509 7,555,664 3,046,508 -794,152 21,041 38,169 -734,942 702,760 319,444 383,316 -936,769 17,599 -31,382 -950,552 2,095,956 342,688 1,753,268 $0.12 $0.12 $0.59 $0.58 3,138,958 3,181,102 2,981,188 3,039,442 All data is imaginary and in no way represents true financial information for the Anderson Bat Company 2 of 6 ABC Financial Statements Consolidated Statements of Cash Flows (USD $) Cash flows from operating activities: Net income Adjustment to reconcile net income to cash provided by operating activities: Depreciation and amortization Amortization of debt discount Change in value of swap agreement Stock based compensation Provision for losses on accounts receivable Provision for losses on inventories Deferred income taxes Change in assets and liabilities: Accounts receivable Inventories Prepaid expenses and other assets Trade payables Accrued liabilities Net cash provided by operating activities Cash flows from investing activities - purchases of property, plant and equipment Cash received from investment in subsidiary Net cash used in investing activities Cash flows from financing activities: Change in checks written in excess of bank balance Net change in revolving line of credit Repayment of long-term debt Proceeds from issuance of debt Proceeds from exercise of stock options and warrants Proceeds from issuance of stock, net Dividends paid Cash paid for deferred financing fees Net cash used in financing activities Effect of exchange rate changes on cash Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flow information: Cash payments for interest Cash payments for taxes Supplemental Disclosure of non-cash investing and financing activity Exercise of Warrants and payment of Subordinated Debt Exercise of Options and Warrants by Surrender of Shares Property, Plant & Equipment acquisitions funded by liabilities Inventory used as investment in subsidiary Reclassification of Line of Credit to Long-Term Debt 12 Months Ended Dec. 31, 2011 Dec. 31, 2010 $383,316 $1,753,268 1,804,049 5,042 158,090 133,830 20,714 8,032 153,830 1,909,497 90,994 0 131,010 8,219 41,742 -43,104 1,144,953 -3,308,400 -753,267 2,218,733 -1,150,949 817,973 -1,092,959 -626,056 -336,137 1,099,336 279,854 3,215,664 -1,106,907 0 -1,106,907 -2,007,286 42,299 -1,964,987 -535,524 -208,251 -506,272 970,523 9,950 300,000 -158,381 -7,510 -135,465 1,048 -423,351 761,874 338,523 -44,012 -72,771 -1,721,084 726,965 139,947 0 -314,441 -90,066 -1,375,462 16,213 -108,572 870,446 761,874 767,965 42,250 855,738 116,054 0 0 49,248 0 $700,000 1,027,000 240,579 35,020 101,400 $0 All data is imaginary and in no way represents true financial information for the Anderson Bat Company 3 of 6 ABC Financial Statements Inventories 12 Months Ended Dec. 31, 2011 7. Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard costs which approximate costing determined on a first-in, first out basis. Standard costs are reviewed and adjusted periodically and at year end based on actual direct and indirect production costs. On a periodic basis, the Company reviews its inventory for estimated obsolescence or unmarketable items, primarily by reviewing future demand requirements and shelf life of the product. Inventories are comprised of the following: 31-Dec-11 31-Dec-10 Raw materials Work in Process Finished Goods Allowance for excess quantities $ 3,027,000 1,503,000 9,193,000 -384,000 $ Total inventories $ 13,339,000 $ All data is imaginary and in no way represents true financial information for the Anderson Bat Company 2,588,000 685,000 7,471,000 -376,000 10,368,000 4 of 6 ABC Financial Statements Notes Payable and Capital Leases 12 Months Ended Dec. 31, 2011 8 Notes Payable and Capital Leases Long term debt consists of: Dec. 31, 2011 Term Loan with Barrington Bank, payable in monthly installments of $11,000 amortized over 7 years, interest at 6.25%, balance due May 2016, which uses balloon production and related equipment as collateral. Term Loan with Harris, payable in monthly installments of $58,333 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.50% (3.75%) at December 31, 2010 (amortized over 10 months), balance due January 31, 2011. Mortgage Loan with Harris, payable in monthly installments of $7,778 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.75% (4.00%) and 0.50% (3.75%) at December 31, 2011 and 2010, respectively (amortized over 25 years), balance due April 30, 2013. Equipment Loan with Harris, payable in monthly installments of $22,323 beginning May 2012 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.75% (4.00%) at December 31, 2011, (amortized over 60 months), balance due April 30, 2013. (2010) Equipment Loan with Harris, payable in monthly installments of $8,333 beginning May 2011 plus interest at prime (3.25%) plus a premium rate (based on loan covenants) of 0.50% (3.75%) at December 31, 2010, (amortized over 60 months), balance due April 30, 2013. Capital Lease with Yale Financial Services, payable