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Part I

Financial Statements
Adobe Trading Company
Pro Forma Income Statement
06/30/11

12/31/11

12/31/12

12/31/13

12/31/14

12/31/15

12/31/16

Sales

$0.00

$275,000.00

$675,000.00

$800,000.00

$900,000.00

$900,000.00

$900,000.00

Cost of Goods Sold

$0.00

$173,250.00

$425,250.00

$504,000.00

$567,000.00

$567,000.00

$567,000.00

Gross Margin

$0.00

$101,750.00

$249,750.00

$296,000.00

$333,000.00

$333,000.00

$333,000.00

Selling & Administrative


Expenses

$0.00

$33,000.00

$81,000.00

$96,000.00

$108,000.00

$108,000.00

$108,000.00

G&A Expenses

$0.00

$70,000.00

$100,000.00

$120,000.00

$120,000.00

$120,000.00

$120,000.00

Depreciation

$0.00

$14,750.00

$29,500.00

$29,500.00

$29,500.00

$29,500.00

$29,500.00

Other

$0.00

$30,000.00

$0.00

$0.00

$0.00

$0.00

$0.00

Total Operating
Expenses
Earnings Before Taxes

$0.00

$147,750.00

$210,500.00

$245,500.00

$257,500.00

$257,500.00

$257,500.00

$0.00

($46,000.00)

($6,750.00)

$43,750.00

$75,500.00

$75,500.00

$75,500.00

Taxes @ 34%

$0.00

$0.00

$0.00

$14,875.00

$25,670.00

$25,670.00

$25,670.00

Net Income

$0.00

($46,000.00)

($6,750.00)

$28,875.00

$49,830.00

$49,830.00

$49,830.00

Taxable Income

$0.00

($46,000.00)

($6,750.00)

$43,750.00

$75,500.00

$75,500.00

$75,500.00

$1,506.85

$1,849.32

$2,191.78

$2,465.75

$2,465.75

$2,465.75

Average Daily Sales

Adobe Trading Company


Pro Forma Inventory Schedule
06/30/11

12/31/11

12/31/12

12/31/13

12/31/14

12/31/15

12/31/16

$0.00

$130,000.00

$115,500.00

$141,750.00

$168,000.00

$189,000.00

$189,000.00

Purchases

$130,000.00

$158,750.00

$451,500.00

$530,250.00

$588,000.00

$567,000.00

$567,000.00

Goods Available for


Sale
Cost of Goods Sold

$130,000.00

$288,750.00

$567,000.00

$672,000.00

$756,000.00

$756,000.00

$756,000.00

$0.00

$173,250.00

$425,250.00

$504,000.00

$567,000.00

$567,000.00

$567,000.00

Ending Inventory

$130,000.00

$115,500.00

$141,750.00

$168,000.00

$189,000.00

$189,000.00

$189,000.00

Beginning Inventory

Adobe Trading Company


Pro Forma Balance Sheet
12/31/12
12/31/13

06/30/11

12/31/11

12/31/14

12/31/15

12/31/16

$20,000.00
$0.00

$20,000.00
$72,328.77

$20,000.00
$88,767.12

$20,000.00
$105,205.48

$20,000.00
$118,356.16

$20,000.00
$118,356.16

$20,000.00
$118,356.16

$130,000.00
$295,000.00

$115,500.00
$295,000.00

$141,750.00
$280,250.00

$168,000.00
$250,750.00

$189,000.00
$221,250.00

$189,000.00
$191,750.00

$189,000.00
$162,250.00

$0.00

$14,750.00

$29,500.00

$29,500.00

$29,500.00

$29,500.00

$29,500.00

$295,000.00

$280,250.00

$250,750.00

$221,250.00

$191,750.00

$162,250.00

$132,750.00

$445,000.00
$0.00

$488,078.77
$24,356.16

$501,267.12
$34,635.62

$514,455.48
$40,676.71

$519,106.16
$45,106.85

$489,606.16
$43,495.89

$460,106.16
$43,495.89

$90,000.00
$235,000.00
$325,000.00

$90,000.00
$189,000.00
$303,356.16

$90,000.00
$182,250.00
$306,885.62

$90,000.00
$211,125.00
$341,801.71

$90,000.00
$260,955.00
$396,061.85

$90,000.00
$310,785.00
$444,280.89

$90,000.00
$360,615.00
$494,110.89

Loan Needs
(mtk. sec's)

