D'Leon Inc. Part I

Integrated Case

3-16

DÐ'ÐŽÐ'¦Leon Inc., Part I

Financial Statements and Taxes

Donna Jamison, a 2000 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairman of the board of DÐ'ÐŽÐ'¦Leon Inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack-foods market. DÐ'ÐŽÐ'¦LeonÐ'ÐŽÐ'¦s president, Al Watkins, decided in 2004 to undertake a major expansion and to Ð'ÐŽÐ'§go nationalÐ'ÐŽÐ'Ё in competition with Frito-Lay, Eagle, and other major snack-food companies. Watkins felt that DÐ'ÐŽÐ'¦LeonÐ'ÐŽÐ'¦s products were of a higher quality than the competitionÐ'ÐŽÐ'¦s; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and stock price.

The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. DÐ'ÐŽÐ'¦LeonÐ'ÐŽÐ'¦s results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice-president plus its major stockholders (who were all local business people), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, Watkins was informed that changes would have to be made, and quickly, or he would be fired. Also, at the boardÐ'ÐŽÐ'¦s insistence Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was DÐ'ÐŽÐ'¦LeonÐ'ÐŽÐ'¦s chairman and largest stockholder. Campo agreed to give up a few of his golfing days and to help nurse the company back to health, with JamisonÐ'ÐŽÐ'¦s help.

Jamison began by gathering the financial statements and other data given in Tables IC 3-1, IC 3-2, IC 3-3, and IC 3-4. Assume that you are JamisonÐ'ÐŽÐ'¦s assistant, and you must help her answer the following questions for Campo. (Note: We will continue with this case in Chapter 4, and you will feel more comfortable with the analysis there, but answering these questions will help prepare you for Chapter 4. Provide clear explanations, not just yes or no answers!)

Table IC 3-1. Balance Sheets

2005 2004

Assets

Cash $ 7,282 $ 57,600

Accounts receivable 632,160 351,200

Inventories 1,287,360 715,200

Total current assets $ 1,926,802 $ 1,124,000

Gross fixed assets 1,202,950 491,000

Less accumulated depreciation 263,160 146,200

Net fixed assets $ 939,790 $ 344,800

Total assets $ 2,866,592 $ 1,468,800

Liabilities and Equity

Accounts payable $ 524,160 $ 145,600

Notes payable 636,808 200,000

Accruals 489,600 136,000

Total current liabilities $ 1,650,568 $ 481,600

Long-term debt 723,432 323,432

Common stock (100,000 shares) 460,000 460,000

Retained earnings 32,592 203,768

Total equity $ 492,592 $ 663,768

Total liabilities and equity $ 2,866,592 $ 1,468,800

Table IC 3-2. Income Statements

2005 2004

Sales $ 6,034,000 $ 3,432,000

Cost of goods sold 5,528,000 2,864,000

Other expenses 519,988 358,672

Total operating costs excluding

depreciation and amortization $ 6,047,988 $ 3,222,672

EBITDA ($ 13,988) $ 209,328

Depreciation and amortization 116,960 18,900

EBIT ($ 130,948) $ 190,428

Interest expense 136,012 43,828

EBT ($ 266,960) $ 146,600

Taxes (40%) (106,784)a 58,640

Net income ($ 160,176) $ 87,960

EPS ($ 1.602) $ 0.880

DPS $ 0.110 $ 0.220

Book value per share $ 4.926 $ 6.638

Stock price $ 2.25 $ 8.50

Shares outstanding 100,000 100,000

Tax rate 40.00% 40.00%

Lease payments 40,000 40,000

Sinking fund payments 0 0

Note:

a The firm had sufficient taxable income in 2003 and 2004 to obtain its full tax refund in 2005.

Table IC 3-3. Statement of Retained Earnings, 2005

Balance of retained earnings, 12/31/04 $ 203,768

Add: Net income, 2005 (160,176)

Less: Dividends paid (11,000)

Balance of retained earnings, 12/31/05 $ 32,592

Table IC 3-4. Statement of Cash Flows, 2005

Operating Activities

Net income ($ 160,176)

Additions (Sources of Cash)

Depreciation and amortization 116,960

Increase in accounts payable 378,560

Increase in accruals 353,600

Subtractions