RICHARDSON REPAIR SERVICES INC. Client Brief Background Richardson Repair Services Inc. (RRS) provides maintenance and repair services for commercial and industrial clients. 75% of their revenues are under contract, with their customers typically agreeing to terms of 3-5 years. The company was founded by owner and CEO Ahmed Richardson 15 years ago. While they are in a larger and more updated facility, RRS operates just around the corner from its original single bay light industrial unit in Anytown, USA. Ahmed is active in the business, but mostly in a relationship management role ensuring that top enterprise customers are satisfied with the level of service provided; he has no intention to step away from the business within the next decade. Prior to founding this company Ahmed spent 5 years learning the heavy machinery maintenance business from a close family friend. While RRS has done extremely well, Ahmed relies heavily on his CFO when it comes to financial matters. RRS has been a client of your financial institution since its inception, and Ahmed is himself a personal client. Ahmeds adjusted net worth is approximately $3,000,000 with about half of it in home equity and the rest in an investment portfolio of Exchange Traded Funds (ETFs) and term deposits. In the last three years his son Bilal joined the family business, although he does not hold an ownership stake. Bilal has an FMVA and a CFA, and has been actively encouraging his father to be paid back some of the promissory note in order to help generate a higher return on his equity. While he has not expressly said so, it seems clear that Bilal would like his father to sell the business and to retire. Concentration is low in the machine and maintenance repair service industry, with lots of small and mid-sized players like RRS achieving success in their local markets by emphasizing customer relationships. The present transaction is an annual review with a requested increase. RRS is looking to overhaul its fleet of vehicles and to add equipment in order to be less reliant on subcontractors. They wish to borrow up to $1,000,000 to do so. Industry The maintenance and repair industry is in the mature stage of its lifecycle, with rising labor costs being the biggest near-term threat to the current margin profile. Revenue volatility is generally medium/high in this industry, while regulation is low and steady. Industry revenues are growing at an annualized rate of 2%, but this is expected to increase to 4.5% over the next 5 years. Technological change is moderate. Some key industry ratios are as follows: Net margin: 4.9% Gross margin: 19.4% Debt service coverage: 1.9x Total liabilities to equity: 1.2x Current ratio: 1.7x Funded debt to EBITDA: 2.1x

