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. Suggestion 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 th e 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 interior development and acquisitions. Ms. Beaumont understands that cash is at present close, in any case, she is resolved about future development and has looked for our feeling as to decide her best game-plan. In introducing a choice we will initially direct an investigation of the business, at that point give a short history of Friendly Cards, Inc. (Benevolent), and afterward look at Friendly's fiscal reports to decide the budgetary soundness of the organization. Industry Information The welcome card industry is ruled by three enormous organizations, (Hallmark, American Greetings, and Gibson), which are alluded to as ‘The Big Three'. ‘The Big Three' command piece of the pie, and the rest of the contenders are overwhelmingly little private and family possessed firms. The welcome card industry is portrayed high fixed expenses because of: enormous stock costs, huge venture costs in the foundation of effective appropriation lines, and the requirement for an exceptionally expanded product offerings. Market pioneers appreciate extraordinary economies of scale which will in general obstruct new ntrants into the market. Thus, the card business is capital escalated and extremely 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 ordinarily littler in size, most of which had under 50 representatives. Furthermore, the serious idea of the market brings about a high level of value affectability which finishes in littler edges on deals. Deals will in general be exceptionally regular in nature with tops during significant occasions. There is inclining toward a bigger assortment of card contributions (expanding inventories), shorter conveying/selling periods, expanded broadening of product offerings, and an expansion in deals of regular cards when contrasted with occasion cards. Amicable Cards, Inc. Beaumont Greeting Card Co. was established by Wendy Beaumont in 1978, in New York City. She later gained Lithograph Publishing Co. what's more, took these organizations open a year later for $3 an offer under the name Friendly Cards, Inc. Cordial has quickly extended by obtaining Glitter Greetings of Lansing, Michigan (for money and value), whose essential market was offering cards to grocery stores. Before long, it gained Edwards and Co. of Long Beach, New York (for money), whose essential market was selling adolescent valentines through chain, medication, assortment, and rebate stores, just as, to wholesalers and general stores. These acquisitions incredibly improved Friendly's circulation line growing it to a provincial force. Later Friendly procured a California firm (Friendly Artists) which stretched out the appropriation line to a national premise. Neighborly Artists' essential market was prepackaged cards direct to the distribution center. Twenty-five percent of Friendly's deals are prepackaged boxes, which have a higher edge than customary 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 advertise and has stayed away from section into the top notch card showcase, in this manner, maintaining a strategic distance from direct rivalry with the ‘Big Three. ‘ Friendly's deals are more thought than the business with most of deals happening close to Christmas at 30% (versus Industry 32%), and Valentines Day at 25% (versus Industry 7%). Consequently, over 55% of deals happen inside a multi month time span. Plants at Friendly are being utilized at limit in this way, development would require further increments or getting contract administrations. Neighborly's dissemination line is successful for a littler firm because of its structure. Of twenty sales reps, 33% work on commission in this manner 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 merchants and discount wholesalers. This abatements the potential edge on cards by 66%. Well disposed's Financials Sales have expanded by over half between 1985 to 1987. Cost of products sold has diminished as a level of deals in every one of those years in this way, creating an expanding edge ( 29. 36% in 1985 to 35. 15% in 1987). The fast development by securing and the national dissemination channels that were cultivated by it, have influenced the number somewhat. In 1986 selling and conveyance costs expanded by 1. 45% and this leveled out in 1987. G&A costs likewise spiked in '86, mirroring the ongoing acquisition of another organization, and afterward settled in 1987. Notwithstanding, 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 gained by both money and value, the larger part were obligation financed, which clarifies why the ROE figures have expanded so drastically (practically 16%) over the most recent three years. The action proportions show that the receivable to payable were falling behind financially by 36 days in 1985 expanding to 52 days in 1987. This is most likely an aftereffect of expanded deals to less financially sound people or absentmindedness to accumulations. Stock turnover umbers are contracting because of the constantly 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 advantage for obligation proportion for this organization is in clining down. The present proportion demonstrates that the organization is getting marginally increasingly bankrupt with a present proportion of 1. 18 during '87. Nonetheless, by taking a gander at the Quick proportion and limiting for the effect of stock in the benefit number, the organization is significantly less fluid at 0. 67 out of 1987. This shows the organization is profoundly utilized and is utilizing its huge stock levels so as to help its significant acquiring needs. Benevolent's genuine development rate surpassed the reasonable development rate in 1986 and was equal in 1987. This distinction in 1986 created a requirement for added obligation to back development. Anyway abundance reserves were not expected to support extra development in 1987 since the real pace of development didn't surpass the reasonable pace of development. This can likewise be found in the all out obligation to value proportion which expanded from 3 of every 1985 to 5. 21 of every 1986 and diminished to 4. 1 of every 1987. The influence proportions demonstrate that the bank credits to obligation are genuinely very much coordinated, with advances being not as much as receivables, be that as it may, expanding in rate. Enthusiasm bearing obligation hopped drastically in 1986 because of obligation financed acquisitions yet keeps on leveling off alongside 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. In this manner Friendly Cards is by all accounts profoundly utilized, significantly more so than different firms in the business despite the fact that the pattern is to build obligation. This profoundly utilized position combined with the high fixed expenses and low edges normal for the business, uncovered Friendly as very vulnerable to changes in the market. Along these lines, further obligation development may not be advisableâ€especially since it is presently abusing 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 circulation 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 expert formas appear reasonalbe generally. There are, notwithstanding, some faulty numbers. For example, all the estimates depend on proceeded with deals development at 20% every year. When contrasted with galactic development paces of 58% in 1986 and 27% in 1987, these appraisals show up practically preservationist. Most of the development before, be that as it may, were related with significant acquisitions which served to blow up the business numbers. The recorded hesitance to utilize value to develop would serve to restrict development whenever proceeded into what's to come. Besides, 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 securing of Friendly Artists and the expanding dependence on a business blend made up of minimal effort prepackaged boxes of card