in monthly installments of $574 (amortized over 5 years). Subordinated Notes (Officers) due on demand, interest at 9% (see Notes 10, 14). Subordinated Notes (Officers) due on demand, interest at 8% (see Notes 10, 14). Subordinated Notes (Officers) due on demand, interest at prime (3.25%) plus 2% (5.25%) at December 31, 2011 and 2010, net of debt discount of $0 and $5,000 at December 31, 2011 and 2010, respectively (See Note 10). Subordinated Notes (Officers) due 2013, interest at 8.5% (see Note 10). Notes Payable (Affiliates) due 2015, interest at prime (3.25%) plus 0.25% (3.50%) at December 31, 2011 and 2010. Notes Payable (Affiliates) due 2021, interest at 11.75%. Total long-term debt Less current portion Total Long-term debt, net of current portion $ 779,000 - Dec. 31, 2010 $ - 117,000 2,178,000 2,271,000 1,339,000 500,000 3,000 8,000 33,000 33,000 795,000 795,000 597,000 592,000 104,000 351,000 28,000 28,000 112,000 134,000 5,968,000 (1,797,000) $ 4,171,000 4,829,000 -1,692,000 $ 3,137,000 On April 29, 2010, the Company entered into a Credit Agreement and associated documents with Harris N.A. (\"Harris\") under which Harris agreed to extend to the Company a credit facility in the aggregate amount of $14,417,000. The facility includes (i) a Revolving Credit providing for maximum advances to the Company, and letters of credit, based upon the level of availability measured by levels of eligible receivables and inventory of the Company of $9,000,000, (ii) an Equipment Loan of up to $2,500,000 providing for loans for the purchase of equipment, (iii) a Mortgage Loan of $2,333,350, and (iv) a Term Loan in the amount of $583,333. The amount we can borrow on the Revolving Credit includes 85% of eligible accounts and 60% of eligible inventory (up to a maximum of $9,000,000). The Mortgage Loan is amortized over a term of 25 years. The maturity date of the facility is April 30, 2013. As of December 31, 2011 the balance outstanding on the Revolving Line of credit with Harris was $7,144,000, which bears interest of 4%, leaving an available balance of $2,106,000. On April 30, 2010, the loan transaction was closed and loan advances were made by Harris in the aggregate amount of $11,964,739 to pay off all loan balances and lease obligations of the Company with RBS Citizens, N.A. and RBS Asset Finance, Inc. The advances included $8,548,000 under the Revolving Credit and $500,000 under the Equipment Loan. All data is imaginary and in no way represents true financial information for the Anderson Bat Company 5 of 6 ABC Financial Statements Certain terms of the loan agreement, as amended, include: o o o o o o o o Restrictive Covenants : The Loan Agreement includes several restrictive covenants under which we are prohibited from, or restricted in our ability to: Borrow money; Pay dividends and make distributions; Make certain investments; Use assets as security in other transactions; Create liens; Enter into affiliate transactions; Merge or consolidate; or Transfer and sell assets. Financial Covenants : The Loan Agreement includes a series of financial covenants we are required to meet including: o We are required to maintain a tangible net worth (plus Subordinated Debt) in excess of $7,100,000 plus 50% of cumulative net income of the Company after January 1, 2010; o We are required to maintain specified ratios of senior debt to EBITDA on an annual basis and determined quarterly; and, o We are required to maintain a level of adjusted EBITDA to fixed charges on an annual basis determined quarterly of not less than 1.1 to 1. Adjusted EBITDA is EBITDA minus (i) taxes paid, (ii) dividends paid, (iii) payments for the purchase or redemption of stock, and (iv) unfunded capital expenditures. As of December 31, 2011, the Company was in compliance with these covenants. Two principal shareholders of the Company have each personally guaranteed the obligations of the Company to Harris up to $1,750,000. In the agreement, the amount of the maximum liability to each decreases to $1,500,000 if the senior leverage ratio requirement is met. At December 31, 2011 and 2010, the Company had met this requirement (see Note 14). Future minimum principal payments for amounts outstanding under these long-term debt agreements for each of the years ended December 31 are: 2012 2013 2014 2015 2016 Thereafter Total $ $ All data is imaginary and in no way represents true financial information for the Anderson Bat Company 1,797,000 3,356,000 118,000 158,000 396,000 143,000 5,968,000 6 of 6 Outline of CRO's Report to the Board of Directors/CEO I. Company Profile A. Provide a profile of ABC using the provided \"Company Profile Template\" II. Inventory of Risk Exposures A. Provide a listing of all identified risk exposures utilizing the following categories. 1. 