Brand Photo Labs, Inc.

, and Subsidiaries

Brand Photo Labs, Inc., and Subsidiaries

The following case information includes:
 Part A
 Company information

 Part B
 Balance sheets
 Income statements
 Financial drivers worksheet
 Notes to consolidated financial statements

 Part C
 Consolidated statements of cash flows

 Part D
 Five years consolidated balance sheets
 Five years consolidated income statements

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Brand Photo Labs, Inc., and Subsidiaries Part A

Company Information
Brand Photo Labs provides wholesale photofinishing services and related merchandise to chain and
individual retail stores. Brand Photo does not engage in any direct consumer business; instead, its
customers are more than 2,000 retail businesses that include camera shops, drug and general
merchandise outlets, and supermarkets in five Midwestern states.
Brand Photo was started twenty years ago by Jonathan Brand. The company’s first major installation
opened in a suburb of Chicago in 1967 and has since expanded to house over 60,000 square feet of
processing capacity. The company also operates a smaller facility in Indiana.
Brand Photo is the recognized leader in its geographic area in serving high-volume, self-service
chains. Its share of total processing volume is ahead of many competitors better known to the
consumer public. Some segments of the photofinishing industry have recently succeeded with
distribution through photo huts, mini-labs and direct response mail order. However, Brand’s
strategy has been to concentrate on serving conventional retail outlets. The company has deliberately
kept a low profile, preferring to develop a proprietary marketing package for each retail chain
account under that account’s own brand name.
The success of Brand Photo’s strategy has resulted in the creation of two wholly-owned subsidiary
corporations that provide services under an exclusive marketing agreement to All-Mart stores in
Texas, Colorado, and the Midwestern states. All-Mart is a major mass-merchandiser with a
nationwide presence. These subsidiaries, called Brand X Corporation and Brand Y Corporation,
operate plants in Dallas and Denver, respectively. Under the terms of the agreements, Brand Photo
will operate the plants for 10 years, during which time All-Mart guarantees to contribute 100 percent
of its photofinishing volume. The profits of these subsidiaries are to be shared based on a formula.
Jonathan Brand, 58, is Chairman and CEO. Other members of the management team include Tom
Dawes, President, who was formerly Director of Marketing with Revlon, and three vice presidents in
charge of production, finance and administration, and marketing/sales.
This organization has had a small deposit relationship with Brand Photo for a number of years and
has actively solicited the company’s overall relationship. The company’s management has now
approached the organization with a request for assistance in financing its activities. They have
promised the organization the overall relationship if it can meet their credit needs.

4 Credit Skills Assessment © Omega Performance Corporation. All Rights Reserved.

Brand Photo Labs, Inc., and Subsidiaries Part B

Brand Photo Labs, Inc., and Subsidiaries

Consolidated Balance Sheets
(in $000s)
February 28, 20X1, and February 29, 20X2:

ASSETS 20X1 20X2

Current assets
Cash (including interest-bearing deposits
of $320,000 in 20X1 and $275,000 in 20X2) $ 618 $ 573
Accounts receivable, net of allowance for doubtful
accounts of $117,569 in 20X1 and $83,197 in 20X2 2,402 2,887
Inventories at lower of cost or market (FIFO)
Photofinishing material 243 645
Merchandise 227 249
Other (Note 1) 400 498
Prepaid expenses 53 44
Deferred income tax benefit (Note 6) 0 215
Total current assets 3,943 5,111

Property and equipment, at cost

Land 34 34
Building and leasehold improvements 2,348 3,700
Production equipment 4,717 6,059
Office equipment 173 401
7,272 10,194

Less: Accumulated depreciation 3,617 4,390

Total property and equipment 3,655 5,804

Other assets
Deferred start-up costs, net of amortization
of $30,329 in 20X2 (Note 3) 85 593
Cash surrender value of insurance on officers’ lives
(face amount $500,000) 153 179
Deposits and other 83 76
Deferred income tax benefit 196 —
Total other assets 517 848

TOTAL ASSETS $ 8,115 $11,763

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Brand Photo Labs, Inc., and Subsidiaries Part B

Brand Photo Labs, Inc., and Subsidiaries

Consolidated Balance Sheets
(in $000s)
February 28, 20X1, and February 29, 20X2:

