Case Studies
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CASE STUDIES
Borrowing Capacity
Banks routinely monitor a company’s health and financial position.
Borrowing capacity is a measure of whether a company has sufficient net
tangible assets to serve as a secondary source of payment in case the business
fails. Determine whether the company in this case has any remaining
borrowing capacity, and if so, how much. Page 3.
Asset Based Lenders
Every asset based lender has a particular criteria it uses to screen
potential clients. Three companies are each applying for credit from a national
asset based lender: Micro Electron, Proxima Comics and Industrial Laundry
services. Apply the lenders criteria to determine whether any of the three
companies will be funded and to what extent. Page 4.
New Furniture Company
Develop a pitch to friends, family and other individuals to convince
them to invest in your start-up furniture company. Student teams should
develop presentations and present them to the class who will act as a panel of
individual investors. The potential investors will ask the kinds of follow-up
questions they would if their own money were at stake. Page 9.
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Raising Capital
New Soup Company
Develop a more sophisticated, fact based pitch to Angel Investors.
The presentation should be made by teams of students. The class will act like
a panel of potential Angel Investors who will ask questions designed to
sharpen the presenters’ analytical and presentation skills. Page 10.
Electric Motor Works
Develop a presentation to persuade Venture Capitalists to invest in a
start up car company. Venture Capitalists are much more sophisticated than
family and friends or most angel investors. They focus on sales, growth,
profits and the yield on their investment. The class will act as a panel of
Venture Capitalists and ask challenging follow-up questions designed to
sharpen the presenters’ skills. Page 17.
Mom’s Soup Company
Develop the forms and filings required by the SEC to comply with
regulations for a Regulation D, private offering. Page 22.
Blenheim Furniture
Develop the forms and filings necessary for a small public offering.
Assume that the company is not going to be listed on a national exchange so
that the filings must satisfy both state and federal securities law. Page 26.
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BORROWING CAPACITY
Use the following information to compute: (i) Tangible Net Worth, (ii)
Borrowing Capacity, and (iii) Remaining Capacity.
Terms: Line of Credit $800; Factor 70%, A/R > 60 days ineligible. How
much more can this company borrow on its line of credit?
Current Assets:
Cash
A/R
Prepaid Expense
Inventory
Total Current Assets
Plant, Property
(net of depreciation)
Total Assets:
Current Liabilities:
Accounts Payable
Line of Credit
Current Leases
Bank Term Loan – current
Total Current Liabilities
$400
$570
$20
$30
$1,020
$1,000 Bank Term Loan
______ Equity
$2,200 Total Liabilities & Equity
$330
$850
$2,200
$20
$600
$20
$560
$1,200
A/R Aging: $225 < 30 days; $175 31-60 days; $125 61-90 days; $75>90 days.
-----------------Tangible Net Worth and Borrowing Capacity Format------------Assets:
Less: Excluded Items:
_________
Subtotal Excluded Items:
___________
Less: Non-bank Liabilities:
_________
Subtotal Non-bank Liabilities
___________
Tangible Net Worth:
x Factor
Borrowing Capacity
Less Outstanding Bank Debt:
Term Loan
Line of Credit
____________
_________
____________
Remaining Capacity:
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Raising Capital
ASSET BASED LENDERS
Asset based lending is an alternative for companies that cannot obtain
conventional bank financing. Loan underwriting is based on the quality of
assets rather than the ability to produce net income.
Assume the following are lending criteria for an asset based lender
called American International Capital. Following the criteria are descriptions
of three companies. Which of these companies gets funding, and about how
much based on these criteria?
American International Capital
General Lending Criteria
American International Capital asset based loans range from $10 to $150
million.
Characteristics of companies that qualify for American International financing
include:

Actively involved management, with a track record of good
performance in the company’s industry

Adequate assets

Historical profitability that is “spotted” to consistent

Moderate to high financial leverage

Realistic projections, consistent with historical data
Required Loan to Asset Value(s)

Accounts receivable, up to 85% based on the quality of accounts
receivable (this usually implies accounts receivable are less than 90
days old, often less than 60 days old.)

Inventory, up to 75% of eligible (lower of cost or market) inventory
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
Machinery and Equipment - up to 80% of appraised, orderly
liquidation value (this usually means, the business is closed, and
assets are sold via regular markets. However, orderly liquidation
value might be a small fraction of fair market value. It is probably
closer to “fire sale,” or exit value, which may be a few percent of
book value.)

Real Estate - up to 65% of appraised fair market value (if property is
already subject to a mortgage, then only the net equity is available for
collateral.)
Terms and Repayment

Repayment consistent with liquidation of assets

Loan terms up to seven years

Rate: Floating rate over prime or LIBOR with fixed rate pricing
available.
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Raising Capital
Case I: Micro Electron Corporation
Micro Electron Corporation designs computer switches based on
electron spin. Founded in 2005 by two Ph.D. scientists, they have raised $5
million in investment capital. They want to borrow $10 million to bring their
first product to market. Their target market is telecommunications companies.
