Credit Submission Commercial in Confidence Barry Example Group 1 Client Group: Barry’s Example Pty Ltd Submission Prepared By: Nathan Keating Date Submitted: Information contained in this memorandum has been provided by our client for the purposes of obtaining credit. Pearl Financial Services Pty Ltd understands all the information contained here to be correct at time of writing, but takes no responsibility for information on which lenders rely. Lenders should make their own independent enquiries on all matters upon which they rely in making a lending decision.
Transcript
Credit Submission
Commercial in Confidence Barry Example Group 1
Client Group: Barry’s Example Pty Ltd Submission Prepared By: Nathan Keating Date Submitted: Information contained in this memorandum has been provided by our client for the purposes of obtaining credit. Pearl Financial Services Pty Ltd understands all the information contained here to be correct at time of writing, but takes no responsibility for information on which lenders rely. Lenders should make their own independent enquiries on all matters upon which they rely in making a lending decision.
Credit Submission
Commercial in Confidence Barry Example Group 2
Table of Contents 1 Application Summary .............................................................................................................................................................................................. 4
1.1 The Transaction ................................................................................................................................................................................................ 4 1.2 The following Facilities are sought by our client:............................................................................................................................................... 4 1.3 Security............................................................................................................................................................................................................. 4
2 Client Details ............................................................................................................................................................................................................ 9 2.1 Business Background ..................................................................................................................................................................................... 11
2.1.1 Business Description .................................................................................................................................................................................. 11 2.1.2 History of the Business ............................................................................................................................................................................... 12 2.1.3 Role of departing directors.......................................................................................................................................................................... 12
2.2 Overview of Operations .................................................................................................................................................................................. 14 2.2.1 Corporate Structure .................................................................................................................................................................................... 14 2.2.2 Key management........................................................................................................................................................................................ 14 2.2.3 Sales and Marketing ................................................................................................................................................................................... 15 2.2.4 Intellectual Property .................................................................................................................................................................................... 15 2.2.5 Licences...................................................................................................................................................................................................... 16 2.2.6 Stock on Hand ............................................................................................................................................................................................ 16 2.2.7 Information Systems ................................................................................................................................................................................... 16 2.2.8 Adverse Credit History ................................................................................................................................................................................ 16
2.4 Business Analysis ........................................................................................................................................................................................... 19 2.4.1 Business Strategy....................................................................................................................................................................................... 19 2.4.2 Business Premises ..................................................................................................................................................................................... 19
3.1.1 BE Group FY07, FY08 and Forecast FY09................................................................................................................................................. 20 3.1.2 BE Group Sales result Comparison ............................................................................................................................................................ 21 3.1.3 BE Group Health Check as at 30 Jun 2008 ................................................................................................................................................ 22 3.1.4 BE Group Health Check of FY09 Forecast ................................................................................................................................................. 24
3.2 Financial Performance .................................................................................................................................................................................... 26 3.2.1 Profitability .................................................................................................................................................................................................. 26 3.2.2 Working Capital .......................................................................................................................................................................................... 27 3.2.3 Cash Flow and Funding.............................................................................................................................................................................. 28 3.2.4 Cash Quality ............................................................................................................................................................................................... 29 3.2.5 Balance Sheet Health ................................................................................................................................................................................. 29
3.3 Debt Servicing....................................................................................................................................................Error! Bookmark not defined. 3.4 Taxation, Insurance and Superannuation Updatedness ................................................................................................................................. 29
4 Appendix 1 - Intellectual Property Detail ....................................................................................................................Error! Bookmark not defined. 5 Appendix 2 – Current Titles .........................................................................................................................................Error! Bookmark not defined.
Credit Submission
Commercial in Confidence Barry Example Group 4
1 Application Summary
1.1 The Transaction
Our clients are seeking assistance to finance a change of control and additional expansion capital for the business.