2. Financial Risks a) Commodity Price Risk (e.g., fuel for delivery fleet) b) Interest Rate Risk (e.g., investment returns) c) Currency Exchange Rate Risk (e.g., international operations) Enterprise Risks a) Pure risks (e.g., property, liability exposures, worker injuries) b) Speculative Risks (e.g., investment portfolio) c) Strategic Risks (e.g., SWOT, goals, growth plans) d) Operational Risks (e.g., manufacturing) B. For each risk that applies, provide a brief description and justification for it being a risk ABC leadership should address. If a listed risk does not apply, briefly explain why. III. Risk Management Recommendations A. For each identified applicable risk, indicate the risk management approach you recommend using the categories above to organize your recommendations. 1. Content of Each Recommendation a) Choice to: Avoid, Control, Retain or Transfer b) Brief (1-2 sentences or bullets) description of your reasoning and how you foresee the risk being avoided, controlled, retained or transferred. (e.g., Control fire risk to all building by installing automatic sprinkler systems. Conduct NPV analysis to ensure cost of systems is an appropriate investment) c) For those risks considered transferrable, briefly indicate what type of insurance you recommend and why. (e.g., products liability insurance for protection should an individual be injured by a manufacturing default in a bat) d) Our previous risk management consultant told us last quarter that it was a \"hard insurance market\" right now. The consultant referred to the underwriting cycle and insurance industry capacity in his memo regarding the hard insurance market. Please provide a 2-3 paragraph explanation of what all this means. IV. Next Steps A. For each recommendation, indicate the immediate next steps you envision, again utilizing the categories indicated in section II above. 1. Example: utilize INSERT NAME analysis to confirm decision to make investments in INSERT RECOMMENDED ACTION/PURCHASE. B. Provide an initial listing of any technology tools you recommend the Board consider to assist your risk management efforts. (We fully expect 2-3 items to be included as well as a 3-4 sentence description of each.) V. Conclusion A. Submit final report, in format of your choosing, by indicated date. Company Profile of The Anderson Bat Company, LLC INSERT LOGO Business Address Tel: Email: Website: Submitted by: insert your name INS39000 Module 1 Case Study 1|Page Background 1. Company History: Insert a short, concise history of the business in two paragraphs or less 2. What the Company Does: Insert a short paragraph about what the company does and the markets it serves. Strategy & Vision 3. Vision Statement: Insert the company's vision statement if located 4. Mission Statement: Insert the company's mission statement if located; if not, write a short paragraph that represents what you believe its mission to be. 5. Values: Insert the company's values if located. 6. Business goals and objectives: Insert the company's goals and objectives if located; if not list 3-5 goals/objectives represents what you believe them to be. 7. Growth strategy: Insert the company's growth strategy if located; if not, write a short paragraph that represents what you believe its growth strategy to be, e.g., diversification, organic growth, growth by acquisition, etc. Products and Services 8. Products: Describe products made/sold 9. Business competitiveness: Write a short paragraph describing what makes this company competitive with other businesses in its sector. 10. Quality Policies: Write a short paragraph describing the company's quality approach/policies. Management & Ownership 11. Corporate Structure: Publicly traded? Inc.? LLC? 12. Company personnel: Indicate number and, where possible, type of staf Distribution 13. Key distributors: Insert names and company descriptions for key distributors/dealers.. INS39000 Module 1 Case Study 2|Page 1 2 3 4 5 In this case study, you find yourself playing the role of a risk manager to mimic application of this module's content in a real-life scenario. The case study document contains the scenario and general instructions to prepare for the assignment (1_CaseStudy_Anderson_Bat_Company) The financial statements document contains information you are directed to review (2_ABC Financial Statements) The report document provides more specific instructions for completion of the assignment; it is an editable MSWord document in case you would like to use it as you work (3_ABC_Report) The company profile template is something the report instructions direct you to complete as part of the assignment; it is an editable MSWord document (4_ABC_Company_Profile_Template) Here is a video about the company and its manufacturing process: Anderson Bat Company Modern Marvels You will use what you have learned in this module to demonstrate that you can associate insurance with its role in enterprise risk management. You must submit both your completed Report Document and Company Profile Document for grading in Section 2. below by the assignment due date indicated