Directions: Click the "Case-link" displayed above and use the information provided in Pacesetters, Part A, to answer this question: Which of the following factors would be the most important to include to develop three-to-five-year future scenarios for Pacesetters? Medium-term demographic outlook Medium-term healthcare legislation outlook Medium-term trends in the number of secondary school and above educational institutions New developments in orthopedic products Part A Pacesetters, Inc. Company Information Today is March 1, 20Y4. You have just been assigned the Pacesetters, Inc. account relationship with your bank. Pacesetters, Inc. is a manufacturer of protective sporting goods primarily for baseball, lacrosse, and football. Beginning with footballl and lacrosse helmets, Pacesetters gradually expanded into shin guards, shoulder pads, and other protective gear. The company markets its products to educational institutions and professional sports teams under the Pacesetter Gear brand name. Pacesetters was founded 15 years ago by Ray Lamontagne, George Bixby, and Robert Hermsen. Lamontagne and Bixby are former professional football players and Hermsen is an orthopedic surgeon affiliated with a university hospital. Lamontagne manages sales and Bixby is CEO and production manager. Dr. Hermsen is in charge of product design. From the outset, Pacesetters established a collaborative relationship with the hospital's orthopedic and neurological services with the intent to offer maximum protection to athletes using their products. This has paid off for the company, as it has earned the reputation of manufacturing the safest products on the market. Three years ago, the company decided to form a new division producing protective gear for non- athletic applications. These include knee and elbow braces, neck-brace collars and a variety of support devices, some used during recovery and others permanently. Although Pacesetters manufactures products used during all four seasons, its winter line has historically been the smallest. Historically, a seasonal peak has occurred in early spring, and a small seasonal low point has occurred during November or December. The company's financial year coincides with the calendar year. The new division is expected to generate steady demand all year round, peaking at the start of the sports season from September to December. At inception, the owners invested $1 million in equity with the remaining financing consisting of long-term debt. The long-term debt was provided in part by your bank ($500,000) and in part by a venture capital firm ($1,300,000). a Your bank also made available to the company what is now a $1 million revolving credit. Advances on the line are determined as a percentage of eligible accounts receivable and inventory (excluding work in process). As a condition of extending the line, the bank has required that Pacesetters be out of debt for 30 consecutive days during the fourth quarter of every calendar year (the clean-up period). Until last year, the company was able to meet the clean-up requirement easily each year. At the end of 20Y3, however, the company was unable to clean up the line. In fact, at the end of December the outstanding balance was $302,000; the company was unable to reduce the line significantly below $300,000 at any time during the entire fourth quarter. The previous lender on the account had waived the clean-up requirement for 20Y3, based company's past history and performance, and on the belief that the owners had high integrity and would do whatever was necessary to repay the debt. The balance outstanding on February 22, 20Y4 (the last date for which you have data) on the $459,000. was 2 Commercial Loans to Business Online ASCB PS 0000113 CLROLIS Fe de Part A Pacesetters, Inc. The credit file contains notes made