Administration Business

Page 5

LIFT TRUCK ATTACHMENTS, INC,

SUMMARY

Lift Truck Attachments, Inc. was incorporated in 1995, The company manufactures and sells material handling equipment specializing in lift truck attachments. Approximately half of the company’s volume is represented by distribution of material handling items and the balance is made up of manufactured products and services.

The company sells to industrial firms primarily in southern Ohio. Management considers the company to be southern Ohio’s leading provider of lift truck attachments.

Sales have grown steadily in recent years from a level of 1.5 million dollars in 2011 to a level of 2.8 million dollars in 2015. Gross profits currently run at approximately 35% of net sales. Pre-tax and pre-bonus profits have been significant in recent years amounting to $340,000 in the fiscal year ending October 31, 2015.

Ownership of the company is split equally between the husband and wife team, Fred and Jane Rierdon. Jane is over 65 years of age and Fred will be 65 in July of 2017. They wish to sell the company at this time to enable them to enjoy more leisure time. The owners desire to sell for cash but will accept some payment over time as long as a substantial portion of the purchase is paid at closing. While no firm deal has been struck, Fred has indicated that $1,000,000 cash would be in the ball park. They wish also to sell the facility occupied by the business but will consider a lease with option to buy, (The facility is owned personally by Fred and Jane and they currently lease it to the company at lease payments of $41,000 per year which is estimated at about one-half of the current market rate.) An estimate of fair market value of the building which was made recently produced a value of $400,000 for the land and building.

COMPANY HISTORY

Lift Truck Attachments, Inc. was incorporated in 1995 by two individuals who wished to use their industrial experience to start a firm which would specialize in the distribution of lift truck attachments. In 1995 Fred Rierdon joined with the two founders of the company becoming a one-third owner. In 2003 he bought out the other two owners and now stock ownership is equally split between Fred and Jane Rierdon.

The central Ohio area represents a strong market for the company’s products. Consequently, in 2007, the company started a subsidiary called Ohio Attachments and operated the company as a sales branch for the main Cincinnati operation. Ohio Attachments was sold in 2011 to the management team on the basis of a down payment and a three year note.

The current owners of Lift Truck Attachments, Inc. recognized the importance of developing a manufacturing capability to enable them to manufacture items which were not readily available from suppliers. Thus, as the company grew, a manufacturing capability was added which enabled them to tailor-make a product for a particular application. Subsequently, the company added an on-site engineer to design these products. This capability has contributed significantly to the company’s growth.

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THE MANAGEMENT TEAM

The company has been lead by a twenty-five year veteran of the lift truck attachment business, Mr. Fred Rierdon. He has assembled a team of experienced sales people with strong technical skills. The company also has an in-house engineering capability allowing it to fabricate lift truck attachments for unique applications.

The company has twenty-two employees including a manufacturing organization consisting of a plant manager and ten production workers. At present, field sales work is accomplished by the President, the Sales Manager, and three outside salesmen. There are two people in inside sales. The office force consists of Jane Rierdon who is Vice President and three office and clerical personnel.

Fred Rierdon has agreed to continue full time employment for the first six months after the sale of the company and then to be on call for the subsequent six months. Jane has agreed to provide whatever time is necessary for a smooth transition (not over six months of part time work). Dave Chambers, sales manager, wishes to make a specific offer to Fred and Jane Rierdon for the purchase of the company. Dave has a strong background in the industry and in sales management. Dave and his wife have a personal net worth of $338,000 including the following:

Cash and securities: $145,000

Home Value: $190,000 less mortgage $54,000

Miscellaneous Assets: $57,000

Dave feels that he could invest $200,000 toward the purchase of the business and he and his wife would be willing to personally guarantee acquisition debt. Donald Graham, who has been a sales representative for the company for the past five years, has an interest in becoming a shareholder of the company. Donald wants to continue his strong contribution to the growth of the company in a sales capacity and is also interested in being a member of the Board of Directors. Donald does not want to manage the company but wants to continue as a sales representative and to have an equity stake in the business. He has $200,000 to invest but does not want to personally guarantee any of the company’s debt.