LIABILITIES AND EQUITY 20X1 20X2

Current liabilities
Trade accounts payable $ 1,893 $ 2,002
Current maturities of long-term debt (Note 4) 155 378
Current amount due under deferred compensation plan
(Note 5) — 586
Accrued expenses
Salaries, vacation pay, and payroll taxes 782 890
Profit-sharing contribution 230 152
Interest payable 19 149
Other 121 77
Payable to shareholder 5 30
Deferred income tax payable (Note 6) 40 —
Total current liabilities 3,245 4,264

Long-term debt, net of current maturities shown above

(Note 4) 669 2,691

Deferred compensation (Note 5) 434 —

Deferred income tax payable (Note 6) — 576

Equity
Common stock 188 188
Retained earnings
Balance at beginning of year 2,843 3,579
Net income for the year 986 715
Dividends paid (250) (250)
Balance at end of year 3,579 4,044
Total equity 3,767 4,232

TOTAL LIABILITIES AND EQUITY $ 8,115 $11,763

6 Credit Skills Assessment © Omega Performance Corporation. All Rights Reserved.

Brand Photo Labs, Inc., and Subsidiaries Part B

Brand Photo Labs, Inc., and Subsidiaries

Consolidated Statements of Income
(in $000s)
Years Ended February 28, 20X1, and February 29, 20X2:

20X1 20X2

Net sales $26,527 $29,934

Cost of sales (Note 1) 17,924 20,377
Gross profit 8,603 9,557

Operating expenses
Delivery 2,193 2,706
General and administrative 1,838 2,183
Advertising and promotion 2,045 2,021
Selling 1,069 1,304
Total operating expenses 7,145 8,214

Income from operations 1,458 1,343

Other income (expense)

Interest income 56 38
Interest expense (54) (146)
Other (Note 2) 192 9
Income before taxes 1,652 1,244

Provision for taxes (Note 6)

Current 716 (37)
Deferred (50) 566

NET INCOME $ 986 $ 715

Monthly Sales
20X1 20X2

March $ 1,658 $ 1,970

April 1,799 1,835
May 1,529 1,790
June 1,631 1,841
July 2,448 2,724
August 2,500 2,946
September 2,740 2,922
October 2,064 2,128
November 2,321 2,520
December 3,096 3,519
January 3,417 3,933
February 1,324 1,807

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Brand Photo Labs, Inc., and Subsidiaries Part B

Financial Drivers Worksheet ( ) = use

of cash
Borrower: Brand Photo Labs, Inc., & Subsidiaries
Cash Impact of Change in Sales ($000s) Year 1 Year 2 Year 3
20X1 20X2
Sales $26,527 $29,934
Sales change % 12.8%
Times: Beginning A/R $2,402
Equals: Impact on A/R ($309)

Cash COGS $17,924 $20,377

Cash COGS change % 13.7%
Times: Beginning inventory $870
Equals: Impact on inventory ($119)

Cash COGS change % 13.7%

Times: Beginning A/P $1,893
Equals: Impact on A/P $259
TOTAL OPERATING CYCLE IMPACT OF CHANGE IN
SALES ($169)

Cash Impact of Change in Turnovers Year 1 Year 2 Year 3

Average daily sales $72.68 $82.01
Times: Change in ARDOH 2.2
Equals: Cash impact of change in ARDOH ($180)

Average daily cash COGS $49.11 $55.83

Times: Change in INVDOH 7.2
Equals: Cash impact of change in INVDOH ($402)

Average daily cash COGS $49.11 $55.83

Times: Change in APDOH -2.7
Equals: Cash impact of change in APDOH ($151)

TOTAL IMPACT OF CHANGE IN TURNOVERS ($733)

Cash Impact of Change in Margins Year 1 Year 2 Year 3
Cash COGS as % sales in prior year 67.6%
Cash COGS as % sales in this year 67.6% 68.1%
Change in cash COGS as % sales 0.5%
Times: Sales this year 26,527 $29,934
Equals: Cash impact of change in
cash COGS as % sales ($151)

Cash SG&A $6,417 $7,420

Cash SG&A as % sales in prior year 24.2%
Cash SG&A as % sales in this year 24.2% 24.8%
Change in cash SG&A as % sales 0.6%
Times: Sales this year 26,527 $29,934
Equals: Cash impact of change in
cash SG&A as % sales ($179)