The business is seeking $8m in total,
$6.5m is required to purchase the shares of the founders of the business, who are choosing to retire and seeking to exit, whilst the remaining $1.5m is required to refinance and increase existing working capital facilities
The $8m will be sought from both Debt and Equity investors. Up to $6.5m is sought from Debt Financing, including $1.5m for working capital whilst the remaining balance is expected to come from either Equity or Mezzanine Finance.
1.2 The following Facilities are sought by our client: Bank Product Limit
required Proposed Term Purpose
Overdraft $250,000 Annual Review Working Capital Debtor Finance Facility $1,250,000 Annual Review Working Capital Term Loan/ Commercial Bill $5,000,000 10 years (P & I
reducing) Payout of Founders
1.3 Potential Offsets/ share of wallet opportunities Leasing Merchant Facilities Currently Conversion earnings/Foreign Exchange Contracts Corporate online – want the ability to see foreign currency account International TTs Business Insurances
1.4 Debt Servicing For the purposes of this submission home loans are assumed to be treated separately and are hence not included in the calculations. 2009 Projected EDITDA: $2,494,094
Credit Submission
Commercial in Confidence Barry Example Group 5
$1.5m Bill @ 5.2 % BBSY + 2% Margin = 7.2% $108,000 + Amortisation $150,000 $ 258,000 Overdraft @ 11% $ 275,000 Trade Finance Facility @ 7.2% $ 144,000 $1.205 Bill @ 5.2 % BBSY + 2% Margin = 7.2% $ 86,760 Total: $ 763,760 Surplus: $1,730,334 Commentary: Whilst EBITDA provides demonstration of a significant surplus, use of Cash after operations indicates that the business cash generation may be lineball for meeting obligations. However comfort is taken that the cash after operations figure forecast for the 2009 year is driven down by a temporary increase in debtors caused by a large sale ($1.2m) for a new product line which falls payable in early July thereby satisfying the shortfall indicated by this measure. Note the 2009 projected figures are based on actual earnings up to December 2008 and projected earnings for the last two quarters.
1.5 Security
1.5.1 Proposed Structure
The following security is being made available to a prospective lender: 1) 1st registered mortgage debenture over the fixed and floating assets of Barry Example Pty Ltd (ACN 129 920 458) in its own right and aft
the Barry Example Unit Trust and the Barry ExampleIP Unit Trust There is possibility that directors will also provide guarantees, however to establish what the new shareholding and board composition will depend on an inherent interest of the senior lender to support the business, and the amount and structure of the remaining funding required to complete the deal. The business is currently courting some major individual players from the publishing industry as investors and should these individuals agree to join the business then a willingness to provide unlimited or limited guarantees will be assessed at this time.
1.5.2 Security Extension
The company requires $6.5m in facilities per above. In return for these funds, the business will provide security as follows: Property Security Available:
Credit Submission
Commercial in Confidence Barry Example Group 6
Nil Business Assets Debtors (valued at Jun 2008) $969,372 Extension Value @ 80% $775,500 Inventory (valued for purchase) $457,250 Extension Value @ 50% $228,625 Mastheads and Website IP $0 Total Business Asset Security Provided approx $1,004,125 Other than debtor value, a prospective lender will rely predominantly on cash flow of the business and the ability of the mastheads and Websites to continue to earn readership and advertising revenues, together with any support being provided by future directors. Note the business accounts are audited.
1.6 Key Strengths and Weaknesses of the Opportunity
Strengths 10 years operating and management experience extending significantly beyond this Strong revenue margin @ over 45% Diverse product line Balance of domestic sales/commission/development – product line is constantly evolving Hold current licenses for very popular brands, generally on 2 year contracts whilst – long enough to give income certainty but not too long if
the brands represented by the licenses fail Pricing point – offer wide range of products at the right pricing point. Low to medium range price points. Strong relationships with all retail majors – TGA holds preferred vendor status with all major retailers & specialist stores in Australia & New
Zealand Debt level is serviceable with significant year on year revenue growth demonstrated year to date validating a 50% growth in forecast sales this
financial year Risks to be understood
Profit & Loss Sheet Analysis: o Business Losses & drop in sales in 2007-8 – this is due to:
New developed lines didn’t take off as fast as expected (but now cemented and doing well).
