my prof, wants me to analyse the finacial statement and deternine if i should give out a the loan or not.

he wants me to predict the following 2 years based on the past 3 years data.

5%2FB17045%2Fitems%2F906N21-PDF-ENG%2Fcontent&metadatase 30%3D 1/7 100% BODIE INDUSTRIAL SUPPLY INC. Jule Harvey revised this case (originally prepared by Richardson, D. G Burgome and I. A Hampire under the supervision of Elizabeth MA Grasby solely to provide material for class discussion The authors do not intend to Bustrate the effective or Ineffective handling of a managerial situation. The authors may have disgused can names and other identitying Information to protect confidentally Ivey Management Services prohibits any form of reproduction storage transmit without is written permission Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies of request permission to reproduce materials contact Ivey Pilishing, Ivey Management Services, Richard Ivey School of Business. The University of Western Ontario, London, Ontario, Canada, NGA 3K7: phone (519) 661-3208: fax (519) 661-3882 e-mal cases@vey.wo.ca Coht 2008. My Management Service VersiA2109.09.22 It was late October 2006 when Brad MacDougall, account manager at the Canadian Commercial Bank (CCB) in Barron, Ontario, reviewed a loan request for $200,000 from Liz Bodie. As owner of Bodie Industrial Supply Inc. (BIS), a distributor of commercial-grade tools, parts and equipment, Bodie requested the long-term loan to cover construction costs associated with a major expansion to BIS's warehouse. BIS was currently operating without a line of credit, and MacDougall wondered whether the business could generate enough cash to cover its expenses, including the new loan payments. MacDougall had to be thorough in his analysis because he knew Bodie was relying on financing from the bank for the expansion COMPANY BACKGROUND In 2003, Liz Bodie purchased the business from its previous owner and changed the company's name to reflect its new ownership. Prior to acquiring the business, Bodic had worked for a variety of different companies, including one of BIS's current metropolitan-based competitors. During those years, it was Bodie's long-term ambition to operate her own business. Her first entrepreneurial venture was a franchised retail hardware store that she operated for several years before selling it to acquire BIS Drawing on her work experience, Bodie expanded BIS into a full-service distributor of top-line, brand name, new and used certified machine tools, maintenance parts and related equipment for the construction, utility and farming markets. The company strove to uphold its reputation as the single source for all industrial equipment needs. Although BIS conducted business country wido, BIS'S hometown of Barron, approximately 100 kilometres northeast of a large metropolitan city, was currently the largest and fastest growing industrial centre in its region with a population of 135.000 BIS'S customers were primarily the industrial maintenance departments of medium to large-sized corporations in the manufacturing, commercial construction and engineering industries. Bis also attracted some high- margin retail business from farming communities and summer cottage trade in the surrounding area. Bodie was pleased with BIS's progress since she had purchased it and had experienced considerable success in growing sales. The business's success was such that in August 2005, BIS purchased its rented MacBook Pro G Search or type URL 2 / 7 100% + 9 Page 2 9B06N021 facilities when the landlord offered the property at what Bodie regarded as "a very attractive price." MacDougall had arranged the loan for the land and building purchase. The loan was currently in good standing with all payments up to date.' BIS's success continued, and by June 2006, monthly sales volumes averaged more than $200,000. (See Exhibits 1 to 5 for historical financial data, cash flow statements, and selected company and industry financial ratios.) Bodie was also proud of the company's reputation for dependability and integrity. She believed her success was due largely to the personalized service and engineering advice she offered BIS's customers. Bodie also noted that an important factor in attracting new customers and building lasting relationships was BIS's success in obtaining exclusive rights to offer the products of some top-line brand-name manufacturers. She also believed that maintaining good supplier relations with those manufacturers who granted BIS exclusivity was a key element to future success. THE COMPETITION Until late 2005, BIS had been the only distributor of machine tools, parts and equipment in Barron. Minimal competition had come from salespeople operating from out-of-town warehouses, but in the fall of 2005, a new distributor opened in downtown Barron. Bodie believed that the new competitor would compete directly with only a small portion of her business because of BIS's exclusive brand distribution rights and complete line of specialized produs. Additionally, this new distributor had not yet earned a reputation comparable to that of BIS for dependable service. Although not necessarily considered a direct threat, the entrance of big-box retailers did increase competition among Canadian wholesalers and retailers