Their balance sheet is given below:
Assets
Cash & cash equivalents
Furniture
Equipment - laboratory
Patents
Real Estate
Liabilities
Accounts Payable
Accrued Payroll
Equity
Capital at Par
Preferred Stock
Retained Earnings
$4,000,000
30,000
300,000
200,000
100,000
$4,630,000
$10,000
8,000
$18,000
$2,000
5,000,000
(390,000)
$4,630,000
Does Micro Electron get an American International Capital loan? If so, how
much?
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Case II: Proxima Comics
Proxima Comics specializes in Spanish language comic books. They have
four different comic books each of which is published monthly. Profits have
been $3 million, a loss of $2 million, and $4 million on sales of $18 million,
$21 million, and $24 million respectively. They want to borrow $12 million
to purchase rights to publish Marvel Comics in Spanish and finance additional
working capital. Their balance sheet in thousands follows:
Assets
Cash
Accounts Receivable (all under 60 day)
Inventory
Furniture & Fixtures
Printing Machinery
Real Estate
Liabilities
Accounts Payable
Term Loan
Mortgage
Equity
Capital at Par and Paid In Capital
Retained Earnings
50
8,000
450
500
6,000
10,000
25,000
300
12,000
5,700
18,000
1,000
6,000
7,000
Does Proxima get an American International Capital loan? If so, how much?
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Raising Capital
Case III: Industrial Laundry Services
Industrial is the leading provider of commercial laundry services in
the Baltimore area with 22% of hospitals, 27% of restaurants and 28% of
nursing homes in their market. Profits for the last three years have been $10,
$12, and $15 million on sales of $110, $120 and $130 million respectively.
Industrial is a third generation, privately held family business. The
owners are: Debbie Glick, 32, a doctor in Seattle, Charles Glick, 35, a lawyer
with the New York firm of Glick and Sales, who is also Industrial’s President,
and Sandy Glick, a New York furniture designer. They want to borrow $15
million for working capital. Their balance sheet is in millions.
Assets
Cash
Accounts Receivable (all under 60 days)
Inventory
Machinery & Equipment
Real estate
Liabilities
Accounts Payable
Term Loans
Mortgage
Equity
Capital at Par and Paid In Capital
Retained Earnings
3
30
2
5
10
50
7
13
15
35
2
13
15
Does Industrial get an American International Capital loan? If so, how much?
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NEW FURNITURE COMPANY
You and your friends have decided to start a furniture business.
Among the reasons for selecting furniture as a business are:
1.
It is low-tech. High tech businesses require constant investment in
new technology, and at any given moment, even the best technology
can be eclipsed by the “latest and greatest.”
2.
Only a few of your friends have engineering or science degrees.
3.
You want a product that everyone can understand, employees,
customers and most important investors.
4.
You perceive there are relatively low barriers to entry in terms of
start-up capital and government regulation (as compared to, for
example starting a pharmaceutical firm, an airline, or nuclear waste
dump.)
Of course the disadvantages of starting a furniture company are:
1.
Relatively low barriers to entry.
2.
A crowded market.
Your challenge is to define a market space, and corresponding
product that is unique, or unique enough that you are not competing head to
head with the largest furniture manufacturers.
One thing you all agree upon is that most furniture is boring, not well
made, and just doesn’t have that… something that makes it stand out.
You must figure out how to distribute your product, the cost to
manufacture it, and its retail price.
You also have to figure out how much money it will take to get the
company started and where you will get it.
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Raising Capital
NEW SOUP COMPANY
While watching the Seinfeld episode on the Soup Nazi, you began
thinking about what really good soup was like. Your writer’s group recently
met at a member’s house and she made the most wonderful, thick, comforting
chicken soup you’ve ever had.
You’ve also tried several varieties of split pea soup sold in
supermarkets and have been disappointed by all of them. For one thing, they
all seemed watery, and not thick and rich like the home made split pea soup
your mom made.
You did some investigation and found that total soup sales, in terms
of cases of soup, has declined one percent per year for the last 30 years.
However, after a little investigation, you found that coffee sales declined
about one percent per year for thirty years until some upstarts from Seattle,
Starbucks, made coffee trendy. At that point demand for better coffee
skyrocketed and the price of a cup of gourmet coffee tripled, and the price of
regular, brewed coffee doubled. You believe that if you can make your
gourmet soup trendy, it will command a premium price in the marketplace.
Your product objective is to make a line of soups that are not just a
little better than today’s canned soup, but are so much better that once people
it, they just won’t be able to go back to anything else.
You have excellent recipes for chicken soup (from your writer
friend), and split pea soup (from your mom) and are searching for receipts for
mushroom, tomato, pepper pot, and one other soup. You would like to make
your soup so satisfying, so trendy, so hip, that people will think of your soup
as a way to end every day. Hence, you want seven varieties of soup.
The issues you have to address are:
1.
2.
3.
4.
5.
The channels of distribution are you going to use – direct sales by
yourself, or your own sales force, or brokers, or some other
alternative.
How to convince supermarkets, or other retailers to carry your soup.
What you are going to do for production. You can make and can (in
ball jars) samples in your own kitchen. However, you can only
produce 100 jars of soup per day.
You have surveyed retail prices and done research as to
supermarket’s gross margin on various soups, and have summarized
those in a table attached.
You have estimated your cost per can of soup in the attached table.