Credit Submission
Commercial in Confidence Barry Example Group 7
A paper loss was incurred from Currency conversions USD-AUD in preparing the USD numbers in AUD, when in reality the loss was not actualized as the funds remained in USD
Lost key sales person at a crucial point in TGA calendar year whereby he would be approaching retailers and obtaining orders for the Jun/Jul Catalogs
Still paying dividends when the company is making a loss o These payments were made to the Directors as a part of their remuneration packages. They are paid in December and the July of
every year. In 2008 the dividend payments substantially drop as only one payment was made on the 1 July 2007 when the business was still considered profitable. No dividend payments have been made since, though directors still receive a wage, required to service personal finance commitments.
Extremely high advertising expense in 2008 - TGA ran a large television campaign, which did not end up providing any leverage in the market and is not to be repeated in the 2009 financial year. The business has commited to spend $150k in advertising specifically for the Tracksters product though this is part of the agreement with Kmart in return for a $3m sale of this new product line (completed in June)
Discount Expense refer too early payment cashflow strategy geared to the major retailers Couple of Debtors reconcile their accounts quarterly IMC, Simba & Dickie Toys AUD was high against the USD reducing the margin on commission paid in USD although this was offset by the ability to purchase product
cheaper o Notably Bankwest doesn’t allow trade contracts to be refinanced and they do not have the system capabilities to provide the customer
foreign currency account balances which limited their ability to manage the currency risk and cashflow. Nursery venture –
o Established in 2004 o This division was dedicated in developing products designed for safer, easier and more comfortable baby gear. o It was decided in December 2008 to phasing out the nursery line o Currently TGA have approximately $280K stock left o Target has a pitch to buy $60K worth of Nursery stock and if this product is successful, Target will be able to continue purchasing this
product through FOB o In 2007, the Nursery line return was less than favorable. This was in part due to losing the Baby Bunting retailer (as it was taken over
by a private equity firm) and the existing relationship between Meyer and the previous owners was diminished, o The nursery market is extremely competitive and TGA also had difficulty with collecting their nursery debtors
Limited amount of equity in the business, relative to debt – The company equity levels suffered as a consequence of the losses incurred in 2008. Immediate plans to increase equity in the business, besides the significant improvement in profitability, are essentially to explore the subordination of directors debt into Pref shares and the implementation of a principle reduction strategy that combines debt reduction with affordability
Limited liquidity – The business recognizes that its current ratio is very close to 1, whilst its Quick Ratio is in fact below 1. Efforts will be made to give this issue focus over the current planning period to ensure ultimate rectification of this matter.
Additional Documentation Required
Statement of Position from all directors Bank Statements for all accounts to be refinanced
Credit Submission
Commercial in Confidence Barry Example Group 8
Tax Portal List of Licences held with details regarding remaining term Financials for Directors & Shareholding companies/entities Current Creditor/Debtor listing
Credit Submission
Commercial in Confidence Barry Example Group 9
2 Client Details Borrowing Entity: Barry Example Pty Ltd (BE) ACN: 123 456 789 Trading Address: 5 Phillips St, Rosehill, NSW 2123 Company Website: www.barryexample.com.au Number of Employees: 33 Year Commenced Trading: 2001 Group Structure:
Barry Example Pty LtdACN 123 456 789
Barry IP Trust Barry Example Media Pty Ltd
ACN 234 567 890
Barry Family Trust
Credit Submission
Commercial in Confidence Barry Example Group 10
Directors as at date of acquisition Name Background Barry Edwards Joined in 2004 as Commercial Director before appointment as CEO in Jan 2008. Over 13 years
in Australian media Industry with previous roles with PBL, ACP and ABC Michael Ng 20 Years of publishing experience with recent directorship with 123 LTD John Peters Managing Partner of XXX Accounting Firm Recent Changes to the Group Structure The business has historically traded as Barry Example Pty Ltd. However the business assets, including the IP Trust have now been transferred to Barry Example Pty Ltd, and Barry Example Pty Ltd (name changed to Barry Media Pty Ltd) is to be wound down and deregistered this year. This changed occurred in April 2008, hence financials for FY08 are split between the 2 companies. For an explanation of why the change occurred, refer to 2.1.2 History of the Business below.