by the former account manager that describe management's expectation for sales to increase between 20 percent and 25 percent in 20Y4. The growth is expected to be evenly divided between athletic and non-athletic products. The previous lender had prepared a partial projection for 20Y4 based on a 20 percent growth rate. The account manager also noted that the company's production facility is operating near capacity Pacesetters' management has requested that the bank increase the limit on the revolving credit to $1.5 million. The material that follows includes reformatted financial statements for 20Y1, 20Y2, and 20Y3 and projected 20Y4, followed by industry data. Pacesetters, Inc. Part B Pacesetters, Inc. Balance Sheets (in $000s) As At December 31 20Y1 20Y2 20Y3 20Y4 (Projected) ASSETS Current assets Cash $ 300 369 $ 198 250 Accounts receivable 720 910 1,219 1,129 Inventory 1,250 1,384 1,640 1,900 Prepaid expenses 151 120 208 163 Other curent assets 200 90 112 112 Total current assets 2,621 2,873 3,644 3,287 Fixed assets 735 771 940 1,030 Other noncurrent assets 214 210 320 290 TOTAL ASSETS $ 3,854 3,570 4,964 4,547 LIABILITIES AND EQUITY Current liabilitles Short-term debt Current portion-HTD Accounts payable Accrued expenses Taxes payable 10 302 $ 359 200 200 200 200 445 613 731 749 170 192 206 210 64 69 108 121 Other current liabilities 76 16 30 30 Total current liabilities 955 1,100 1,577 1,669 Long-term debt 1,392 1,192 992 792 Deferred taxes 54 58 60 65 Owner's equity Paid-in capital Retained eamings Total owners' equity 1,000 1,000 1,000 1,000 169 504 918 1,438 1,169 1,504 1,918 2,438 TOTAL LIABILITIES AND EQUITY $ 3,570 $ 3,854 4,547 4,964 Working investment 1,355 1,489 1,832 2,160 1 sh Pacesetters, Inc. Part B Pacesetters, Inc. cors Income Statements (In $000s) Years Ended December 31: 201 202 203 20Y4 (Projected) Sales 7,500 $ $ 12,900 9,000 $ 10,710 Cost of goods sold Gross profit 5,320 6,280 7,400 8,920 3,310 2,180 2.720 3,980 211,559 Operating expenses 1,227 2.208 1,916 Interest expense Income before taxes 143 126 130 142 810 1,035 1,264 1,630 Taxes 324 446 564 700 750 Net Income 486 589 880 Dividends 143 194 254 286 360 Retained earnings 292 335 $ 414 $ 520 Depreciation in COGS 75 81 103 $ 105 Pacesetters, Inc. Ratios and Indicators 201 202 20Y3 Balance Sheet Accounts receivable days on hand Inventory days on hand Sales/Net fixed assets Sales/Assets 35.0 days 85.8 days 36.9 days 80.4 days 11.7 38.5 days 80.9 days 10.2 2.1 11.4 2.4 2.4 Income Statement Sales growth Gross profit margin Operating profit margin 20.0 % 30.2% 11.5% n/a 29.1 % 10.8% 19.0 % 30.9 % 11.8% Part C Pacesetters, Inc. Athletic and Sporting Goods Manufacturers Industry Data 20Y1 20Y3 20Y2 BALANCE SHEETS Current assets 4.2% 4.9 % 5.5 % Cash and equivalents 23.8 25.3 27.0 Accounts receivable 42.7 40.7 39.8 Inventory 1.7 1.5 1.6 Other current assets 74.0 72.2 72.5 Total current assets Fixed assets (net) 20.8 19.5 21.1 6.5 Other noncurent assets 6.7 6.7 100.0 % TOTAL ASSETSs 100.0 % 100.0 % Current Babilit ies 14.1 Short-term debt 14.1 14.0 3.0 Current maturities-LTD 3.3 3.1 Accounts payable 12.0 13.3 15.1 10.4 Accrued expenses 11.0 10.8 42.6 Total current liabilities 40.4 41.2 Long-term debt 17.5 16.7 15.4 Other noncurrent liabilities 2.0 2.1 2.3 Equity and reserves 40.1 40.0 39.7 100.0 % 100.0 % TOTAL LIABILITIES AND EQUITY 100.0 % 201 20Y2 203 INCOME STATEMENTS 100.0 % 100.0 % 100.0 % Net sales Cost of goods sold 70.1 69.1 67.8 Gross profit 29.9 30.9 32.2 Operating expenses 25.9 25.3 25.8 Operating profit 4.0 6.4 5.6 All other expenses 2.1 1.8 2.0 Income before taxes 1.9 % 4.4% 3.8 % RATIOS AND INDICATORS Current ratio (range) Accounts receivable DOH (range) Inventory DOH (range) Sales/Total assets (range) 1.3-2.6 14-2.6 1.3-2.7 35-74 34-68 36-72 85-185 81-170 70-165 1.3-2.1 1.4-2.4 1.5-2.5