What have you included in that cost? Investors will want to know
because your cost per can is an integral part of your cost structure.
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7.
8.
9.
11
Attached is a break-even analysis that shows how your economic
model will change as sales volume increases. They will probably ask
questions about whether you have allocated enough for each type of
fixed and variable expense. Do the best you can to explain/rationalize
the numbers.
You have allocated a certain amount for marketing/advertising costs.
Investors will want to know how you intend to spend those dollars. If
they are smart, they may ask whether you are spending too much or
too little. They may also ask how you intend to measure the
effectiveness of your advertising.
You hired Rutgers Rohrer Center for Management and
Entrepreneurship to conduct focus group studies for you. A one-page
summary of the studies is attached.
You must decide how much you need for plant, equipment, and
working capital to get started. You should also forecast how much
cash you will need to develop other recipes and for product
introduction.
Marketing Plan Issues
There are two overlays to your marketing plan, one regional and
one demographic. Rather than scattering marketing and advertising
resources across the country, you intend to focus on one region until you
get a penetration of three percent of all supermarket soup sales for the
region. At that point you will consider opening a new region. Priority
will be given to high income regions first, such as the North East, Middle
Atlantic states and California.
The second overlay is demographic. Marketing efforts will focus
on towns with high per capita income. This data is available from the
census bureau. Within these town, you will focus on high end retailers,
bypassing supermarkets that emphasize low price.
Product introductions will be through in-store promotions,
coupons, and perhaps even samples distributed to homes in very high
income areas. The strategy is to get “buzz” going among trend setters.
National soup sales have declined about 1% per year for thirty
years. You plan to reverse this. Since the US population is growing at
about 2% per year, the number of new, potential, soup consumers grows
by 2% per year, or about 5.6 million (280 million population x 2%.) If
we capture 10 percent of them (560,000). Combine this with focus group
data to estimate sales. Another market is high end restaurants which
purchase about $1.8 billion of soup per year.
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Raising Capital
Who Buys Soup Wholesale?
Sales
(billions)
Percent
Supermarkets
4.2
35.0%
Institutions (Schools, Hospitals, etc.)
2.5
20.8%
Restaurants
1.8
15.0%
Discount Stores (Wal-Mart, BJs, etc.)
1.7
14.2%
Convenience Stores (7-11, Wa-wa, etc.)
1.0
8.3%
Gourmet Stores
0.5
4.2%
All Others
0.3
2.5%
Total
12.0
Gourmet Stores
All Others
Convience
Stores (7-11,
Wawa, etc.)
Supermarkets
Discount Stores
(Walmart, BJs,
etc.)
Resturants
Institutions
(Schools,
Hospitals, etc.)
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Economics of Retail Soup
Retail
Price
Cost to Super- Manufactur’s Manufactur's
Super- Market
Cost of
Gross Profit
Market Margin Goods Sold
Per Can
(1)
The Competition
Campbell
Chicken Noodle Condensed
$0.63
$0.58
7.2%
$0.28
$0.30
Chicken Noodle Select
$1.69
$1.55
8.0%
$0.75
$0.81
Split Pea Condensed
$0.79
$0.73
7.5%
$0.35
$0.38
Split Pea Select
$1.69
$1.55
8.2%
$0.74
$0.81
Chicken Soup
$1.59
$1.45
9.0%
$0.94
$0.51
Split Pea Soup
$1.59
$1.45
9.0%
$0.94
$0.51
Hearty Chicken
$2.50
$1.25 50.0%
$0.75
$0.50
Hearty Split Pea
$2.50
$1.25 50.0%
$0.75
$0.50
Progresso
Proposed
(1) Cost of Goods Sold form
company 10-Ks
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Raising Capital
Focus Group Results
Question: How many cans of soup does your household purchase per
year?
Campbell
Cans
Chicken Noodle Condensed
40
Chicken Noodle Select (not condensed)
12
Spit Pea Condensed
10
Split Pea Select (not condensed)
4
Progresso
Chicken Soup (not condensed)
15
Split Pea (not condensed)
5
Question: How much soup would you purchase at each given price point?
Price:
$1.25
$1.50
$2.00
$2.50
$3.00
Hearty Chicken Soup
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20
16
9
5
Hearty Split Pea
10
7
6
3
2
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Pitch Notes
Supermarkets view their shelf space as valuable real estate. How are you
going to convince them to stock your product?
Even if your soup is wonderful, how are you going to get people to try it?
How are you going to let consumers know where to look for your soup?
Does your cost per can include packaging? Packaging includes: cans or jars,
cardboard boxes, shipping pallets and shrink-wrap.
Your sales costs/sales commissions are about 10%. Is that reasonable? Do
you have any data, or norms you can point to?
What is your professional background? Do you have a degree, or any college
at all? Do you have any work experience?
What do you know about the food industry?
Have you been in contact with Rutgers University’s Food Industry Research
Extension in Bridgeton? How about at the Davis Campus in New Brunswick?
How much are you going to pay yourself as president & CEO? Is that more
than you have budgeted?
How much capital do you need?
What are you going to use it for?