FACILITIES AND EQUIPMENT

The company operates out of single facility in central Cincinnati, Ohio. The facility has 18,000 square feet of total space including 3,000 square feet of offices and the remainder housing plant operations. The facility is located on a parcel of land just sufficient for the building plus a small amount of area adjacent to one corner of the building. Parking space is rented from a neighboring firm.

Machinery used is owned by the company and includes the following major pieces of equipment:

Equipment Estimated Value

A machining center $65,000.00

A heavy duty shear $50,000.00

A 500 ton press $25,000.00

A large engine lathe $20,000.00

Four industrial welding machines $30,000.00

In addition to this major shop equipment, the company owns a computer system used to process financial and operating data. This computer system has an estimated value of $12,000.00. An appraisal of all company fixed assets was done in June 2016 by a certified appraiser. The appraiser set values as follows:

Orderly Market Value

Liquidation Value in From The Stand Point

Value Place of Continued Use

$87,000 $185,000 $277,000

FINANCIAL ANALYSIS

Financial results for Lift Truck Attachments, Inc covering the fiscal years 2013 through 2015 have been analyzed and compared with industry averages. Robert Morris Associates Statement Studies for SIC 5084 (wholesalers-industrial machinery and equipment) were used. Various liquidity ratios, leverage ratios and operating rations were calculated. A brief discussion of these ratios follows:

The company’s gross margin as a percent of sales has consistently led the industry averaging approximately 33% of net sales for the past three years versus an industry average of 29%, With approximately 40% of the company’s business being distribution and the balance being manufactured items, Lift Truck Attachments, Inc. Is able to achieve a higher gross margin due to being able to charge higher prices on customized items. This puts the company in a unique position with regard to distributor competitors and substantially enhances the profitability of the company. Gross margins for the company have grown from 30% in 2013 to 35% in 2015.

Current ratios which compare current assets with current liabilities show that the company is in a good position with an average of 2.1 times versus an industry average of 1.5 times. This shows a strong ability of the company to cover current liabilities with current assets and represents a very favorable picture for the company.

The sales to working capital ratio compares the amount that current assets exceeds current liabilities relative to the annual sales of the company. This ratio which averages 7.0 for the company versus an industry average of 11.0 would indicate that the company has excess working capital.

That working capital which is in excess of what is needed to support day to day operations of the business is capital which could be used for other purposes to the extent that cash resources, inventories, and/or receivables are higher than necessary to support the sales level of the company. It is estimated that about $100,000 of working capital is excess and could be siphoned off and used to retire debt and/or avoid borrowing.

The quick ratio or acid test compares the liquid current assets including cash and accounts receivable to all current liabilities. In this case the company has an average quick ratio 1.2 versus the industry average of .8. This shows that the company has easily been able to cover current payments to suppliers and employees with existing liquid assets.

Days receivable outstanding has averaged 38 days over the past 3 years for the company versus an industry average of 44 days. This is a comparison of how promptly the company collects its invoices which have been issued to customers. It shows that the company has done a good job of collecting invoices and has maintained receivables in balance better than the industry as a whole.

The cost of sales/inventory (days) describes how many days of the cost of sales are represented by the inventory level. The company has maintained an average of approximately 55 days versus industry averages of 68 days. This indicates that inventory is in good control relative to the volume of business done by the company. It is considered that the value of inventory as shown on the balance sheet is understated by approximately $80,000.

Cost of sales/payable (days) is a measure of how quickly the company pays its bills. This measure has declined over the past three years from a level of 42 days in fiscal 2013 to level of 26 days in 2015 or an average of 35 days. This compares very closely to the industry average of 38 days. This indicates that the company has maintained good control over payables paying them very promptly and taking discounts when offered enhancing the profitability of the company.

The fixed/worth ratio compares the net fixed assets of the company to the net worth of the company. In this case the company has a ratio of .2 versus an industry average of .3 meaning that fewer fixed assets are in use with the company than in the industry on an average. It is considered that the company’ net assets are significantly understated on the balance sheet causing this ratio to be low.

