Sweet Dreams Incorporated (SDI) manufactures mattresses and box springs for sale primarily to fur- niture retailers and large hotel chains. More than 75 percent of their sales come from small Mom & Pop retailers and hotels located in the southeastern states. SDI operates two manufacturing facilities, one located in North Carolina and the other in South Florida. SDI manufactures more than 20 styles of bedding from these two plants. Douglas May, SDI's founder and president, recently received a call from Ingrid Diaz, vice president of First International Bank. Ms. Diaz told Doug that the bank's computerized analysis sys- tem had generated a negative report on the company, indicating that SDI's financial position was poor and deteriorating. First International requires quarterly and annual financial statements from each of its major loan customers. Information from these statements is input in a software package on a personal com- puter, which calculates key ratios for each customer and charts ratio trends. Also, the software package compares each company's statistics with industry average ratios and against any protec- tive covenants contained in the loan agreements. If any ratio is significantly worse than the indus- try average, reflects a marked adverse trend, or fails to meet contractual requirements, the computer highlights the deficiency. The latest report on SDI revealed a number of adverse trends, and several potentially serious problems. (See Tables 1 through 6 for SDI's historical financial statements.) Particularly disturbing were the 1995 current, quick, and debt ratios, all of which failed to meet the contractual limits of 2.0, 1.0, and 5.5 percent, respectively. Technically, the bank had a legal right to call all the loans it had extended to SDI for immediate repayment, and if the loans were not repaid within ten days, to force the company into bankruptcy. Ingrid hoped to avoid calling the loans if at all possible, as she knew this would back the company into a corner from which it might not be able to emerge. Still, First International, which has always avoided risky loans, had recently become even more sensitive to the issue of problem loans. Due to the spate of bank failures in the early 1990s, regulators have become stricter than ever in their examination of bank loan portfolios, and they are demanding early identification of potential repay- ment problems and that corrective actions be taken. One measure of the quality of a loan is the Altman Z score, which for SDI was 3.07 for 1995, slightly below the 3.20 minimum that Ingrid's bank uses to differentiate strong firms with little