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Raising Capital
ELECTRIC MOTOR WORKS
This case provides background for a pitch to Venture Capitalist for
funds to start a company called Electric Motor Works. Electric Motor Works
(EMW) was formed to produce and sell electric cars.
Product Description
Historically, there have been two problems with electric cars. First
they have limited range. Second, they have been expensive, mostly because
they have been individually “hand made.”
The range problem will be overcome by a combination of strategies.
1.
Cars will have on-board chargers that can be plugged into any
standard outlet. Using on-board chargers it takes approximately 1
hour to recharge each battery.
2.
Cars will have solar cell panels. Each solar panel can recharge a
battery in 8 hours in the Philadelphia area. Going as far north as
Boston, it takes 12 hours to recharge one battery with one solar panel.
Going south to Arizona, it takes 6 hours to recharge one battery with
one solar panel.
3.
An on board, 3500 watt, electric generator can charge a battery in 30
minutes. A 3,500-watt generator can be used, without the battery or
solar cells to propel the Sportster at speeds up to 40 miles per hour or
the Sedan at speeds up to 30 miles per hour.
4.
Each car has space for ten batteries.
The Sportster is really meant as a single passenger vehicle, wherein
the driver sits in the center of the car. There is a second seat directly behind
the driver’s seat, but it isn’t expected to be used much.
The Sedan has four full sized seats. Neither car has a trunk per se
because batteries and electrical equipment use that space. This shouldn’t be a
problem for grocery shopping, for example, because groceries can be placed
on the seats.
Each fully charged battery is able to propel the Sedan 8 miles or the
Sportster 10 miles. Top speed for the Sportster is 75-mph. Top speed for the
Sedan is 65 mph.
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The car bodies are plastic panels that bolt onto the aluminum frame.
The bumpers will prevent damage to the car in crashes up to 10 miles per hour
in front and 5 miles per hour in a back-up accident.
As long as production volumes are below 500 units per year, EMW
cars will be exempt from the requirement to install airbags. All cars will have
three point seat belts, headrests, collapsible steering wheel column and a
padded interior. If production volume exceeds 500 vehicles per year, air bags
will be required. The cost of an airbag system and installation is $1,100 on
the Sportster and $1,900 on the Sedan.
Each car comes with a one year, 10,000 warranty. Batteries are
guaranteed to last 4 years.
Production
The frame, wheel assemblies – which include electric motors,
regenerative breaking and regular breaks and plastic body panels are being
subcontracted out. All other parts are either stock items or manufactured inhouse. For example, the electric generator is a Home Depot EXL 7000 watt
electric start generator. The batteries are Sears Diehards, but any equivalent
battery can be used.
The production facility is a 12,000 square foot warehouse. The office
is set up in one corner of the building.
Fixed Costs include the cost of the warehouse, heat, light, power, and
staff salaries.
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Raising Capital
Electric Motor Works Cost Analysis
Components
Aluminum Frame
Wheel Assemblies
Seats
Plastic Body Panels
Front Bumper
Rear Bumper
Solar Panels
Batteries
Recharger
Power Controller
Electric Generator 7000
watt EXL
Electronic Dashboard
CD / Clock / Radio
Interior Misc.
Other Misc.
Reserve For Warranty
Claims
Labor Hours
Variable Manufacturing
Costs
Cost
Qty Each
1 2400
3 500
2
90
8
50
1 300
1 200
3 250
6
40
1 100
1 500
1 749
Cost
Cost
Qty Each
Cost
2400
1500
180
400
300
200
750
240
100
500
749
1 3600
4 500
4
90
12
50
1 200
1 200
4 250
8
40
1 100
1 500
1 749
3600
2000
360
600
200
200
1000
320
100
500
749
1 200
1 200
1 900
1 500
1 1000
200
200
900
500
1000
1
1
1
1
1
200
200
500
500
800
200
200
500
500
800
40
20
800
60
20
$10,3
19
1200
$13,6
29
Fixed Costs are $20,000 per month plus depreciation. Depreciation is
$10,000 per year.
Financing
EMW is going to need the following start-up capital:
Facility deposit plus rent for six month
Machinery & Equipment
Raw materials inventory
Accounts Receivable (to finance sale of first units)
Staff salaries for six months
Insurance & other start up costs
$70,000
$50.000
$50,000
$130,000
$100,000
$100,000
$500,000
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The five founders of EMW have raised $100,000 from savings, and
by taking second mortgages on their homes. An additional $4,500,000 is
being sought from Venture Capitalists in the form of 12% convertible bonds.
Case Study Issues
1.
Who are your customers? Who is likely to buy an electric car? What
are your customers going to use their cars for?
2.
How are you going to find your customers and put your value
proposition in front of them? What is your product’s competitive
advantage?
3.
How are you going to sell your cars? Are you going to sell them
through established Ford, GM, Toyota, Honda or other new car
dealerships? If so, how much of the price will have to go to new car
dealers so that they can meet their gross margin requirements? If you
are not going to sell through established new car dealerships, how are
you going to sell cars?
4.
How many cars do you need to make and sell to break even?
5.
What is your first year target profit (or loss) before taxes and interest?
(EBIT) What is your projected first year EBT (earnings before taxes)?
6.
What is your forecast sales over the life of the investment?
