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The O.M. Scott and Sons CompanyCristina Cataldo|260532717Fathima Mullick|260400364Karim El-Hajj|260509922 Mark Muchantef|260482101Olivia Julia Lanni|260535306

Karim1HistoryProblem AnalysisAlternativesRecommendation18681920s1930s1950s1960Karim2Problem: Scotts distribution system had not evolved adequately in response to developing market opportunitiesHistoryProblem AnalysisAlternativesRecommendationKarim3HistoryProblem AnalysisAlternativesRecommendationINCOME STATEMENTSales Growth25.30%30.61%25.63%12.35%19571958195919601961Net sales$18,676 $23,400 $30,564 $38,396 $43,140 COGS15,501 18,915 24,120 30,417 34,332 Expenses1,817 2,134 2,499 2,854 3,851 Depreciation263 186 378 584 590 Interest charges200 213 411 882 1,132 Total cost of sales17,781 21,447 27,407 34,736 39,904 Earnings before taxes895 1,953 3,157 3,660 3,237 Income taxes444 1,052 1,671 1,875 1,666 Net income after taxes$451 $901 $1,486 $1,785 $1,571 Karim4HistoryProblem AnalysisAlternativesRecommendationOlivia5HistoryRecommendationProblem AnalysisAlternativesSHIPDUESHIPDUEOlivia

Turnover increases as we get closer to the payment due date.

OctNovember December- Place ordersJanuaryFebMarch- Place ordersApril- due at endMay- dueJuneJulyAugSeptemberOct- dueNovember -dueDecemberJanuaryFebMarchAprilMayJune- shipJulyAugSeptember6HistoryProblem AnalysisAlternativesRecommendationOlivia7HistoryRecommendationProblem AnalysisAlternativesBalance Sheet: Liabilities19571958195919601961Accounts payable 1,540.8 2,134.6 4,140.2 2,791.0 6,239.2 Notes payable banks 300.0 -1,000.0 --Accrued expenses 674.3 1,437.7 1,900.7 1,941.2 1,207.7 Current sinking fund77.0 173.9 324.3 382.5 512.5 Total current liabilities 2,592.1 3,746.2 7,365.2 5,114.7 7,959.4 Long-term debt: Of parent company2,186.7 2,059.7 1,777.2 9,000.0 12,000.0 Of subsidiary--5,162.6 4,649.5 4,170.4 Total liabilities4,778.8 5,805.9 14,305.0 18,764.2 24,129.8 Olivia

Turnover increases as we get closer to the payment due date.

OctNovember December- Place ordersJanuaryFebMarch- Place ordersApril- due at endMay- dueJuneJulyAugSeptemberOct- dueNovember -dueDecemberJanuaryFebMarchAprilMayJune- shipJulyAugSeptember8HistoryProblem AnalysisAlternativesRecommendationOlivia9

RatiosHistoryProblem AnalysisAlternativesRecommendationMark10Cash ShortageHistoryProblem AnalysisAlternativesRecommendation*Compensating balance of $1,875,000 [15%*$12,500,000]Dec. 1960Mar. 1961June. 1961Sept. 1961Cash (with loan)3,000 3,040 2,610 2,400 Cash (without loan)(3,250)(8,960)(3,140)2,400 Cash (without loan and with debt covenant*)(5,125)(10,835)(5,015)525 Karim11EFN: Income StatementHistoryProblem AnalysisAlternativesRecommendationCurrent: March 1961% SalesProforma: March 1962Net sales 15,780.00 100% 19,725.00 COGS 11,730.00 74% 14,662.50 Expenses 800.00 5% 1,000.00 Interest Charges 240.00 n.a. 240.00 Total cost of sales 12,770.00 15,902.50 Earnings before taxes 3,010.00 3,822.50 Income taxes 1,570.00 1,993.80 Net income after taxes 1,440.00 1,828.70 Retained Earnings89.9% 1,644.01 Karim12EFN: Balance SheetHistoryProblem AnalysisAlternativesRecommendationCurrent: March 1961% SalesProforma: March 1962Cash 2,140.00 14% 2,675.00 Standard Plan 6,540.00 41% 8,175.00 Trust Receipt Plan 15,880.00 101% 19,850.00 Total Receivables 22,420.00 142% 28,025.00 Inventories Finished Goods 5,850.00 37% 7,312.50 Raw materials and supplies 2,520.00 16% 3,150.00 Total Inventories 8,370.00 53% 10,462.50 Current assets 32,930.00 209% 41,162.50 Land, buildings, equipment 2,190.00 14% 2,737.50 Less: Accumulated Depreciation 830.00 5% 1,037.50 Net fixed assets 1,360.00 9% 1,700.00 Other assets 1,730.00 n.a. 1,730.00 Total assets 36,020.00 44,592.50 Karim13HistoryProblem AnalysisAlternativesRecommendationCurrent: March 1961% SalesProforma: March 1962Accounts payable 3,680.00 23% 4,600.00 Notes payable, Bank 12,000.00 n.a. 12,000.00 Accrued taxes, interest, and other expenses 950.00 n.a. 950.00 Current liabilities 16,630.00 17,550.00 Subordinated promissory notes 9,000.00 n.a. 9,000.00 Total liabilities 25,630.00 29,550.00 Preferred Stock 2,380.00 n.a. 2,380.00 Commons stock and surplus 8,010.00 n.a. 8,010.00 Retained Earnings90% 1,644.01 Net Worth 10,390.00 12,034.01 Total liabilities and net worth 36,020.00 38,584.01 EFN: Balance SheetKarim14EFN = Assets Liabilities = $44,592,500 $38,584,010 = $6,008,490HistoryProblem AnalysisAlternativesRecommendationKarim15HistoryProblem AnalysisAlternativesRecommendationEFN = $6,008,490Available debt:$900,000Still need:$5,108,490Line of Credit:$500,000Subordinated Promissory notes:$400,000 March 1962AR $28,025,000$7,006,250 x (1 27.09%) =Mark16Reduce Growth RateHistoryProblem AnalysisAlternativesRecommendationEFN25%12.68%$6,008,490$900,000$0%Karim17HistoryProblem AnalysisAlternativesRecommendationScotts SolutionInitial ProblemOur SolutionOliviaRising Cash cycle mainly due to generous sale terms and credit extensionsConsignment solution: No longer dependent on dealer NWC and AR not affected18Three Step StrategyFactor accounts receivablesReduce growth rate to a range between:- Sustainable growth rate (12.68%)- Highest growth rate given debt capacity ( %)3. Sell on consignmentHistoryProblem AnalysisAlternativesRecommendationMark19Questions?Karim20Year1957195819591960 1961

Liquidity (ST)

Current2.132.481.974.303.59

Quick1.221.581.023.532.88

Cash Ratio0.100.130.120.110.05

Financial Leverage (LT)

Debt Ratio1.171.021.921.682.08

Equity Multiplier1.391.221.581.841.83

Interest Coverage(income)5.4810.188.695.153.86

Interest Coverage(cash)6.8011.069.615.814.38

Profitability

Net profit margin2.42%3.85%4.86%4.65%3.64%

Return on assets (ROA)5.08%8.85%8.94%6.91%4.79%

Return on equity (ROE)11.01%18.42%22.64%19.22%13.81%