1.

  Provide the synopsis of the case and state the issue(s).

Be Our Guest Company founded in 1983 by Stephen Lizio. They expand their
business from providing services to catering companies to renting equipment to the caterers
in mid-1980s. Lovata was appointed as Chief Executive Officer. The business received a big
boost in 1988 where Be Our Guest contributed equipment for several of the catering firm in a
big event called Aid & Comfort. Simone Wiliamson was added to the management and
appointed as President of the firm. From being a small business, Be Our Guest reaching
revenues of $million in 1991and increase to $2.7 million in 1997. They have become one of
the leading provider of party rental equipment and got selected as the Small Business Firm of
the year. Be Our Guest had moved its banking relationship to State Street as the company opt
for renewal of their loan to expand their business. The bank officer had set up several
covenants and requirement to be accepted by the firm to grant the loan.
The issues that faced by the firm are:
- The net earnings declined over the past four years due to rise in general and administrative
salaries.
- Due to extremely seasonal business, only 10% of annual revenues were realized in first
quarter of the past years compared to other quarters.
- Difficulty in develop annual projection due to seasonal compounding and sales uncertainty.
This makes their balance sheet to be conservative on the whole.
- Competitors putting pressure on Be Our Guest to bring down the price but Be Our Guest
only provide standard 10% wholesale discount.

7. Should Al Lovata and Williamson ask for some relaxation or change in the loan covenants,
particularly the personal guarantees that they have provided at the bank's request?
Yes they should. Because;
-The income statement shows significant growth. Therefore some relaxation or changes in
covenant 1 & 2 can be imposed, as Be Our Guest’s balance sheet is fairly strong and liquid.
-Decrease in the previous 4 years of the net income is an issue caused by covenant 5
(distribute more than 50% of the earnings to the principals). This leads to increase the costs
as the salaries increases.
-As Be Our Guest wants to expand their business and planning to improve the computer and
telephone system, they cannot rely solely on the borrowing arrangement.
-They using different way such as selling equity ti raise funds. For that, they need to review
the personal guarantees agreed. Because, when selling equity to raise cash, they actually sell
the rights to certain amount of control over the company.