7.
Are prices competitive yet sufficient to generate profits needed by the
investors? Are gross margins adequate? (40% to 50% is probably
reasonable for this type of product.)
8.
How much does the company need from the Venture Capitalists? Do
they need it all at once or staged over the life of the investment?
9.
How long is the investor’s money going to be tied up in the
investment?
10.
What will be the investors’ yield on their investment?
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Raising Capital
11.
What is the exit strategy to take the Venture Capitalists out of the
investment? Is there any backup plan to take out the Venture
Capitalists if forecast targets aren’t met?
12.
What qualifies the principals to succeed in this type of business?
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MOM’S SOUP COMPANY REGULATION D OFFERING
A Regulation D Offering requires at least four documents: a
Disclosure document, Stock Purchase Agreement, Accredited Investor
Affidavit, and Form D.
The class project involves completing the: 1) Stock Purchase
Agreement and 2) and 3) Form D based on the facts of the attached case.
COVER SHEET
Attach a cover sheet to your documentation package that states the
name of the company in the case, your name and the date.
STOCK PURCHASE AGREEMENT: Complete the following:
Section I
Section II - No one ever gets everything they want in a negotiated deal. Of
the 23 rights (blanks in the Model Terms and Conditions), you as an Angel
investor could bargain for, select the five most important and complete this
section of the stock purchase agreement accordingly.
FORM D
Complete Form D through, and including the Federal Signature.
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Raising Capital
Mom’s Soup Company
Mom’s Soup Company (MSC) is a C corporation with 1,000 shares
authorized and 500 shares issued and outstanding. Otto Schmidlap, the
president and CEO of MSC owns all outstanding shares.
He plans to raise $300,000 to $500,000 to commercialize his line of
hearty soups. The recipes for his soups are proprietary intellectual property
which he protects as trade secrets. He has no patents.
His attorney has advised him that the best way to raise capital is
through a Regulation D offering sold only to Accredited Investors.
His plan is to build a line of seven soups. He already has recipes for
chicken soup, and split pea soup. He is prospecting for five other receipts.
He plans to sell soup to gourmet shops and high-end supermarkets.
Initially he will sell the soup in jars so that he doesn’t have to invest in
expensive canning equipment.
Attached is a description of the investors he has lined up, a general
ledger as of year end, and a spread sheet as to how funds will be spent.
Investors
Each of the five investors is willing to put up $100,000 in return for
100 shares of stock. If the transaction is completed as planned, Otto
Schmidlap will raise $500,000 through sale of 500 shares of stock.
1.
Don Woodson has been a neurosurgeon at Philadelphia General
Hospital for ten years. He owns a condo in Florida and a home in
Haddonfield, New Jersey. Neither has a mortgage on them. His
salary is $300,000 per year.
2.
Even Jason Sanborne’s mother calls him a bum because he doesn’t
work. He dropped out of college last year when he inherited 200,000
shares of GE stock from his Uncle Milt. He has been living on
dividends ever since. He rents a beach front house in Ocean City,
New Jersey.
3.
The Pennsauken Fire Fighter’s Benevolent Association, a 501( c )(3)
corporation with $15 million in assets is interested in providing better
ready to “heat and eat” food to firefighters. The Association is
headquartered in New Jersey.
4.
Carlotta Brazil, age 34, lives in Tavistock, New Jersey, has $200,000
equity in her home, and just received a $1,000,000 life insurance
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payoff after her husband Milton, age 73, was mysteriously killed in an
auto accident while walking the dog. The dog is O.K. Now that he’s
dead, she has no visible means of support.
5.
Scott Anderson is a CPA in private practice who has considerable
experience in corporate valuations and in analyzing and putting
together investment deals for his clients. Scott is the individual who
brought Schmidlap together with the investors. Scott makes $70,000
per year so he was too expensive for Schmidlap’s business model.
Scott recommended that Schmidlap hire his younger cousin Todd
Anderson who is willing to work for $30,000 as controller.
Mom’s Soup Company Financial Condition
The following general ledger information will be put in the form of financial
statements and audited.
General Ledger As Of 12/31
Assets:
Cash
2,000
Kitchen Equipment
4,000
Liabilities:
None
Equity:
Schmidlap Paid In Capital
20,000
Revenue:
None
Expenses:
Employee Wages
7,000
Supplies, Raw Materials, etc.
4,000
Travel
1,500
Business Entertainment
1,000
Legal Fees
500
20,000
Losses have yet to be closed into Mom’s equity account.
20,000
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Raising Capital
Use of Proceeds
Schmidlap plans to spend all the money he can raise. The more he
raises, the faster he will be able to penetrate his target market. He has
prepared several budgets depending on the amount he raises.
Use of Funds \ Amount Raised:
$300,000
$400,000
$500,000
Rent
25,000
35,000
45,000
Equipment
10,000
15,000
20,000
Supplies & Raw Material
20,000
30,000
40,000
Travel
10,000
15,000
20,000
Soup Promotion/Demonstrations
10,000
15,000
20,000
Coop Advertising
5,000
10,000
15,000
Employee Wages
50,000
75,000
100,000
CEO Salary
40,000
60,000
80,000
Soup Sales Commissions &
Salaries
Accountant Salary
60,000
75,000
90,000
40,000
40,000
40,000
Legal Fees - Filing From D,
Stockholder Agreements, etc.