Credit Submission
Commercial in Confidence Barry Example Group 11
2.1 Business Background
2.1.1 Business Description
Founded in 2001, BE is a privately owned Australian mid sized publishing company specialising in the special interest market. The business produces consumer magazines as well as custom media and online content. Primarily targeting 16 – 35 year olds in youth markets by providing specialist content through integrated media, the business targets readers
who are passionate about their interests and hobbies at work and at home. BE’s magazines, websites and catalogues entertain, educate and inform the audience for their benefit and that of BE’s commercial partners.
The business currently has 13 consumer magazine titles specialising in the gaming (note: computer games, not gambling), technology, entertainment, craft and lifestyle sectors.
Digital services provided to national and multinational clients, predominantly within the gaming and technology sectors The business currently provides custom publications (magazines and websites) on behalf of 10 clients, including The Chartered Accountants
Association magazine, Charter, as well as Blockbuster, Big W and Virgin Mobile The business generated over 1.5m unique visits to websites within the portfolio in September 2008
The following table summarises current main contracts held for the custom titles maintained
The magazine titles produced by BE are distributed through PBL to newsagents, as well as offering subscription options for readers.
Credit Submission
Commercial in Confidence Barry Example Group 12
The business is set up to be able to very quickly produce new mastheads (publication brands) as new trends in interests emerge for the 16 – 35 target market. The business is able to very quickly (and cheaply) start a new brand using the templated publication process, and just as quickly as the trend subsides, close down the publication.
The business has also build web technologies that allow them to integrate the magazine and online content so that the advertising opportunity with the niche markets developed can be maximised.
2.1.2 History of the Business
Barry Example moved from the UK in 2000 after being appointed by his then employer, English Publishing (English), to set up an Australian
operation. Shortly after moving to Australia English suffered financial hardship globally and chose to cease international operations including the Australian business, retrenching Barry in the process.
Barry met Michael Ng in the role with English and together they recognised a gap in the Australian magazine market for specialised, niche publications
Barry Examplewas consequently set up and initially the company was given the rights to publish English publications for free for 6 months in return for a 10% equity share in the new venture
In 2004 Barry Edwards joined the company, initially as Commercial manager In 2007 Michael and Barry developed a succession plan with the intention of setting up the business for sale. Barry was promoted to CEO in 2008 as part of this plan The business has always been constrained by the relationship with English. English has a number of international publishing agreements and
Barry has found in recent times that these often either constrained the businesses ability to build mastheads of their own as these may adversely impact on these international agreements. The business was also often forced to produce publications that were expensive an in low demand in this market.
Hence in 2008 it was decided to end the relationship with English. This meant purchasing equity back from partners, and transferring the business assets from Barry Example to a new entity Barry Example Pty Ltd. Barry Example Pty Ltd had its name changed to Barry Media an this company is currently in the process of being wound up, and will cease registration in 2009. The business needs to be wound up as it is still bound by various publishing contracts, which the company no longer wishes to produce.
2.1.3 Role of departing directors
Michael and Barry have nearly totally extricated themselves from the day to day operation of the business. In recent times, their only involvement, besides Board responsibilities has been in the managing of circulation (ie distribution of magazines through newsagents and subscriptions). In order to ensure that they do not leave a hole by their departure, the company is currently interviewing a number of highly experienced candidates to fill this role.
Credit Submission
Commercial in Confidence Barry Example Group 13
The directors have also performed an editorial overview role which will be handed across to the new management upon their departure.