alike. Big-box retailers competing within the home improvement, construction and building maintenance industries, such as Home Depot, RONA and Lowes, opened stores from 3,500 square metres to 15,000 square metres in size. Not only did these retailers offer lower prices, but they also provided a wide variety of products for retail and commercial consumers. At present, there were three major retailers in Barron with a fourth scheduled to open in the coming months. Although these retailers did not carry specialized, large and commercial-grade industrial equipment, they did offer a wide selection of construction supplies typically used by many of BIS's smaller, higher margin accounts, Bodic was still uncertain how and to what extent mass retailers and wholesalers could influence the business Bodie believed a more eminent threat was the rapid growth of Internet-based selling. Many of BIS's competitors now had websites with online ordering and e-commerce capabilities that provided added convenience and quicker service to customers looking to order general use supplies. Online selling also reduced the need for customers to do business with a local supplier, potentially vastly increasing BIS'S pool of competition. Although BIS did currently have a company website, it was purely informational MacBook Pro THE COMPETITION Until late 2005, BIS had been the only distributor of machine tools, parts and equipment in Barro linimal competition had come from salespeople operating from out-of-town warehouses, but in the fall 2005, a new distributor opened in downtown Barron. Bodie believed that the new competitor would Compete directly with only a small portion of her business because of BIS's exclusive brand distribution rights and complete line of specialized products. Additionally, this new distributor had not yet earned reputation comparable to that of BIS for dependable service. Although not necessarily considered a direct threat, the entrance of big-box retailers did increase competition among Canadian wholesalers and retailers alike. Big-box retailers competing within the home improvement, construction and building maintenance industries, such as Home Depot, RONA and Lowes, opened stores from 3,500 square metres to 15,000 square metres in size. Not only did these retailers offer lower prices, but they also provided a wide variety of products for retail and commercial consumers. At present, there were three major retailers in Barron with a fourth scheduled to open in the coming months. Although these retailers did not carry specialized, large and commercial-grade industrial equipment, they did offer a wide selection of construction supplies typically used by many of BIS'S smaller, higher margin accounts. Bodie was still uncertain how and to what extent mass retailers and wholesalers could influence the business. Bodie believed a more eminent threat was the rapid growth of Internet-based selling. Many of BIS's competitors now had websites with online ordering and e-commerce capabilities that provided added convenience and quicker service to customers looking to order general use supplies. Online selling also reduced the need for customers to do business with a local supplier, potentially vastly increasing BIS's pool of competition. Although BIS did currently have a company website, it was purely informational. FINANCIAL PROJECTIONS FOR EXPANSION Although market information was limited, Bodie thought that BIS had about 35 per cent of the machine and equipment market in Barron and the surrounding region. Given the existing market potential, she believed sales could not increase beyond S4 million without expanding BIS's geographical market. For the next two years, she projected sales at $2.8 million for the year ending January 31, 2007, and $3.2 million for the year ending January 31, 2008, Appears as CCB mortgage payable on the balance sheet: secured by land and building MacBook Pro G Search or type URL 3 / 7 |- 100% + Page 3 9B06N021 Bodie's major concern was the cramped space in BIS's warehouse. She believed the business could not handle any significant increases in inventory, given its present facilities. In order to maintain BIS's standard of service and delivery, Bodie wanted to add a warehouse extension, estimated at a cost of $200,000, by the beginning of November If the loan was approved, principal payments would be $40,000 each year, beginning February 1, 2007, and annual interest payments would be approximately $13,000 for the first two years. In addition to these new loan payments, the combined principal payment on the total amount of all existing long-term debt for fiscal 2007 and 2008 would be $36,528 and $71.924 respectively. The associated annual interest payments on these outstanding liabilities would be $20,914 for 2007 and $35,528 for 2008. Other iterns on the statement of earnings would remain roughly the same percentage of sales as was experienced in 2006. Bodie believed the days of inventory would not change after the warehouse expansion, even though sales were expected to increase. She did consider, however, that increasing inventory levels could present a risk to cashflows if sales did not increase proportionately. One of Bodie's top priorities was to reduce the age of BIS's accounts payables to 60 days