TOTAL IMPACT OF CHANGE IN MARGINS ($330)

Cash Impact of Change in Fixed Assets Year 1 Year 2 Year 3
Beginning net fixed assets $3,655
Less: Depreciation expense for this year $794
Equals: Expected ending net fixed assets $2,861

Actual ending net fixed assets $5,804

Less: Expected ending net fixed assets $2,861
Equals: Cash impact of change in fixed assets ($2,943)

TOTAL IMPACT OF CHANGE IN FIXED ASSETS ($2,943)

8 Credit Skills Assessment © Omega Performance Corporation. All Rights Reserved.

Brand Photo Labs, Inc., and Subsidiaries Part B

Notes to Consolidated Financial Statements

Note 1: Summary of significant accounting policies
Consolidation: The consolidated financial statements include the accounts of the
company and its subsidiaries after elimination of intercompany items and
transactions.
Inventories: Inventories are stated at lower of cost or market. Cost is determined on
the basis of first-in, first-out for raw materials and merchandise.
Silver revenue: The company values silver obtained as a by-product of the
photofinishing process at fair market value. Silver is included in “other inventory” on
the accompanying balance sheets and is valued at approximately $278,000 at
February 28, 20X1, and $125,000 at February 29, 20X2. Revenue from the sale of
silver is reported as a reduction to cost of sales. This revenue amount for the years
ended February 28, 20X1, and February 29, 20X2, was approximately $1,195,000,
and $708,000 respectively.
Property and equipment: Property and equipment is stated at cost and depreciated
using straight-line and declining-balance methods over the following useful lives:
Building and leasehold improvements 5–33 years
Production equipment 5–10 years
Office equipment 5–10 years
Profit-sharing plan: The company makes discretionary annual contributions to a
profit-sharing plan covering all of its employees who meet a minimum service
requirement. These contributions ($230,000 in 20X1 and $152,000 in 20X2) are
charged to expense in the year that they are declared.
Note 2: Sale of property and equipment
In February, 20X1, the company completed the sale of certain property and
equipment related to the move of its production facilities. A gain on the sale of these
assets of approximately $200,000 was recognized as other income in that year.
Note 3: Long-term contracts
In fiscal 20X2, the company entered into an agreement with a major customer for
the opening of two new production plants. The plants are operated by two wholly-
owned subsidiaries of Brand Photo Labs, Inc. The revenues received by the
subsidiaries are shared according to the agreement with the major customer.
Under the terms of the agreement, certain start-up costs have been deferred and will
be amortized over the 10-year term of the agreement.

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Brand Photo Labs, Inc., and Subsidiaries Part B

Note 4: Bank borrowings

The company has borrowed under several bank term loans to finance the acquisition
of production equipment and the opening of its subsidiary plant facilities. The loans
are priced at Prime plus 2 percent and are collateralized by equipment. These loans
are also governed by loan agreements that contain certain terms and conditions. The
company was in compliance with these agreements as of February 29, 20X2.
Schedule of required principal payments:
20X3 $378,000
20X4 290,000
20X5 260,000
20X6 1,260,000
20X7 and thereafter 881,000
Note 5: Commitments
The company leases vehicles, equipment, and real property under agreements
expiring through fiscal year 20X7. At February 29, 20X2, the approximate aggregate
remaining rental commitments under these leases are as follows:
20X3 $315,000
20X4 265,000
20X5 196,000
20X6 82,000
20X7 24,000
During the five years ended February 29, 20X2, the company had a deferred
compensation incentive bonus plan. The plan was based on the average after-tax
income of the company for the five-year period preceding February 29, 20X2. The
plan automatically terminated at the latter date, and the liability of the company was
$586,000 as of February 29, 20X2.
Note 6: Income taxes
Deferred income taxes result primarily from timing differences relating to the
company’s deferred compensation incentive bonus plan (Note 5) and start-up costs
incurred by the company’s subsidiaries.