(Unaudited - Reviewed) 20X9 20X8 ASSETS Current Assets: Cash $ 564,911 $ 34,251 Trade and Other Receivables 8,158,139 7,990,341 Unbilled Revenue 2,679,949 2,624,827 Total Current Assets 11,402,998 10,649,420 Non-Current Assets: Property Plant and Equipment (Note 3) 541,404 530,268 TOTAL ASSETS $ 11,944,402 $ 11,179,688 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Bank Indebtedness (Note 4) $ - $ - Trade and Other Payables 4,048,068 3,955,219 Government Remittances 270,883 264,670 Total Current Liabilities: 4,318,952 4,219,889 Non-Current Liabilities: Promissory Note (Note 4) 3,500,000 3,500,000 Shareholder's Equity: Common Stock and Additional Paid-In Capital (Note 5) 200 200 Retained Earnings 4,125,250 3,459,599 Total Shareholders' Equity 4,125,450 3,459,799 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,944,402 $ 11,179,688 HAMPTON & HENDERSON LTD. - CERTIFIED GENERAL ACCOUNTANTS RICHARDSON REPAIR SERVICES INC. (Review Engagement Financial Statements) DECEMBER 31, 20X9 STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 20X9 (Unaudited - Reviewed) 20X9 20X8 REVENUES $ 29,777,206 $ 29,164,746 Cost of Sales 24,625,749 24,060,916 GROSS PROFIT 5,151,457 5,103,831 EXPENSES Executive Compensation 446,658 466,636 Rent & Occupancy Costs 599,293 594,923 Depreciation 148,886 174,988 Selling, General, and Administrative 2,977,721 2,945,639 4,172,558 4,182,187 OPERATING PROFIT 978,899 921,644 Interest - - INCOME BEFORE TAXES 978,899 921,644 Taxes 146,835 138,247 NET INCOME (LOSS) $ 832,064 $ 783,397 HAMPTON & HENDERSON LTD. - CERTIFIED GENERAL ACCOUNTANTS RICHARDSON REPAIR SERVICES INC. (Review Engagement Financial Statements) DECEMBER 31, 20X9 STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 20X9 (Unaudited - Reviewed) 20X9 20X8 SHARE CAPITAL (Note 5) $ 200 $ 200 RETAINED EARNINGS - Beginning 3,459,799 2,832,881 NET INCOME AFTER TAXES 832,064 783,397 DIVIDENDS (166,413) (156,679) SHAREHOLDERS EQUITY - Ending $4,125,250 $3,459,599 HAMPTON & HENDERSON LTD. - CERTIFIED GENERAL ACCOUNTANTS RICHARDSON REPAIR SERVICES INC. (Review Engagement Financial Statements) DECEMBER 31, 20X9 STATEMENT OF CASH FLOW FOR THE YEAR ENDED DECEMBER 31, 20X9 (Unaudited - Reviewed) 20X9 20X8 Cash Flows from Operating Activities Net Income $ 832,064 $ 783,397 Depreciation 148,886 174,988 Changes in Operating Assets and Liabilities: Trade and Other Receivables (167,797) (194,886) Unbilled Revenue (55,121) (64,020) Trade and Other Payables 92,849 87,114 Government Remittances 6,213 5,829 Net Cash Provided by Operating Activities 857,094 792,423 Investing Activities Proceeds from Sale of Equipment Acquisitions of Property and Equipment (160,022) (187,922) Cash Flows from Investing Activities (160,022) (187,922) Financing Activities Issuance of Common Stock - - Dividends (current year) (166,413) (156,679) Increase/(Decrease) in Promissory Note - (500,000) Cash Flows from Financing Activities (166,413) (656,679) Increase/(Decrease) in Cash and Equivalents Cash and Equivalents, Beginning of the Year 34,251 86,430 Cash and Equivalents, End of the Year $ 564,911 $ 34,251 HAMPTON & HENDERSON LTD. - CERTIFIED GENERAL ACCOUNTANTS RICHARDSON REPAIR SERVICES INC. (Review Engagement Financial Statements) DECEMBER 31, 20X9 NOTES TO THE FINANCIAL STATEMENTS (Unaudited - Reviewed) 1. DESCRIPTION OF BUSINESS The Company was incorporated in the state of Anystate, USA and is primarily involved in providing repair services for mainly commercial equipment, while also providing its services to a limited number of residential customers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with US Generally Accepted Accounting Principles (US GAAP). a. RevenueRecognition Revenue consists of fees collected through repairing items. Revenue for services is recognized when billed, which occurs after completion of repairs, or on a percentage basis of completion for long term projects. b. Property, Plant and Equipment Property, plant and equipment is recorded at cost less accumulated amortization. Amortization is only recorded when the assets are put in use. The costs of repairs and replacements of a routine nature are charged to expense, while those expenditures which improve or extend the useful lives of the assets are capitalized. Amortization is provided annually at the following rates and methods over their estimated useful lives as follows, except in the year of acquisition when one half of the rate is used. Management reviews the estimates of useful lives of the assets every year and adjust them on prospective basis, if needed. Repair equipment 30% declining balance Computer equipment 30% declining balance Computer software 100% declining balance Office equipment & furniture 20% declining balance Vehicles 30% declining balance HAMPTON & HENDERSON LTD. - CERTIFIED GENERAL ACCOUNTANTS RICHARDSON REPAIR SERVICES INC. (Review Engagement Financial Statements) DECEMBER 31, 20X9 NOTES TO THE FINANCIAL STATEMENTS (Unaudited - Reviewed) 3. CAPITAL ASSETS EQUIPMENT Cost Accumulated Depreciation Net 20X9 Net 20X8 Repair equipment 561,862 426,511 135,351 132,567 Computer equipment 98,432 17,221 81,211 79,540 Computer software 36,546 9,476 27,070 26,513 Office equipment & furniture 134,655 26,374 108,281 106,054 Vehicles 213,556 24,065 189,491 185,594 1,045,051 503,647 541,404 530,268 4. LOANS The company has a promissory note outstanding of $3.5MM (2018; $3.5MM) payable to the CEO and sole shareholder Ahmed Richardson. The also have a revolving credit line of $3MM priced at Bank Prime +1.75%. As of December 31, 20X9, the company has 100% of the revolver amount undrawn and available for use. A summary of the loan and facility is as follows: 5. SHARE CAPITAL 20X9 20X8 Authorized, issued and outstanding Class A common shares 200 200 200 200 SUMMARY OF FACILITIES 20X9 20X8 Promissory Note $3,500,000 $3,500,000 Bank Prime + 1.75% - $3MM Operating Facility $3,000,000 $3,000,000 Total revolver amount 3,000,000 3,000,000 Drawn revolver amount - - Total available facility amount $3,000,000 $3,000,00

From 20X8 to 20X9, what was Richardson Repair Services' revenue growth?

