XYZ Company

Loan Request: PHP 8 million credit line

President & Owner: Robert Santos

Nature of the Business:

Developed, manufactured, and sold scientific medical instruments, needles, and

catheters that allowed rapid and less invasive access to a number of different organs
and vessels. These products represented an alternative to traditional surgical
procedures and allowed analysis or corrective treatment with less risk and trauma and
at a lower cost.

XYZ had experienced extraordinary growth, fueled by heavy spending on research and
development and a rapid expansion of its sales force. Its technical staff was very well
regarded for developing new products. The combination of the innovative products and
a rapidly expanding market resulted in sales growth in excess of 30% per year.

Management met the financing pressures by heavy reliance on short-term credit, by

leasing, instead of buying, some manufacturing facilities, and by establishing a
connection with DEF Company, a leading distribution firm that did not have the
capability to manufacture on its own. DEF Company purchased PHP 12 million of capital
stock of XYZ Company. The four purchases of stock of DEF Company are shown in Table
A.

Table A
Equity Investments by DEF Company

April 2017 June 2017 October 2017 May 2018

PHP 4,000,000 PHP 2,000,000 PHP 2,000,000 PHP 4,000,000

Mr. Santos was thoroughly dissatisfied with the company’s current loan arrangement
with BBB Bank, from which it had a credit line of PHP 6 million with accounts receivable
and inventory pledged as security. He was perfectly willing to pledge the company’s
accounts receivable, inventory, or anything else that the bank thought would be
desirable security as long as the arrangement was fair to the company and specific
enough so that he could count on having the funds available when he needed them.

A call was made to BBB Bank and learned that its experience with XYZ Company had
been thoroughly unsatisfactory. The company had maintained extremely low balances
with its bank and on several occasions had overdrawn its account. The pattern of
minimal earnings, despite excellent products that were well received in the trade,

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seemed to be the direct result of Mr. Santos’ determination to spend heavily on
research and development and on marketing.

Upon visiting the XYZ plants, it can be observed that the production process involved
several hundred products typically produced in small lots. Desired inventory levels are
as follows:

• 8 weeks Raw materials storage & processing

• 10 – 12 weeks Finished goods inventory

Mr. Santos has a manual inventory system. He has postponed purchasing a computer-
based inventory control system that will link purchasing, production, and sales because
of the tightness of his cash position. Supplier credit terms is 30 days.

Sales were made to over 1,000 retailing outlets. These accounts had been extended
open lines of credit on net 30 terms without investigation. Most of the hospital orders
were served by DEF Company who is their major distributor. Accounts receivable on
XYZ’s books as of December 31, 2017, included PHP 500,000 due from hospitals,
representing 8.3% of the total. An aging of the receivables was as shown in Table B.

Table B
Aging of Accounts Receivable as of December 31, 2017

Age Outstanding
Month of Shipment (Days) Receivables Sales
December 2017 0-30 PHP 2,598,000 PHP 2,917,000
November 31-60 1,890,000 2,657,000
October 61-90 627,000 2,730,000
Prior 90 881,000
Total PHP 5,996,000

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Exhibit 1
Income Statements, 2015-2017 (thousands of pesos)
2015 2016 2017
Net sales 13,198 21,624 30,848
Cost of goods sold 6,825 9,682 13,989
Gross profit 6,373 11,942 16,859
Operating expenses 4,519 8,099 11,418
Depreciation 180 275 360
Research & development 1,168 2,839 4,182
Operating income 506 729 899
Interest expense 501 611 634
Other income 103 336 321
Earnings before taxes 108 454 586
Income taxes 38 159 205
Net income 70 295 381

Exhibit 2
Balance Sheets at December 31, 2015-2017 (thousands of pesos)
2015 2016 2017
Cash 1,379 883 646
Accounts receivable 2,549 3,359 5,996
Inventories 3,305 6,831 10,262
Other 520 2,249 2,605
Current assets 7,753 13,322 19,509
Net fixed assets 3,806 4,744 5,402
Investment 0 1,943 1,943
Other 301 322 303
Total Assets 11,860 20,331 27,157

Notes payable to DEF Company 0 2,260 1,735

Notes payable to bank 1,307 5,628 4,900
Notes payable to vendor 47 0 0
Accounts payable 725 1,926 1,853
Accrued expenses 740 1,086 1,331
Current portion – long-term debt 420 470 470
Other 22 37 33
Current liabilities 3,261 11,407 10,322
Long-term debt 2,940 2,970 2,500
Total liabilities 6,201 14,377 12,822
Capital stock 5,000 5,000 13,000
Retained earnings 659 954 1,335
Total Liabilities & Equity 11,860 20,331 27,157

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XYZ Company
Cash Flow Statement
For Years Ended December 31
(in pesos)
2016 2017
Operating Activity
Operating profit 729 899
Income tax expense (159) (205)
Add Depreciation 275 360
Gross operating funds generated 845 1,054

Changes in operating assets & liabilities

Accounts receivable (810) (2,637)
Inventory (3,526) (3,431)
Other operating current assets (1,729) (356)
Notes payable to vendor (47) -
Accounts payable 1,201 (73)
Accrued expenses 346 245
Other operating current liabilities 15 (4)
Net change in operating assets & liabilities (4,550) (6,256)

Operating cash generated (3,705) (5,202)

Add Other income 336 321
Net operating cash generated (3,369) (4,881)

Investing activity
Capital expenditures (1,213) (1,018)
Change in investments (1,943) -
Change in other non current assets (21) 19
Cash from investing activity (3,177) (999)

Cash before financing (6,546) (5,880)

Financing Activity
Interest expense (611) (634)
Current portion of long-term debt (420) (470)
Dividends - -
Short-term debt 4,321 (728)
Long-term debt 500 -
Notes payable to DEF 2,260 (525)
Equity financing - 8,000
Total financing activity 6,050 5,643

Change in cash (496) (237)

Cash beginning 1,379 883
Cash ending 883 646

Cash ending 883 646

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