Credit Submission
Commercial in Confidence Barry Example Group 14
2.2 Overview of Operations
2.2.1 Corporate Structure
2.2.2 Key management
The company is recognised in the market for “punching above its weight” with the quality of staff that it employs. An outline of the key management team is as follows:
XXXXXXXX – Group Sales Manager XXXX has over 15 years experience in the Australian media industry having launched some of Australia’s biggest magazines including ABC and ZYX Weekly. XXXXXX heads the GSM commercial Team with all staff reporting directly to him.
Credit Submission
Commercial in Confidence Barry Example Group 15
SSSSSSSS – Head of Online Having recently being General Sales Manager at Yahoo, SSSSS now heads up the online commercial team at BEM. SSSSS has over 18 years experience in the media sector across the UK and Australia. CCCCCCC – Head of Custom Media CCCCCC has over 10 years experience within the publishing sector having worked at 1234, AAA and now BEM. He has worked in a diverse range of sectors including, film, youth, fashion and sport. RRRRRRRR – Production Manager With over 30 years purchasing and production experience RRRRRRR has worked for both printers and Publishers nationally BBBBBBBB – Editor Online With over 8 years editorial experience within the ever popular gaming market, BBBBB heads up the gaming online division driving eyeballs on an hourly basis to the BEM websites
2.2.3 Sales and Marketing
Overall responsibility for sales growth sits with Barry Edwards, the CEO. The business continues to monitor the hobbies and trends for opportunities for new mastheads. In the meantime the company is building up craft publications, where the following is small but dedicated. The company has also succeeded in obtaining a number of new custom titles, which have or will commence production in FY09. These include
Fun for Kids Ronnie Website IT website
2.2.4 Intellectual Property
A list of current IP is attached in Section 5 of this report.
Credit Submission
Commercial in Confidence Barry Example Group 16
2.2.5 Licences
There are currently no license requirements for this business.
2.2.6 Stock on Hand
Generally the stock on hand pertains to a current issue of a magazine, due to be distributed. Hence for the most part stock has a value.
2.2.7 Information Systems
The business hosts its own websites on its servers. It employs a mirror site to ensure sufficient capacity and to protect against risks regarding business continuity and disaster recovery
2.2.8 Adverse Credit History
No adverse history is believed to be held though not verified.
Credit Submission
Commercial in Confidence Barry Example Group 17
2.3 Industry Analysis
2.3.1 Industry Outlook
The magazine industry recent predicted that even in the expected economic decline of 2009, the industry will enjoy 6% growth, whilst the US market will decline. Those publishers that compete for mass markets (esp. woman’s daily magazine market) will experience a decline in advertising revenues, even if readership holds steady. However for BE, which competes in the specialised, niche market the business does not expect to suffer. The reason for tis confidence is that the business predominantly produces titles with little to no competition, producing titles bought by passionate people. The logic is that even if times are tough, you’ll spend a few bucks on the latest craft magazine if this is what you really enjoy. BE recognise that there is a trend to general research being undertaken on the web, however the level of detail provided on the topics for which BE supports, deserve and invite people paying for it, and this is provided both in the web environment and in print. The online advertising market is still relatively new and as such is expected to grow as a percentage of advertisers spend relative to print media. BE is well placed to be a recipient of this.
2.3.2 Competition
There are currently some 3 – 4000 mastheads in Australia. Whilst the magazine market has some large players, (ie Fairfax and PBL) the specialised market does not interest them as it requires low cost structures and nimbleness, as well as having low margins compared to the mass publications for which they compete. BE does compete against some international publications, but the business benefits from being able to provide local content and relative advertising, making them a more relevant offering for the readership.
2.3.3 Supply Risk
The key supplier that holds some degree of power is PBL, who BE (and most of the market) rely upon to distribute publications to the newsagents. Currently PBL are quite reasonable, with BE generally retaining 75% of the sale price. Overseas, publishers might only retain 50 – 60% of sale price. This does indicate a risk of decreased retention in the future, however the business does not believe this to be a concern currently as PBL enjoy significant market share, and the market continues to grow allowing PBL sufficient growth opportunity at existing rates.