Cash Reserves
20,000
20,000
20,000
10,000
10,000
10,000
300,000
400,000
500,000
Total:
Case Studies
25
BLENHEIM FURNITURE
The class project is to complete the forms necessary to comply with
federal and state securities law for a small public offering.
This project will be done by teams. One person on each team will
take the lead in completing the federal Form 1-A, which is required under
SEC Regulation A, Small Offerings up to $5 million. One person on each
team will take the lead in completing the state form which goes by two
alternate names. It is often called the SCOR form or the Form U-7.
The data used for both forms is similar. The case that will be the
basis of these forms is Blenheim Furniture, Inc. The following pages provide
most of the detail necessary to complete the forms. If additional material is
needed, make reasonable judgments as to what is necessary and provide that
information. With regard to the “Risks” use your best judgment as to the top
five risks that a company of this type will encounter.
The forms are available on the accompanying CD-Rom. Half to two
thirds of these forms are instructions. This instructional material may be
edited out. What should remain are: headings, questions and your answers.
Omit no questions even if the answer is NA. The forms are 12 point type with
wide margins. You may reduce the font to 10 points and narrow the margins
to reduce the amount of paper printed.
When a question asks for information about facts not in the case, it is
O.K. to say NA, unless you believe the question is “required.” Example:
there are questions about debt, preferred stock and underwriters. None of
these items are presented in the facts of the case so NA is an appropriate
response. Form 1-A and Form U-7 each count as half the project grade.
The following is correspondence between the President of Blenheim
Furniture, Roger Blenheim and his lawyer Abe Baker. Yes, the
correspondence and facts are imperfect, but in real life you will face imperfect
information as well. Do the best you can.
26
Raising Capital
Blenheim Furniture - Correspondence
_________________________________________________________
Date:
August 12
To:
Abe Baker, Esquire
From: Roger Blenheim
Phone: 856-555-1234
Subject: Small Public Offering
Abe, the bank is driving me nuts. They want 12.5% interest on my line of
credit and are bumping the rate I pay on my term loan to 11%. And, they
want a lien on my house as collateral. You’d think after being a bank
customer for almost 20 years they’d know I was good for the loan.
I want to do a small public offering and sell common stock to raise $5 million.
I’m thinking I could sell about half a million shares for $10 per share. The
first thing I’d so with the money is to pay off the bank. That would eat up
about $2 million; I’d use about a million and a half to buy a woodworking
business in Frenchtown, New Jersey, another million to set up a
manufacturer’s outlet store in the Pavilions in Marlton and keep the rest for
working capital. What do you think?
______________________________________________________________
Date:
August 15
From
Abe Baker, Esquire
To:
Roger Blenheim
Subject: Small Public Offering
How much equity are you willing to give up for this new capital? Looking at
your Articles of Incorporation I see you have 5 million shares authorized and
a million and a half shares were outstanding as of 12/31.
______________________________________________________________
Case Studies
Date:
August 18
To:
Able Baker, Esquire
27
From: Roger Blenheim
Subject: Shares
I’d give up half a million shares for $5 million of new capital. What will your
fee be for handling this?
______________________________________________________________
Date:
August 21
To:
Roger
From: Abe
Costs & Fees
1.
My fee will be about $125,000.
2.
We’ll have to get a licensed broker/dealer to handle sale of the
securities. He or she will charge about 4% so that’s another $200,000.
I recommend we use Sharon Stanfield, 112 Main St., Voorhees, N.J.
08043 856-555-1234.
3.
I suggest we limit our offering to New Jersey and Pennsylvania. Our
state filing fees will be another $25,000.
4.
I also suggest we impound the proceeds until we get enough to pay
off the bank. That’s about $2 million. We’ll use Commerce Bank as
a Trustee. They will charge about $2,500.
To complete a Regulation A, Form 1-A filing for the SEC and a SCOR filing,
Form U-7 for the states I will need a description of the company, its market,
employees, properties, research & development, company history, milestones,
background of officers and directors, contracts with officers & directors and
their compensation, and capital structure including outstanding options and
warrants.
______________________________________________________________
28
Raising Capital
Date: September 1
Abe,
This is a summary of the information you requested. Let me know if you
need more.
Company Background
Blenheim Furniture was started in January, 1990 and incorporated in
New Jersey May 31, 1990. It files taxes as a C corporation. Its original
business was custom built furniture for corporate offices, art museums, and
upscale retail establishments. The business expanded into the home market
when a number of architects asked Blenheim to custom built furniture for
million dollar homes. High end furniture sales expanded and in 1996,
Blenheim opened a small showroom.
Blenheim makes primarily wood furniture including: dining room
tables, hutches, servers, book cases, and desks. It also makes dining room,
desk and den chairs trimmed in a variety of fabrics. Blenheim is known for
its use of fine woods including: mahogany, walnut, ebony and birch. It is also
know for its use of inlays to create exceptional pieces. About 90% of sales
are for home use. About 15% of its products are new each year.
The company distributes its products a number of different ways.