before the end of the next fiscal year. If this was not accomplished, some of BIS's exclusive distribution agreements could be jeopardized. Although Bodie thought BIS could reduce its days of accounts payables as sales and profits grew, she wondered whether this objective was attainable within the next year. For this reason, Bodie anticipated that BIS could be in need of a line of credit to support the increased working capital requirements in addition to the requested new long-term loan THE DECISION BIS had shown strong growth results within the past three years, but MacDougall was concemed about providing more financing in addition to the loan the Canadian Commercial Bank had already extended in August 2005. Furthermore, he was aware of the pressure BIS's preferred suppliers were putting on Bodie to reduce days of accounts payables. Could BIS support such an aggressive reduction at this time? Without a short-term source of financing, MacDougall wondered whether BIS would even be able to yenerate the cash required to cover its debt payments over the next few years MacBook Pro G Search or type URL Exhibit 1 STATEMENT OF EARNINGS (for years ending January 31) 2006 2005 2004 Net sales Cost of goods sold Gross profit $2,066,820 1.476,840 $589,980 $1,599,920 1.171,760 $428,160 $930,110 644.190 $285,920 S306,170 11.100 $253,910 22,200 Operating expenses Wages and commissions Rent Provision for doubtful accounts General selling expenses General administrative expenses Amortization Total operating expenses $183,620 19,430 6,710 29,100 76,430 23,860 132,850 24,360 498,340 27,560 104,720 10,300 418,690 315,290 Interest expense 33.750 29 220 27.230 Net income before tax Income tax $57.890 $(19,750) S(56,600) Net income (loss) $57.890 $(19.750) S(56,600) Exhibit 2 STATEMENTS OF RETAINED EARNINGS (for years onding January 31) 2006 2005 2004 MacBook Pro G Search or type URL + & S - . 6 7 8 9 ) 0 Y 0 Amortization Total operating expenses 24,360 498,340 10,300 418,690 315,290 Interest expense 33,750 29.220 27,230 Net income before tax Income tax $57,890 $(19,750) $(56,600) Net income (lossy $57.890 $(19.750 S(56,600) Exhibit 2 STATEMENTS OF RETAINED EARNINGS (for years ending January 31) 2006 2005 2004 Beginning retained earnings Add: net income Less: dividends $(76,350) 57.890 $ S(56,600) (19,750) (56,600) Ending retained earnings S(18.460) $(76350) $(56,600) with the purchase of the land and building in August 2005,ront expense had been eliminated Previous losses were carried forward, offsettings owing for 2006 BIS ostmated taxas 23 percent MacBook Pro G Search or type URL . & * ) + 6 7 8 9 0 T Y U | O { [ K L $ 201,000 $ 24,050 $ 34,350 Net fixed assets Other assets: Goodwill Deferred charges 30,000 2.750 30,000 3.850 30,000 6.570 TOTAL ASSETS S 1.050,230 $622,180 $597.480 $ 502,500 $5.850 $ 538,350 $290,740 11.850 $302,590 $184,640 15.790 $200,430 LIABILITIES Current liabilities: Accounts payable Other current liabilities Total current liabilities Long-term liabilities: Bank loan Transport loan Mortgage payable CCB mortgage payable Total long-term liabilities Equity: Common stock Retained camings S 76,500 5,210 176,510 172,120 $430,340 S101,700 17.730 176,510 $126,900 30,240 196,510 $295,940 $353,650 Total equity $ 100,000 (18,460) $ 81,540 $100,000 (76,350) $ 23,650 $100,000 (56.600) $ 43,400 TOTAL LIABILITIES & EQUITY S1.050,230 $622,180 $597.480 Unsecured on wed to the Provincial Bank of Commerce Balance Owing on a truck purchased in 2001. Loans pad in April 2006 Loan from previous owner, secured by for incurred in February 2009 as part of the purchase agreement MacBook Pro 0 G Search or type URL % A 5 6 & 7 - 00 9 ) 0 11 T Y I O G H L Exhibit 4 FINANCIAL RATIOS 2006 Selected Industry Ratios Whare available) 2006 2005 2004 100% 71.5% 28.5% 100% 73.2% 26.8% 100% 69,3% 30.7% 100% 67.9% 32.1% PROFITABILITY Net sales Cost of goods sold Gross profit Operating expenses Wages and commissions Rent Provision, doubtful accounts General selling expenses General & admin expenses Amortization Total operating expenses 14.8% 0.5% 15.9% 1.4% 19.7% 2.1% 0.7% 3.1% 8.2% 1.2% 6,4% 1.2% 1.7% 6.5% 0.6% 26.2% 24.1% 33.9% Interest expense 1.6% 1.8% 2.9% Net income (loss) 2.8% ma n/a 2.8% Return on average equity 110.1% n/a n/a 12.3% LIQUIDITY Current ratio Acid test Working capital 1.52:1 0.631 $278,130 1.86:1 0.72:1 $261,690 2.63:1 1.07:1 S326,130 1.8: 1 0.6:1 EFFICIENCY Age of receivables Age of inventory Age of payables 60 days 117 days 114 days 46 days 107 days days 52.4 days 50 days 175 days 93 days STABILITY MacBook Pro o G Search or type URL # 5 6 & 7 8 9 ) 0 N + -7 Y U 0 P { G H J L Interest expense 1.6% 1.8% 2.9% 2.8% n/a n/a 2.8% Net income (loss) Return on average cquity 110.1% n/a n/a 12.3% LIQUIDITY Current ratio Acid test Working capital 1.52:1 0.631 S278,130 1.86:1 0.72:1 $261,690 2.63 : 1 1.07:1 $326,130 1.8:1 0.6:1 EFFICIENCY Age of receivables Age of inventory Age of payables 60 days 117 days 114 days 52.4 days 46 days 107 days 88 days 50 days 175 days 93 days STABILITY Net worth to total assets Interest coverage 7.8% 2.7 X 3.8% 0.3 X 7.3% n/a 48.07% 3.6 X GROWTH Sales Net income Total acts Equity 2005-06 29% n/a 6996 245% 2004-05 72% n/a 4% (46%) MacBook Pro D G Search or type URL . % 5 & 7 ) 6 1 * 0 C 9 o - 1 + T Y 0 G H J L B N