Assessment of Financial Health

Reocities Home Neighborhoods Making Of Cases in Finance †Final Project Report Friendly Cards, Inc. (1988) Gary Cao Noah N Flom Robert Harris Srini Pidikiti May 1997 TABLE of CONTENTS 1 Assessment of Financial Health and Pro Forma Financial Statements 1. 1 Review of History and Statement of Financial Health 1. 1. 1 Industry 1. 1. 2 Friendly Cards History 1. 1. 3 Friendly Financials 1. 2 Review and Evaluation of Pro Forma Statements 1. 3 Financial Policy/Covenants 2 Beaumont's Decisions 2. 1 Envelope Machine Proposal 2. 1. 1 Evaluation 2. 1. 2 Financial Effect of Investment 2. 1. Proposal 2. 2 Evaluation of West Coast (new value offer) 2. 2. 1 Advantages 2. 2. 2 Disadvantages 2. 3 Valuation of Creative Designs, Inc. 2. 3. 1 Capital Structure Argument 2. 3. 2 Weighted Average Cost of Capital Assumptions (WACC) 2. 3. 3 Cash Flows, Terminal Value, Equity Value Valuations 2. 4 Pooling Implictions (Friendly + CD) 2. 5 Friendly Cards Stock Valuation 3 Overall Assessment 4 Goals for the Financial Structure of Friendly Cards, Inc. â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€â€- PART 1. Evaluation of Financial Health and Pro Formas 1. Survey of History and Statement of Financial Health Wendy Beaumont, leader of Friendly Cards, Inc. , has quickly extended her welcome card business through inner development and acquisitions. Ms. Beaumont understands that cash is right now close, in any case, she is inflexible about future development and has looked for our supposition as to decide her best game-plan. In introducing a choice we will initially direct an examination of the business, at that point give a short history of Friendly Cards, Inc. (Amicable), and afterward look at Friendly's fiscal summaries to decide the monetary wellbeing of the organization. Industry Information The welcome card industry is ruled by three huge organizations, (Hallmark, American Greetings, and Gibson), which are alluded to as ‘The Big Three'. ‘The Big Three' command piece of the overall industry, and the rest of the contenders are prevalently little private and family claimed firms. The welcome card industry is described high fixed expenses because of: enormous stock costs, huge venture costs in the foundation of proficient circulation lines, and the requirement for a profoundly differentiated product offerings. Market pioneers appreciate extraordinary economies of scale which will in general impede new ntrants into the market. Subsequently, the card business is capital serious and serious. The quantity of firms contending in the business has diminished by an annualized pace of 15% in the course of the most recent three decades. Leaving firms were commonly littler in size, most of which had under 50 representatives. Furthermore, the serious id ea of the market brings about a high level of value affectability which comes full circle in littler edges on deals. Deals will in general be regular in nature with tops during significant occasions. There is slanting toward a bigger assortment of card contributions (expanding inventories), shorter conveying/selling periods, expanded expansion of product offerings, and an increment in deals of ordinary cards when contrasted with occasion cards. Neighborly Cards, Inc. Beaumont Greeting Card Co. was established by Wendy Beaumont in 1978, in New York City. She later gained Lithograph Publishing Co. furthermore, took these organizations open a year later for $3 an offer under the name Friendly Cards, Inc. Benevolent has quickly extended by getting Glitter Greetings of Lansing, Michigan (for money and value), whose essential market was offering cards to grocery stores. Before long, it obtained Edwards and Co. of Long Beach, New York (for money), whose essential market was selling adolescent valentines through chain, medication, assortment, and markdown stores, just as, to wholesalers and grocery stores. These acquisitions incredibly upgraded Friendly's appropriation line extending it to a territorial force. Later Friendly gained a California firm (Friendly Artists) which stretched out the dispersion line to a national premise. Neighborly Artists' essential market was prepackaged cards direct to the stockroom. Twenty-five percent of Friendly's deals are prepackaged boxes, which have a higher edge than normal cards because of lower return rates and lower taking care of expenses. Right now, Friendly has all the earmarks of being a specialty player in the prepackaged box cards showcase and has kept away from section into the top notch card advertise, hence, evading direct rivalry with the ‘Big Three. ‘ Friendly's deals are more focused than the business with most of deals happening close to Christmas at 30% (versus Industry 32%), and Valentines Day at 25% (versus Industry 7%). In this way, over 55% of deals happen inside a multi month time frame. Plants at Friendly are being utilized at limit in this way, development would require further increments or procuring contract administrations. Amicable's dissemination line is compelling for a littler firm because of its structure. Of twenty sales reps, 33% work on commission in this way bringing down Friendly's expenses. Be that as it may, one issue with utilizing sales reps on commission and having such a little deals power is the propensity to offer to rack middlemen and discount wholesalers. This declines the potential edge on cards by 66%. Well disposed's Financials Sales have expanded by over half between 1985 to 1987. Cost of merchandise sold has diminished as a level of deals in every one of those years in this manner, creating an expanding edge ( 29. 