Primarily, it distributes through eleven fine furniture stores or small store
chain in New York, New Jersey, Pennsylvania and Delaware. With the
proceeds of the public offering the company expects to add five new stores or
store chains to its distribution network. The company also distributes
furniture through interior design companies. Architects continue to contribute
a small, but significant of sales. The company advertises in Architect’s
Digest, Home & Garden and only occasionally in newspapers. It has a
website that lists stores where its products can be seen. The website also
contains detailed information on the company’s products including the nature
of the woods used, the level of craftsmanship and other information that is
designed to appeal the discerning buyer.
Generally, the furniture market is very crowded, with large chains
such as Semmans and Levitts keeping the price of furniture for the masses
low. Cheap imports of furniture from China are putting pressure on the price
of furniture. Fortunately, Blenheim Furniture doesn’t compete on price. It
competes based on unique interpretations of classic American designs,
exceptional workmanship and fine woods. Blenheim is in the business of
creating future heirlooms, pieces that their owners can be proud of generation
Case Studies
29
after generation. The typical buyer of a Blenheim piece has a household
income of over $200,000.
Suppliers
The company isn’t dependent on any particular supplier for wood,
fabric, finishings, brass or machine tools.
Employees
The company has 30 employees. The chief designer, Bob Hendry has
just signed a three year contract for $70,000 per year plus 0.5% of sales. The
vice president of sales, Linda Pearl has two years remaining on her contract
she gets $40,000 plus a bonus equal to 1.5% of sales. Marty Childs, the shop
manager is under a two year contract for $50,000 per year plus a bonus of up
to $30,000 based on certain performance standards. There are no other
employment contracts. The company is not unionized and labor relations are
good.
Research & Development
The major item that could be considered research and development
are the design and development of new products. The principal costs are for
models and full scale prototypes which cost about $100,000 per year.
However, since most of the prototypes are eventually sold, this doesn’t
represent a pure cost.
Government Regulation
Furniture manufacturing per se isn’t regulated. Like every company,
Blenheim must comply with environmental laws. Principally this involves
use of ventilated painting booths and disposal of paint and finish waste using
EPA licensed hazmat disposal companies. These costs are already reflected
in the company’s cost of goods sold.
Properties
The company operates a 50,000 square foot shop at 1515 Mocking
Bird Lane, Sewell, New Jersey 08080 and a 1,500 square foot showroom at
that same location.
30
Raising Capital
Key Personnel
Roger Blenheim, President & CEO, Blenheim Furniture
Roger Blenheim graduated Merchantville High School in 1966 and
joined the Army rising to the rank of motor pool sergeant by the time he left
in 1972. He then took a job with Cherry Hill Custom Cabinets where he rose
to shop foreman by 1980 and was promoted to general manager in 1985 on
completing his business degree at Rutgers University. In 1990 he started
Blenheim Furniture.
Bob Hendry, Chief Designer
Bob Hendry received a degree in Art from Rutgers University in 1974
and became a designer for Lenox China. He spent a year as a conservator at
the Winterthur Museum in Delaware, and then accepted a design position at
North Carolina Furniture in Cecil, North Carolina where he worked until
joining Blenheim Furniture in 1994.
Linda Pearl, Vice President, Sales
Linda Pearl received a business degree from Rutgers University in
1980 and worked at Colgate Palmolive as a brand manager until 1992. She
then accepted a position as a regional sales representative for Ethan Allen
Galleries where she worked until joining Blenheim Furniture in 2002.
William Bendix, CPA, Chief Financial Officer
William Bendix graduated from Rutgers University with a degree in
accounting in 1986. He worked for the Bozman and Company, CPAs from
1986 to 1992 when he came to Blenheim Furniture as accounting manager.
He was promoted to CFO in 1998.
Professor Sunny Von Buelo, Rutgers University, Independent Director
Professor Von Buelo is a professor of management at Rutgers
University School of Business, 401 Penn Street, Camden, New Jersey 08102,
where he has taught since 1997. Professor Von Buelo has no other relation to
Blenheim Furniture other than his compensation of $6,000 per year to sit on
the Board of Directors.
Robert Petre, Architect, Independent Director
Robert Petre is the Principal in the Architecture firm of Petre and
Associates, 61 Haddon Avenue, Haddonfield, New Jersey 08025. Mr. Petre
has no other relation to Blenheim Furniture other than his compensation of
$6,000 per year to sit on the Board of Directors.
Case Studies
31
Avery Garner, Director, Shareholder
2306 Lord of the Ring Boulevard, Cherry Hill, New Jersey 08103.
Clevon Jacobson, Director, Shareholder
16 Parsnip Way, Moorestown, New Jersey 08152.
General Legal
Blenheim Furniture is a corporation in good standing in the state of New
Jersey. There are no outstanding or pending legal or regulatory actions or
claims against the company. There is no litigation against the company.
Let me know if you need any more.
Roger
______________________________________________________________
Date: September 15
To:
Roger Blenheim
From: Abe Baker
Subject: Insider Dealing
Roger,
We have to disclose any insider trading between you, your family or major
shareholders and the company. Attached are some questions that might help
you think about anything we should disclose.