$120,000.00

$184,722.60

$194,381.51

$172,653.77

$123,044.32

$45,325.27

($34,004.73)

Total Liabilities
& Equity including
new loan needs

$445,000.00

$488,078.77

$501,267.12

$514,455.48

$519,106.16

$489,606.16

$460,106.16

Change in Loan
Needs

$120,000.00

$64,722.60

$9,658.90

($21,727.74)

($49,609.45)

($77,719.04)

($79,330.00)

Cash
Accounts
Receivables
Inventory
Gross Fixed
Assets
less
Accumulated
Depreciation
Net Plant and
Equipment
Total Assets

Accounts
Payable
Notes Payable
Equity
Total Liabilities
& Equity

Adobe Trading Company


Pro Forma Cash Budget
12/31/11
12/31/12
12/31/13

06/30/11
Cash Sales
Net Sales
less change in A/R
Total Cash
Receipts
Cash Disbursements
COGS
less change in
inventory
plus change in A/P
Total Cash
Purchases
Total Operating
Expenses
plus Depreciation
less Taxes Paid
Total Cash
Disbursements
Cash Flow from
Operations
Capital Expenditures
Change in Stock and
LTD
Change in loan needs
Change in Cash

12/31/14

12/31/15

12/31/16

$0.00
$0.00
$0.00

$275,000.00
($72,328.77)
$202,671.23

$675,000.00
($16,438.36)
$658,561.64

$800,000.00
($16,438.36)
$783,561.64

$900,000.00
($13,150.68)
$886,849.32

$900,000.00
$0.00
$900,000.00

$900,000.00
$0.00
$900,000.00

$0.00
($130,000.00)

($173,250.00)
$14,500.00

($425,250.00)
($26,250.00)

($504,000.00)
($26,250.00)

($567,000.00)
($21,000.00)

($567,000.00)
$0.00

($567,000.00)
$0.00

$0.00
($130,000.00)

$24,356.16
($134,393.84)

$10,279.45
($441,220.55)

$6,041.10
($524,208.90)

$4,430.14
($583,569.86)

($1,610.96)
($568,610.96)

$0.00
($567,000.00)

$0.00

($147,750.00)

($210,500.00)

($245,500.00)

($257,500.00)

($257,500.00)

($257,500.00)

$0.00
$0.00
($130,000.00)

$14,750.00
$0.00
($267,393.84)

$29,500.00
$13,345.00
($608,875.55)

$29,500.00
$17,170.00
($723,038.90)

$29,500.00
$25,670.00
($785,899.86)

$29,500.00
$25,670.00
($770,940.96)

$29,500.00
$25,670.00
($769,330.00)

($130,000.00)

($64,722.60)

$49,686.10

$60,522.74

$100,949.45

$129,059.04

$130,670.00

($295,000.00)
$325,000.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$0.00
$0.00

$120,000.00
$20,000.00

$64,722.60
$0.00

($22,996.10)
$26,690.00

($26,182.74)
$34,340.00

($49,609.45)
$51,340.00

($77,719.04)
$51,340.00

($79,330.00)
$51,340.00

12/31/14

12/31/15

12/31/16

06/30/11

Adobe Trading Company


Pro Forma Collateral Schedule
12/31/11
12/31/12
12/31/13

Collateral
Schedule
Cash
Accounts
Receivables @
75%
Inventory @
75%
Building
(historical cost
80%)
Total
available
Loan from bank
Excess over
loan (deficit)
Coverage Ratio

$20,000.00

$20,000.00

$20,000.00

$20,000.00

$20,000.00

$20,000.00

$20,000.00

$0.00

$54,246.58

$66,575.34

$78,904.11

$88,767.12

$88,767.12

$88,767.12

$97,500.00

$86,625.00

$106,312.50

$126,000.00

$141,750.00

$141,750.00

$141,750.00

$236,000.00

$236,000.00

$236,000.00

$236,000.00

$236,000.00

$236,000.00

$236,000.00

$353,500.00

$396,871.58

$428,887.84

$460,904.11

$486,517.12

$486,517.12

$486,517.12

$120,000.00

$184,722.60

$161,726.51

$135,543.77

$85,934.32

$8,215.27

($71,114.73)