36% in 1985 to 35. 15% in 1987). The quick development by obtaining and the national dissemination channels that were cultivated by it, have influenced the number marginally. In 1986 selling and conveyance costs expanded by 1. 45% and this leveled out in 1987. G&A costs additionally spiked in '86, mirroring the ongoing acquisition of another organization, and afterward settled in 1987. Be that as it may, while deals may have developed quickly they have not coordinated the expansion in resource development, which almost multiplied in 1986. Development in this organization is being financed by improving edges and by expanding influence, as showed by the Dupont Data. In spite of the fact that the acquisitions were obtained by both money and value, the larger part were obligation financed, which clarifies why the ROE figures have expanded so significantly (practically 16%) over the most recent three years. The action proportions demonstrate that the receivable to payable were falling behind financially by 36 days in 1985 expanding to 52 days in 1987. This is presumably an aftereffect of expanded deals to less financially sound people or carelessness to accumulations. Stock turnover umbers are contracting because of the consistently bigger inventories being conveyed. Net fixed resource turnover has diminished by 2. 3% somewhere in the range of 1985 and 1987. This can be clarified by higher development in resources than in deals. The liquidity proportions show that the resource for risk proportion for this organization is d rifting down. The present proportion shows that the organization is getting somewhat progressively ruined with a present proportion of 1. 18 during '87. In any case, by taking a gander at the Quick proportion and limiting for the effect of stock in the benefit number, the organization is drastically less fluid at 0. 67 out of 1987. This shows the organization is exceptionally utilized and is utilizing its huge stock levels so as to help its significant obtaining needs. Amicable's real development rate surpassed the economical development rate in 1986 and was proportional in 1987. This distinction in 1986 created a requirement for added obligation to fund development. Anyway abundance reserves were not expected to finance extra development in 1987 since the genuine pace of development didn't surpass the feasible pace of development. This can likewise be found in the all out obligation to value proportion which expanded from 3 out of 1985 to 5. 21 of every 1986 and decreased to 4. 1 out of 1987. The influence proportions show that the bank advances to obligation are genuinely very much coordinated, with advances being not as much as receivables, in any case, expanding in rate. Enthusiasm bearing obligation bounced significantly in 1986 because of obligation financed acquisitions yet keeps on leveling off alongsid e absolute obligation to value figures in 1987. At long last, obligation to resources has expanded drastically over the most recent three years, expanding by 7. 5% to 82. 5% in 1987. Consequently Friendly Cards is by all accounts exceptionally utilized, much more so than different firms in the business in spite of the fact that the pattern is to expand obligation. This profoundly utilized position combined with the high fixed expenses and low edges normal for the business, uncovered Friendly as very helpless to changes in the market. Along these lines, further obligation development may not be advisableâ€especially since it is right now disregarding its current obligation pledges. Be that as it may, Continued development, in any case, is required as to permit the organization to additionally exploit its current appropriation lines and acknowledge further economies of scale. 1. 2 Review and Evaluation of Pro Forma Statements The parameters that Ms. Beaumont has set for the master formas appear reasonalbe generally. There are, in any case, some flawed numbers. For example, all the gauges depend on proceeded with deals development at 20% every year. When contrasted with cosmic development paces of 58% in 1986 and 27% in 1987, these appraisals show up practically moderate. Most of the development before, in any case, were related with significant acquisitions which served to swell the business numbers. The chronicled hesitance to utilize value to develop would serve to constrain development whenever proceeded into what's to come. Moreover, it might be hard to keep on developing at such a high rates in an inexorably serious market. Holding expenses of products runs at 65% of deals and may likewise introduce an issue contingent upon whether the organization can keep on dealing with its expenses as it keeps on developing. It could be contended that the explanation CGS has dropped as of late is because of the obtaining of Friendly Artists and the expanding dependence on a business blend made up of ease prepackaged boxes of card