2.3.4 Demand Risk
The business relies on 2 types of customer, sale of print publications and website subscriptions purchase by the readers, and advertising. The customers purchasing publications are wide and varied and as such hold no risk to profitability regarding purchasing power. The same lack of risk applies to the advertising market due to the wide variety of publications produced by the company.
Credit Submission
Commercial in Confidence Barry Example Group 18
2.3.5 Geographic Risk
5% of revenues stem from New Zealand and otherwise the publications are nationally distributed across Australia.
2.3.6 Technology Risks
The business employs detailed business continuity practices given the reliance on web publication. This includes mirrored sites for hardware and regular back-up (every 2 days).
2.3.7 Credit Risk
The business employs a rigid credit management policy including the requirement for a credit application, credit checking and supply contracts.
2.3.8 Regulatory Risks
No regulatory risks exist at this time.
Credit Submission
Commercial in Confidence Barry Example Group 19
2.4 Business Analysis
2.4.1 Business Strategy
Business Objective - To develop continually profitable business with emphasis will be on media content creation, and evolving the business
from its magazine publishing roots.
Business Strategy - To review the existing core business of 1233 properties (print and online) in regards to personnel, market drivers, product position, product proposition, audience, growth potential, cost base and drivers affecting costs and profitability. Objective is to achieve an effective, efficient, lean operation.
Growth Strategy - By concentrating on what BEM does well and continuing its aggressive, fast paced and decisive publishing strategy in the
arenas will see BEM’s revenue grow across the board in a challenging market. Being well placed within the online space, having laid the foundations will see increased revenue growth in the digital site www.friends.com.au. This combined with the gaming magazines holding the number 1 position in the market will allow for further integrated marketing campaigns. With the custom market continuing to grow, running off its success to date BEM is in the prefect position for large growth within this sector at solid margins. Its lifestyle one shot division, combined with heavy concentration within circulation data will see this division achieve solid levels of increases in revenue. Combined with new launches of:
123 for Kids ABCs Website GHJ website
There is very much a solid base for BEM to take its next step in the Australian media market
2.4.2 Business Premises
The business currently leases office space however should the business be required to move then this would not impact on the ability of the business to provide its services.
Credit Submission
Commercial in Confidence Barry Example Group 20
3 Financial Analysis
3.1 Financial Reports Summary
3.1.1 BE Group FY07, FY08 and Forecast FY09
BE currently distributes print media in bulk, effectively on consignment, booking revenue as if all of the publications were sold. It then carries a provision for an expected percentage of returned, unsold publications. This is normal for the industry.
Credit Submission
Commercial in Confidence Barry Example Group 21
3.1.2 BE Group Sales result Comparison
The following Table compares annual sales performance year on year.
A few observations can be drawn from the above table:
Advertising – It is anticipated that the advertising revenue for some publications will decline, in particular craft publications. However technical publications continue to demonstrate strong performance. Website advertising continues to grow as businesses redirect some of their promotional spend to the web as businesses recognise a greater ability to measure return on investment from this medium. The business also continues to increase the number of custom titles being provided to large corporates.
Subscriptions –The 68% reduction in FY09 forecast reflects the change in the business make-up as the majority of subscriptions historically were
related to English group publications which BE has ceased in 2009. Note that this category is not the only subscription revenue as circulation revenue includes the primary subscription revenue for the company’s magazines. This category relates purely to publications that are only purchased through subscription, which the company is opting to wind down.
Value Add – A reallocation of categories sees much of the value added revenue now included in the Advertising and Circulation categories of
revenue.
Circulation – Without the English business publications, BE expects to be able to increase circulation revenues developing more relevant publications for the target market.