$233,500.00

$212,148.98

$267,161.33

$325,360.34

$400,582.80

$478,301.85

$557,631.85

2.95

2.15

2.65

3.40

5.66

59.22

-6.84

(times)

Part II
Questions and Analysis
1. How much initial and additional financing is required?
When considering initial financing, we have to consider all the expenses required for Adobe
Training Company to start its operations. As such, this amount will correspond to the amount of
money that is needed by June 2011, date the company is planning to start its operations. As
such, the initial financing needed for Abode Training Company is of $120,000. In terms of
additional financial, the change in loan needs are of $64,722 by December 2011, $9,658.90 by
December 2012, $-21,727.74 by December 2013, -$49,609.45 by December 2014, -$77,719.04
by December 2015 and -$79,330.00 by December 2016. As such, the total of the additional
financing needed for Adobe Training Company is of $74,381.50.

2. What are the loans proceeds to be used for?


For the first year, loan proceeds will be used to finance the initial elements that are crucial for
the company to start its operations. These elements include the $20,000 in cash that are needed
to cover operating expenses, the $130,000 in beginning inventory, and $45,000 related to fixing
the building. In upcoming years, loan proceeds are expected to be used to build up inventory to
cope with the increasing demand for the companys product. This can be seen by the gradual
increase in inventory from $130,000 in 2011 to $189,000 in 2014, 2015, and 2016. Additionally,
Ill be used to cover the increasing operating expenses that will occur as the company expands it
operations.

3. What is the primary source of repayment for the loan?


The primary source of repayment for the loan comes from the owners equity and
the liabilities the company has assumed at the start its operations (the $90,000 note
payable). This is the case because the company is unable to generate a high enough
net income that is able to cover the total amount of the loan ($194,000).
4. When will the loan be repaid using the primary source of repayment?

By the end of year 2015, the loan should be repaid. This is demonstrated by the fact that
as shown in the balance sheet, loan needs are negative by year 2016 (-34,000.73).
5. What is the secondary source of repayment for the loan?
By 2013, the company starts generating a positing net income that demonstrates
their ability to make revenue out of their operating activities. This will be the
secondary source of repayment for the loan.
6. What type of loan covenants would you require?
7. What are the largest risks for the bank in making this loan?
The largest risks for the bank include the following:

Inability of company to generate sufficient income from operations.

High losses in first year as company earns market share

Company entering into more debt as it attempts to fulfill its financial


obligations

Company having a coverage ratio that is very low

Company suffering from a managerial crisis as it attempts to move from a


small business into a partnership, LLC. or corporation

8. How would structure the loan agreement to protect the bank?


Given the fact that the company suffers from a high level of business risk, we would
structure the loan agreement to contain the following provisions:

The interest of the loan will be set a fixed level for every year until the
company generates a positive net income.

Interest will be variable but contain a fixed 1.5% premium even after
company generates positive net income.

The company will have to maintain a current ratio and a coverage ratio that
is consistently above competitors.

Loan covenants will be stated as permanent in the loan agreement.

Late interest payments will result in an increase in the risk premium (added
to the variable interest rate), not in a simple fee or penalty.

Drop of net income to a level below one-third of net sales will result in the
company being placed in a probation period for three months during which
fixed interest rates assessed to the loan will be higher.

9. What is your recommendation concerning the loan request? Would you make
or deny the loan? State your reasons.
After having analyzed the financial statements of Adobe Training Company and its
associated risks, we would deny the request of the loan because of the following
reasons:

The company does not generate a net income that is sufficient to offset the loan
in any of the years presented.

The gradual increase in inventory for the company does not project a major
growth in future years (2012,2013,2014,2015,and 2016).

Sales seem to hit a stalemate after 2013 for the company since they are expected
to stay at $800,000 for years 2014, 2015, and 2016.

Coverage ratio does not significantly increase even as the company is able to
finance itself through its operations starting in 2013.

Cost of goods sold represents 63% of sales, resulting in a low gross margin.

Given the nature of the business (southwest furniture, art, and jewelry),
company sales are vulnerable to business cycle fluctuations.