Sunny Day Stores operates convenience stores throughout much of the United States. The industry is highly competitive, with low profit margins. The company's competition includes national, regional, and local supermarkets; oil companies; and convenience store operators.

A note to the 2017 financial statements described the company's long-term debt:

Note payable to the Prudential Insurance Company of America ("Prudential") with annual principal payments of $900,000, interest at 8.93%. Amount outstanding: $5,700,000 in 2017 and $6,600,000 in 2016.

Term note payable to First Florida Bank ("First Florida") maturing in September 2022, with quarterly principal payments of $125,000 through June 30, 2018, and $250,000 thereafter, with interest at 1% in excess of prime (5.5% at December 26, 2017). Amount outstanding $3,563,956 in 2017 and $3,000,000 in 2016.

Revolving note payable to First Florida with interest at 1% in excess of prime (5.5% at December 26, 2017). Amount outstanding: $7,400,000 in 2017 and 2016.

Certain of the Company's loan agreements pertaining to the borrowings from Prudential and First Florida require the Company to maintain minimum interest coverage ratio, working capital, and net worth levels, impose restrictions on additional borrowings, and prohibit the payment of dividends. Specifically, at the end of fiscal 2017, Sunny Day must have a net worth of at least $22,850,000, working capital (on a FIFO inventory basis) must be at least $1,300,000, and the interest coverage ratio must be at least 1.6.

The company's 2017 financial statements that follow show that Sunny Day Stores was not in compliance with these loan covenants at year-end.

Sunny Day Stores, Inc.

Comparative Balance Sheets

Sunny Day Stores, Inc.
Statement of Cash Flows

Required:
It's late January 2018, and Prudential and First Florida have hired you to act on their behalf in negotiations with Sunny Day Stores. Both lenders want to restructure their loans to address the company's current financial problems, and the restructured loans may require covenant changes.
Prudential and First Florida seek your advice on the type and amount of collateral to be required, revised interest rates, and possible changes to the payment schedules. In addition, the lenders have asked you to suggest new minimum net worth, working capital, and interest coverage ratios for 2018 and 2019. Specifically:
1. What type and amount of collateral do you suggest be required?
2. Should a higher interest rate be charged? Why or why not?
3. What changes would you suggest be made to the payment schedule?
4. What new minimum net worth, working capital, and interest coverage limits would you suggest the lenders set?
5. Suppose the company asked permission to resume payment of its $0.12 per share dividend, which was suspended in 2016. What advice would you give Prudential and First Florida?

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December 31 December 31 2017 2016 2017 2016 Cash and cash equivalents 1,451,688 2,971,457 Accounts payable Accounts receivable less $ 9,237,416 1,637,255 1,106,713 6,208,733 1,442,811 635,556 allowances for doubtful accounts of $82,000 and $63,000 in 2017 and 2016, respectively Money orders Fuel taxes Accrued liabilities 985,987 400,000 705,923 135,831 Salaries and wages Self-insurance reserves State and local taxes 966,770 569,160 Refundable income taxes Inventories-FIFO basis Total inventories 1,186,613 1,136,241 10,640,125 (3,057,715) 8,690,734 (2,845.703) Current portion of long- Less: LIFO re serve 1,956,369 17,035,126 term debt 1,082,429 11,751,590 Total current liabilities Prepaid expenses and Refundable deposits Property and equipment 547,705 764,627 700,000 other assets Total current assets Land 0,586,469 Deferred income taxes 400,000 111,426 1,477,323 179,224 Unearned revenue 11,016,168 9,67363619,801.221 ongterm debt, less 32,232,643 13,603,304 32,749.133 4,929,748 Buildings Eatuolans ingui32.23264332.749,.59rest patin current portion 13,969,745 16,693,772 improvements 5,084,679 68,007,126 083,406 Less: Allowances for depreciation and amortization Stockholders equity (31,008,778) 36,998,348 (28,988,173) 42,095,233 Common stock Additional paid-in capital Retained earnings 170,165 5,124,245 15,171,001 170,165 5,124,245 17,735,240 Other assets Other Total assets 2,641,735 456,913449,857 Total liabilities and Land held for sale $51.981 708 $53,131 59 stockholders equity $53,131,559 $51,981,708 53,131,559 2017 2016 Cash flows from operating activities ncom $(2,564,239) $(1,042,297) Adjustments Depreciation and amortization Deferred income taxes Gain on sale of property Decrease in unearned revenue 3,980,186 (1,077,323) (532,570) (67,798) 4,460,529 (512,995) (174,657) (83,804) 3,793,119 (100,322) (84,235) Changes in assets and liabilities Increase) in accounts receivable Increase) in refundable income taxes Increase) in inventories Increase) in other assets Increa Increase in accounts payable and other liabilities (280,064) (264,169) (1,737,379) (263,981) (319,478) 4,409,596 244,085 2,908,024 (141,910) (15,107) (4,304,076) 210 1,390,913 (358,982) (113,675) 412,647 (241,347) (145,866) 3,807,200 ase in refundable deposits Total adjustments Net cash flow operations 1,282,781 Cash flows from investing activities Purchase of property and equipment, net Sale of property and equipment Collections of notes and loans receivables (2,390,832) 1,428,051 10,318 (9,593,270) 821,641 668,656 (103,610) 7,775 Net cash used in investing activities (95 Cash flows from financing activities 4,528,915 (204,198) (1,588,391) 2,736,326 Issuance of long-term debt Dividends (3,108,251) (474,797) Payment of long-term debt (1,932,602) (1,850,087) Net cash provided by financing activities Net incre ase (decrease) in cash Sunny Day Stores, Inc Statement of Operations Net revenue 217,710,782 $202,393,136 $191,243,016 Cost and expenses 176,102,027 44,631,749 1,551,138 (532,570) 221,752,344 4,041,562) 58,643.287 43,687.704 1.728,650 146,652,853 41,805,330 1,658.732 (100,322) 190,016,593 1,226,423 Costs of goods sold Selling, general, and administrative Interest expense-net Net gain from sale of property 203,884,984 (1,491,848) Income (loss) before taxes Provision (benefit) for income taxes (400,000) (1077,323) (1,477.323) S (2,564.239) 50,000 563,000 613,000 nt (512,995) 449.551) rre Net income (loss) Earnings per common share 0.36