The debt/worth ratio gives a comparison of how much debt versus how much equity the company shows on its balance sheet. This ratio averages 2.1 for the company versus an industry average of 2.2 indicating the company is very close to the average in the industry when it comes to leverage of the capital structure of the company.

Pre-tax return on net worth for the company has been extremely high averaging approximately 75% over the past three years versus an industry average of 16%. This results from a very profitable company with a small stated net worth. The pre-tax return is based upon pre-tax profits before deduction of officers and family members bonuses. If those bonuses were deducted from pre-tax profits the average would be approximately 27%, still substantially higher than the industry average.

The sales to net fixed assets ratio measures the amount of fixed assets in comparison with annual sales. For this ratio the company shows a significant shortage in net fixed assets. This ratio is at variance with industry averages primarily because the net assets on the balance sheet are significantly understated. The company’s average ratio is 44 for the past three years whereas the industry average is 28.

The sales to total assets ratio compares total assets on the balance sheet to annual sales. For this ratio, the company averages a ratio of 3.4 versus an industry average of 2.6. This means that fewer total assets are used to support the company’s sales level than are generally used in the industry.

The percent officers compensation sales compares the amount of officers compensation at the company to industry averages. The company’s percent officers compensation prior to bonuses amounted to an average of 2.8% over the past three years versus an industry average of 4.1%. If officers bonuses were also considered, this ratio would average 5.3% or somewhat higher than industry averages.

FINANCIAL FORECAST

The attached financial statements (income statements, balance sheets and statements of cash flow) can be used to assist in forecasting results for the next 1-1/2 half years. In addition, the RMA ratios can also be used to determine forecasted financials. The assumptions to be used in the forecast are as follows:

1. Net sales are forecasted to total $2.7 million, a drop from 2015 to 2016. Net sales are expected to improve in 2017 to a level of $3 million

2. Gross profits are expected to drop to 36% of sales for the entire year 2016 and to drop further to 35% of net sales in 2017.

3. Sales expenses are projected to increase in the second half of 2016 with the total year 2016 amounting to $169,000. Sales expenses for 2017 are projected to increase by 5% over those in 2016.

4. Administrative expenses are expected to increase to a projected $452,400 for all of 2016 and to $481,200 in 2017.

5. Depreciation will amount to $36,300 for all of 2016 and $20,000 for 2017.

6. Other expense will increase to $27,800 for all of 2016 and will amount to $20,800 in 2017. (This results from substantial increases in interest costs resulting from acquisition debt.)

7. Income taxes include both state and federal taxes and will amount to 32.69% of pretax profits in 2016 and 39.22% of pretax profits in 2017. (This is a higher rate than that historically experienced because of the previous use of tax credits that reduced income tax to a lower than normal rate.)

8. There will be no profit sharing bonuses in 2016 and 2017.

9. Accounts receivable will amount to 43 days of sales at the end of 2016 and will hold at the same dollar figure at the end of 2017. (Hint: Don’t enter cash into the balance sheet initially. Use cash as the “plug” figure.)

10. Inventory at the end of 2016 will amount to 59.07days of 2016 Cost of Sales and will hold the same dollar figure at the end of 2017.

11. Prepaid expenses will amount to the same dollar figure at the end of 2016 and 2017 as it was on April 30, 2016.

12. There will be no additions to fixed assets in the last fiscal half of 2016 and additions to fixed assets will amount to $20,000 during 2017.

13. The current portion of long term debt will amount to $49,700 at the end of 2016 and $42,300 at the end of 1992.

14. Accounts payable will amount to 35.43 days of 1991 cost of sales at the end of 1991 and will amount to 35.04 days of 2017 projected cost of sales.

15. Accrued expenses will amount to $38,400 at the end of 2016 and $40,000 at the end of 2017.

16. Long term debt net of the current portion will amount to $182,700 at the end of 2016 and to $140,400 at the end of 2017.

17. Common stock will remain at $9,800 at the end of 2016 and 2017.

18. Retained earnings will increase or decrease by the amount of after tax profit or loss during the period covered by the statements.

19. There will be no distributions from retained earnings to shareholders during the forecast period.

ASSIGNMENT

Please complete the forecasted financial statements by filling in the blanks on the attached statements.