1. Do you own the building and lease it back to the company?
2. Have you sold any company assets to yourself, your family, or major
shareholders?
3. Where sales for less than fair market value?
4. Have you, your family or investors borrowed any money from the
company? If so, do you pay interest at the fair market value?
32
Raising Capital
5. Have you, your family or investors lent any money to the company? If so,
does the company pay interest at fair market rates?
6. Do you, your family or your investors sell anything to the company? If so,
do they sell at fair market rates?
______________________________________________________________
September 20
To:
Abe
From: Roger
Subject: Insider Dealing Answers
1. No, the company owns the building
2. No.
3. NA
4. The company lent me $300,000 to buy my new house. That amount is
being carried as an accounts receivable, although our outside accountant tells
me we will have to reclassify it as a Due From Officer. I never thought about
paying interest.
5. No.
6. No.
______________________________________________________________
Roger,
State securities regulators are going to baulk at the company lending
you $300,000. I recommend you pay it off. I’ve seen your house; it’s worth
at least $500,000. You should have no trouble getting a $300,000 mortgage.
Abe
______________________________________________________________
Abe,
Done.
Roger
______________________________________________________________
Case Studies
33
January 31
(Audit Opinion Condensed)
To the Board of Directors of Blenheim Furniture, Inc.
Sewell, New Jersey
We have examined the books and records of Blenheim Furniture, Inc. for the
year ended December 31, 2005 and tested transactions in accordance with
Generally Accepted Auditing Standards. We found the Income Statement and
Balance Sheet fairly state the position of the company in all material respects
in accordance with Generally Accepted Accounting Practices.
We previously audited the balance sheet for the year ended December 31,
2004 in accordance with Generally Accepted Auditing Standards and found it
fairly stated the position of the company as of that date in all material respects
in accordance with Generally Accepted Accounting Practices. We did not
audit the Income Statement for the Period Ended December 31, 2004 and
express no opinion on it. The income statement for the period ended
December 31, 2004 is the solely the representation of management. It is
included for comparative purposes only.
Murray Schwartz
Murray
Schwartz,
CPA
Murray Schwartz &
Company CPAs
______________________________________________________________
October 1
Roger,
I’ve made some inquiries and I think we can sell your new offering
without an underwriter. In any event, I think $5 million is too small to
interest an underwriter anyway. Let’s just use our stockbroker as the sales
agent.
Abe
______________________________________________________________
34
Raising Capital
Blenheim Furniture Financial Statements
BLENHEIM FURNITURE
INCOME STATEMENT
2005
Unaudited
2004
Revenue
Cost of Goods Sold
9,000,000
5,000,000
8,000,000
4,500,000
Gross Profit
4,000,000
3,500,000
Sales & Marketing Expenses
Fred Blenheim's Salary & Bonus
Depreciation
Other Overhead
900,000
300,000
200,000
2,000,000
800,000
300,000
200,000
1,800,000
3,400,000
3,100,000
Earnings Before Interest & Taxes
600,000
400,000
Interest
200,000
150,000
Earnings Before Taxes
400,000
250,000
Income Taxes
100,000
62,500
Net Income
300,000
187,500
Total Operating Expenses
Case Studies
35
BLENHEIM FURNITURE
BALANCE SHEET
12/31/2005
12/31/2004
Cash
Accounts Receivable
Inventory
Other Current Assets
300,000
1,300,000
1,200,000
200,000
10,000
900,000
500,000
90,000
3,000,000
1,500,000
1,500,000
500,000
4,500,000
2,000,000
800,000
100,000
1,000,000
100,000
600,000
50,000
850,000
25,000
2,000,000
1,525,000
900,000
175,000
2,900,000
1,700,000
500,000
150,000
950,000
200,000
100,000
0
Total Equity
1,600,000
300,000
Liabilities & Equity
4,500,000
2,000,000
Total Current Assets
Plant Property & Equipment
Total Assets
Accounts Payable
Accrued Payroll
Line of Credit
Bank Loan Current
Total Current Liabilities
Bank Loan
Total Liabilities
Retained Earnings
Common Stock at Par of $0.10
Additional Paid In Capital
36
Raising Capital
BLENHEIM FURNITURE
OWNERSHIP INTEREST
Name
Shares
Purchase
Price
Purchase
Date
Roger Blenheim
1,000,000
$.10/share
5/31/1990
250,000 $2.00/share
250,000 $2.00/share
3/15/2003
3/15/2003
Avery Gardner
Clevon Jacobson
The company has no warrants or
options
ANALYSIS OF SALES BY
CUSTOMER
Royal Oaks Furniture Galleries
Imperial Design
Linwood Furniture
Ebony Furniture
Gleason Interior Design
Danson Galleries
Radnor Furniture
Bryn Mawr Furniture
New York City Gallery
Other Furniture Stores
Blenheim's Showroom Store
BACKLOG ORDERS
As of 12/31/2002
As of 12/31/2003
2,000,000
1,400,000
1,100,000
800,000
700,000
600,000
500,000
400,000
400,000
500,000
600,000
1,600,000
900,000
1,000,000
850,000
600,000
800,000
500,000
400,000
350,000
450,000
550,000
9,000,000
8,000,000
900,000
1,100,000