6.2%

2.3%

2.1%

0.9%

In 20X7, Richardson Repair Services' total sales were $28.5MM. What conclusion could you draw based on the reported revenue over the last 3 years?

The company has likely achieved relative saturation in its local market.

Ahmed is looking to slowly wind down the business and has not sought out new revenue opportunities.

The company's experience is in line with the industry and supported by longer term contracts.

The company is in the mature stage of its lifecycle and we can expect to see a decline over the next few years.

Which of the following facts from the case suggest that Ahmed is financially conservative? (select ALL that apply)

He has a 3.5MM loan to the company that he does not seem rushed to pay back

His investment portfolio is mostly individual equity securities

Revenues appear to be growing steadily, suggesting a methodical and conservative growth strategy

RRS had over $500,000 cash on hand at fiscal year end

Excluding net income, in 20X9 the line item with the biggest influence (increase or decrease) on cash flow from operations was:

A decrease in accounts receivable

Dividends paid

An increase in accounts receivable

Depreciation expense

Which of the following factors could cause a company's Debt Service Coverage Ratio to be higher than that of its peers?

Similar EBITDA levels, but a higher annual principal plus interest obligation

Lower overall debt levels and a lower EBITDA figure

Similar debt levels, but with longer average amortization periods

A higher cost of borrowing, relative to industry comparables

What factors might be causing Richardson Repair Services' Gross Margin to be lower than the average of their peer group? (select ALL that may apply

A higher proportion of subcontractors rather than salaried employees, compared to their peers

Interest expense from the large promissory note

Offering lower prices to entice clients to sign on for longer contract terms

Excessive dividends

What is Richardson Repair Services' 20X9 Total Liabilities to Equity ratio, tested under the following assumptions: 1. The $1MM loan is drawn 2. The operating line is being tested at 50% average utilization, and 3. The promissory note to Ahmed is treated as debt"

2.62x

2.5x

2.26x

3.2x

What is Richardson Repair Services' 20X9 Funded Debt to EBITDA ratio, tested under the following assumptions: 1. The $1MM loan advances on a 6-year amortization 2. The operating line is being tested at 75% average utilization"

2.9x

3.0x

3.6x

3.9x

What is Richardson Repair Services' 20X9 Total Liabilities to Equity ratio, tested under the following assumptions: 1. The $1MM loan is drawn 2. The operating line is being tested at 75% average utilization, and 3. The promissory note to Ahmed is postponed (or subordinated), and therefore is to be treated as equity

1.09x

0.9x

1.1x

1.0x

At what rate does Richardson Repair Services depreciate their computer equipment?

100% per year

30% per year

20% per year

Unknown - this information is not provided in the case material

Suppose that you, the lender, have agreed to permit a gradual shareholder loan repayment over the next 3-5 years. What strategy, or strategies, would you consider proposing to help mitigate default risk? (select ALL that apply):

Require that all future capital expenditures are financed using 100% loan to value.

A liquidy covenant to ensure that sufficient cash remains in the corporation to comfortably offset current obligations.

A maximum Debt Service Coverage covenant, which is adjusted to account for the shareholder loan repayment amount.

A covenant stipulating a maximum leverage threshold that is not to be exceeded.

What is Richardson Repair Services' 20X9 Funded Debt to EBITDA ratio, tested under the following assumptions: 1. The $1MM loan advances on a 6-year amortization 2. The operating line is being tested at 50% average utilization, and 3. EBITDA should be reflected NET of dividends to shareholders"

1.93x

3.38x

2.6x

4.2x

What is Richardson Repair Services' 20X9 Current Ratio, tested under the following assumptions: 1. The $1MM loan is equal amortizing 2. The operating line is being tested at 75% average utilization

1.69x

1.86x

2.64x

1.45x

With respect to the addition of Ahmed's son Bilal to the management team, which of the following statements are most likely false? (select ALL that apply)

Bilal has considerably more financial acumen than his father does.

Bilal's apparent focus on key financial metrics is preferable to focusing on relationships based on the low concentration of competitors in the industry.

Bilal and Ahmed seem to be in agreement on growth strategies and the ultimate direction of the business.

Bilal can provide guidance and strategic recommendations, but he has no voting rights to challenge his father's opinions.

Based on 20X9 net book value figures, what percent of Richardson Repair Services' total PP&E is made up of repair equipment and vehicles?

74%

60%

35%

25%