re City Inc.

Mr. Abdullah the CFO of the Tire City Inc (TCI) is preparing for a meeting with their bank later in the week. At the meeting he needs to present a request to the bank for funding requirement(s) for a long-term loan facility to finance the expected growth in the company and expansion of its warehouse facilities.

The historical financial statements of the company collected by Mr. Abdullah are attached here with;

Company Background

Tire City is a rapidly growing retailer of automobile tires in Saudi Arabia. TCI sells tires through 15 locations throughout Saudi Arabia. All these stores keep sufficient inventory on hand to service immediate customer requirements but the bulk of TCIs inventories is kept at a central warehouse in Kharj just outside Riyadh. Each store can be serviced by this warehouse which could fill their extra orders within 24 hours

Sales were growing for the last three years at a compound annual rate of 20% due to the excellent service level and customer satisfaction but after work on expansion of the warehouse was initiated the estimates were revised due to the changing economic condition in the country and now sales are expected to be +10% p.a. each year from the previous years levels both in 1996 and 1997. But Mr. Abdullah is confident that this is a short-term phenomenon and sales will jump back to previous levels and TCI is pushing forward with the warehouse expansion

Past Relationship with AlAmana Bank

In 1991 TCI borrowed funds from AlAmana Bank to build the Kharj warehouse. This loan was being repaid in equal annual installments of SAR125,000. At the end of 1995 the balance outstanding was SAR750,000. Another line of credit for working capital requirements of TCI was also established in 1991 but it had not been utilized to date

Current Financing Requirement

TCI has now decided to expand the warehouse in Kharaj to accommodate future growth of the company. For this TCI has planned to expand the warehouse at a cost of SAR2,400,000 of which SAR1,200,000 will be spent in 1996 and the remaining in 1997 (TCI has no other capital expenditure plans for these two years). It is projected that this expansion will fulfill the companys requirements for many years to come, they expect the useful life of the warehouse to be 25 years and the warehouse building will be depreciated using the straight-line method during this time. The construction of the warehouse is projected to be completed in early 1997. TCI would not charge any depreciation on the warehouse during the construction phase in 1996. (You can assume that the SAR value of depreciation of other assets will continue to be the same as 1995 in 1996 and 1997)

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Kingdom of Saudi Arabia Ministry of Higher Education Dar Al-Uloom University

Requirement

The warehouse expansion has been carefully planned so that it will have very little disruptive effect on current operations of the company. However due to the ongoing construction work inventories would have to be reduced to SAR1,625,000 by the end of 1996 to make room for construction equipment and materials which will be stored on the same site. The level of inventories as a % of sales would revert to 1995 level as soon as the warehouse construction is completed in early 1997.

TCIs operations would not be affected in any other way due to the ongoing expansion except for the drop in inventories level for the reason mentioned above.

Operating Profit Margin will remain in line with the historical trend. Current Accounts (except for inventories) will maintain the same steady relationship with sales.

Cash Balances / Overdraft or Short Term Loan required from Bank is one item that Mr.Abdullah is worried about and has asked his staff to determine what will be the ending level in 1996 and 1997

Although TCIs corporate tax rate is 35% but after adding miscellaneous local taxes the effective average tax rate for TCI had been historically higher and the same trend was expected to continue.

TCI is expected to continue with the past dividend payout policy to make sure that the stock price of the company was unaffected during the construction phase.

TCI had some preliminary discussion with AlAmana Bank about the modus operandi of how they can borrow money to finance the expansion project and the bank agreed that TCI can borrow money for the expansion project in two separate installments on an as- needed basis, one in 1996 and the other in 1997.

The loan would be repayable in 6 equal annual installments. The first installment would become payable after the completion of the warehouse (i.e., starting in 1998). The interest rate offered is 9.5% per annum

To prepare Mr. Abdullah for the final meeting with the bank you need to complete; 1. Pro Forma Income Statement for TCI for 1996 & 1997 10 Marks

Tire City Inc.
INCOME STATEMENT	1993 (A)	1994 (A)	1995 (A)	???	???
Net Sales	8,115	10,178	11,753
Cost of Sales	4,463	5,699	6,699
Gross Profit	3,652	4,478	5,054
Selling G & O Expenses	2,598	3,176	3,736
Depreciation	80	90	107
Net Interest Expense	60	53	38
Pre-tax Income	915	1,159	1,174
Income Taxes	366	464	470
Net Income	549	695	704
Dividends	137	174	176
	25%	25%
BALANCE SHEET	1993 (A)	1994 (A)	1995 (A)
AEESTS
Cash	801	631	485
Accounts Receivable	1,273	1,548	1,826
Inventories	815	919	1,095
Total Current Assets	2,889	3,098	3,406
Gross Plant & Equipment	3,232	3,795	4,163
Accumulated Depreciation	1,335	1,425	1,532
Net Plant & Equipment	1,897	2,370	2,632
Total Assets	4,786	5,468	6,038
LIABILITIES
Current Maturities of Long Term Debt	125	125	125
Accounts Payable	521	663	720
Accrued Expenses	573	716	827
Total Current Liabilities	1,219	1,504	1,672
Long-term Debt	1,000	875	750
Common Stock	1,500	1,500	1,500
Retained Earnings	1,067	1,588	2,116
Total Shareholders Equity	2,567	3,088	3,616
Total Liabilities	4,786	5,468	6,038

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