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Brand Photo Labs, Inc., and Subsidiaries Part C

Brand Photo Labs, Inc., and Subsidiaries

Consolidated Statements of Cash Flows
(in $000s)
Years Ended February 28, 20X1, and February 29, 20X2:

20X1 20X2
Cash flows from operating activities
Net income $ 986 $ 715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 719 773
Amortization 9 21
Accounts receivable (303) (485)
Inventory (7) (522)
Prepaid expense 30 9
Deferred income tax benefit (26) (19)
Deposits and other assets 101 7
Accounts payable 652 109
Accrued liabilities 143 116
Other liabilities 5 25
Deferred compensation 68 152
Deferred income tax payable (135) 536
Net cash provided by operations 2,242 1,437
Cash flows from investing activities
Purchase of buildings and leasehold improvements (292) (1,352)
Purchase of production equipment (1,136) (1,342)
Purchase of office equipment 0 (228)
Deferred startup costs (94) (529)
Cash value life insurance (22) (26)
Net cash used in investing (1,544) (3,477)
Cash flows from financing activities
Long-term debt including current maturities (137) 2,245
Dividends paid (250) (250)
Net cash provided (used by) financing (387) 1,995
Increase (decrease) in cash
Beginning 307 618
Ending 618 573
Increase (decrease) 311 (45)
Supplemental disclosures
Cash payments for:
Interest 95 102
Income tax 801 (7)

See Notes to Consolidated Financial Statements.

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Brand Photo Labs, Inc., and Subsidiaries Part D

Brand Photo Labs, Inc., and Subsidiaries

Consolidated Balance Sheets
(in $000s)

2/29/X8 2/28/X9 2/28/X0 2/28/X1 2/29/X2

ASSETS
Cash $ 250 $ 265 $ 307 $ 618 $ 573
Accounts receivable 1,353 1,748 2,099 2,402 2,887
Inventory 221 331 863 870 1,392
Prepaid expenses 46 62 83 53 44
Other current assets 63 52 75 — 215
Current assets 1,933 2,458 3,427 3,943 5,111

Land 34 34 34 34 34
Buildings 1,270 1,985 2,056 2,348 3,700
Equipment 2,199 2,882 3,754 4,890 6,460
Depreciation (1,814) (2,319) (2,898) (3,617) (4,390)
Property and equipment 1,689 2,582 2,946 3,655 5,804
Other assets 207 240 410 517 848

Total assets $ 3,829 $ 5,280 $ 6,783 $ 8,115 $11,763

LIABILITIES
Accounts payable $ 639 $ 685 $ 1,241 $ 1,893 $ 2,002
Current maturities of long-term debt 30 331 435 155 378
Deferred compensation — — — — 586
Accrued expenses 673 853 1,009 1,157 1,298
Deferred taxes 281 3 175 40 —
Current liabilities 1,623 1,872 2,860 3,245 4,264
Long-term debt 131 675 526 669 2,691
Other 183 373 366 434 576
Total liabilities 1,937 2,920 3,752 4,348 7,531
EQUITY
Common stock 188 188 188 188 188
Retained earnings—beginning 1,334 1,704 2,172 2,843 3,579
Net income—current year 670 768 1,021 986 715
Dividends paid (300) (300) (350) (250) (250)
Total equity 1,892 2,360 3,031 3,767 4,232
Total liabilities and equity $ 3,829 $ 5,280 $ 6,783 $ 8,115 $11,763
Debt/equity 1.02 1.24 1.24 1.15 1.78
Current ratio 1.19 1.31 1.20 1.22 1.20
Sales/assets 4.47 3.90 3.47 3.27 2.54

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 Brand Photo Labs, Inc., and Subsidiaries Part D

Brand Photo Labs, Inc., and Subsidiaries

Consolidated Income Statements
(in $000s)

Fiscal Fiscal Fiscal Fiscal Fiscal

20X8 % 20X9 % 20X0 % 20X1 % 20X2 %

Net sales $17,130 100 $20,616 $23,541 $26,527 $29,934

Cost of sales 11,888 69 15,137 15,784 17,924 20,377 68

Gross profit 5,242 31 5,479 7,757 8,603 9,557 32

Marketing expense 2,584 15 2,854 3,943 5,307 6,031 20

General and administrative 1,199 7 1,239 6 1,733 7 1,838 7 2,183 7

Income from operations 1,459 9 1,386 7 2,081 9 1,458 6 1,343 4

Other income (expense) 56 (18) (163) 194 (99)

Income before taxes 1,515 9 1,368 7 1,918 8 1,652 6 1,244 4

Taxes 845 600 897 666 529

NET INCOME $ 670 4 $ 768 4 $ 1,021 4 $ 986 4 $ 715 2

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