Credit Submission
Commercial in Confidence Barry Example Group 22
3.1.3 BE Group Health Check as at 30 Jun 2008
Statement Date 30-06-2007 30-06-2008 Variance % +ve/-ve Comments Period Length 12 Months 12 Months Impact Accounts
Barry Example Group
Profitability Measures Revenue 17,362,819 16,529,925 (4.80) X Ceased less profitable publ”ns with English Gross Profit 3,599,590 5,102,183 41.74 X Remaining Publications more profitable Gross Margin % 20.73 30.87 48.89 X COGS % 79.27 69.13 (12.79) X Operating Expenses % 13.29 15.43 16.11 X EBIT 1,485,396 2,614,063 75.98 X Profitability % 8.56 15.81 84.85 X Net Income 1,338,854 2,515,822 87.91 X Net Profit % 7.71 15.22 97.38 X EBITDA 1,685,082 3,012,208 78.76 X
Coverage Measures Interest Cover 10.14 26.61 162.51 X Effect Interest % 16.67 12.71 (23.74) X Debt Service Cover 15.49 19.75 27.49 X Debt Payback Period 0.48 0.24 (49.78) X
Efficiency Measures Acc Receivable 2,175,579 969,372 (55.44) Days Receivable 45.73 21.40 (53.20) X New CFO implements improved processes Inventory 546,758 457,250 (16.37) Days Inventory 14.50 14.60 0.72 X Accounts Payable 2,515,610 1,831,807 (27.18) Days Payable 66.71 58.51 (12.30) X Working Capital % 1.19 (2.45) (305.88) X Asset Turnover (39.59) 14.97 137.82 X
Credit Submission
Commercial in Confidence Barry Example Group 23
Quick Ratio 0.47 0.39 (16.75) X Largely unearned income and provisions exceeding Current Ratio 0.55 0.50 (9.34) X Trading assets but will be rectified in 2009
Return Measures RONA % (338.67) 236.74 169.90 X Return on Equity % (Annualized) (106.85) 674.42 731.21 X Return on Assets % (Annualized) 27.46 56.25 104.87 X
Leverage Measures Leverage (5.32) 11.46 315.48 X Business equity improving but historically low Equity / Total Assets (23.16) 8.03 134.66 X Debt to Equity (0.65) 1.96 401.56 X Change to positive equity, position improved Bank Debt to Liabilities 0.12 0.17 39.94 X Borrowed Funds 814,458 731,161 (10.23) X
Cash Measures Change in Net Debt (150,854) 222,704 247.63 X Cash After Operations 1,840,718 1,641,755 (10.81) X Business maintains strong cash position Net Cash Income 2,123,919 1,147,780 (45.96) X Cash After Debt Amortization 2,123,919 1,147,780 (45.96) X Marginal Cash Flow 19.54 33.32 70.50 X
The business finished 2008 much improved in the area of working capital and financial management. The business still maintained poor solvency ratios however this is not seen as detrimental as the majority of short term liabilities related to provisions for staff expenses and unearned income from expected returns which are not actually cash items.
Credit Submission
Commercial in Confidence Barry Example Group 24
3.1.4 BE Group Health Check of FY09 Forecast
Statement Date 30-06-2008 30-06-2009 Variance % +ve/-ve Comments Period Length 12 Months 12 Months Impact Accounts Budget
Barry Example Group
Profitability Measures Revenue 16,529,925 18,638,818 12.76 X Increased Custom business Gross Profit 5,102,183 5,327,400 4.41 X Gross Margin % 30.87 28.58 (7.40) X COGS % 69.13 71.42 3.30 X Operating Expenses % 15.43 14.31 (7.26) X EBIT 2,614,063 2,722,570 4.15 X Profitability % 15.81 14.61 (7.63) X Net Income 2,515,822 2,517,123 0.05 X Net Profit % 15.22 13.50 (11.27) X EBITDA 3,012,208 3,120,715 3.60 X
Coverage Measures Interest Cover 26.61 13.25 (50.20) X Budgeting for lower debts at higher rates Effect Interest % 12.71 27.84 118.97 X Debt Service Cover 19.75 5.23 (73.51) X Debt Payback Period 0.24 0.24 (1.65) X
Efficiency Measures Acc Receivable 969,372 2,642,000 172.55 Forecasting large corporate customers pushing Days Receivable 21.40 51.74 141.71 X out payment timing Inventory 457,250 620,000 35.59 Days Inventory 14.60 17.00 16.41 X Accounts Payable 1,831,807 2,615,000 42.76 Forecasting pushing out suppliers in line with Days Payable 58.51 71.70 22.55 X debtors Working Capital % (2.45) 3.47 241.61 X Asset Turnover 14.97 5.26 (64.84) X Due to increased Working Cap Assets
Credit Submission
Commercial in Confidence Barry Example Group 25
Quick Ratio 0.39 0.95 143.13 X Current Ratio 0.50 1.11 121.38 X
Return Measures RONA % 236.74 76.89 (67.52) X Increased net Assets is positive Return on Equity % (Annualized) 674.42 90.03 (86.65) X Rate of return still attractive Return on Assets % (Annualized) 56.25 38.95 (30.75) X
Leverage Measures Leverage 11.46 1.50 (86.91) X Increased Equity position Equity / Total Assets 8.03 40.00 398.33 X Debt to Equity 1.96 0.27 (86.41) X Bank Debt to Liabilities 0.17 0.18 3.84 X Not Material Borrowed Funds 731,161 745,000 1.89 X
Cash Measures Change in Net Debt 222,705 215,013 (3.45) X Cash After Operations 1,641,755 1,143,864 (30.33) X Adversely impacted by Debtor Days but Net Cash Income 1,147,780 869,392 (24.25) X remains acceptable Cash After Debt Amortization 1,147,780 869,392 (24.25) X Marginal Cash Flow 33.32 25.11 (24.63) X The business has seen large corporate debtors, predominantly clients of the custom titles part of the business, adversely trend towards longer trading terms, though they actually remain on 30 days terms. BE is not concerned by the trend from a credit risk perspective as the clients are all substantial entities, however this trend has placed pressure on the business’s cash flow. To combat this, besides increasing collections pressure applied on these debtors, the business has commenced to pass on the effects to creditors, whilst maintaining good relationships with these key parties. Revenue will continue to grow as the business is having some considerable success in selling in new customer titles for the business. This service is seen as the key opportunity for business growth in the current climate and will ensure that the business maintains a successful track record through a depressed economy.
Credit Submission
Commercial in Confidence Barry Example Group 26
3.2 Financial Performance
3.2.1 Profitability
Commencing a process of re-engineering the financials of the business in 2008 and the cessation of English publications saw a significant improvement in profit performance. The focus for 2009 is in revenue growth, now that the business provides improved retained earnings performance.
Credit Submission
Commercial in Confidence Barry Example Group 27
3.2.2 Working Capital
Working Capital Management for the business has always been strong, with the business actually generating cash from its working capital management due to the low receivables vs payables ratio. 2009 will see a reduction in performance, due to clients taking longer to pay, however the clients continue to pay and as such this is not seen as a financial concern for the business, as long as they can pass on the delays to creditors, which they are currently doing.
Credit Submission
Commercial in Confidence Barry Example Group 28
3.2.3 Cash Flow and Funding
Cash after Operations shows a slight decline in performance expected in 2009 due to the debtor day increase. However business profitability continues to be strong and careful management of cash flow will ensure that the business continues to perform strongly in this regard.
Credit Submission
Commercial in Confidence Barry Example Group 29
3.2.4 Cash Quality
The increase in Debtor days has a negative effect on the quality of cash generated by the business and will need to be managed carefully throughout the year as the business has historically demonstrated a capability of doing.
3.2.5 Balance Sheet Health
BE forecasts an improved balance sheet position in 2009.
3.3 Taxation, Insurance and Superannuation Updatedness BE is currently up to date with all outstanding taxation, Insurance and Superannuation liabilities.
